Balance Sheet Disclosures

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33. Employee Benefits

Breakdown of Employee Benefits
in million €Remaining term31 Dec. 2017
Total
Remaining term31 Dec. 2016
Total
Up to 1 yearMore than 1 yearUp to 1 yearMore than 1 year
Pensions67.0558.2625.276.1472.0548.1
Severance pay and TFR1.5228.4229.91.6229.0230.6
Special annual bonuses196.611.7208.3217.413.9231.3
Service anniversary bonuses10.0143.0153.09.8139.1148.9
Holiday provisions126.40.0126.4117.60.0117.6
Liabilities from employee benefits121.00.0121.0107.00.2107.2
Employee termination benefits35.00.035.031.00.631.6
Overtime and performance bonuses26.40.026.422.90.022.9
Partial and early retirement7.613.621.26.711.518.2
Retirement allowances1.16.07.10.85.96.7
Survivors' benefits0.06.56.50.06.56.5
Holiday/Christmas bonuses5.80.05.84.10.04.1
Other35.813.749.530.60.531.1
Total634.2981.11,615.3625.6879.21,504.8

Disclosures of Defined Benefit Pension Plans

Depending on the respective national law, different retirement benefit systems are available to the employees of the consolidated companies. These pension plans can be defined contribution or defined benefit plans. Significant defined benefit pension plans are currently in place for consolidated companies in Germany, Switzerland, the United Kingdom, Austria and Italy.

a) Description of Defined Benefit Pension Plans

The defined benefit obligations consist of pensions and similar obligations, such as end-of-service and Trattamento di Fine Rapporto (TFR) benefits, survivor benefits and retirement allowances.

Breakdown of Present Value of Defined Benefit Obligations by Country
in million €20172016
PensionsSimilar obligationsPensionsSimilar obligations
Germany726.013.5625.113.2
Switzerland235.20.0269.30.0
United Kingdom33.90.036.80.0
Austria1.5222.22.4223.0
Italy0.07.20.07.1
Other1.50.61.10.5
Present value of defined-benefit obligation
as at 31 December
998.1243.5934.7243.8

The material pension plans break down into growing and fixed (closed) commitments as follows:

Germany

The major part of the obligations results from two different types of pension commitment: firstly there is an active defined contribution commitment, whose volume is set to increase further in the future, and secondly there is a pension commitment that was closed in 2008. Both commitments are subject to guaranteed interest rates. For the consolidated companies, this entails the risk of not generating the guaranteed interest rate of the pension commitment in the long term. The old pension commitment was financed exclusively on the basis of deferred compensation. To reduce the longevity risk, a lump-sum option was introduced for this commitment. The new pension commitment is no longer financed exclusively, but still predominantly by deferred compensation as well as by employer contributions. Risk is minimised by arranging it as a defined contribution commitment. The longevity risk is reduced by granting generous lump-sum options at the start of pension payments. In addition, the inflation risk for this pension commitment is minimised by specifying the pension adjustments in advance. For the pension commitment, there are secured trust assets, which are allocated to individual commitments and the pension commitment described here. Since the trust assets are plan assets, these are netted against the corresponding obligations. 

The other pension commitments made by consolidated German companies are exposed to inflation risk because, pursuant to section 16 of the Company Pensions Act (Gesetz zur Verbesserung der betrieblichen Altersversorgung, "BetrAVG"), pension adjustments must be made in line with the consumer price index.

In addition, a large portion of the defined benefit obligations results from an overall benefit commitment fixed back in 1992 and a pension commitment closed in 1997. Since most of the beneficiaries already receive retirement benefits, these defined benefit commitments only represent a small risk for the consolidated companies.

In the Travel and Tourism business segment, there are moreover commitments that depend on salary and length of service. Most of them are pension commitments, but some are overall benefit commitments. Here the number of active beneficiaries means the consolidated companies are exposed to the risk of a disproportionate increase in the obligation due to salary increases. Since the payment of the commitments is planned exclusively in the form of pensions, there is also a longevity risk.

In addition, there are pension commitments based on length of service in Travel and Tourism; these commitments were closed to new joiners in 2004. Since payments are planned in the form of pensions, they are also exposed to a longevity risk. Plan assets are available to secure these pension commitments. The plan assets available to Travel and Tourism in Germany are composed of approximately two-thirds real estate and one-third cash and cash equivalents.

Furthermore, a large portion of the defined benefit obligations of the consolidated companies consists of a direct pension commitment assumed as the result of a business acquisition; this relates primarily to the Penny Germany business segment and is, at a low level, dependent on length of service. The commitment was financed by a once-off payment by the seller as at the transfer date and thereafter by employer contributions from the consolidated companies. To mitigate the financing risk from salary adjustments, it has been agreed to fix the commitment as at a specified date in the past by entering into individual agreements with a large number of employees.

