Chairman’s Letter
Notes
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Financial Statements
25. Provisions for pensions and other post-employment benefits
The provisions for pensions and other post-employment benefits are as follows:
| Pensions | Other post- employment benefits | Total | ||||
| € million | Dec. 31, 2005 | Dec. 31, 2006 | Dec. 31, 2005 | Dec. 31, 2006 | Dec. 31, 2005 | Dec. 31, 2006 |
| Germany | 5,657 | 5,304 | 158 | 139 | 5,815 | 5,443 |
| Other countries | 832 | 587 | 527 | 513 | 1,359 | 1,100 |
| Total | 6,489 | 5,891 | 685 | 652 | 7,174 | 6,543 |
Group companies provide retirement benefits for most of their employees, either directly or by contributing to independently 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 the employees’ remuneration and years of service. The obligations relate both to existing retirees’ pensions and to pension entitlements of future retirees. Group companies provide retirement benefits under defined contribution and/or defined benefit plans.
In the case of defined contribution plans, the company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the company has no further payment obligations.
The regular contributions constitute expenses for the year in which they are due and as such are included in the functional cost items, and thus in the operating result (EBIT). In 2006, these expenses totaled €392 million (2005: €320 million). All other retirement benefit plans are defined benefit plans, which may be either unfunded, i.e. financed by provisions (accruals), or funded, i.e. financed through pension funds.
All income and expenses relating to funded defined benefit plans apart from interest cost and the expected return on plan assets are recognized in the Group operating result (EBIT). Interest cost and the expected return on plan assets are reflected in the non-operating result.
Actuarial gains and losses from defined benefit plans and deductions in connection with asset limitation are recognized entirely as pension provisions via the statement of changes in stockholders’ equity and shown in a separate statement of recognized income and expense, so they have no impact on profit or loss.
Early retirement payments and certain other benefits to retirees are also included here, since these obligations are similar in character to pension obligations.
The costs for defined-benefit pension plans for the continuing and discontinued operations are comprised as follows:
In the case of defined contribution plans, the company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the company has no further payment obligations.
The regular contributions constitute expenses for the year in which they are due and as such are included in the functional cost items, and thus in the operating result (EBIT). In 2006, these expenses totaled €392 million (2005: €320 million). All other retirement benefit plans are defined benefit plans, which may be either unfunded, i.e. financed by provisions (accruals), or funded, i.e. financed through pension funds.
All income and expenses relating to funded defined benefit plans apart from interest cost and the expected return on plan assets are recognized in the Group operating result (EBIT). Interest cost and the expected return on plan assets are reflected in the non-operating result.
Actuarial gains and losses from defined benefit plans and deductions in connection with asset limitation are recognized entirely as pension provisions via the statement of changes in stockholders’ equity and shown in a separate statement of recognized income and expense, so they have no impact on profit or loss.
Early retirement payments and certain other benefits to retirees are also included here, since these obligations are similar in character to pension obligations.
The costs for defined-benefit pension plans for the continuing and discontinued operations are comprised as follows:
| Germany | Other countries | Total | ||||
| € million | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 |
| Current service cost | 138 | 195 | 122 | 76 | 260 | 271 |
| Past service cost | 56 | (8) | 4 | 3 | 60 | (5) |
| Interest cost | 432 | 466 | 222 | 230 | 654 | 696 |
| Expected return on plan assets | (237) | (270) | (237) | (262) | (474) | (532) |
| Plan curtailments | - | (2) | (317) | (20) | (317) | (22) |
| Plan settlements | - | - | 0 | (2) | 0 | (2) |
| 389 | 381 | (206) | 25 | 183 | 406 | |
Expenses for other post-employment benefit obligations comprised:
| Germany | Other Countries | Total | ||||
| € million | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 |
| Current service cost | 17 | 19 | 30 | 24 | 47 | 43 |
| Past service cost | - | - | (61) | (12) | (61) | (12) |
| Interest cost | 5 | 4 | 51 | 51 | 56 | 55 |
| Expected return on plan assets | - | - | (27) | (27) | (27) | (27) |
| Plan curtailments | - | - | (10) | (25) | (10) | (25) |
| Plan settlements | - | - | - | 1 | - | 1 |
| 22 | 23 | (17) | 12 | 5 | 35 | |
Expenses for pension plans assigned to assets held for sale in 2006 comprised service cost of €14 million (2005: €14 million), interest cost of €20 million (2005: €21 million) for entitlements earned in previous years, expected returns on plan assets amounting to €10 million (2005: €9 million) and income of €37 million (2005: €45 million) from plan curtailments.
