13 Provisions for Pensions

WACKER Group employees can avail themselves of various post-employment pension plans, which depend on the legal, economic and fiscal conditions prevailing in the respective countries. These pension plans generally take account of employees’ length of service and salary levels.

The company pension plan makes a distinction between defined contribution and defined benefit plans. Defined contribution plans lead to no further obligation for the company beyond paying contributions into special-purpose funds. Group companies have both defined-contribution and defined-benefit plans. They are financed, on the one hand, by funds and Pensionskasse der Wacker Chemie VVaG, and, on the other, by provisions in the form of direct commitments. Pension obligations result from defined benefit plans in the form of entitlements to future pensions and ongoing payments for eligible active and former employees of the WACKER Group and their surviving dependents.

Employees at Wacker Chemie AG and other German Group companies are granted a basic pension plan via Pensionskasse der Wacker Chemie VVaG, a legally independent German pension fund. The pension fund is financed by member and company contributions. Employees who joined the pension fund by the end of 2004 are on a defined benefit model. The pension amount is the same regardless of the employee’s age at which the employee starts paying contributions and of the interest generated from assets. Employees who joined the pension fund after January 1, 2005 are on a new basic-pension model. The guaranteed payments there are based on a fixed interest rate and the amount depends on the employee’s age when he/she starts paying contributions. In this model, annual profit distributions can increase the future payment.

Additionally, employees in Germany have the option of converting part of their remuneration into direct benefit commitments. Benefit plans taken out by December 31, 2000 are measured (in accordance with the projected unit credit method) at the value of years’ service to date/years served to retirement (pro rata temporis), whereas any benefit plans taken out on or after January 1, 2001 are measured at the present value of the defined benefit obligation.

2011 marked the implementation at WACKER of the “Working Life and Demography” collective-bargaining agreement. This will be in the form of additional contributions into a “PK+” supplementary voluntary insurance fund within Pensionskasse der Wacker Chemie VVaG. With this additional pension component, employees can enhance their company pension plan benefits.

In view of their pension-like character, obligations relating to the medical care of retired employees (USA) and severance payments are likewise included under pension provisions.

The obligations from direct benefit plans are calculated using the projected unit credit method, taking account of anticipated future payout and pension adjustments. The current service cost of pension benefit claimants results from the planned development of provisions for anticipated future pension payments. Any differences between those pension obligations calculated as planned and the defined benefit obligation at the end of the year are treated as actuarial gains or losses and, with the exception of effects of changed assumptions regarding probable mortality rates, are spread in subsequent periods over the average remaining service years of the plan participants, insofar as these differences exceed 10 percent of the present value of the defined benefit obligation and the fair value of the plan assets, whichever is higher. WACKER takes the view that, as far as probable mortality rates are concerned, it will be necessary to assume continuous increases in life expectancy. For this reason, it does not make sense to smooth out the expenses for the period on the basis of changed or adjusted mortality tables. Deviations in the other valuation parameters will be included as actuarial losses or gains using the corridor method. As from January 1, 2013, WACKER will report actuarial losses and gains in other comprehensive income, which will result in an increase in provisions for pensions of around €680 million and a reduction in Group equity of around €490 million on the same date. Such recognition within other comprehensive income of variations in actuarial gains and losses will lead to more volatility in equity in the future.

The obligations are only partially funded by means of provisions. The Group’s pension obligations are funded to a considerable degree by externally invested plan assets. In the case of both Wacker Chemie AG and the German Group companies, these assets are handled by Pensionskasse der Wacker Chemie VVaG.

The funding of Pensionskasse der Wacker Chemie VVaG by the German Group companies is included in expenses for pensions. The pension obligations resulting from the application of the projected unit credit method are reduced by the fair value of the plan assets and by still unrecognized actuarial losses, or increased by still unrecognized actuarial gains, provided that these do not concern effects from changes in probable mortality rates. Actuarial gains or losses from changed or adjusted mortality tables reduce or increase, respectively, the pension obligation reported.

If the fund’s assets exceed the obligation from the pension commitment, an asset is generally recognized. Such recognition, however, is permitted only on the condition that the reporting entity can draw an economic benefit from these assets, e.g. in the form of refunds from the plan or reductions in future contributions to the plan (“asset ceiling” pursuant to IAS 19.58 et seq.).

As Pensionskasse der Wacker Chemie VVaG sets its contributions in the manner stipulated by supervisory bodies, there is no access to the surplus fund assets in Germany. Surplus amounts are, therefore, not capitalized. Unless the fund assets cover the obligation, the net obligation is shown as a liability under pension provisions.

The pension obligations are calculated by taking account of company-specific biometric calculation principles and country-specific calculation principles and parameters. The calculations are based on actuarial valuations that take account of the following parameters:

The discount rates and salary increase rates underlying the calculation of the pension obligations were determined in line with the general economic situation and by applying uniform standards. The actuarial interest rate is based on a yield curve that is derived from the yields of country-specific, high-grade, fixed-interest corporate bonds with maturities corresponding to the pension obligations. The actuarial rate takes account of the WACKER-specific, expected future cash flows for these obligations.

Assumptions regarding the expected return on plan assets are made based on detailed analyses performed by financial experts and actuaries. Both historic actual returns and future expected long-term returns were taken into account. Interest income may vary in the funds’ individual asset classes. The percentage chosen corresponds to the average rate across all types of investment.

To arrive at the amount recognized as a defined benefit liability, the plan assets transferred into funds are balanced against the defined benefit obligation at the end of the year (financial status). Provisions for pensions and assets from excess pension-plan coverage are obtained after the actuarial profits and losses not yet recognized are deducted or added as appropriate.

The increase in actuarial losses or gains is attributable to the lower assumed interest rate of 3.5 percent.

The companys pension fund contribution was raised from 250 percent to 350 percent in fiscal 2012.

Reported under other changes is the elimination in connection with the closure of part of Siltronic Corporation’s Portland production facility.

In fiscal 2012, pension payments were made under plans in Germany totaling €64.1 million (2011: €62.3 million) and under plans in the remaining countries totaling €6.1 million (2011: €4.9 million). WACKER anticipates that payments under pension plans will reach approximately €70.0 million in the coming fiscal year. Employer contributions to fund assets are expected to amount to about €35.0 million in 2013.

The pension expenses incurred as a result of defined benefit plans and the sum total of all pension expenses consist of the following:

An adjustment of mortality assumptions in 2011 resulted in actuarial losses of €29.9 million. They are included in the expense from amortization of actuarial gains and losses.

Deviations between obligations and plan assets due to differences between assumptions and actual developments:

The following table shows the composition of pension-fund assets: