25. Provisions for Pensions and Other Post-Employment Benefits

Provisions were established for defined benefit obligations pertaining to pensions and other post-employment benefits. The net liability was accounted for as follows:

Net Defined Benefit Liability Reflected in the Statement of Financial Position

 

 

Pensions

 

Other post-employment benefits

 

Total

 

 

Dec. 31, 2014

Dec. 31, 2015

 

Dec. 31, 2014

Dec. 31, 2015

 

Dec. 31, 2014

Dec. 31, 2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Provisions for pensions and other post-employment benefits (net liability)

 

11,796

10,454

 

440

419

 

12,236

10,873

of which Germany

 

10,336

8,972

 

 

10,336

8,972

of which other countries

 

1,460

1,482

 

440

419

 

1,900

1,901

Net defined benefit asset

 

38

29

 

3

1

 

41

30

of which Germany

 

22

23

 

 

22

23

of which other countries

 

16

6

 

3

1

 

19

7

Net defined benefit liability

 

11,758

10,425

 

437

418

 

12,195

10,843

of which Germany

 

10,314

8,949

 

 

10,314

8,949

of which other countries

 

1,444

1,476

 

437

418

 

1,881

1,894

The expenses for defined benefit plans for pensions and other post-employment benefits comprised the following components:

Expenses for Defined Benefit Plans

 

 

Pension plans

 

Other post-employment benefit plans

 

 

Germany

 

Other countries

 

Total

 

Other countries

 

 

2014

2015

 

2014

2015

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Current service cost

 

236

362

 

66

99

 

302

461

 

28

17

Past service cost

 

23

27

 

(25)

(3)

 

(2)

24

 

2

of which plan curtailments

 

 

(15)

(2)

 

(15)

(2)

 

Plan settlements

 

 

21

 

21

 

Net interest

 

223

204

 

34

52

 

257

256

 

18

20

Total

 

482

593

 

96

148

 

578

741

 

48

37

In addition, a total of €1,216 million in effects of remeasurements of the net defined benefit liability was recognized in 2015 outside profit or loss (2014: minus €5,159 million). Of this amount, €1,185 million (2014: minus €5,098 million) related to pension obligations, €53 million (2014: minus €61 million) to other post-employment benefit obligations, and minus €22 million (2014: €0 million) to the effects of the asset ceiling.

The net defined benefit liability developed as follows:

Changes in Net Defined Benefit Liability

 

 

Defined benefit obligation

 

Fair value of plan assets

 

Effects of the asset ceiling

 

Net defined benefit liability

 

 

2014

2015

 

2014

2015

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Germany

 

 

 

 

 

 

 

 

 

 

 

 

January 1

 

14,870

20,339

 

8,735

10,025

 

 

(6,135)

(10,314)

Acquisitions

 

 

 

 

Divestitures / changes in the scope of consolidation

 

21

 

17

 

 

(4)

Current service cost

 

236

362

 

 

 

 

 

 

 

(236)

(362)

Past service cost

 

23

27

 

 

 

 

 

 

 

(23)

(27)

Gains / losses from plan settlements

 

 

 

 

 

 

 

 

Net interest

 

553

425

 

330

221

 

 

(223)

(204)

Net actuarial (gain) loss

 

5,254

(1,393)

 

 

 

 

 

 

 

(5,254)

1,393

of which due to changes in financial assumptions

 

5,208

(1,371)

 

 

 

 

 

 

 

(5,208)

1,371

of which due to changes in demographic assumptions

 

 

 

 

 

 

 

 

of which due to experience adjustments

 

46

(22)

 

 

 

 

 

 

 

(46)

22

Return on plan assets excluding amounts recognized as interest income

 

 

 

 

802

(262)

 

 

 

 

802

(262)

Remeasurement of asset ceiling

 

 

 

 

 

 

 

 

Employer contributions

 

 

 

 

331

387

 

 

 

 

331

387

Employee contributions

 

38

37

 

