Provisions for Pensions and Similar Obligations

in € millions12/31/201712/31/2016
Defined benefit obligation1,6061,902
Obligations similar to pensions7997

The Bertelsmann Group operates various pension plans for current and former employees and their surviving dependents. The model of such plans varies according to the legal, fiscal and economic environment of the country concerned. These company pension plans include both defined contribution and defined benefit plans.

In the case of defined contribution plans, the company makes payments into an external pension fund or another welfare fund through a statutory, contractual or voluntary model. The company has no obligation to provide further benefits once it has made these payments, so no provisions are recognized.
Expenses for defined contribution plans in the amount of €46 million were recognized in the financial year 2017 (previous year: €50 million).

All other pension plans are defined benefit plans. The US companies’ obligations for healthcare costs for employees after they retire (medical care plans) are also defined benefit obligations and are included in the provisions on the balance sheet. For all of the retirement benefit plans, a distinction must be made as to whether or not these are financed through an external investment fund.

Net Defined Benefit Liability Recognized in the Balance Sheet

in € millions12/31/201712/31/2016
Present value of defined benefit obligation of unfunded plans826876
Present value of defined benefit obligation of funded plans3,3473,493
Total present value of defined benefit obligation4,1734,369
Fair value of plan assets(2,591)(2,479)
Impact from asset ceiling1
Net defined benefit liability recognized in the balance sheet1,5831,890
– thereof provisions for pensions1,6061,902
– thereof other assets2312

Provisions are recognized for these defined benefit plans. These are mostly flat salary plans and final salary plans.

Defined Benefit Plans

in € millions12/31/201712/31/2016
Flat salary plans/plans with fixed amounts2,2542,317
Final salary plans1,2651,316
Career average plans416428
Other commitments given181245
Medical care plans5863
Present value of defined benefit obligation4,1744,369
– thereof capital commitments246231

The obligations and plan assets available for the existing pension plans are, in some cases, exposed to demographic, economic and legal risks. The demographic risks are primarily the longevity risk for pensioners. Economic risks include, in this respect, mostly unforeseeable developments on the capital markets and the associated impacts on plan assets and pension obligations. Legal risks can result from restrictions to investments and minimum funding requirements. To substantially minimize these risks, a Group-wide pension guideline was introduced in 2004. This stipulates that all new pension plans are, as a rule, only to be designed as defined contribution plans so that the charges from benefit commitments are always acceptable, calculable and transparent, and so that no risks can arise that the company cannot influence. In addition, the Bertelsmann Group aims, in particular, to transfer existing final salary-related pension agreements to plans with fixed amounts and capital commitments that are independent from trends. As a result of these measures, the obligations are almost entirely due to the plans that have been closed.

The Bertelsmann Group has minimum funding obligations for the plans in the United States and the United Kingdom. The pension plan in the United States is subject to the minimum funding agreements according to the “Employee Retirement Income Security Act of 1974” (ERISA). In general, the aim under this agreement is for a fully funded pension plan so that the annual contributions to the plan assets are limited to the pension entitlements that the insured employee has earned during the year, as is the case for a defined contribution plan. If the pension obligations are not fully covered by the plan assets, an additional amount sufficient to ensure full financing over a seven-year period must be applied in excess of this contribution. The plans in the United Kingdom are subject to the “Pensions Act 2004,” which includes reviewing the full financing of the pension plan from an actuarial perspective every three years with annual monitoring and, if necessary, eliminating any deficits that may have arisen by means of further additions to plan assets. There are no other material regulatory conditions over and above the minimum funding regulations in the United States and the United Kingdom.

Furthermore, one Group company participated in a multiemployer plan with other non-affiliated companies until December 31, 2014. As the relevant information required to account for this as a defined benefit plan was neither available on time nor available to a sufficient extent, this benefit plan was carried in the Consolidated Financial Statements in line with the requirements for defined contribution benefit plans. In the financial year 2015, the withdrawal from the plan with retrospective effect from January 1, 2015, was declared. The resulting withdrawal liability shall be settled by a lump sum for which a provision in the amount of €16 million was recognized in 2014. The negotiations concerning the agreement of the withdrawal modalities started in the first half of 2017 are still ongoing. Since April 2017, the company has been making monthly contribution payments, which are expected to amount to €1 million in the financial year 2018. The provision was still carried at €16 million as of December 31, 2017.

The provisions are determined using actuarial formulas in accordance with IAS 19. The amount of provisions depends on employees’ length of service with the company and their pensionable salary. Provisions are computed using the projected unit credit method, in which the benefit entitlement earned is allocated to each year of service, thus assuming an increasing cost of service in comparison to the entry age normal method. When identifying the present value of the pension obligation, the underlying interest rate is of material importance. In the Bertelsmann Group, this is based on the “Mercer Yield Curve Approach.” With this approach, separate spot rate yield curves are created for the eurozone, the United Kingdom and the United States on the basis of high-quality corporate bonds. To appropriately present the time value of money in accordance with IAS 19.84, the basis does not consider either spikes for which the risk estimate may be substantially higher or lower or bonds with embedded options that distort interest rates. As in the previous year, the biometric calculations in Germany are based on the 2005 G mortality tables issued by Prof. Dr. Klaus Heubeck.

