(13) Provisions for pensions and other post-employment benefits

Most employees in the LANXESS Group are entitled to retirement benefits on the basis of contractual agreements or statutory regulations. These are provided through defined contribution or defined benefit plans.

Defined contribution plans

In the case of defined contribution plans, the company pays contributions into separate pension funds. These contributions are included in the functional cost items as expenses for the respective year, and thus in the operating result. Once the contributions have been paid, the company has no further payment obligations. Payments to defined contribution plans in 2013 totaled €49 million (2012: €54 million).

Multi-employer plans

The pension plan in Germany financed through the Bayer Pensionskasse is also accounted for in the consolidated financial statements as a defined contribution plan. The above amounts include contributions of €28 million (2012: €28 million) to this pension fund. Contributions of about the same amount are expected for the following fiscal year.

The Bayer Pensionskasse is a legally independent private insurance company and is therefore subject to the German Insurance Supervision Act. Since the obligations of the participating entities are not confined to payment of the contributions for the respective fiscal year, the Bayer Pensionskasse constitutes a defined benefit multi-employer plan and therefore would normally have to be accounted for pro rata as a defined benefit plan.

The Bayer Pensionskasse is financed not on the principle of coverage for individual benefit entitlements, but on the actuarial equivalence principle, based on totals for the whole plan. This means that the sum of existing plan assets and the present value of future contributions must be at least equal to the present value of the future benefits payable under the plan. The LANXESS Group is therefore exposed to the actuarial risks of the other entities participating in the Bayer Pensionskasse. Thus no consistent or reliable basis exists for allocating the benefit obligation, plan assets and costs that would enable LANXESS to account for the Bayer Pensionskasse as a defined benefit plan in accordance with IAS 19. As contributions are based on future coverage of the total obligation, all participating entities pay contributions at the same rates based on the employee income levels on which social security contributions are payable. The Bayer Pensionskasse is therefore accounted for as a defined contribution plan and not as a defined benefit plan.

There are no minimum funding requirements, nor is there any information that could be used to estimate the future contributions on the basis of current under- or overfunding. The statutes do not provide for the sharing of any surplus or shortfall in the event that the Bayer Pensionskasse is wound up or LANXESS ceases to participate.

LANXESS’s share of the total contributions to the Bayer Pensionskasse was unchanged from the previous year at approximately 17%. The Bayer Pensionskasse has been closed to new members since January 1, 2005.

Defined benefit plans

The global post-employment benefit obligations are calculated at regular intervals – at least every three years – by an independent actuary using the projected unit credit method. Comprehensive actuarial valuations are generally undertaken annually for all major post-employment benefit plans.

The principal contractually based defined benefit pension plans exist in Germany, Canada and Brazil.

The defined benefit pension obligations in Germany mainly relate to lifelong benefits payable in the event of death or disability or when the employee reaches retirement age. Benefits are determined on the basis of the total annual pension increments earned during the period of employment and depend on employees’ individual salaries. Additional pension entitlements exist that are related to deferred compensation and are payable when employees reach retirement age. Alongside direct commitments, the pension adjustment obligation assumed by the Bayer Pensionskasse is accounted for in a separate defined benefit plan in accordance with Section 16 of the German Occupational Pensions Improvement Act (BetrAVG).

In Canada, the defined benefit obligations comprise, in particular, lifelong pension benefits, which are payable in the event of disability or death or when the employee reaches retirement age. The level of these benefits is determined from the total annual pension increments earned during the period of employment, depending on individual salary and the actual date of retirement. Some of the existing defined benefit pension plans are closed to new members.

In Brazil, the defined benefit obligations comprise lifelong benefits, principally in the event of death or disability or when the employee reaches retirement age. The benefits are calculated according to the total annual pension increments earned during the period of employment and also depend on individual salary, the number of years for which statutory social insurance contributions have been paid, and comparable statutory pension benefits. The principal defined benefit pension plans are closed to new members.

Only limited defined benefit pension obligations exist on the basis of statutory regulations. These principally comprise obligations to make a lump-sum payment if employment is terminated. The amount of this payment mainly depends on years of service and final salary.

The other post-employment benefit obligations primarily relate to the reimbursement of retirees’ health care costs in North and South America. The other post-employment benefit obligations in Germany comprise other long-term benefits payable to employees and benefits payable upon termination of employment. These are mainly early-retirement benefits and collectively agreed salary components granted in the form of pension benefits. They are included in pension provisions as they are by nature pension entitlements.