38

37

 

 

 

 

Payments due to plan settlements

 

 

 

 

 

 

Benefits paid out of plan assets

 

(211)

(215)

 

(211)

(215)

 

 

 

 

Benefits paid by the company

 

(424)

(433)

 

 

 

 

 

 

 

424

433

Reclassification to current assets / liabilities held for sale

 

(22)

 

(11)

 

 

 

 

11

December 31

 

20,339

19,148

 

10,025

10,199

 

 

(10,314)

(8,949)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other countries

 

 

 

 

 

 

 

 

 

 

 

 

January 1

 

5,812

7,432

 

4,705

5,560

 

(9)

(9)

 

(1,116)

(1,881)

Acquisitions

 

4

 

 

 

(4)

Divestitures / changes in the scope of consolidation

 

 

 

 

Current service cost

 

94

116

 

 

 

 

 

 

 

(94)

(116)

Past service cost

 

(23)

(3)

 

 

 

 

 

 

 

23

3

Gains / losses from plan settlements

 

21

 

 

 

 

 

 

 

(21)

Net interest

 

275

287

 

223

215

 

 

(52)

(72)

Net actuarial (gain) loss

 

1,094

(318)

 

 

 

 

 

 

 

(1,094)

318

of which due to changes in financial assumptions

 

815

(310)

 

 

 

 

 

 

 

(815)

310

of which due to changes in demographic assumptions

 

264

(79)

 

 

 

 

 

 

 

(264)

79

of which due to experience adjustments

 

15

71

 

 

 

 

 

 

 

(15)

(71)

Return on plan assets excluding amounts recognized as interest income

 

 

 

 

387

(211)

 

 

 

 

387

(211)

Remeasurement of asset ceiling

 

 

 

 

 

 

 

(22)

 

(22)

Employer contributions

 

 

 

 

130

148

 

 

 

 

130

148

Employee contributions

 

9

11

 

9

11

 

 

 

 

Payments due to plan settlements

 

(64)

 

(64)

 

 

 

 

Benefits paid out of plan assets

 

(254)

(289)

 

(254)

(289)

 

 

 

 

Benefits paid by the company

 

(53)

(60)

 

 

 

 

 

 

 

53

60

Plan administration costs paid out of plan assets

 

 

 

 

(1)

(1)

 

 

 

 

(1)

(1)

Reclassification to current assets / liabilities held for sale

 

(20)

 

(8)

 

 

12

Exchange differences

 

521

501

 

425

374

 

(1)

 

(96)

(128)

December 31

 

7,432

7,661

 

5,560

5,799

 

(9)

(32)

 

(1,881)

(1,894)

of which other post-employment benefits

 

918

836

 

481

418

 

 

(437)

(418)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, December 31

 

27,771

26,809

 

15,585

15,998

 

(9)

(32)

 

(12,195)

(10,843)

The benefit obligations pertained mainly to Germany (71%; 2014: 73%), the United States (15%; 2014: 14%) and the United Kingdom (7%; 2014: 6%). In Germany, current employees accounted for about 44% (2014: 45%), retirees or their surviving dependents for about 49% (2014: 47%) and former employees with vested pension rights for about 7% (2014: 8%) of entitlements under defined benefit plans. In the United States, current employees accounted for about 26% (2014: 26%), retirees or their surviving dependents for about 61% (2014: 61%) and former employees with vested pension rights for about 13% (2014: 13%) of entitlements under defined benefit plans.

The changes in the net defined benefit liability in Germany reported as due to changes in the scope of consolidation mainly resulted from employee transfers outside the consolidated group of companies.

The actual return on the assets of defined benefit plans for pensions or other post-employment benefits amounted to minus €34 million (2014: €1,691 million) and minus €3 million (2014: €51 million), respectively.

The following table shows the defined benefit obligations for pensions and other post-employment benefits along with the funded status of the funded obligations.