In addition, there are defined benefit obligations with different pension commitments from other company acquisitions. In most cases, they are financed by the employer and employees making equal contributions. A portion of the commitments are funded by a support fund with back-to-back reinsurance. The assets transferred to the support funds represent plan assets.

Finally, there are pension-related benefit commitments in the form of retirement allowances and survivor benefits. The levels of these once-off payments depend on the length of service of the employees concerned.

Switzerland

Retirement provisions, survivor benefits and loss of earnings provisions in Switzerland are based on a three-pillar system, which is financed in different ways. In accordance with the Swiss Occupational Pensions Act (Gesetz über die berufliche Vorsorge, "BVG"), the second pillar ensures disability benefits or survivor benefits (in case of the insured person's death) for all employed persons of legal age with an annual income of at least 21,060 Swiss francs. From the age of 25, there is also an obligatory retirement pension component. This retirement provision is financed by the employer and the employee on a funded basis as a percentage of the income insured. The Act prescribes minimum benefits. At the consolidated Swiss companies, occupational benefit provisions are arranged through the BonAssistus pension fund, PAX BVG, the PAX Foundation, Swiss Life BVG and the IGP Foundation. This plan is run jointly by several employers. The above pension funds and foundations may amend their financing system (contributions and benefits) at any time. If there is a shortfall, recovery contributions may be levied on the employer. The plan assets deposited with the pension fund and the collective foundations cover most of the obligations arising from the benefit obligations that exist under the BVG. The assets the consolidated companies have contributed to the pension fund and the foundations is determined in the same way as for a partial liquidation incorporating value fluctuation reserves: by allocating the individual provisions to the beneficiaries and then assigning the assets of all insured persons in active service to the respective companies in proportion to their retirement assets, while the assets of retired employees are allocated to them directly. The pension funds and foundations have taken out reinsurance to ensure they can meet the legal benefit obligations.

United Kingdom

There is an employer's pension commitment in the Travel and Tourism business segment that has been closed for new hires since 2002, but which continues to accumulate for the existing beneficiaries. The commitment is based on salary and length of service and is currently covered by plan assets. Upon retirement, up to 25.0 per cent of the pension entitlement may be paid out as a one-off payment. However, there is a longevity risk due to the foreseen lifetime pension payments of at least 75.0 per cent.

In the United Kingdom the plan assets in the trusts are remeasured at least every three years. As part of this remeasurement, the trustees of the corresponding trusts use mostly very conservative parameters and determine from them any existing financing surplus or shortfall and thus the future payments by the employer.

Austria

In Austria, labour law requires all employment contracts that were entered into by 31 December 2002 and lasted for an uninterrupted period of at least three years to be included in a defined benefit plan (old end-of-service benefit model), which provides for a once-off payment if an employee's contract is terminated (except in cases of voluntary resignation) or upon retirement at the latest. The amount of the once-off payment depends on the employee's average monthly remuneration and length of service and varies between two and twelve times the monthly remuneration. The payment arrangements range from immediate payment to payment in half-monthly instalments.

The above model was amended with effect from 1 January 2003 and every employer is now obliged to contribute 1.5 per cent of the employee's monthly remuneration to a statutory end-of-service benefit fund. The new end-of-service benefit model therefore takes the form of a defined contribution benefit model.

Italy

Similar to Austria, employees in Italy have a right to a severance payment if the employment contract is terminated. This payment if referred to as "Trattamento di Fine Rapporto" (TFR). This is an additional pension entitlement granted under public law. The entitlement is comparable to deferred compensation and is based on the level of income and the number of years in service.

Before the TFR was reformed in 2005, it was a defined benefit plan. With effect from 1 January 2007, all existing plans were closed and transferred to a defined contribution benefit system. The amendment applied to both new joiners and to future years of service of beneficiaries in active service. The defined benefit obligation of consolidated Italian companies therefore reflects the extent of the obligation for beneficiaries' years in active service up to 2007.

Since the benefit models in Switzerland, Austria and Italy are statutory benefit systems, there are no company-specific risks.

b) Significant Actuarial Assumptions

The defined benefit obligations reported in the balance sheet are based on expert actuarial opinions. The following parameters were used to measure the significant defined benefit obligations:

Country-specific Parameters for Measuring Significant Defined Benefit Obligations
Significant Measurement parameters20172016
Accounting interest rateExpected future salary increasesRate of pension increasesDurationAccounting interest rateExpected future salary increasesRate of pension increasesDuration
Germany1.5%2.8%1.9%16 years1.5%2.8%1.9%15 years
Switzerland0.7%1.2%14 years0.7%1.2%14 years
United Kingdom2.5%3.4%3.4%20 years2.7%3.6%3.6%21 years
Austria1.1%2.8%9 years1.0%2.8%9 years
Italy1.2%9 years0.8%7 years