The present value of defined benefit obligations is calculated in accordance with IAS 19 (Employee Benefits) by the projected unit credit method. The future benefit obligations are valued by actuarial methods on the basis of a prudent assessment of the relevant parameters. The fair value of plan assets is deducted from the present value of the obligation for pensions and other post-employment benefits. The obligations and plan assets are valued at regular intervals of not more than three years. For all major plans, comprehensive actuarial valuations are performed annually as of December 31.
The difference between the defined benefit obligation – after deducting the fair value of plan assets – and the net liability recognized in the balance sheet is attributable to unrecognized past service cost.
Plan assets in excess of the benefit obligation are reflected in other receivables, subject to the asset limitation specified in IAS 19 (Employee Benefits).
Benefits expected to be payable after retirement are spread over each employee’s entire period of employment, allowing for future changes in remuneration.
Changes in provisions for pensions and other post-employment benefits were as follows:
The present value of defined benefit obligations is calculated in accordance with IAS 19 (Employee Benefits) by the projected unit credit method. The future benefit obligations are valued by actuarial methods on the basis of a prudent assessment of the relevant parameters. The fair value of plan assets is deducted from the present value of the obligation for pensions and other post-employment benefits. The obligations and plan assets are valued at regular intervals of not more than three years. For all major plans, comprehensive actuarial valuations are performed annually as of December 31.
The difference between the defined benefit obligation – after deducting the fair value of plan assets – and the net liability recognized in the balance sheet is attributable to unrecognized past service cost.
Plan assets in excess of the benefit obligation are reflected in other receivables, subject to the asset limitation specified in IAS 19 (Employee Benefits).
Benefits expected to be payable after retirement are spread over each employee’s entire period of employment, allowing for future changes in remuneration.
Changes in provisions for pensions and other post-employment benefits were as follows:
| Balance as of Jan. 1 | Aquisiti- ons and changes in the scope of conso- lidation | Additions | Utilization | Reversal | Reclassi-fications to current liabilities | Exchange differences | Balance as of Dec. 31 | |
| € million | ||||||||
| 2006 | 7,174 | 341 | 497 | (565) | (519) | (297) | (88) | 6,543 |
| 2005 | 6,219 | 25 | 1,849 | (615) | (403) | - | 99 | 7,174 |
In 2005, provisions for pensions and other post-employment benefits were influenced mainly by the restructuring of Bayer’s global pension systems and especially the modification of several of its largest pension plans in the United States, replacing defined-benefit plans with purely defined-contribution plans. In 2006, by contrast, the main impact came from structural adjustments to the Bayer Group’s portfolio. Reclassifications to current liabilities totaled €297 million, while additions to provisions as a result of the acquisition of the Schering group amounted to €345 million. Changes in value caused by actuarial gains and losses are shown as reversals or additions.
The status of unfunded and funded defined benefit obligations, computed using the appropriate parameters, is as follows:
The status of unfunded and funded defined benefit obligations, computed using the appropriate parameters, is as follows:
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| Click on the table to enlarge. |
Of the defined benefit obligation for pensions, €5,067 million (2005: €5,516 million) relates to unfunded benefit obligations while €10,638 million (2005: €9,009 million) relates to funded benefit obligations. Of the defined benefit obligation for other post-employment benefits, €328 million (2005: €341 million) relates to unfunded benefit obligations while €675 million (2005: €695 million) relates to funded benefit obligations.