Defined Benefit Obligation and Funded Status

 

 

Pension obligation

 

Other post-employment benefit obligation

 

Total

 

 

2014

2015

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Defined benefit obligation

 

26,853

25,973

 

918

836

 

27,771

26,809

of which unfunded

 

1,117

1,126

 

104

101

 

1,221

1,227

of which funded

 

25,736

24,847

 

814

735

 

26,550

25,582

 

 

 

 

 

 

 

 

 

 

Funded status of funded obligations

 

 

 

 

 

 

 

 

 

Overfunding

 

47

61

 

3

1

 

50

62

Underfunding

 

10,679

9,328

 

336

318

 

11,015

9,646

Pension and other post-employment benefit obligations

Group companies provide retirement benefits for most of their employees, either directly or by contributing to privately or publicly administered funds. The way these benefits are provided varies according to the legal, fiscal and economic conditions of each country, the benefits generally being based on employee compensation and years of service. The obligations relate both to existing retirees’ pensions and to pension entitlements of future retirees.

Bayer has set up funded pension plans for its employees in various countries. The most appropriate investment strategy is determined for each defined benefit pension plan based on the risk structure of the obligations (especially demographics, the current funded status, the structure of the expected future Cash flow Key indicator for assessing a company’s financial strength; in addition to gross cash flow, the statement of cash flows also reports the cash flow from operating activities (net cash flow), which shows the amount of funds available from operating activities for financing investments, repaying debts or distributing dividends. The cash flows from investing and financing activities are also reported. , interest sensitivity, biometric risks etc.), the regulatory environment and the existing level of risk tolerance or risk capacity. A strategic target investment portfolio is then developed in line with the plan’s risk structure, taking capital market factors into consideration. Further determinants are risk diversification, portfolio efficiency and the need for both a country-specific and a global risk / return profile centered on ensuring the payment of all future benefits. As the capital investment strategy for each pension plan is developed individually in light of the plan-specific conditions listed above, the investment strategies for different pension plans may vary considerably. For example, the proportion of plan assets invested in equities is greater with the non-German pension plans than with the plans domiciled in Germany. The investment strategies are generally aligned less toward maximizing absolute returns and more toward the reasonable assurance of financing pension commitments over the long term. For plan assets, stress scenarios are simulated and other risk analyses (such as value at risk) undertaken with the aid of risk management systems.

Bayer-Pensionskasse VVaG (Bayer-Pensionskasse), Leverkusen, Germany, is by far the most significant of the pension plans. It was closed to new members effective January 1, 2005. This legally independent fund is regarded as a life insurance company and therefore is subject to the German Insurance Supervision Act. The benefit obligations covered by Bayer-Pensionskasse comprise retirement, surviving dependents’ and disability pensions. It constitutes a multi-employer plan, to which the active members and their employers contribute. The company contribution is a certain percentage of the employee contribution. This percentage is the same for all participating employers, including those outside the Bayer Group, and is set by agreement between the plan’s executive committee and its supervisory board, acting on a proposal from the responsible actuary. It takes into account the differences between the actuarial estimates and the actual values for the factors used to determine liabilities and contributions. Bayer may also adjust the company contribution in agreement with the plan’s executive committee and its supervisory board, acting on a proposal from the responsible actuary. The plan’s liability is governed by Section 1, Paragraph 1, Sentence 3 of the German Law on the Improvement of Occupational Pensions. This means that if the pension plan exercises its right under the articles of association to reduce benefits, each participating employer has to make up the resulting difference. Bayer is not liable for the obligations of participating employers outside the Bayer Group, even if they cease to participate in the plan.

Pension entitlements for people who joined Bayer in Germany on or after January 1, 2005, are granted via Rheinische Pensionskasse VVaG, Leverkusen. Future pension payments from this plan are based on contributions and the return on plan assets; a guaranteed interest rate applies.

