(23) Provision for pensions and other post-employment benefits

In general, Group companies make pension commitments to their employees based on defined contributions or defined benefits. The type of pension commitment depends on the relevant pension plan. In terms of amounts paid, the majority of commitments are based on defined-benefit pension plans. Final salary plans that depend on length of service involve fully employer-financed commitments for retirement, disability and survivor benefits in the form of a monthly pension essentially without a lump-sum option. Events that cause benefits to become due (e.g. retirement age, disability, death) closely follow the eligibility requirements for statutory pension insurance. The benefit amount is based on a percentage of the final salary. The calculation includes the number of service years completed at the time benefits become due as well as the amount of salary at that time (where necessary, as an average over several years). In some cases, the relevant parts of income below the contribution assessment ceiling for statutory pension insurance (BBG-RV) are weighted differently than those above the ceiling.

Unless they relate to commitments for members of the Board of Management, these pension plans are closed to new employees. Some existing commitments are grandfathered with salary trends without increasing the benefit obligation beyond the current level of work performance, whereas others are maintained unchanged with continued growth depending on current work performance. To the greatest extent possible, the plans are not financed with plan assets.

The pension plans classified here are exposed to the following risks:

Mortality constitutes the risk that expected mortality contained in the calculation bases does not correspond to actual mortality, such that, e.g. annuity payments have to be made and financed for a longer period.

Pension progression under § 16 Para. 1 Act on the Improvement of Occupational Pensions (BetrAVG) constitutes the risk that assumptions about the trend in the consumer price index taken into account in progression assumptions were too low and that benefit obligations will increase due to the statutory requirement to adjust pensions.

Morbidity constitutes the risk that the assumed number of early retirements due to disability from the sub-portfolio of beneficiaries does not correspond to the actual trend and that benefit obligations will increase for this reason.

Trends in salary and BBG-RV constitutes the risk that increases in pensionable salaries taken concurrently into account in progression assumptions and, in some cases, increases in the BBG-RV do not adequately depict actual trends. In addition, with plans under which the relevant parts of income below the BBG-RV are, for the purposes of benefit calculation, weighted differently than those above the ceiling there is a risk that salary and BBG-RV will trend differently in the future.

Premature drawing of pensions (transitional allowances) constitutes the risk that benefits become due prematurely in accordance with contractual arrangements. In this case, benefits that have not yet been fully “financed” through provisions may have to be paid prior to the expected pension age.

Plans based on annual pension modules involve fully employer-financed commitments for retirement, disability and survivor benefits in the form of a monthly pension without a lump-sum option. Events that cause benefits to become due (e.g. retirement age, disability, death) closely follow the eligibility requirements for statutory pension insurance. The benefit amount is based on the sum of annual pension modules, which are derived from a transformation table. The level of employment, the amount of the relevant salary and, in some cases, the business result of the employer company making the commitment are taken into account. The relevant parts of income below the BBG-RV are weighted differently than those above the ceiling.

The pension plan is closed to new employees and is not financed with plan assets. However, reinsurance was obtained for a large sub-portfolio.

This plan is exposed to risks similar to those for final salary plans that depend on length of service. However, risks do not include “trends in benefits under statutory pension insurance” and “trends in net remuneration”.

Defined-contribution plans with guarantees involve fully employer-financed commitments for retirement, disability and survivor benefits in the form of a monthly pension through the “HDI Unterstützungskasse”. Instead of a retirement pension, lump-sum distribution of pension capital can be requested. This has to do with defined-contribution benefit commitments within the meaning of German labour law, which are classified economically as a defined-benefit plan. The pension amount given by the employer to the Unterstützungskasse is used by the latter as a contribution toward the obtaining of reinsurance that reflects the committed benefits spectrum (congruent reinsurance). The committed benefits result from the rate under the reinsurance policy.

The associated assets of the HDI Unterstützungskasse are recognised as plan assets.

