28 Provisions for pensions and other post-employment benefits

Provisions for pensions are recognized for benefits 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.

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 Company. Current contributions are recognized as pension expenses of the period concerned. In 2008, they amounted to a total of €966 million (previous year, adjusted: €853 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to € 804 million (previous year: € 746 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 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 assumptions as to trends in the relevant variables affecting the level of benefits. All defined benefit plans require actuarial calculations. Actuarial gains or losses arise from changes in the number of beneficiaries and differences between actual trends (for example, in salary and pension increases or changes in interest rates) and the assumptions on which calculations were based. Actuarial gains and losses are taken directly to equity.

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. A one percentage point increase or decrease in the assumed healthcare cost trends only marginally affects the amount of the obligations. €17 million was recognized in fiscal year 2008 as an expense for healthcare costs (previous year: €10 million). The related carrying amount was therefore €174 million as of December 31, 2008 (previous year: €160 million).

Since 1996, the occupational pension arrangements of the Volkswagen Group in Germany have been based on a specially developed expense-related pension model that is classified as a defined benefit plan under IAS 19. With effect from January 1, 2001, this model was further developed into a pension fund, with the annual remuneration-linked contributions being invested in funds by Volkswagen Pension Trust e.V. as the trustee. By investing in funds, this model offers an opportunity for increasing benefit entitlements, while at the same time fully safeguarding them. For this reason, almost all Group companies in Germany have now joined the fund. Since the fund investments held by the trust meet the criteria of IAS 19 for classification as plan assets, they are deducted from the obligation.

Where the foreign Group companies provide collateral for obligations, this mainly takes the form of shares, fixed-income securities and real estate. These do not include any financial instruments issued by companies of the Volkswagen Group, or any investment property used by Group companies.

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

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€ million

 

Dec. 31, 2008

 

Dec. 31, 2007

 

Dec. 31, 2006

 

Dec. 31, 2005

 

Dec. 31, 2004

Present value of funded obligations

 

3,240

 

3,330

 

3,235

 

2,959

 

2,455

Fair value of plan assets

 

3,153

 

3,422

 

3,159

 

2,690

 

2,068

Funded status (net)

 

87

 

–92

 

76

 

269

 

387

Present value of unfunded obligations

 

12,743

 

12,532

 

13,652

 

13,618

 

12,169

Unrecognized past service cost

 

22

 

31

 

23

 

39

 

–31

Amount not recognized as an assetbecause of the limit in IAS 19

 

34

 

31

 

42

 

47

 

33

Net liability recognized
in the balance sheet

 

12,886

 

12,502

 

13,793

 

13,973

 

12,558

of which provisions for pensions and other post-employment benefits

 

12,955

 

12,603

 

13,854

 

14,003

 

12,633

of which other assets

 

69

 

101

 

61

 

30

 

75


The present value of the obligations is calculated as follows:

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€ million

 

2008

 

2007

Present value of obligations at January 1

 

15,862

 

16,887

Current service cost

 

324

 

336

Interest cost

 

884

 

796

Actuarial gains

 

–687

 

–1,522

Employee contributions to plan assets

 

17

 

12

Pension payments from company assets

 

576

 

540

Pension payments from plan assets

 

121

 

97

Past service cost

 

17

 

10

Losses/gains from plan curtailments and settlements

 

1

 

–25

Changes in consolidated Group

 

485

 

37

Other changes

 

17

 

56

Foreign exchange differences

 

–240

 

–88

Present value of obligations at December 31

 

15,983

 

15,862


Changes in the composition of the plan assets are shown in the following table:

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€ million

 

2008

 

2007

Fair value of plan assets at January 1

 

3,422

 

3,159

Expected return on plan assets

 

215

 

217

Actuarial losses

 

–473

 

–95

Employer contributions to plan assets

 

277

 

281

Employee contributions to plan assets

 

12

 

12

Pension payments from plan assets

 

121

 

97

Changes in consolidated Group

 

120

 

2

Other changes

 

–4

 

37

Foreign exchange differences

 

–295

 

–94

Fair value of plan assets at December 31

 

3,153

 

3,422

Investment of the plan assets to cover future pension obligations resulted in losses in the amount of €258 million (previous year: income of € 122 million).

The rate for the expected long-term return on plan assets is based on the long-term returns actually generated for the portfolio, historical overall market returns and a forecast of expected returns on the securities classes held in the portfolio. The forecasts are based on detailed analyses by actuaries and experts in the investment industry. As the remaining period of service is used as the investment horizon, no major changes were made to assumptions regarding the expected return.

Employer contributions to plan assets are expected to amount to € 237 million next year.

Plan assets consist of the following components:

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%

 

2008

 

2007

Equities

 

20.1

 

35.6

Fixed-income securities

 

54.8

 

52.4

Cash

 

18.7

 

5.0

Real estate

 

2.5

 

3.1

Other

 

3.9

 

3.9


The following amounts were recognized in the income statement:

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€ million

 

2008

 

2007

Current service cost

 

324

 

336

Interest cost

 

884

 

796

Expected return on plan assets

 

215

 

217

Past service cost

 

17

 

10

Losses/gains from plan curtailments and settlements

 

2

 

–25

Losses/gains as a result of application of limit
under IAS 19.58(b)

 

14

 

–8

Net income and expenses
recognized in profit or loss

 

1,026

 

892


The above amounts are generally included in the personnel costs of the functions in the income statement. Interest cost on pension provisions and the expected return on plan assets are presented in Finance costs (note 8).

The net liability recognized in the balance sheet has changed as follows:

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€ million

 

2008

 

2007

Net liability recognized in the balance sheet
at January 1

 

12,502

 

13,793

Changes in consolidated Group

 

365

 

35

Net expense recognized in the income statement

 

1,026

 

892

Benefit payments from company assets and contributions to funds

 

848

 

821

Actuarial gains

 

–214

 

–1,427

Other changes

 

9

 

30

Foreign exchange differences

 

46

 

0

Net liability recognized in the balance sheet
at December 31

 

12,886

 

12,502


The experience adjustments, meaning differences between changes in assets and obligations expected on the basis of actuarial assumptions and actual changes in those assets and obligations, are shown in the following table:

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2008

 

2007

 

2006

 

2005

 

2004

Differences between expected and actual developments:

 

 

 

 

 

 

 

 

 

 

as % of present value of the obligation

 

–1.04

 

–0.48

 

0.03

 

0.25

 

2.63

as % of fair value of plan assets

 

–10.47

 

–2.44

 

2.57

 

2.12

 

–0.27


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

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Germany

 

Abroad

%

 

2008

 

2007

 

2008

 

2007

Discount rate
at December 31

 

5.75

 

5.50

 

2.00 – 9.00

 

2.00 – 9.00

Expected return on
plan assets

 

5.00

 

5.00

 

2.00 – 11.30

 

2.00 – 9.80

Salary trend

 

2.50

 

2.50

 

1.50 – 10.00

 

2.00 – 7.60

Pension trend

 

1.00 – 1.60

 

1.00 – 1.60

 

0.80 – 5.25

 

2.20 – 5.25

Employee turnover rate

 

0.75 – 1.20

 

0.75 – 1.40

 

1.50 – 5.75

 

3.00 – 5.25

Annual increase in
healthcare costs

 

 

 

4.50 – 7.25

 

4.50 – 7.75

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