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 2020, they amounted to a total of €2,622 million (previous year: €2,565 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €1,826 million (previous year: €1,796 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, from changes in assumptions, as well as from gains or losses on plan assets, excluding amounts included in net interest income or expenses. 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 and the Netherlands. 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 2021.

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 2020, €15 million (previous year: €18 million) was recognized as an expense for healthcare costs. The related carrying amount as of December 31, 2020 was €228 million (previous year: €266 million).

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

€ million

 

Dec. 31, 2020

 

Dec. 31, 2019

 

 

 

 

 

Present value of funded obligations

 

24,101

 

21,090

Fair value of plan assets

 

13,264

 

12,478

Funded status (net)

 

10,838

 

8,613

Present value of unfunded obligations

 

34,200

 

32,710

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

 

2

 

2

Net liability recognized in the balance sheet

 

45,040

 

41,324

of which provisions for pensions

 

45,081

 

41,389

of which other assets

 

41

 

65

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 aforementioned 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 2018 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 2018 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:

 

 

GERMANY

 

ABROAD

%

 

2020

 

2019

 

2020

 

2019

1

Prior-year figures adjusted.

 

 

 

 

 

 

 

 

 

Discount rate at December 31

 

0.70

 

1.09

 

1.70

 

2.30

Payroll trend

 

3.31

 

3.59

 

2.74

 

2.881

Pension trend

 

1.49

 

1.50

 

2.50

 

2.68

Employee turnover rate

 

1.16

 

1.24

 

4.36

 

3.75

Annual increase in healthcare costs

 

 

 

5.30

 

5.56

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 Corporate Bond index was taken as the basis for the obligations of German Group companies. Similar indices were used for foreign pension obligations.

Some steps in the calculation of the EUR discount rate were adjusted in the course of the fiscal year in order to better reflect the persistently low interest rates in the valuation technique. The adjustment resulted in an increase in the discount rate by 0.1 percentage points and, consequently, a €1.4 billion decrease in actuarial losses.

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:

€ million

 

2020

 

2019

 

 

 

 

 

Net liability recognized in the balance sheet at January 1

 

41,324

 

33,022

Current service cost

 

2,215

 

1,555

Net interest expense

 

459

 

660

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

 

−420

 

−67

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

 

4,393

 

8,689

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

 

−394

 

27

Income/expenses from plan assets not included in interest income

 

677

 

654

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

 

0

 

21

Employer contributions to plan assets

 

929

 

969

Employee contributions to plan assets

 

−8

 

−9

Pension payments from company assets

 

885

 

873

Past service cost (including plan curtailments)

 

−99

 

−25

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

 

7

 

2

Changes in consolidated Group

 

11

 

−3

Classified as held for sale

 

 

14

Other changes

 

25

 

−8

Foreign exchange differences from foreign plans

 

−1

 

−4

Net liability recognized in the balance sheet at December 31

 

45,040

 

41,324

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:

€ million

 

2020

 

2019

 

 

 

 

 

Present value of obligations at January 1

 

53,800

 

43,918

Current service cost

 

2,215

 

1,555

Interest cost

 

631

 

921

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

 

−420

 

−67

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

 

4,393

 

8,689

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

 

−394

 

27

Employee contributions to plan assets

 

17

 

19

Pension payments from company assets

 

885

 

873

Pension payments from plan assets

 

292

 

300

Past service cost (including plan curtailments)

 

−99

 

−25

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

 

7

 

−8

Changes in consolidated Group

 

16

 

−7

Classified as held for sale

 

 

182

Other changes

 

−471

 

−2

Foreign exchange differences from foreign plans

 

−219

 

135

Present value of obligations at December 31

 

58,301

 

53,800

In fiscal year 2020, a pension plan in the USA funded by external plan assets was settled. The resulting decrease in the present value of the defined benefit obligation in the amount of €520 million is shown under other changes. The plan settlement led to a loss of €7 million.