The calculations of the German commitments are based on basic biometric values (probabilities of death and disability) contained in the 2005 G mortality tables of Prof. Klaus Heubeck. The death and disability probabilities contained in "Technische Grundlagen BVG 2015" were used for Switzerland, the AVÖ 2008 P tables of Pagler & Pagler were used for Austria, and the Tavole IPS55 and Tavole INPS 2000 were used for Italy.

c) Changes in the Net Defined Benefit Obligation and the Reimbursement Rights Against Trust Associations

Calculation of Net Obligation Recognised in the Balance Sheet
in million €20172016
PensionsSimilar obligationsPensionsSimilar obligations
Present value of unfunded obligations568.4243.5385.0243.8
Present value of obligations funded in whole or in part429.70.0549.70.0
Present value of defined benefit obligations998.1243.5934.7243.8
Fair value of plan assets375.20.0386.90.0
Net liability from defined-benefit pension plans
as at 31 December
622.9243.5547.8243.8
 of which: reported as provision for pensions and similar
 obligations
625.2243.5548.1243.8
 of which: reported as other assets2.30.00.30.0

The net liability from pensions and similar obligations reported under provisions includes obligations for end-of-service and TFR benefits of 229.9 million euros (previous year: 230.6 million euros), obligations for retirement allowances of 7.1 million euros (previous year: 6.7 million euros) and obligations for survivor benefits of 6.5 million euros (previous year: 6.5 million euros).

Other assets resulted from surpluses of defined benefit plans of DER Touristik UK Limited, Dorking, United Kingdom, and RZAG.

Change in the Present Value of Defined Benefit Obligation in the Financial Year
in million €20172016
PensionsSimilar obligationsPensionsSimilar obligations
Present value of defined-benefit obligation as at 1 January934.7243.8773.4225.8
Current service cost19.110.916.612.2
Interest cost12.52.314.34.4
Effects from remeasurements15.6-2.667.911.5
 of which: effects from change to demographic assumptions-0.40.2-2.30.2
 of which: effects from change to financial assumptions11.0-2.075.718.4
 of which: effects from experience adjustments5.0-0.8-5.5-7.1
Past service cost19.80.0-8.20.0
 of which: from plan settlements-0.40.00.00.0
Effects from exchange rate changes-22.90.0-3.40.0
Contributions to pension plan20.80.020.10.0
 of which: employer contributions3.70.04.10.0
 of which: plan participant contributions17.10.016.00.0
Benefits paid-40.4-10.9-32.4-10.1
 of which: benefits paid in the context of plan settlements-0.90.0-0.30.0
Effects from business combinations and disposals38.90.086.40.0
Present value of defined-benefit obligation
as at 31 December
998.1243.5934.7243.8

The impacts from business combinations in the financial year related primarily to the acquisition of shares in REWE Dortmund Verwaltung SE, Dortmund, and of various store locations of the Kaiser's Tengelmann Group and the shares in REWE Berlin Logistik GmbH, Berlin (see note 4 "Acquisitions").

Change in Fair Value of Plan Assets in the Financial Year
in million €20172016
Fair value of plan assets as at 1 January386.9288.9
Interest income4.43.7
Effects from remeasurements10.912.2
Effects from exchange rate changes-18.7-3.6
Contributions to pension plan18.622.3
 of which: employer contributions15.518.8
 of which: plan participant contributions3.13.5
Benefits paid-25.9-19.8
 of which: benefits paid from plan assets-25.2-19.7
 of which: benefits paid in the context of plan settlements-0.7-0.1
Effects from business combinations and disposals0.051.1
Effects from asset transfers-1.032.1
Fair value of plan assets as at 31 December375.2386.9

Plan assets consist primarily in connection with pension obligations in Germany, Switzerland and the United Kingdom. 

Composition of Plan Assets of the Consolidated Companies
in million €20172016
Cash and cash equivalents9.512.4
 of which: quoted market price on an active market9.512.4
Equity instruments48.151.2
 of which: quoted market price on an active market48.151.2
Debt instruments42.047.1
 of which: quoted market price on an active market40.247.0
Real estate41.543.3
 of which: quoted market price on an active market10.911.6
 of which: owner-occupied1.41.4
Securities funds54.244.3
 of which: quoted market price on an active market54.244.3
Reinsurance policies165.8175.4
Other14.113.2
 of which: quoted market price on an active market9.28.5
Fair value of plan assets as at 31 December375.2386.9
Change in Reimbursement Rights from the Trust Assets of the Consolidated Companies Used to Secure the Pension Obligations in the Course of the Financial Year
in million €20172016
Fair value of reimbursement rights as at 1 January0.032.1
Interest income0.01.0
Effects from remeasurements0.0-1.0
Effects from asset transfers0.6-32.1
 of which: effects of assumptions of assets0.60.0
 of which: effects of assignments of assets0.0-32.1
Fair value of reimbursement rights as at 31 December0.60.0