The defined benefit pension obligations are financed both internally through provisions and externally through legally independent pension funds. The pension obligations in Germany are partly covered on a voluntary basis via LANXESS Pension Trust e.V., Leverkusen, Germany. The allocation of funds to the LANXESS Pension Trust e.V. is dependent on future decisions by the company. In Canada and Brazil, pension obligations have to be financed through pension funds. Allocations to pension funds in these countries are determined by the regulatory environments and the need to comply with funding regulations. Contributions are paid mainly by the employer. The investment strategy is determined principally by the LANXESS Corporate Pension Committee and is designed to protect the capital, optimally manage risks, take into account changes in pension obligations and ensure the timely availability of plan assets. At the regional level, the strategy is generally directly coordinated and monitored by representatives of LANXESS via the relevant committees of the pension funds or of LANXESS Pension Trust e.V., taking regulatory requirements into account. In Brazil, the investment of plan assets forms an integral part of the pension fund’s overall investment strategy and is basically managed and supervised by the pension fund.

Minimum funding requirements may have to be met for defined benefit obligations in both Brazil and Canada. These depend on the local regulatory framework and are reflected in additional pension provisions. Funding surpluses from defined benefit plans are recognized as receivables relating to pension obligations to the extent that they can be used to reduce future contributions, taking into account the asset ceiling. These mainly relate to defined benefit plans in Brazil. The respective calculations are based on actuarial valuations.

Adjustments occasioned by applying the revised version of IAS 19 are explained in the section headed “Financial reporting standards and interpretations applied.”

In 2013, total expenses of €106 million (2012: €63 million) for defined benefit plans were recognized in profit or loss and are split between the operating result and the financial result as follows:

Expenses for Defined Benefit Plans
 
€ million Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Operating result        
Current service cost 27 34 11 36
Past service cost 0 17 (9)
Gains/losses from settlements (1) 0
Administration expenses/taxes 1 1 0 0
Actuarial gains and losses from changes in financial valuation assumptions 1 0
Financial result        
Net interest 17 22 7 5
Recognized in profit or loss 44 74 19 32
2012 figures restated

Administration expenses in the operating result contain expenses from the investment of assets that are not directly attributable to the earning of income on plan assets. Costs of managing plan assets that are directly attributable to the earning of income on plan assets are recognized in other comprehensive income.

The actuarial gains and losses relate to other non-current employee benefits or termination benefits that are included in pension provisions because they are by nature retirement benefits.

The net interest is the balance of the interest expense for pension provisions, interest expense from changes in the effects of the asset ceiling and minimum funding requirements, and interest income from plan assets.

The table shows the amounts recognized in other comprehensive income rather than profit or loss in 2013:

Amounts Recognized in Other Comprehensive Income
 
€ million Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Return on plan assets excluding amounts recognized as interest (13) (45) 0 0
Actuarial gains/losses from changes in demographic assumptions 0 0 0 0
Actuarial gains/losses from changes in financial assumptions (291) 101 0 7
Actuarial gains/losses from experience adjustments (17) (37) 5 4
Changes in effects of the asset ceiling 52 (61)
Changes in effects of minimum funding requirements 49 (2)
Other amounts recognized in other comprehensive income (220) (44) 5 11
2012 figures restated

The change in the net defined benefit liability for post-employment benefit plans is shown in the following table:

Changes in Net Defined Benefit Liability
 
€ million Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Net defined benefit liability, January 1 472 708 122 121
Recognized in profit or loss 44 74 19 32
Recognized in other comprehensive income 220 44 (5) (11)
Employer contributions (20) (13) (1) 0
Benefits paid (18) (21) (11) (10)
Business combinations and disposals 3 1 0 0
Exchange differences 7 4 (3) (8)
Net defined benefit liability, December 31 708 797 121 124
Recognized in the statement of financial position        
Receivables from pension obligations (64) (22)
Provisions for pensions and other post-employment benefits 772 819 121 124
Net defined benefit liability, December 31 708 797 121 124
2012 figures restated

The components of the reconciliation of the net recognized liability are explained in the following tables, which show the development of the defined benefit obligation, the external plan assets and the effects of the asset ceiling and minimum funding requirements and explain the major changes.

