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Annual Report

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 2010, they amounted to a total of €1,040 million (previous year: €983 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to €816 million (previous year: €806 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 recognized in other comprehensive income.

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 would only marginally affect the amount of the obligations. €16 million was recognized in fiscal year 2010 as an expense for healthcare costs (previous year: €16 million). The related carrying amount as of December 31, 2010 was €175 million (previous year: €142 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 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.

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

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€ million

 

Dec. 31, 2010

 

Dec. 31, 2009

 

Dec. 31, 2008

 

Dec. 31, 2007

 

Dec. 31, 2006

Present value of funded obligations

 

4,885

 

4,120

 

3,240

 

3,330

 

3,235

Fair value of plan assets

 

4,554

 

3,852

 

3,153

 

3,422

 

3,159

Funded status (net)

 

331

 

268

 

87

 

–92

 

76

Present value of unfunded obligations

 

14,986

 

13,552

 

12,743

 

12,532

 

13,652

Unrecognized past service cost

 

35

 

36

 

22

 

31

 

23

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

 

22

 

26

 

34

 

31

 

42

Net liability recognized in the balance sheet

 

15,375

 

13,881

 

12,886

 

12,502

 

13,793

of which provisions for pensions

 

15,432

 

13,936

 

12,955

 

12,603

 

13,854

of which other assets

 

57

 

54

 

69

 

101

 

61

The present value of the obligations is calculated as follows:

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€ million

 

2010

 

2009

Present value of obligations at January 1

 

17,672

 

15,983

Current service cost

 

366

 

343

Interest cost

 

972

 

918

Actuarial gains/losses

 

1,352

 

985

Employee contributions to plan assets

 

20

 

15

Pension payments from company assets

 

643

 

609

Pension payments from plan assets

 

114

 

117

Past service cost

 

3

 

–33

Gains from plan curtailments and settlements

 

–24

 

–3

Changes in consolidated Group

 

45

 

–14

Other changes

 

0

 

25

Foreign exchange differences from foreign plans

 

222

 

178

Present value of obligations at December 31

 

19,871

 

17,672

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

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€ million

 

2010

 

2009

Fair value of plan assets at January 1

 

3,852

 

3,153

Expected return on plan assets

 

247

 

203

Actuarial gains/losses

 

42

 

136

Employer contributions to plan assets

 

333

 

297

Employee contributions to plan assets

 

21

 

16

Pension payments from plan assets

 

111

 

114

Changes in consolidated Group

 

18

 

–14

Other changes

 

–1

 

17

Foreign exchange differences from foreign plans

 

154

 

157

Fair value of plan assets at December 31

 

4,554

 

3,852

Investment of the plan assets to cover future pension obligations resulted in income in the amount of €288 million (previous year: €339 million).

Plan assets include €3 million (previous year: €3 million) invested in Volkswagen Group assets and €23 million (previous year: €14 million) invested in Volkswagen Group debt instruments.

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 €403 million in the next fiscal year (previous year: €274 million).

Plan assets consist of the following components:

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%

 

2010

 

2009

Equities

 

29.8

 

29.3

Fixed-income securities

 

52.9

 

53.2

Cash

 

8.0

 

7.4

Real estate

 

4.3

 

4.1

Other

 

5.1

 

6.0

The following amounts were recognized in the income statement:

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€ million

 

2010

 

2009

Current service cost

 

366

 

343

Interest cost

 

972

 

918

Expected return on plan assets

 

247

 

203

Past service cost

 

3

 

–33

Losses/gains from plan curtailments and settlements

 

–24

 

–1

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

 

–8

 

4

Net income and expenses recognized in profit or loss

 

1,062

 

1,028

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.

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

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€ million

 

2010

 

2009

Net liability recognized in the balance sheet at January 1

 

13,881

 

12,886

Changes in consolidated Group

 

25

 

0

Net expense recognized in the income statement

 

1,062

 

1,028

Benefit payments from company assets and contributions to funds

 

979

 

910

Actuarial gains/losses

 

1,311

 

849

Other changes

 

–33

 

40

Foreign exchange differences

 

108

 

–11

Net liability recognized in the balance sheet at December 31

 

15,375

 

13,881

€2,248 million (previous year: €1,297 million) of actuarial gains and losses recognized in the balance sheet was debited to equity.

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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€ million

 

2010

 

2009

 

2008

 

2007

 

2006

Differences between expected and actual developments:

 

 

 

 

 

 

 

 

 

 

as % of present value of the obligation

 

0.39

 

1.16

 

–1.04

 

–0.48

 

0.03

as % of fair value of plan assets

 

0.13

 

3.16

 

–10.47

 

–2.44

 

2.57

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

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Germany

 

Abroad

%

 

2010

 

2009

 

2010

 

2009

Discount rate at December 31

 

4.90

 

5.40

 

1.20 – 10.80

 

1.20 – 11.30

Expected return on plan assets

 

4.25

 

5.00

 

3.00 – 11.70

 

4.00 – 11.70

Salary trend

 

2.70

 

2.50

 

1.60 – 8.70

 

1.50 – 8.70

Pension trend

 

1.00 – 1.60

 

1.00 – 1.60

 

0.80 – 5.58

 

0.80 – 6.00

Employee turnover rate

 

0.75 – 1.00

 

0.75 – 1.00

 

2.00 – 11.00

 

2.00 – 18.00

Annual increase in healthcare costs

 

 

 

2.00 – 7.60

 

4.50 – 8.00

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