In addition, there are pension commitments for a lump-sum benefit from lump-sum deferral of compensation by employees in the event of death or survival upon reaching the retirement age. Here, the waived amount is used as a lump-sum contribution toward the obtaining of reinsurance. There is no right to choose the type of annuity. These commitments are not allocated to any plan assets.

Commitments to the HDI Unterstützungskasse are exposed to the risk that for commitments made prior to 1999, the surplus participation under due and owing reinsurance policies is insufficient for meeting the adjustment requirements under § 16 Para. 1 BetrAVG. There is likewise the risk that for commitments made prior 2001, the claims to be ascertained upon retirement in accordance with the provisions of the BetrAVG are not covered by the achieved entitlement to benefits from the elements of compensation that have been deferred to that point.

Employees of the former Gerling Group also have the option of obtaining pension commitments through deferred compensation with Gerling Versorgungskasse VVaG. In economic terms, these are defined contribution plans for which provisions for pensions are not recognised.

N121 FINANCING STATUS OF PENSION PLANS
  FIGURES IN EUR MILLION
  Type of plan 2013 2012 1)
  Final salary plans that depend on length
of service
  • Plan assets
  • Present value of the defined-benefit obligation
  • Effect of upper asset limit Surplus (net asset value)
    Shortfall (net debt)

 –128

1,720
 —
 –1
1,593

 –134

1,825
 —
 —
1,691
  Plan on the basis of pension modules
  • Plan assets
  • Present value of the defined-benefit obligation
  • Effect of upper asset limit Shortfall (net debt)

 —

60
 —
60

 —

128
 —
128
  Defined-contribution plans with guarantees
  • Plan assets
  • Present value of the defined-benefit obligation
  • Effect of upper asset limit Shortfall (net debt)

 –41
 
78
6
43

 –36

82
4
50
  Balance as at 31.12 of the financial year (net asset value) –1
  Balance as at 31.12 of the financial year (net debt) 1,696 1,869
  1) Adjusted on the basis of IAS 8. Cf. “Accounting policies” section of the Notes, subsection “Changes in accounting policies and accounting errors”
   

The risks affecting the largest sub-portfolios of the defined-benefit obligation are summarised in the following table

N122 DEFINED-BENEFIT OBLIGATION OF THE SUB-PORTFOLIO EXPOSED TO RISK
  FIGURES IN EUR MILLION
  Type of risk Defined-benefit obligation of the
partial portfolio exposed to risk
  Mortality 1,296
  Pension progression under § 16 Para. 1 BetrAVG 1,274
  Morbidity 487
  Trends in salary and BBG-RV 323
  Differing trends in salary and BBG-RV 92
   

The risk associated with the premature drawing of pensions affects the entire portfolio of beneficiaries from commitments to the Board of Management in the amount of EUR 51 million.

The change in net debt and net asset value for the Group’s various defined benefit pension plans is shown in the following table. In addition to the main components – projected benefit obligation and plan assets – the change in the asset value adjustment from the calculation of the upper limit of the asset value resulting from a plan surplus is also listed. Realisability of the economic benefit associated with a plan surplus is verified on the level of the individual pension plan, and this necessitated a curtailment of the carrying amount for the net asset value both as at 31 December 2013 and as at 31 December 2012.

N123 CHANGE IN NET DEBT AND NET ASSET VALUE FOR THE VARIOUS DEFINED-BENEFIT PENSION PLANS
  FIGURES IN EUR MILLION
    Leistungorientierte Verpflichtung Fair value of plan assets Asset value adjustment
         