The defined benefit obligation developed as follows:

Change in Defined Benefit Obligation
 
€ million Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Defined benefit obligation        
Defined benefit obligation, January 1 1,534 1,854 126 125
Current service cost 27 34 11 36
Interest expense 92 90 7 5
Actuarial gains/losses from changes in demographic assumptions 0 0 0 0
Actuarial gains/losses from changes in financial assumptions 291 (101) 1 (7)
Actuarial gains/losses from experience adjustments 17 37 (5) (4)
Past service cost 0 17 (9)
Gains/losses from settlements (4) 0
Employee contributions 2 1
Benefits paid (69) (70) (12) (10)
Disbursements for settlements
Business combinations and disposals 4 1
Other additions 33
Administration expenses/taxes 0 0 0 0
Exchange differences (40) (109) (3) (8)
Defined benefit obligation, December 31 1,854 1,787 125 128
2012 figures restated

Of the defined benefit obligation for pensions, Germany accounts for 56% (2012: 50%), Canada for 22% (2012: 25%) and Brazil for 17% (2012: 21%).

The other post-employment benefit obligations comprise €63 million (2012: €89 million) for the reimbursement of health care costs and €65 million (2012: €36 million) for miscellaneous other benefit obligations.

Remeasurements of the defined benefit liability due to actuarial gains and losses resulting from changes in financial assumptions are mainly attributable to changes in the discount rates for defined benefit obligations in the main countries of relevance for LANXESS.

The changes in past service cost for pension obligations and in current service cost for the other post-employment benefit obligations result mainly from the Advance cost-saving program in Germany and relate to early-retirement agreements and improvements to existing benefit entitlements for employees taking early retirement. On the other hand, the other post-employment benefit obligations include a negative change in past service cost in the United States due to the new regulatory requirements aimed at securing health care benefits.

The gain from plan settlements in 2012 related to the closure of a defined benefit pension plan in the Netherlands.

The other additions in 2013 mainly resulted from the reclassification of existing pension plans in Belgium as defined benefit plans rather than defined contribution plans following the decrease in insurance companies’ guaranteed interest rates to less than the statutory minimum return on contributions to corporate pension plans.

The exchange differences pertaining to defined benefit obligations mainly resulted from changes in the exchange rates for the Canadian dollar and the Brazilian real.

The change in external plan assets is shown in the following table:

Changes in External Plan Assets
 
in Mio. € Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Plan assets at fair value        
Plan assets, January 1 1,156 1,146 4 4
Interest income 82 68 0 0
Return on plan assets excluding amounts recognized as interest (13) (45) 0 0
Gains/losses from settlements (3)
Employer contributions 20 13 1 0
Employee contributions 2 1
Benefits paid (51) (49) (1) 0
Disbursements for settlements
Business combinations and disposals 1
Other additions 33
Costs of managing plan assets/taxes (1) (1) 0 0
Exchange differences (47) (120) 0 0
Plan assets, December 31 1,146 1,046 4 4
2012 figures restated

Of the plan assets, Canada accounts for 37% (2012: 38%), Brazil for 36% (2012: 40%) and Germany for 20% (2012: 18%).

The loss on plan settlements in 2012 related to the closure of a defined benefit pension plan in the Netherlands. This did not involve any cash outflows to third parties.

The other additions resulted from the reclassification of pension plans in Belgium as defined benefit plans rather than defined contribution plans.

Employer contributions are used both for external funding of pension obligations where LANXESS is eligible for reimbursements of pension payments and for external funding of pension obligations where subsequent pension payments will be made directly out of external plan assets.

The latter type of obligations existed mainly outside Germany and totaled €13 million in 2013 (2012: €21 million). External funding where LANXESS can assert reimbursement claims mainly pertains to LANXESS Pension Trust e.V. No additional funding was provided to LANXESS Pension Trust e.V in 2013 or 2012.

The exchange differences pertaining to plan assets mainly resulted from changes in the exchange rates for the Canadian dollar and the Brazilian real.

Changes in the effects of the asset ceiling and minimum funding requirements are shown in the following table:

Changes in Effects of the Asset Ceiling and Minimum Funding Requirements for Defined Benefit Plans
 
€ million Effects of the
asset ceiling
Minimum funding
requirements
         
  2012 2013 2012 2013
         
January 1 48 0 46 0
Interest expense 5 0 2 0
Additions (+) / deductions (–) (52) 61 (49) 2
Exchange differences (1) (7) 1 0
December 31 0 54 0 2
2012 figures restated

Changes in the effects of the asset ceiling mainly relate to the Brazilian defined benefit pension plans, while changes in minimum funding requirements relate to the Canadian plans.