Of the funded pension plans, total overfunding of individual plans amounts to €89 million (2005: €41 million) while underfunding amounts to €870 million (2005: €966 million). Similarly, other funded post-employment benefit obligations of individual funds are underfunded by €318 million (2005: €336 million).
The Bayer Group has set up funded pension plans for its employees in many countries. Since the legal and tax requirements and economic conditions may vary considerably between countries, assets are managed according to country-specific principles.
Bayer Pensionskasse VvaG (Bayer Pensionskasse) in Germany is by far the most significant of the pension funds. This legally independent fund is a private insurance company and is therefore subject to the German Law on the Supervision of Private Insurance Companies. Since Bayer guarantees the commitments of Bayer Pensionskasse, it is classified as a defined benefit plan for IFRS purposes. The fair value of the plan assets includes real estate leased by Bayer which is recognized at a fair value of €54 million (2005: €56 million). Bayer AG has undertaken to provide profit-sharing capital in the form of an interest-bearing loan totaling €150 million for the Bayer Pensionskasse. The entire amount was drawn as of December 31, 2005 and 2006.
The investment policy of Bayer Pensionskasse is geared to compliance with regulatory provisions and to the risk structure resulting from its obligations. In light of capital market movements, Bayer Pensionskasse has therefore developed a strategic target investment portfolio aligned to its risk structure. Its investment strategy focuses principally on stringent management of downside risks rather than on maximizing absolute returns. It is anticipated that this investment policy can generate a return that enables it to meet its long-term commitments.
A large proportion of the benefit obligations of Bayer Schering Pharma AG, Germany*, which was acquired during the year, are covered by Schering Altersversorgung Treuhand Verein. Its investment strategy allows the use of derivatives; all currency risks are fully hedged. A risk management system simulates worst case scenarios for defined portfolios on the basis of historical price data.
For plan assets in other countries, too, the key investment strategy criteria are the structure of the benefit obligations and the risk profile. Other determinants are risk diversification, portfolio efficiency and a country-specific and global balance of opportunity and risk capable of ensuring the payment of all future benefits.
At year end, plan assets to cover pension obligations were allocated as follows:
Bayer Pensionskasse VvaG (Bayer Pensionskasse) in Germany is by far the most significant of the pension funds. This legally independent fund is a private insurance company and is therefore subject to the German Law on the Supervision of Private Insurance Companies. Since Bayer guarantees the commitments of Bayer Pensionskasse, it is classified as a defined benefit plan for IFRS purposes. The fair value of the plan assets includes real estate leased by Bayer which is recognized at a fair value of €54 million (2005: €56 million). Bayer AG has undertaken to provide profit-sharing capital in the form of an interest-bearing loan totaling €150 million for the Bayer Pensionskasse. The entire amount was drawn as of December 31, 2005 and 2006.
The investment policy of Bayer Pensionskasse is geared to compliance with regulatory provisions and to the risk structure resulting from its obligations. In light of capital market movements, Bayer Pensionskasse has therefore developed a strategic target investment portfolio aligned to its risk structure. Its investment strategy focuses principally on stringent management of downside risks rather than on maximizing absolute returns. It is anticipated that this investment policy can generate a return that enables it to meet its long-term commitments.
A large proportion of the benefit obligations of Bayer Schering Pharma AG, Germany*, which was acquired during the year, are covered by Schering Altersversorgung Treuhand Verein. Its investment strategy allows the use of derivatives; all currency risks are fully hedged. A risk management system simulates worst case scenarios for defined portfolios on the basis of historical price data.
For plan assets in other countries, too, the key investment strategy criteria are the structure of the benefit obligations and the risk profile. Other determinants are risk diversification, portfolio efficiency and a country-specific and global balance of opportunity and risk capable of ensuring the payment of all future benefits.