Another important pension provision vehicle is Bayer Pension Trust e.V. (BPT). This covers further retirement provision arrangements of the Bayer Group, such as deferred compensation, pension obligations previously administered by Schering Altersversorgung Treuhand e.V., and components of other direct commitments. In October 2015, a total of €293 million in investments, representing the equivalent of the Covestro group’s obligations, was transferred from Bayer Pension Trust to another trust fund, which now (partially) covers the respective obligations of Covestro.

The defined benefit pension plans in the United States have been frozen for some years, and no significant new entitlements can be earned under these plans. The assets of all the U.S. pension plans are held by a master trust for reasons of efficiency. The applicable regulatory framework is based on the Employee Retirement Income Security Act (ERISA), which includes a statutory 80% minimum funding requirement to avoid benefit reductions. The actuarial risks, such as investment risk, interest-rate risk and longevity risk, remain with the company.

The defined benefit pension plans in the United Kingdom are closed to new members. Plan assets in the U.K. are administered by independent trustees, who are legally obligated to act solely in the interests of the beneficiaries. A technical assessment is performed every three years in line with U.K. regulations. This serves as the basis for developing a plan to cover any potential financing requirements. Here, too, the actuarial risks remain with the company.

The other post-employment benefit obligations outside Germany mainly comprised health care benefit payments for retirees in the United States.

The fair value of the plan assets to cover pension and other post-employment benefit obligations was as follows:

Fair Value of Plan Assets as of December 31

 

 

Pension obligations

 

Other post-employment obligations

 

 

Germany

 

Other countries

 

Other countries

 

 

2014

2015

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Plan assets based on quoted prices in active markets

 

 

 

 

 

 

 

 

 

Real estate and special real estate funds

 

 

205

199

 

18

19

Equities and equity funds

 

1,941

2,105

 

1,669

1,855

 

125

130

Callable debt instruments

 

 

162

182

 

Noncallable debt instruments

 

112

 

690

752

 

110

121

Bond funds

 

3,345

3,543

 

1,509

1,744

 

90

90

Derivatives

 

28

18

 

86

(5)

 

Cash and cash equivalents

 

409

158

 

98

84

 

14

8

Other

 

 

236

4

 

 

 

5,723

5,936

 

4,655

4,815

 

357

368

Plan assets for which quoted prices in active markets are not available

 

 

 

 

 

 

 

 

 

Real estate and special real estate funds

 

544

517

 

41

83

 

Equities and equity funds

 

70

90

 

59

59

 

Callable debt instruments

 

1,493

1,555

 

6

2

 

Noncallable debt instruments

 

1,931

1,832

 

 

Bond funds

 

 

60

60

 

Derivatives

 

(4)

(2)

 

 

Other

 

268

271

 

258

362

 

124

50

 

 

4,302

4,263

 

424

566

 

124

50

Total plan assets

 

10,025

10,199

 

5,079

5,381

 

481

418

The fair value of plan assets in Germany included real estate leased by Group companies, recognized at a fair value of €61 million (2014: €65 million), and Bayer AG shares and bonds held through investment funds, recognized at their fair value of €48 million (2014: €58 million) and €3 million (2014: €6 million), respectively. The other plan assets comprised mortgage loans granted, other receivables and qualified insurance policies.

Risks

The risks from defined benefit plans arise partly from the defined benefit obligations and partly from the investment in plan assets. The risks lie in the possibility that higher direct pension payments will have to be made to the beneficiaries and / or that additional contributions will have to be made to plan assets in order to meet current and future pension obligations.

Demographic / biometric risks

Since a large proportion of the defined benefit obligations comprises lifelong pension payments to retirees or surviving dependents’ pensions, longer claim periods or earlier claims may result in higher benefit obligations, higher benefit expense and / or higher pension payments than previously anticipated.

Investment risks

If the actual return on plan assets were below the return anticipated on the basis of the discount rate, the net defined benefit liability would increase, assuming there were no changes in other parameters. This could happen as a result of a drop in share prices, increases in market rates of interest, default of individual debtors or the purchase of low-risk but low-interest bonds, for example.