The fair value of plan assets is comprised as follows:

Breakdown of Plan Assets as of December 31
 
€ million 2012 2013
     
Cash and cash equivalents 75 69
of which quoted in an active market 75 69
Equity instruments 260 231
of which quoted in an active market 132 120
Government bonds 439 245
of which quoted in an active market 439 245
Corporate bonds 258 372
of which quoted in an active market 182 304
Investment funds 47 35
of which quoted in an active market 12 16
Real estate 28 27
Insurance contracts 28 55
Other 15 16
  1,150 1,050
 

The plan assets do not include any real estate used by the company, nor do they normally include any financial instruments owned by the company. However, plan assets could conceivably include index products containing LANXESS securities.

The following material weighted valuation parameters were used to calculate the benefit obligation and determine the benefit expense:

Valuation Assumptions as of December 31
 
% Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Discount rate 5.1 5.3 4.4 4.0
Germany 3.8 3.8 1.5 1.4
Canada 4.3 4.5 4.3 4.8
Brazil 9.7 12.3 9.7 12.3
Expected salary increases 3.6 3.4 3.7 3.2
Expected benefit increases 2.4 2.2
Expected increases in medical costs 7.9 7.3
Expected long-term increases in medical costs 5.3 5.2
2012 figures restated

The assumptions are weighted on the basis of the defined benefit obligation at year end. The discount rates used for Germany and Canada are derived from high-quality fixed-interest corporate bonds with the same maturities. In Brazil, however, there is no liquid market for such bonds so the discount rate is based on those for government bonds with the same maturities. This method of deriving the discount rates is unchanged from the previous year in the principal countries.

The long-term cost increase for medical care is expected to take place within about 13 years (2012: 11 years).

The Heubeck mortality tables 2005 G form the biometric basis for the computation of pension obligations in Germany. Current national biometric assumptions are used to compute benefit obligations at other Group companies.

A change in the principal valuation parameters would result in the following percentage changes in the benefit obligation:

Sensitivities of Benefit Obligations as of December 31, 2013
 
% Pension plans Other post-employment
benefit plans
     
Discount rate    
+0.5%-pt. (8.1) (3.3)
– 0.5%-pt. 8.7 3.7
Expected salary increases    
+0.25%-pt. 0.5 0.2
– 0.25%-pt. (0.4) (0.2)
Expected benefit increases    
+0.25%-pt. 3.6
– 0.25%-pt. (3.2)
Mortality    
– 10% 2.7 3.2
Expected increases in medical costs    
+1%-pt. 3.7
– 1%-pt. (3.4)
 

The sensitivity of the mortality rates was calculated for the countries with significant pension obligations. A reduction in mortality increases the individual life expectancy of beneficiaries. A 10% reduction would increase the average life expectancy of employees of retirement age in the countries of importance for LANXESS by about one year.

Sensitivity is calculated by altering one parameter while leaving all the others unchanged. The method used is the same as for the actuarial valuation of benefit obligations. However, sensitivity calculations depend on interest rate effects and the absolute change in the parameter. Moreover, it is unlikely in practice that only one parameter would change, so the change in a parameter could correlate with other assumptions. Where the expected development of the parameter used in the sensitivity calculation was based on a different variation in the parameter, the stated change in the benefit obligation was approximated using the straight-line method.

The average duration of defined benefit pension obligations was 16 years (2012: 16 years). This figure is based on the average durations of 20 years (2012: 21 years) for Germany, 11 years (2012: 10 years) for Canada and 12 years (2012: 11 years) for Brazil. The average duration of the defined benefit obligations for other post-employment benefits was 9 years (2012: 11 years).

The funded status is reported in the following table as the under- or overfunding of the defined benefit obligation after deduction of plan assets, without taking into account changes in the effects of the asset ceiling or minimum funding requirements:

Funded Status as of December 31
 
€ million Pension plans Other post-employment
benefit plans
         
  2012 2013 2012 2013
         
Funded status        
Defined benefit obligation for funded plans 1,579 1,497 8 12
External plan assets (1,146) (1,046) (4) (4)
Underfunding of funded plans 433 451 4 8
Defined benefit obligation for unfunded plans 275 290 117 116
Funded status, December 31 708 741 121 124
 
 

The expected cash outflow for pension fund contributions and benefit payments in 2014 is €38 million based on year-end 2013 exchange rates.