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

 

 

 

 

DEC. 31, 2020

 

DEC. 31, 2019

Present value of defined benefit obligation if

 

€ million

 

Change in percent

 

€ million

 

Change in percent

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

is 0.5 percentage points higher

 

52,604

 

−9.77

 

48,598

 

−9.67

 

 

is 0.5 percentage points lower

 

64,981

 

11.46

 

59,888

 

11.32

Pension trend

 

is 0.5 percentage points higher

 

61,360

 

5.25

 

56,633

 

5.27

 

 

is 0.5 percentage points lower

 

55,552

 

−4.71

 

51,258

 

−4.73

Payroll trend

 

is 0.5 percentage points higher

 

58,808

 

0.87

 

54,331

 

0.99

 

 

is 0.5 percentage points lower

 

57,843

 

−0.79

 

53,319

 

−0.89

Longevity

 

increases by one year

 

60,385

 

3.57

 

55,719

 

3.57

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 21 years (previous year: 22 years).

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

€ million

 

2020

 

2019

 

 

 

 

 

Active members with pension entitlements

 

36,124

 

33,027

Members with vested entitlements who have left the Company

 

3,642

 

3,136

Pensioners

 

18,535

 

17,637

 

 

58,301

 

53,800

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:

€ million

 

2020

 

2019

 

 

 

 

 

Payments due within the next fiscal year

 

1,162

 

1,161

Payments due between two and five years

 

5,334

 

5,121

Payments due in more than five years

 

51,806

 

47,518

 

 

58,301

 

53,800

Changes in plan assets are shown in the following table:

€ million

 

2020

 

2019

 

 

 

 

 

Fair value of plan assets at January 1

 

12,478

 

10,920

Interest income on plan assets determined using the discount rate

 

172

 

261

Income/expenses from plan assets not included in interest income

 

677

 

654

Employer contributions to plan assets

 

929

 

969

Employee contributions to plan assets

 

9

 

9

Pension payments from plan assets

 

291

 

299

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

 

 

10

Changes in consolidated Group

 

5

 

−5

Classified as held for sale

 

 

167

Other changes

 

−496

 

7

Foreign exchange differences from foreign plans

 

−219

 

139

Fair value of plan assets at December 31

 

13,264

 

12,478

Other changes in fiscal year 2020 resulted primarily from the derecognition of plan assets in the context of the settlement of a pension plan in the USA funded by external plan assets.

The investment of the plan assets to cover future pension obligations resulted in income of €849 million (previous year: income of €915 million).

Employer contributions to plan assets are expected to amount to €851 million (previous year: €927 million) in the next fiscal year.

Plan assets are invested in the following asset classes:

 

 

DEC. 31, 2020

 

DEC. 31, 2019

€ 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

 

628

 

 

628

 

501

 

 

501

Equity instruments

 

264

 

 

264

 

401

 

 

401

Debt instruments

 

496

 

 

496

 

850

 

5

 

855

Direct investments in real estate

 

 

121

 

121

 

 

110

 

110

Derivatives

 

20

 

−6

 

14

 

15

 

−28

 

−13

Equity funds

 

3,640

 

15

 

3,655

 

2,653

 

20

 

2,673

Bond funds

 

6,011

 

133

 

6,144

 

5,729

 

128

 

5,857

Real estate funds

 

190

 

 

190

 

170

 

 

170

Other funds

 

1,315

 

28

 

1,344

 

1,225

 

22

 

1,247

Other instruments

 

48

 

360

 

408

 

83

 

594

 

676

Plan assets include €12 million (previous year: €14 million) invested in Volkswagen Group assets and €5 million (previous year: €14 million) in Volkswagen Group debt instruments.

The following amounts were recognized in the income statement:

€ million

 

2020

 

2019

 

 

 

 

 

Current service cost

 

2,215

 

1,555

Net interest on the net defined benefit liability

 

459

 

662

Past service cost (including plan curtailments)

 

−99

 

−25

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

 

7

 

2

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

 

2,583

 

2,194

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