Interest-rate risk

A decline in capital market interest rates, especially for high-quality corporate bonds, would increase the defined benefit obligation. This effect would be at least partially offset by the ensuing increase in the market values of the debt instruments held.

Measurement parameters and their sensitivities

The following weighted parameters were used to measure the obligations for pensions and other post-employment benefits as of December 31 of the respective year:

Parameters for Benefit Obligations

 

 

Germany

 

Other countries

 

Total

 

 

2014

2015

 

2014

2015

 

2014

2015

 

 

%

%

 

%

%

 

%

%

Pension obligations

 

 

 

 

 

 

 

 

 

Discount rate

 

2.00

2.40

 

3.70

3.85

 

2.40

2.75

of which U.S.A.

 

 

 

 

3.70

4.00

 

3.70

4.00

of which U.K.

 

 

 

 

3.60

3.80

 

3.60

3.80

Projected future salary increases

 

3.00

3.00

 

3.65

3.35

 

3.15

3.10

Projected future benefit increases

 

1.75

1.75

 

3.30

3.20

 

2.10

2.15

Other post-employment benefit obligations

 

 

 

 

 

 

 

 

 

Discount rate

 

 

3.95

4.45

 

3.95

4.45

The data selection criteria used to determine the discount rate in the eurozone were modified at the beginning of 2015. The modification of the data selection criteria diminished provisions by €1.0 billion. The discount rate obtained by applying the previous data selection criteria would have been lower by 30 basis points as of December 31, 2015. The change in the way the discount rate is determined reduced the net pension expense for the 2015 fiscal year by €17 million. As before, the underlying bond portfolio consists entirely of high-quality corporate bonds with a minimum AA or AAA rating. It no longer includes government-guaranteed or covered bonds.

In Germany the Heubeck 2005 G mortality tables were used, in the United States the RP-2014 Combined Healthy Mortality Tables, and in the United Kingdom 95% of S1NXA. In the United States, adjustments contained in the MP-2015 mortality improvement scale were taken into account in 2015. This led to an actuarial gain of approximately €66 million.

The following weighted parameters were used to measure the expense for pension and other post-employment benefits in the respective year:

Parameters for Benefit Expense

 

 

Germany

 

Other countries

 

Total

 

 

2014

2015

 

2014

2015

 

2014

2015

 

 

%

%

 

%

%

 

%

%

Pension obligations

 

 

 

 

 

 

 

 

 

Discount rate

 

3.80

2.20

 

4.70

3.70

 

4.05

2.55

Projected future salary increases

 

3.00

3.00

 

3.95

3.65

 

3.95

3.15

Projected future benefit increases

 

1.75

1.75

 

3.60

3.30

 

3.60

2.10

Other post-employment benefit obligations

 

 

 

 

 

 

 

 

 

Discount rate

 

 

4.90

3.95

 

4.90

3.95

The parameter sensitivities were computed by expert actuaries based on a detailed evaluation similar to that performed to obtain the data presented in Table "Changes in Net Defined Benefit Liability". Altering individual parameters by 0.5 percentage points (mortality by 10% per beneficiary) while leaving the other parameters unchanged would have impacted pension and other post-employment benefit obligations as of year end 2015 as follows:

Sensitivity of Benefit Obligations

 

 

Germany

 

Other countries

 

Total

 

 

Increase

Decrease

 

Increase

Decrease

 

Increase

Decrease

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Pension obligations

 

 

 

 

 

 

 

 

 

0.5%-pt. change in discount rate

 

(1,544)

1,767

 

(450)

504

 

(1,994)

2,271

0.5%-pt. change in projected future salary increases

 

121

(113)

 

47

(44)

 

168

(157)

0.5%-pt. change in projected future benefit increases

 

1,006

(919)

 

127

(96)

 

1,133

(1,015)

10% change in mortality

 

(597)

669

 

(173)

185

 

(770)

854

Other post-employment benefit obligations

 

