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 2016, they amounted to a total of €2,084 million (previous year: €1,978 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €1,552 million (previous year: €1,500 million).

In the case of defined benefit plans, a distinction is made between pensions funded 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. Remeasurements 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. No probable significant risks arising from multi-employer defined benefit pension plans that are accounted for as defined contribution plans have been identified. The expected contributions to those plans will amount to €25 million for fiscal year 2017.

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. In fiscal year 2016, €19 million (previous year: €19 million) was recognized as an expense for health care costs. The related carrying amount as of December 31, 2016 was €232 million (previous year: €222 million).

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

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€ million

 

Dec. 31, 2016

 

Dec. 31, 2015

 

 

 

 

 

Present value of funded obligations

 

15,104

 

12,098

Fair value of plan assets

 

10,749

 

9,769

Funded status (net)

 

4,355

 

2,329

Present value of unfunded obligations

 

28,585

 

25,118

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

 

26

 

17

Net liability recognized in the balance sheet

 

32,967

 

27,464

of which provisions for pensions

 

33,012

 

27,535

of which other assets

 

46

 

71

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 independently of the Company in trust and invested in the capital markets. 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

%

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Discount rate at December 31

 

1.79

 

2.70

 

3.82

 

4.36

Payroll trend

 

3.46

 

3.42

 

3.32

 

3.27

Pension trend

 

1.50

 

1.70

 

2.44

 

2.46

Employee turnover rate

 

1.13

 

1.01

 

3.63

 

3.80

Annual increase in healthcare costs

 

 

 

4.88

 

5.03

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

 

2016

 

2015

 

 

 

 

 

Net liability recognized in the balance sheet at January 1

 

27,464

 

29,731

Current service cost

 

1,066

 

1,104

Net interest expense

 

729

 

688

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

 

17

 

−23

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

 

5,862

 

−2,904

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

 

−283

 

190

Income/expenses from plan assets not included in interest income

 

349

 

−164

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

 

−4

 

−7

Employer contributions to plan assets

 

680

 

654

Employee contributions to plan assets

 

−7

 

−6

Pension payments from company assets

 

833

 

808

Past service cost (including plan curtailments)

 

−24

 

9

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

 

4

 

2

Changes in consolidated Group

 

0

 

1

Other changes

 

−42

 

−15

Foreign exchange differences from foreign plans

 

25

 

−34

Net liability recognized in the balance sheet at December 31

 

32,967

 

27,464

The change in the amount not recognized as an asset because of the ceiling in IAS 19 contains an interest component, part of which was recognized in the financial result in profit or loss, and part of which was recognized outside profit or loss directly in equity.

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

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€ million

 

2016

 

2015

 

 

 

 

 

Present value of obligations at January 1

 

37,215

 

38,939

Current service cost

 

1,066

 

1,104

Interest cost

 

1,075

 

996

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

 

17

 

−23

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

 

5,862

 

−2,904

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

 

−283

 

190

Employee contributions to plan assets

 

31

 

33

Pension payments from company assets

 

833

 

808

Pension payments from plan assets

 

308

 

292

Past service cost (including plan curtailments)

 

−24

 

9

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

 

−64

 

−4

Changes in consolidated Group

 

0

 

2

Other changes

 

−4

 

−8

Foreign exchange differences from foreign plans

 

−62

 

−19

Present value of obligations at December 31

 

43,689

 

37,215

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

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DEC. 31, 2016

 

DEC. 31, 2015

Present value of defined benefit obligation if

 

 

 

€ million

 

Change in percent

 

€ million

 

Change in percent

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

is 0.5 percentage points higher

 

39,761

 

−8.99

 

34,103

 

−8.36

 

 

is 0.5 percentage points lower

 

48,249

 

10.44

 

40,787

 

9.60

Pension trend

 

is 0.5 percentage points higher

 

45,985

 

5.25

 

39,081

 

5.01

 

 

is 0.5 percentage points lower

 

41,601

 

−4.78

 

35,444

 

−4.76

Payroll trend

 

is 0.5 percentage points higher

 

44,297

 

1.39

 

37,693

 

1.28

 

 

is 0.5 percentage points lower

 

43,145

 

−1.25

 

36,772

 

−1.19

Longevity

 

increases by one year

 

44,986

 

2.97

 

38,242

 

2.76

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 20 years (previous year: 19 years).

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

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€ million

 

2016

 

2015

 

 

 

 

 

Active members with pension entitlements

 

25,622

 

21,148

Members with vested entitlements who have left the Company

 

2,222

 

1,754

Pensioners

 

15,846

 

14,314

 

 

43,689

 

37,215

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

 

2016

 

2015

 

 

 

 

 

Payments due within the next fiscal year

 

1,126

 

1,098

Payments due between two and five years

 

4,801

 

4,420

Payments due in more than five years

 

37,762

 

31,697

 

 

43,689

 

37,215

Changes in plan assets are shown in the following table:

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€ million

 

2016

 

2015

 

 

 

 

 

Fair value of plan assets at January 1

 

9,769

 

9,224

Interest income on plan assets determined using the discount rate

 

346

 

308

Income/expenses from plan assets not included in interest income

 

349

 

−164

Employer contributions to plan assets

 

680

 

654

Employee contributions to plan assets

 

25

 

27

Pension payments from plan assets

 

308

 

292

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

 

68

 

5

Changes in consolidated Group

 

 

1

Other changes

 

38

 

7

Foreign exchange differences from foreign plans

 

−82

 

10

Fair value of plan assets at December 31

 

10,749

 

9,769

The investment of the plan assets to cover future pension obligations resulted in income in the amount of €695 million (previous year: €144 million).

Employer contributions to plan assets are expected to amount to €594 million (€599 million) in the next fiscal year.

Plan assets are invested in the following asset classes:

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DEC. 31, 2016

 

DEC. 31, 2015

€ 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

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

269

 

 

269

 

289

 

 

289

Equity instruments

 

360

 

 

360

 

313

 

 

313

Debt instruments

 

1,658

 

0

 

1,659

 

1,513

 

0

 

1,513

Direct investments in real estate

 

2

 

107

 

109

 

2

 

96

 

98

Derivatives

 

−15

 

 

−15

 

−19

 

 

−19

Equity funds

 

1,531

 

43

 

1,574

 

1,424

 

50

 

1,475

Bond funds

 

5,310

 

108

 

5,418

 

4,682

 

99

 

4,781

Real estate funds

 

192

 

 

192

 

257

 

 

257

Other funds

 

591

 

2

 

593

 

496

 

2

 

499

Other instruments

 

32

 

559

 

591

 

24

 

540

 

564

48.1% (previous year: 47.0%) of the plan assets are invested in German assets, 26.7% (previous year: 29.1%) in other European assets and 25.2 % (previous year: 24.0%) in assets in other regions.

Plan assets include €19 million (previous year: €15 million) invested in Volkswagen Group assets and €9 million (previous year: €8 million) in Volkswagen Group debt instruments.

The following amounts were recognized in the income statement:

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€ million

 

2016

 

2015

 

 

 

 

 

Current service cost

 

1,066

 

1,104

Net interest on the net defined benefit liability

 

731

 

690

Past service cost (including plan curtailments)

 

−24

 

9

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

 

4

 

2

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

 

1,777

 

1,804

The above amounts are generally included in the personnel costs of the functions in the income statement. Net interest on the net defined benefit liability is reported in finance costs.