    2013 2012 1) 2013 2012 1) 2013 2012 1)
  Balance as at 1.1 of the financial year 2,036 1,542 –171 –120 4 4
  Changes recognised in net income            
  Current service cost 20 19
  Past service cost and plan curtailments –11 –8
  Net interest components 61 73 –6 –7 3
  Result from settlements 1
    71 84 –6 –7 3
  Income and expenses recognised in other comprehensive income            
  Remeasurements            
  Underwriting gains (–)/losses (+) from change in biometric assumptions –14 2
  Underwriting gains (–)/losses (+) from change in financial assumptions –143 464
  Experience adjustments –15 1
  Income from plan assets (less interest income) 10 –21
  Change from asset value adjustment 2 –3
  Changes in foreign exchange rates –4 –1 3
    –176 466 13 –21 2 –3
  Other changes            
  Employer contributions –9 –12
  Contributions and deferred employee compensation 1
  Pension benefits paid during the year –74 –69 4 3
  Business combinations and disposals 1 13 –8
  Effect of plan settlements –1 –6
    –73 –56 –5 –23
  Balance as at 31.12 of the financial year 1,858 2,036 –169 –171 6 4
  1) Adjusted on the basis of IAS 8. Cf. “Accounting policies” section of the Notes, subsection “Changes in accounting policies and accounting errors”
   

The structure of the investment portfolio underlying the plan assets was as follows:

N124 PORTFOLIO STRUCTURE OF PLAN ASSETS
  IN %
    2013 2012
  Cash and cash equivalents 2 1
  Equity instruments 2
  Fixed-income securities 11 11
  Securities funds 17 23
  Qualifying insurance contracts 70 63
  Total 100 100
   

Since all equity instruments, fixed-income securities and securities funds are listed on an active market, market prices are available for them. Almost all of the assets in these investment categories are managed in a British pension scheme trust.

The fair value of plan assets does not include any amounts for own financial instruments.

Actual income from plan assets amounted to EUR 28 million in the previous year. In the year under review, losses of EUR 4 million were recognised.

Defined benefit obligations were measured on the basis of the following assumptions:

N125 ASSUMPTIONS FOR DEFINED-BENEFIT OBLIGATIONS
  MEASUREMENT PARAMETERS/ASSUMPTIONS WEIGHTED
IN %
    2013 2012
  Discount rate 3.46 2.98
  Expected rate of salary increase 2.75 2.73
  Pension increase 2.12 2.09
   

The mortality tables “2005G” of Dr. Klaus Heubeck formed the basis for the biometric calculation of domestic pension commitments.

The weighted average duration of the defined-benefit obligation is 15 years.

Sensitivity analysis

An increase or decrease in key actuarial assumptions would have the following effect on the present value of the defined-benefit obligation as at 31 December 2013:

N126 EFFECT OF THE CHANGE IN ACTUARIAL ASSUMPTIONS
  FIGURES IN EUR MILLION
    Effect on the defined-benefit obligation
    Parameter increase Parameter decrease
  Discount rate (+/– 0,5%) –123 144
  Salary increase rate (+/– 0,25%) 9 –9
  Pension adjustment rate (+/– 0,25%) 47 –45
   

Also conceivable is a change in the underlying mortality rates and life spans. For the purposes of calculating the longevity risk, the underlying mortality tables were adjusted by lowering mortalities by 10%. This extension of longevities would have led to the pension obligation being higher by EUR 56 million as at the end of the financial year.

Sensitivities are calculated by means of the difference between pension obligations under changed actuarial assumptions and those under unchanged actuarial assumptions. The calculation was carried out separately for key parameters.

The German Federal Labour Court judgment of 23 April 2013 on the split pension formula was taken into account in the recognition of pension obligations. With this ruling, the Court departed from its earlier case law on the treatment of split pension formulas that are oriented towards the contribution assessment ceiling for statutory pension insurance (BBG). If pension commitments contain formulas that rely on the BBG, the extraordinary increase of the BBG from 2003 is now once again taken into account. The increase tends to lead to a reduction in pension benefits.

For the 2014 financial year the Group anticipates employer contributions of EUR 11 (4) million, which are to be paid into the defined benefit plans shown here.

The defined contribution plans are funded through external pension funds or similar institutions. In this case, fixed contributions (e.g. based on the relevant income) are paid to these institutions, such that the beneficiary’s claim is against such institutions. In effect, the employer has no further obligation beyond payment of the contributions. The expense recognised in the financial year for these commitments amounted to EUR 14 (14) million, of which EUR 1 million was attributable to commitments to employees in key positions. In addition, contributions in the amount of EUR 56 (74) million were paid to state pension plans.