 

 

 

 

 

 

 

 

0.5%-pt. change in discount rate

 

 

(46)

51

 

(46)

51

10% change in mortality

 

 

(21)

24

 

(21)

24

Sensitivity of Benefit Obligations (prior year)

 

 

Germany

 

Other countries

 

Total

 

 

Increase

Decrease

 

Increase

Decrease

 

Increase

Decrease

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

Pension obligations

 

 

 

 

 

 

 

 

 

0.5%-pt. change in discount rate

 

(1,712)

1,969

 

(441)

494

 

(2,153)

2,463

0.5%-pt. change in projected future salary increases

 

145

(135)

 

44

(41)

 

189

(176)

0.5%-pt. change in projected future benefit increases

 

1,119

(1,020)

 

106

(76)

 

1,225

(1,096)

10% change in mortality

 

(657)

737

 

(168)

179

 

(825)

916

Other post-employment benefit obligations

 

 

 

 

 

 

 

 

 

0.5%-pt. change in discount rate

 

 

(51)

56

 

(51)

56

10% change in mortality

 

 

(22)

24

 

(22)

24

Provisions are also set up for the obligations, mainly of U.S. subsidiaries, to provide post-employment benefits in the form of health care cost payments for retirees. The valuation of health care costs was based on the assumption that they will increase at a rate of 7.0%, which should gradually decline to 5.0% by 2023 (assumption in 2014: 7.0%, which should gradually decline to 5.0% by 2018). The following table shows the impact on other post-employment benefit obligations and total benefit expense of a one-percentage-point change in the assumed cost increase rates:

Sensitivity to Health Care Cost Increases

 

 

Increase of one percentage point

 

Decrease of one percentage point

 

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

Impact on other post-employment benefit obligations

 

86

79

 

(72)

(68)

Impact on benefit expense

 

4

5

 

(4)

(4)

Payments made and expected future payments

The following payments correspond to the employer contributions made or expected to be made to funded benefit plans:

Employer Contributions Paid or Expected

 

 

Germany

 

Other countries

 

 

2014

2015

2016 expected

 

2014

2015

2016 expected

 

 

€ million

€ million

€ million

 

€ million

€ million

€ million

Pension obligations

 

331

387

74

 

112

148

133

Other post-employment benefit obligations

 

 

18

1

Total

 

331

387

74

 

130

148

134

Bayer has currently committed to make deficit contributions for its U.K. pension plans of GBP 21 million in 2016 and of approximately GBP 16 million annually thereafter through 2019 and expects to make payments of US$50 million in 2016 for its U.S. pension plans, the latter amount being subject to change depending on future circumstances.

Pensions and other post-employment benefits payable in the future from funded and unfunded plans are estimated as follows:

Future Benefit Payments

 

 

Payments out of plan assets

 

Payments by the company

 

 

Pensions

 

Other post-employment benefits

 

 

 

Pensions

 

Other post-employment benefits

 

 

 

 

Germany

Other countries

 

Other countries

 

Total

 

Germany

Other countries

 

Other countries

 

Total

 

 

€ million

€ million

 

€ million

 

€ million

 

€ million

€ million

 

€ million

 

€ million

2016

 

219

303

 

9

 

531

 

447

66

 

35

 

548

2017

 

221

311

 

9

 

541

 

451

68

 

37

 

556

2018

 

224

322

 

10

 

556

 

458

71

 

39

 

568

2019

 

229

328

 

9

 

566

 

470

71

 

42

 

583

2020

 

234

340

 

9

 

583

 

476

75

 

43

 

594

2021 – 2025

 

1,260

1,763

 

46

 

3,069

 

2,471

436

 

241

 

3,148

The weighted average term of the pension obligations is 17.3 years (2014: 17.6 years) in Germany and 13.4 years (2014: 13.9 years) in other countries. The weighted average term of the obligations for other post-employment benefits in other countries is 11.5 years (2014: 12.1 years).