The assets reported under Reimbursement rights against trust associations are term deposits and bank balances. The reimbursement rights are reported under other financial assets (see note 28 "Other Financial Assets").

d) Effects of Defined Benefit Plans Recognised Directly in Equity and Effects Recognised in the Income Statement

Effects from the Remeasurement of the Net Obligation from Defined Benefit Obligations and Reimbursement Rights against Trust Associations on Retained Earnings
in million €20172016
PensionsSimilar obligationsPensionsSimilar obligations
Remeasurement of present value of defined-benefit obligations-15.62.6-67.9-11.5
Remeasurement of plan assets10.90.012.20.0
Remeasurement of reimbursement rights0.00.0-1.00.0
Total-4.72.6-56.7-11.5
Composition of Expenses from Defined Benefit Plans
in million €20172016
PensionsSimilar obligationsPensionsSimilar obligations
Current service cost19.110.916.612.2
Past service cost and effects from plan settlements19.80.0-8.20.0
Net interest cost8.12.39.64.4
Pension expense47.013.218.016.6

The past service cost and the effects from plan settlements are recognised under personnel expenses, while the net interest cost is reported under the financial result.

e) Effects of Significant Actuarial Assumptions on the Present Value of the Defined Benefit Obligation

The tables below show the effects of an isolated change to the significant actuarial parameters on the present value of the defined benefit obligations for pensions and similar obligations. In each of these scenarios, a change of 0.5 percentage points is assumed in the discount rate, in expected future wage and salary increases and in expected future pension increases. In addition, a change in the life expectancy of all beneficiaries, regardless of age, is simulated by shifting the review date by one year.

Effects of Significant Actuarial Assumptions on Pensions
in million €20172016
IncreaseDecreaseIncreaseDecrease
Increase/decrease in discount rate by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December826.4948.5874.81,003.3
Increase/decrease in rate of expected future salary increases by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December885.8880.7937.2931.6
Increase/decrease in rate of pension increases by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December922.7860.7976.0910.4
Increase/decrease in life expectancy by 1 year    
 Present value of defined-benefit obligation as at 31 December909.7857.7962.6907.6
Effects of Significant Actuarial Assumptions on Similar Obligations
in million €20172016
IncreaseDecreaseIncreaseDecrease
Increase/decrease in discount rate by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December234.0253.8234.2254.1
Increase/decrease in rate of expected future salary increases by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December253.3234.3253.6234.5
Increase/decrease in rate of pension increases by 0.5 percentage points    
 Present value of defined-benefit obligation as at 31 December243.5243.5243.8243.8
Increase/decrease in life expectancy by 1 year    
 Present value of defined-benefit obligation as at 31 December243.5243.5243.8243.8

In the same way as for the calculation of the present value of the defined benefit obligation in the balance sheet, the projected unit credit method is also used to determine the changes in the defined benefit obligation in relation to the above measurement parameters.

The expected payments under the defined benefit plans for the following financial year are 41.9 million euros (previous year: 36.1 million euros) for pensions and 17.0 million euros (previous year: 16.7 million euros) for similar obligations.

Disclosures of Other Employee Benefits

The consolidated companies have committed themselves to paying service anniversary bonuses on the basis of a works agreement. The liability of 153.0 million euros (previous year: 148.9 million euros) corresponds to the full amount of the obligation; it was determined in Germany in accordance with financial engineering principles, assuming a discount rate appropriate to the maturity of 0.8 per cent (previous year: 0.5 per cent), based on the 2005 G mortality tables of Prof. Klaus Heubeck. The increase in service anniversary bonuses is primarily due to the increase in the amounts granted as a result of including the financial year just concluded.

Liabilities from employee benefits include 61.8 million euros (previous year: 56.9 million euros) in liabilities to statutory social insurance funds. In addition, this item primarily comprises liabilities from wages and salaries still to be settled as well as liabilities from merchandise vouchers to employees.

The provisions for partial retirement obligations amounting to 21.2 million euros (previous year: 18.2 million euros) are based on actuarial reports of Hamburger Pensionsverwaltung e.G., Hamburg. They were measured on the basis of the 2005 G mortality tables of Prof. Klaus Heubeck, assuming a discount rate appropriate to the maturity of 0.0 per cent (previous year: 0.0 per cent). Despite the general expiry of the partial retirement models, the amount reported for provisions increased. This was due to the fact that new partial retirement agreements were signed during the financial year.

Other employee benefits include, as in the previous year, provisions for redundancy plan costs and continued remuneration in the context of restructuring.