29 Provisions for pensions and other post-employment benefits

Provisions for pensions are recognized for commitments in the form of retirement, invalidity and dependents’ benefits payable under pension plans. The benefits provided by the Group vary according to the legal, tax and economic circumstances of the country concerned, and usually depend on the length of service and remuneration of the employees.

Volkswagen Group companies provide occupational pensions under both defined contribution and defined benefit plans. In the case of defined contribution plans, the Company makes contributions to state or private pension schemes based on legal or contractual requirements, or on a voluntary basis. Once the contributions have been paid, there are no further obligations for the Volkswagen Group. Current contributions are recognized as pension expenses of the period concerned. In 2013, they amounted to a total of €1,670 million (previous year: €1,580 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €1,292 million (previous year: €1,219 million).

Most pension plans are defined benefit plans, with a distinction made between pensions financed by provisions and externally funded plans.

The pension provisions for defined benefits are measured by independent actuaries using the internationally accepted projected unit credit method in accordance with IAS 19, under which the future obligations are measured on the basis of the ratable benefit entitlements earned as of the balance sheet date. Measurement reflects actuarial assumptions as to discount rates, salary and pension trends, employee turnover rates, longevity and increases in healthcare costs, which were determined for each Group company depending on the economic environment. Actuarial gains or losses arise from differences between what has actually occurred and the prior-year assumptions as well as from changes in assumptions. They are recognized in other comprehensive income, net of deferred taxes, in the period in which they arise.

Multi-employer pension plans exist in the Volkswagen Group in the United Kingdom, Switzerland, Sweden, the Netherlands and Japan. These plans are defined benefit plans. A small proportion of them are accounted for as defined contribution plans, as the Volkswagen Group is not authorized to receive the information required in order to account for them as defined benefit plans. Under the terms of the multi-employer plans, the Volkswagen Group is not liable for the obligations of the other employers. In the event of its withdrawal from the plans or their winding-up, the proportionate share of the surplus of assets attributable to the Volkswagen Group will be credited or the proportionate share of the deficit attributable to the Volkswagen Group will have to be funded. In the case of the defined benefit plans accounted for as defined contribution plans, the Volkswagen Group’s share of the obligations represents a small proportion of the total obligations. It is not aware of any probable significant risks arising from multi-employer defined benefit pension plans that are accounted for as defined contribution plans. The expected contributions to those plans will amount to €17 million for fiscal year 2014.

Owing to their benefit character, the obligations of the US Group companies in respect of post-employment medical care in particular are also carried under provisions for pensions and other post-employment benefits. These post-employment benefit provisions take into account the expected long-term rise in the cost of healthcare. €16 million (previous year:  €18 million) was recognized in fiscal year 2013 as an expense for health care costs. The related carrying amount as of December 31, 2013 was €177 million (previous year: €226 million).

The following amounts were recognized in the balance sheet for defined benefit plans:

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€ million

 

Dec. 31, 2013

 

Dec. 31, 2012*

 

 

 

 

 

*

Prior-year figures adjusted to reflect application of IAS 19R.

Present value of funded obligations

 

8,728

 

8,824

Fair value of plan assets

 

7,970

 

7,288

Funded status (net)

 

758

 

1,536

Present value of unfunded obligations

 

20,929

 

22,361

Amount not recognized as an asset because of the ceiling in IAS 19

 

22

 

7

Net liability recognized in the balance sheet

 

21,709

 

23,903

of which provisions for pensions

 

21,774

 

23,939

of which other assets

 

65

 

36

SIGNIFICANT PENSION ARRANGEMENTS IN THE VOLKSWAGEN GROUP

For the period after their active working life, the Volkswagen Group offers its employees benefits under attractive, modern occupational pension arrangements. Most of the arrangements in the Volkswagen Group are pension plans for employees in Germany classified as defined benefit plans under IAS 19. The majority of these obligations are funded solely by recognized provisions. These plans are now largely closed to new members. To reduce the risks associated with defined benefit plans, in particular longevity, salary increases and inflation, the Volkswagen Group has introduced new defined benefit plans in recent years whose benefits are funded by appropriate external plan assets. The above-mentioned risks have been largely reduced in these pension plans. The proportion of the total defined benefit obligation attributable to pension obligations funded by plan assets will continue to rise in the future. The significant pension plans are described in the following.

GERMAN PENSION PLANS FUNDED SOLELY BY RECOGNIZED PROVISIONS

The pension plans funded solely by recognized provisions comprise both contribution-based plans with guarantees and final salary plans. For contribution-based plans, an annual pension expense dependent on income and status is converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlements). The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. For final salary plans, the underlying salary is multiplied at retirement by a percentage that depends on the years of service up until the retirement date.

The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk.

The pension system provides for lifelong pension payments. The companies bear the longevity risk in this respect. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables – the “Heubeck 2005 G” mortality tables – which already reflect future increases in life expectancy.

To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law.

