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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 2021, they amounted to a total of €2,660 million (previous year: €2,622 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €1,825 million (previous year: €1,826 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 €27 million for fiscal year 2022.

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 2021, €20 million (previous year: €15 million) was recognized as an expense for healthcare costs. The related carrying amount as of December 31, 2021 was €800 million (previous year: €228 million).

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

€ million

 

Dec. 31, 2021

 

Dec. 31, 2020

 

 

 

 

 

Present value of funded obligations

 

26,449

 

24,101

Fair value of plan assets

 

17,285

 

13,264

Funded status (net)

 

9,165

 

10,838

Present value of unfunded obligations

 

32,105

 

34,200

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

 

106

 

2

Net liability recognized in the balance sheet

 

41,376

 

45,040

of which provisions for pensions

 

41,550

 

45,081

of which other assets

 

175

 

41

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

%

 

2021

 

2020

 

2021

 

2020

 

 

 

 

 

 

 

 

 

Discount rate at December 31

 

1.21

 

0.70

 

2.42

 

1.70

Payroll trend

 

3.25

 

3.31

 

3.33

 

2.74

Pension trend

 

1.69

 

1.49

 

3.03

 

2.50

Employee turnover rate

 

1.18

 

1.16

 

3.85

 

4.36

Annual increase in healthcare costs

 

 

 

6.03

 

5.30

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.

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

 

2021

 

2020

 

 

 

 

 

Net liability recognized in the balance sheet at January 1

 

45,040

 

41,324

Current service cost

 

2,419

 

2,215

Net interest expense

 

352

 

459

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

 

0

 

–420

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

 

–4,879

 

4,393

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

 

–75

 

–394

Income/expenses from plan assets not included in interest income

 

719

 

677

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

 

12

 

0

Employer contributions to plan assets

 

1,003

 

929

Employee contributions to plan assets

 

–14

 

–8

Pension payments from company assets

 

933

 

885

Past service cost (including plan curtailments)

 

–2

 

–99

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

 

–1

 

7

Changes in consolidated Group

 

972

 

11

Classified as held for sale

 

18

 

Other changes

 

145

 

25

Foreign exchange differences from foreign plans

 

51

 

–1

Net liability recognized in the balance sheet at December 31

 

41,376

 

45,040

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

 

2021

 

2020

 

 

 

 

 

Present value of obligations at January 1

 

58,301

 

53,800

Current service cost

 

2,419

 

2,215

Interest cost

 

504

 

631

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

 

0

 

–420

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

 

–4,879

 

4,393

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

 

–75

 

–394

Employee contributions to plan assets

 

22

 

17

Pension payments from company assets

 

933

 

885

Pension payments from plan assets

 

370

 

292

Past service cost (including plan curtailments)

 

–2

 

–99

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

 

–1

 

7

Changes in consolidated Group

 

3,078

 

16

Classified as held for sale

 

32

 

Other changes

 

180

 

–471

Foreign exchange differences from foreign plans

 

341

 

–219

Present value of obligations at December 31

 

58,555

 

58,301

In the previous year, 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, 2021

 

DEC. 31, 2020

Present value of defined benefit obligation if

 

€ million

 

Change in percent

 

€ million

 

Change in percent

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

is 0.5 percentage points higher

 

52,999

 

–9.49

 

52,604

 

–9.77

 

 

is 0.5 percentage points lower

 

64,766

 

10.61

 

64,981

 

11.46

Pension trend

 

is 0.5 percentage points higher

 

61,402

 

4.86

 

61,360

 

5.25

 

 

is 0.5 percentage points lower

 

55,994

 

–4.37

 

55,552

 

–4.71

Payroll trend

 

is 0.5 percentage points higher

 

58,969

 

0.71

 

58,808

 

0.87

 

 

is 0.5 percentage points lower

 

57,942

 

–1.05

 

57,843

 

–0.79

Longevity

 

increases by one year

 

60,641

 

3.56

 

60,385

 

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 20 years (previous year: 21 years).

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

€ million

 

2021

 

2020

 

 

 

 

 

Active members with pension entitlements

 

33,394

 

36,124

Members with vested entitlements who have left the Company

 

3,788

 

3,642

Pensioners

 

21,372

 

18,535

 

 

58,555

 

58,301

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

 

2021

 

2020

 

 

 

 

 

Payments due within the next fiscal year

 

1,513

 

1,162

Payments due between two and five years

 

6,535

 

5,334

Payments due in more than five years

 

50,506

 

51,806

 

 

58,555

 

58,301

Changes in plan assets are shown in the following table:

€ million

 

2021

 

2020

 

 

 

 

 

Fair value of plan assets at January 1

 

13,264

 

12,478

Interest income on plan assets determined using the discount rate

 

152

 

172

Income/expenses from plan assets not included in interest income

 

808

 

677

Employer contributions to plan assets

 

1,003

 

929

Employee contributions to plan assets

 

8

 

9

Pension payments from plan assets

 

371

 

291

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

 

 

Changes in consolidated Group

 

2,107

 

5

Classified as held for sale

 

15

 

Other changes

 

36

 

–496

Foreign exchange differences from foreign plans

 

291

 

–219

Fair value of plan assets at December 31

 

17,285

 

13,264

Other changes in the previous year 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 €960 million (previous year: income of €849 million).

Employer contributions to plan assets are expected to amount to €838 million (previous year: €851 million) in the next fiscal year.

Plan assets are invested in the following asset classes:

 

 

DEC. 31, 2021

 

DEC. 31, 2020

€ 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

 

791

 

 

791

 

628

 

 

628

Equity instruments

 

279

 

 

279

 

264

 

 

264

Debt instruments

 

611

 

5

 

615

 

496

 

 

496

Direct investments in real estate

 

 

170

 

170

 

 

121

 

121

Derivatives

 

2

 

–27

 

–26

 

20

 

–6

 

14

Equity funds

 

5,547

 

15

 

5,563

 

3,640

 

15

 

3,655

Bond funds

 

6,494

 

168

 

6,663

 

6,011

 

133

 

6,144

Real estate funds

 

510

 

23

 

532

 

190

 

 

190

Other funds

 

1,922

 

183

 

2,105

 

1,315

 

28

 

1,344

Other instruments

 

85

 

507

 

592

 

48

 

360

 

408

Plan assets include €6 million (previous year: €12 million) invested in Volkswagen Group assets and €5 million (previous year: €5 million) in Volkswagen Group debt instruments.

The following amounts were recognized in the income statement:

€ million

 

2021

 

2020

 

 

 

 

 

Current service cost

 

2,419

 

2,215

Net interest on the net defined benefit liability

 

352

 

459

Past service cost (including plan curtailments)

 

–2

 

–99

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

 

0

 

7

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

 

2,770

 

2,583

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.