Further significant actuarial assumptions were made as follows:

Actuarial Assumptions

Discount rate2.06%2.58%1.72%2.80%
Rate of salary increase2.25%3.03%2.25%3.08%
Rate of pension increase1.56%3.00%1.56%3.20%

An increase or decrease in the assumptions set out above compared to the assumptions actually applied would have had the following effects on the present value of the defined benefit obligation as of December 31, 2017:

Effect of Actuarial Assumptions

in € millionsIncreaseDecrease
Effect of 0.5 percentage point change in discount rate(318)363
Effect of 0.5 percentage point change in rate of salary increase41(37)
Effect of 0.5 percentage point change in rate of pension increase155(139)
Effect of change in average life expectancy by 1 year155(153)

To determine the sensitivity of the longevity, the mortality rates for all beneficiaries were reduced or increased evenly, so that the life expectancy of a person of a country-specific retirement age increases or decreases by one year.

Changes in the present value of defined benefit obligations and plan assets in the reporting period were as follows:

Development of the Defined Benefit Plans

 Defined benefit obligation
Fair value of plan assets
Net defined benefit balance
in € millions201720162017201620172016
Balance as of 1/14,3693,9602,4792,3651,8901,595
Current service cost71647164
Interest expenses8610786107
Interest income5267(52)(67)
Past service cost(7)2(7)2
Income and expenses for defined benefit plans recognized in the combined income statement150173526798106
Income/expense on plan assets excluding amounts included in net interest income and net interest expenses80115(80)(115)
Actuarial gains (-) and losses (+)
– changes in financial assumptions(136)510(136)510
– changes in demographic assumptions(11)(17)(11)(17)
– experience adjustments5(30)12(7)(30)
Impact from asset ceiling1
Remeasurements for defined benefit plans recognized in the combined statement of comprehensive income(142)46392115(233)348
Contributions to plan assets by employer3733(37)(33)
Contributions to plan assets by employees3434
Pension payments(159)(141)(30)(27)(129)(114)
Cash effects from settlements(1)(1)
Change of consolidation scope(13)(13)
Currency translation differences(51)(66)(41)(69)(10)3
Other changes4(11)(9)4(2)
Other reconciling items(204)(227)(32)(68)(172)(159)
Balance as of 12/314,1734,3692,5912,4791,5831,890
United Kingdom531543551526(20)17
United States1992111441375574
Other European countries1911795339139140
Other countries312913121817

Of the contributions to plan assets, €3 million (previous year: €3 million) pertains to Germany. Employer contributions to plan assets are expected to amount to €20 million in the next financial year.

In Germany, reimbursement rights for defined benefit obligations in the amount of €18 million (previous year: €22 million) mostly relate to reinsurance, which is not pledged to the pension beneficiary. Reimbursement rights are carried under the balance sheet item “Trade and other receivables.”

The expenses for defined benefit plans are broken down as follows:

Expenses for Defined Benefit Plans

in € millions20172016
Current service cost7164
Past service cost and impact from settlement(7)2
Net interest expenses3440
Net pension expenses98106

The portfolio structure of plan assets is composed as follows:

Portfolio Structure of Plan Assets

in € millions12/31/201712/31/2016
Equity instruments1)659675
Debt instruments1)1,6581,582
Other funds7868
Qualifying insurance policies140129
Cash and cash equivalents4312
Fair value of plan assets2,5912,479

The plan assets in the Bertelsmann Group are used exclusively for the fulfillment of benefit obligations. To avoid a concentration of risk, plan assets are invested in various classes of investments. The majority of plan assets are managed by Bertelsmann Pension Trust e.V. under a contractual trust arrangement (CTA) for pension commitments of Bertelsmann SE & Co. KGaA and some of the German subsidiaries. There is no funding requirement for the CTA. No contribution was made to plan assets during the reporting period. The trust assets were invested in accordance with the investment guideline of the beneficiary, using a longterm total return approach. This approach is based on the aim of using strategic asset allocation to generate a suitable return in the long term regardless of short-term market fluctuations and/or crises. The management board of the pension trust is responsible for the investment and regularly informs the beneficiary of the status and performance of the pension assets.

The weighted average duration of the pension obligations on December 31, 2017, was 17 years (previous year: 17 years). The maturity profile of the anticipated undiscounted pension payments is presented in the following table:

Maturity Profile of Pension Payments

in € millionsExpected pension
2023 – 2027884

Obligations similar to pensions relate to provisions for bonuses for employee service anniversaries, amounts due but not yet paid to defined contribution plans and severance payments at retirement. Severance payments at retirement are made when employees leave the company and are based on statutory obligations, primarily in Italy and Austria. Provisions for employee service anniversary bonuses and severance payments at retirement are recognized in the same way as defined benefit plans, but with actuarial gains and losses recognized in profit or loss. Employees in Germany who are at least 55 years old and have a permanent employment contract with the company qualify for the old-age part-time schemes. The partial retirement phase lasts two to five years.

The following table shows the breakdown in obligations similar to pensions:

Breakdown of Obligations Similar to Pensions

in € millions12/31/201712/31/2016
Provisions for old-age part-time schemes1030
Provisions for severance payments3634
Provisions for employee service anniversaries2828
Obligations similar to pensions7997