GERMAN PENSION PLANS FUNDED BY EXTERNAL PLAN ASSETS

The pension plans funded by external plan assets are contribution-based plans with guarantees. In this case, an annual pension expense dependent on income and status is either converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlement) or paid out in a single lump sum or in installments. In some cases, employees also have the opportunity to provide for their own retirement through deferred compensation. The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. The pension expense is contributed on an ongoing basis to a separate pool of assets that is administered in trust. These assets are invested in the capital markets by trusts that are independent of the Company. If the plan assets exceed the present value of the obligations calculated using the guaranteed rate of interest, surpluses are allocated (modular pension bonuses).

Since the assets administered in trust meet the IAS 19 criteria for classification as plan assets, they are deducted from the obligations.

The amount of the pension assets is exposed to general market risk. The investment strategy and its implementation are therefore continuously monitored by the trusts’ governing bodies, on which the companies are also represented. For example, investment policies are stipulated in investment guidelines with the aim of limiting market risk and its impact on plan assets. In addition, asset-liability management studies are conducted if required so as to ensure that investments are in line with the obligations that need to be covered. The pension assets are currently invested primarily in fixed-income or equity funds. The main risks are therefore interest rate and equity price risk. To mitigate market risk, the pension system also provides for cash funds to be set aside in an equalization reserve before any surplus is allocated.

The present value of the obligation is the present value of the guaranteed obligation after deducting the plan assets. If the plan assets fall below the present value of the guaranteed obligation, a provision must be recognized in that amount. The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk.

In the case of lifelong pension payments, the Volkswagen Group bears the longevity risk. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables – the “Heubeck 2005 G” mortality tables – which already reflect future increases in life expectancy. In addition, the independent actuaries carry out annual risk monitoring as part of the review of the assets administered by the trusts.

To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law.

Calculation of the pension provisions was based on the following actuarial assumptions:

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GERMANY

 

ABROAD

%

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Discount rate at December 31

 

3.70

 

3.20

 

5.51

 

4.66

Payroll trend

 

3.36

 

2.78

 

3.24

 

3.87

Pension trend

 

1.80

 

1.80

 

3.02

 

2.29

Employee turnover rate

 

1.03

 

1.02

 

3.76

 

4.22

Annual increase in healthcare costs

 

 

 

5.51

 

6.08

These assumptions are averages that were weighted using the present value of the defined benefit obligation.

With regard to life expectancy, consideration is given to the latest mortality tables in each country.

The discount rates are generally defined to reflect the yields on prime-rated corporate bonds with matching maturities and currencies. The iBoxx AA 10+ Corporates index was taken as the basis for the obligations of German Group companies. Similar indices were used for foreign pension obligations.

The payroll trends cover expected wage and salary trends, which also include increases attributable to career development.

The pension trends either reflect the contractually guaranteed pension adjustments or are based on the rules on pension adjustments in force in each country.

The employee turnover rates are based on past experience and future expectations.

The following table shows changes in the net defined benefit liability recognized in the balance sheet:

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€ million

 

2013

 

2012*

 

 

 

 

 

 

Prior-year figures adjusted to reflect application of IAS 19R.

Net liability recognized in the balance sheet at January 1

 

23,903

 

16,705

Current service cost

 

759

 

573

Net interest expense

 

752

 

760

Actuarial gains (–)/losses (+) arising from changes in demographic assumptions

 

21

 

–14

Actuarial gains (–)/losses (+) arising from changes in financial assumptions

 

–2,323

 

5,518

Actuarial gains (–)/losses (+) arising from experience adjustments

 

–16

 

193

Income/expenses from plan assets not included in interest income

 

49

 

108

Change in amount not recognized as an asset because of the ceiling in IAS 19

 

–17

 

6

Employer contributions to plan assets

 

572

 

440

Pension payments from company assets

 

766

 

762

Past service cost (including plan curtailments)

 

4

 

–10

Gains (–) or losses (+) arising from plan settlements

 

1

 

0

Changes in consolidated Group

 

1

 

1,424

Other changes

 

47

 

78

Foreign exchange differences from foreign plans

 

–72

 

–8

Net liability recognized in the balance sheet at December 31

 

21,709

 

23,903

The change in the present value of the defined benefit obligation is attributable to the following factors:

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€ million

 

2013

 

2012*

 

 

 

 

 

*

Prior-year figures adjusted to reflect application of IAS 19R.

Present value of obligations at January 1

 

31,185

 

23,251

Current service cost

 

759

 

573

Interest cost

 

1,041

 

1,102

Actuarial gains(–)/losses (+) arising from changes in demographic assumptions

 

21

 

–14

Actuarial gains(–)/losses (+) arising from changes in financial assumptions

 

–2,323

 

5,518

Actuarial gains(–)/losses (+) arising from experience adjustments

 

–16

 

193

Employee contributions to plan assets

 

41

 

41

Pension payments from company assets

 

766

 

762

Pension payments from plan assets

 

222

 

210

Past service cost (including plan curtailments)

 

4

 

–10

Gains (–) or losses (+) arising from plan settlements

 

1

 

0

Changes in consolidated Group

 

1

 

1,485

Other changes

 

197

 

84

Foreign exchange differences from foreign plans

 

–266

 

–67

Present value of obligations at December 31

 

29,657

 