At year end, plan assets to cover pension obligations were allocated as follows:
| Plan assets as of December 31 | Germany | Other countries | ||||
| % | 2005 | 2006 | Target for 2007 | 2005 | 2006 | Target for 2007 |
| Equity securities (directly held) | 0.04 | 13.36 | 13.10 | 50.98 | 50.84 | 49.09 |
| Debt securities | 53.75 | 41.68 | 42.14 | 41.26 | 40.46 | 41.24 |
| Special securities funds | 25.65 | 26.13 | 22.62 | 0.00 | 0.01 | 0.01 |
| Real estate and special real estate funds | 12.13 | 8.92 | 12.92 | 1.58 | 3.03 | 3.14 |
| Other | 8.43 | 9.91 | 9.22 | 6.18 | 5.66 | 6.52 |
| 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | |
Obligations in Germany to pay early retirement benefits are funded entirely by provisions.
At year end, plan assets to cover other post-employment benefit obligations were allocated as follows:
At year end, plan assets to cover other post-employment benefit obligations were allocated as follows:
| Plan assets as of December 31 | Germany | Other countries | ||||
| % | 2005 | 2006 | Target for 2007 | 2005 | 2006 | Target for 2007 |
| Equity securities (directly held) | - | - | - | 56.10 | 56.80 | 53.00 |
| Debt securities | - | - | - | 35.40 | 35.30 | 35.00 |
| Special securities funds | - | - | - | - | - | - |
| Real estate and special real estate funds | - | - | - | - | - | - |
| Other | - | - | - | 8.50 | 7.90 | 12.00 |
| - | - | - | 100.00 | 100.00 | 100.00 | |
At the closing dates, plan assets included roughly the same weightings of Bayer shares as the major stock indices.
All defined benefit plans necessitate actuarial computations and valuations. These are based not only on life expectancy and staff fluctuation, but also on the following parameters, which vary from country to country according to economic conditions.
The weighted parameters used to value pension obligations as of December 31 of the respective year were as follows:
All defined benefit plans necessitate actuarial computations and valuations. These are based not only on life expectancy and staff fluctuation, but also on the following parameters, which vary from country to country according to economic conditions.
The weighted parameters used to value pension obligations as of December 31 of the respective year were as follows:
| Germany | Other countries | Total | ||||
| % | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 |
| Pension obligations | ||||||
| Discount rate | 4.25 | 4.60 | 5.50 | 5.65 | 4.60 | 4.90 |
| Projected future remuneration increases | 2.50 | 2.60 | 4.00 | 4.10 | 2.75 | 2.85 |
| Projected future benefit increases | 1.25 | 1.50 | 2.75 | 2.45 | 1.45 | 1.60 |
| Other post-employment benefit obligations | ||||||
| Discount rate | 3.25 | 4.30 | 6.00 | 6.25 | 5.65 | 6.00 |
The following weighted parameters were used to value the cost of pensions and other post-employment benefits:
| Germany | Other countries | Total | ||||
| % | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 |
| Pension obligations | ||||||
| Discount rate | 5.00 | 4.25 | 5.75 | 5.50 | 5.20 | 4.60 |
| Projected future remuneration increases | 2.50 | 2.50 | 4.10 | 4.00 | 2.95 | 2.75 |
| Projected future benefit increases | 1.25 | 1.25 | 2.70 | 2.75 | 1.40 | 1.45 |
| Expected return on plan assets | 5.50 | 5.25 | 7.50 | 7.50 | 6.35 | 6.10 |
| Other post-employment benefit obligations | ||||||
| Discount rate | 3.25 | 3.25 | 6.00 | 6.00 | 5.40 | 5.65 |
| Expected return on plan assets | - | - | 8.25 | 8.25 | 8.25 | 8.25 |
The expected long-term return on plan assets is determined on the basis of published and internal capital market reports and forecasts for each asset class.
Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact pension and other post-employment benefit obligations as of year end 2006 as follows:
Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact pension and other post-employment benefit obligations as of year end 2006 as follows:
| Germany | Other countries | Total | ||||
| € million | 0.5 percentage point increase | 0.5 percentage point decrease | 0.5 percentage point increase | 0.5 percentage point decrease | 0.5 percentage point increase | 0.5 percentage point decrease |
| Pension obligations | ||||||
| Change in discount rate | (771) | 865 | (273) | 295 | (1,044) | 1,160 |
| Change in projected future remuneration increases | 139 | (132) | 56 | (50) | 195 | (182) |
| Change in projected future benefit increases | 568 | (531) | 70 | (31) | 638 | (562) |
| Other post-employment benefit obligations | ||||||
| Change in discount rate | (1) | 1 | (42) | 42 | (43) | 43 |
Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact pension expense as of year end 2007 as follows:
| Germany | Other countries | Total | ||||
| € million | 0.5 percentage point increase | 0.5 percentage point decrease | 0.5 percentage point increase | 0.5 percentage point decrease | 0.5 percentage point increase | 0.5 percentage point decrease |
| Pension obligations | ||||||
| Change in discount rate | (10) | 10 | (1) | (1) | (11) | 9 |
| Change in projected future remuneration increases | 9 | (8) | 4 | (4) | 13 | (12) |
| Change in projected future benefit increases | 33 | (30) | 3 | (2) | 36 | (32) |
| Change in expected return on plan assets | (30) | 30 | (18) | 18 | (48) | 48 |
| Other post-employment benefit obligations | ||||||
| Change in discount rate | 0 | 0 | (2) | 2 | (2) | 2 |
| Change in expected return on plan assets | - | - | (2) | 2 | (2) | 2 |
Provisions are also set up for the obligations of Group companies, particularly in the United States, to provide post-employment benefits in the form of health care cost payments to retirees. The valuation of health care costs is based on the assumption that they will increase at a rate of 11 percent (assumption in 2005: 10 percent), which should decline to 9 percent by 2008 (assumption in 2005: 8 percent by 2007). The table shows the impact of a one percentage point change in the assumed rate of cost increases:
| Increase of one percentage point | Decrease of one percentage point | |
| € million | ||
| Impact on pension expense | 3 | (2) |
| Impact on other post-employment benefit obligations | 65 | (60) |
The following employer contributions were made in 2006 and 2005, and are expected to be made in 2007, in connection with defined benefit obligations
| Germany | Other countries | |||||
| € million | 2005 | 2006 | 2007 projected | 2005 | 2006 | 2007 projected |
| Pension obligations | 306 | 325 | 348 | 176 | 173 | 92 |
| Other post-employment benefit obligations | 48 | 46 | 39 | 53 | 38 | 44 |
| Total | 354 | 371 | 387 | 229 | 211 | 136 |
Pensions and other post-employment benefits payable in the future are estimated as follows:
| Germany | Other countries | Total | ||||
| € million | Pension obligations | Other post-employment benefit obligations | Pension obligations | Other post-employment benefit obligations | Pension obligations | Other post-employment benefit obligations |
| 2007 | 528 | 39 | 191 | 43 | 719 | 82 |
| 2008 | 544 | 29 | 195 | 45 | 739 | 74 |
| 2009 | 566 | 22 | 205 | 48 | 771 | 70 |
| 2010 | 587 | 20 | 221 | 52 | 808 | 72 |
| 2011 | 609 | 16 | 241 | 55 | 850 | 71 |
| 2012 – 2016 | 3,378 | 12 | 1,327 | 312 | 4,705 | 324 |
The actuarial gains and losses related to defined benefit obligations and plan assets, recognized in a separate statement of recognized income and expense outside of profit or loss, and the deductions in connection with asset limitation due to the uncertainty of obtaining future benefits, are as follows:
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| Click on the table to enlarge. |
In Germany, no unrealized gains/losses or deductions due to asset limitation exist in relation to other post-employment benefit obligations.
*
The names "Bayer Schering Pharma" or "Schering" as used in this publication always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively.
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