31,185

Changes in the relevant actuarial assumptions would have had the following effects on the defined benefit obligation:

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DEC. 31, 2013

Present value of defined benefit obligation if

 

€ million

 

Change in percent

 

 

 

 

 

 

 

Discount rate

 

is 0.5 percentage points higher

 

27,656

 

–6.75

 

 

is 0.5 percentage points lower

 

32,263

 

8.79

Pension trend

 

is 0.5 percentage points higher

 

31,113

 

4.91

 

 

is 0.5 percentage points lower

 

28,360

 

–4.37

Payroll trend

 

is 0.5 percentage points higher

 

30,047

 

1.31

 

 

is 0.5 percentage points lower

 

29,324

 

–1.12

Longevity

 

increases by one year

 

30,413

 

2.55

The sensitivity analysis shown above considers the change in one assumption at a time, leaving the other assumptions unchanged versus the original calculation, i.e. any correlation effects between the individual assumptions are ignored.

To examine the sensitivity of the defined benefit obligation to a change in assumed longevity, the estimates of mortality were reduced as part of a comparative calculation to the extent that doing so increases life expectancy by approximately one year.

The average duration of the defined benefit obligation weighted by the present value of the defined benefit obligation (Macaulay duration) is 17 years (previous year: 18 years).

The present value of the defined benefit obligation is attributable as follows to the members of the plan:

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€ million

 

2013

 

2012*

 

 

 

 

 

*

Prior-year figures adjusted to reflect application of IAS 19R.

Active members with pension entitlements

 

15,772

 

16,431

Members with vested entitlements who have left the Company

 

1,418

 

1,567

Pensioners

 

12,468

 

13,186

The maturity profile of payments attributable to the defined benefit obligation is presented in the following table, which classifies the present value of the obligation by the maturity of the underlying payments:

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€ million

 

2013

 

2012*

 

 

 

 

 

*

Prior-year figures adjusted to reflect application of IAS 19R.

Payments due within the next fiscal year

 

977

 

1,047

Payments due between two and five years

 

3,856

 

3,844

Payments due in more than five years

 

24,824

 

26,294

Changes in plan assets are shown in the following table:

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€ million

 

2013

 

2012

 

 

 

 

 

Fair value of plan assets at January 1

 

7,288

 

6,559

Interest income on plan assets determined using the discount rate

 

290

 

342

Income/expenses from plan assets not included in interest income

 

49

 

108

Employer contributions to plan assets

 

572

 

440

Employee contributions to plan assets

 

41

 

41

Pension payments from plan assets

 

222

 

210

Gains (+) or losses (–) arising from plan settlements

 

 

Changes in consolidated Group

 

0

 

60

Other changes

 

150

 

6

Foreign exchange differences from foreign plans

 

–196

 

–59

Fair value of plan assets at December 31

 

7,970

 

7,288

The investment of the plan assets to cover future pension obligations resulted in income in the amount of €338 million (previous year: €450 million).

Employer contributions to plan assets are expected to amount to €501 million in the next fiscal year (previous year: €485 million).

Plan assets are invested in the following asset classes:

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DEC. 31, 2013

 

DEC. 31, 2012*

€ million

 

Quoted prices in active markets

 

No quoted prices in active markets

 

Total

 

Quoted prices in active markets

 

No quoted prices in active markets

 

Total

*

Prior-year figures adjusted to reflect application of IAS 19R.

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

338

 

 

338

 

478

 

0

 

478

Equity instruments

 

271

 

 

271

 

119

 

23

 

141

Debt instruments

 

1,304

 

0

 

1,305

 

1,353

 

1

 

1,354

Direct investments in real estate

 

2

 

82

 

84

 

 

39

 

39

Derivatives

 

17

 

 

17

 

63

 

 

63

Equity funds

 

1,812

 

70

 

1,883

 

1,637

 

59

 

1,696

Bond funds

 

2,955

 

86

 

3,041

 

2,467

 

91

 

2,558

Real estate funds

 

197

 

1

 

197

 

158

 

34

 

192

Other funds

 

317

 

2

 

319

 

240

 

 

240

Other instruments

 

46

 

469

 

516

 

95

 

431

 

526

37.7% (previous year: 30.4%) of the plan assets are invested in German assets, 29.6% (previous year: 17.2%) in other European assets and 32.7% (previous years: 52.3%) in assets in other regions.

Plan assets include €22 million (previous year: €20 million) invested in Volkswagen Group assets and €19 million (previous year: €7 million) in Volkswagen Group debt instruments.

The following amounts were recognized in the income statement:

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€ million

 

2013

 

2012*

 

 

 

 

 

*

Prior-year figures adjusted to reflect application of IAS 19R.

Current service cost

 

759

 

573

Net interest expense (+)/income (–)

 

752

 

760

Past service cost (including plan curtailments)

 

4

 

–10

Gains (–) or losses (+) arising from plan settlements

 

1

 

0

Net income (–) and expenses (+) recognized in profit or loss

 

1,516

 

1,324

The above amounts are generally included in the personnel costs of the functions in the income statement. Net interest expense/income from unwinding the discount on the obligation and contained in the return on plan assets is presented in finance costs.