Annual Report 2013

Notes to the consolidated statement of
financial position

Plan assets by country 2013
Classification of bonds by rating 2013

(15) Pension obligations

Description of the pension plans

Employees in companies included in the consolidated financial statements have entitlements under company pension plans which are either defined contribution or defined benefit plansdefined benefit plans
Post-employment benefit plans other than defined contribution plans.
. These take different forms depending on the legal, financial and tax regime of each country. The level of benefits provided is based, as a rule, on the length of service and on the income of the person entitled. Details on pension benefits for members of the Management Board are provided in the remuneration report.

In defined benefit plansdefined benefit plans
Post-employment benefit plans other than defined contribution plans.
, the liability for pensions and other post-employment benefits is calculated at the present value of the future obligations (projected unit credit method). This actuarial method of calculation takes future trends in wages, salaries and retirement benefits into account.

A total of around 67,600 plan participants qualify for benefits under our pension programs. Of this figure, 28,300 are active employees, 9,100 are former employees with vested benefits, and 30,200 are retirees. The majority of the recipients of pension benefits are located in Germany and the USA. The pension obligations are primarily financed via various external trust assets that are legally independent of Henkel.

Active employees of Henkel in Germany participate in a defined contribution system, “Altersversorgung 2004 (AV 2004),” which was restructured in 2004. AV 2004 is an employer-financed pension plan that reflects the personal income development of employees during their career at Henkel and thus provides a defined benefit pension. Henkel guarantees a minimum return on the company’s contributions. The benefit essentially consists of an annuity payable upon attainment of the retirement age plus a lump-sum payment if the annuity threshold is exceeded in the employee’s service period. In addition to age and disability pensions, the plan benefits include surviving spouse and surviving child benefits.

Employees who started at Henkel after April 1, 2011 participate in the pension plan “Altersversorgung 2011 (AV 2011).” AV 2011 is an employer-financed, fund-linked retirement plan funded by contributions based on the income development of the employee. Henkel ensures its employees that a principal amount is available upon retirement which is at least equivalent to the level of principal contributions made by Henkel. Henkel makes the pension contribution to an investment fund established for the purpose of the company pension plan. Upon attaining retirement age, the employee can choose between an annuity through transfer of the superannuation lump-sum to a pension fund, or a one-time payment.

To provide protection under civil law of the pension entitlements of future and current pensioners of Henkel AG & Co. KGaAKGaA
Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders).
against insolvency, we have transferred the proceeds of the bond issued in 2005 and certain other assets to Henkel Trust e.V. The trustee invests the cash with which it has been entrusted in the capital market in accordance with investment policies laid down in the trust agreement. In addition, we also subsidize medical benefits for retired employees resident mainly in the USA. Under these programs, retirees are reimbursed for a certain percentage of their medical expenses. We build provisions during the employees’ service period and pay the promised benefits when they are claimed.

The defined contribution plansdefined contribution plans
Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
are structured in such a way that the corporation pays contributions to public or private sector institutions on the basis of statutory or contractual terms or on a voluntary basis and has no further obligations regarding the payment of benefits to employees. The contributions for defined contribution plansdefined contribution plans
Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
excluding multi-employer plans for the year under review amounted to 85 million euros (previous year: 90 million euros). In 2013, we paid 46 million euros to public sector institutions (previous year: 48 million euros) and 39 million euros to private sector institutions (previous year: 42 million euros).

The pension benefits paid from plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
in the USA increased from –45 million euros to –149 million euros in the reporting period. The increase resulted from early benefit payments to former employees in the USA.

Multi-employer plans

Henkel provides defined pension benefits that are financed by more than one employer. The following multi-employer plans are treated as defined contribution plansdefined contribution plans
Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
because, due to the limited share of the contribution volume in the plans, the information available for each of the financing companies is insufficient for defined benefit accounting. In the Henkel Group, benefits from multi-employer plans are provided for employees primarily in the USA and Japan. Withdrawal from our multi-employer plans at the present time would incur a one-time expense of around 25 million euros (previous year: around 25 million euros).

The most significant information concerning our major multiemployer plans is presented below:

Overview of multi-employer plans at December 31, 2013
Country
in million euros
Share of plan
contribution volume
Coverage ratioContributions 2013Expected
contributions 2014
USA 0.20 % 48 % 1.01.0
Japan 0.44 % 75 % 0.50.5
Japan 1.67 % 82 % 0.50.5
Japan 7.13 % 81 % 0.2 0.2
 

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Assumptions

Group-wide, the obligations from our pension plans are valued by an independent external actuary at the end of the fiscal year. The calculations at the end of the fiscal year are based on the actuarial assumptions below. These are given as the weighted average. The mortality rates used are based on published statistics and experience relating to each country. In Germany, the assumptions are based on the “Heubeck 2005G” mortality table. In the USA, the assumptions are based on the “RP 2000 projected to 2030” mortality table. The valuation of pension obligations in Germany was based essentially on the assumption of a 2 percent increase in retirement benefits (previous year: 2 percent).

The discount rate is based on yields in the market for highranking corporate bonds on the respective date. The currency and term of the underlying bonds are aligned with the currency and expected maturities of the post-employment pension obligation.

Actuarial assumptions

in percent
Germany USA Other countries1
2012 2013 2012 2013 2012 2013
Discount rate 3.00 3.00 3.80 4.90 4.20 3.50
Income trend 3.25 3.25 4.25 4.25 3.00 3.25
Expected increases in costs for medical benefits 8.00 7.50 6.30 3.00
in years            
Life expectancy at age 65 as of the valuation date for a person currently            
65 years old 20.6 20.8 20.0 21.0 22.9 23.5
40 years old 23.7 24.0 20.0 21.0 25.2 26.0

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Prior-year figures adjusted in application of IAS 19 revised (see notes here).

Present value of pension obligations at December 31, 2012
in million euros Germany USA Other countries Total
At January 1, 2012 2,269 1,169 846 4,284
Changes in the Group
Translation differences –20 –20
Actuarial gains (–)/losses (+) 418 89 115 622
of which: from changes in demographic assumptions1
of which: from changes in financial assumptions 413 84 109 606
of which: from experience adjustments 5 5 6 16
Current service cost 37 19 27 83
Employee contributions to pension funds 1 1
Gains (–)/losses (+) arising from the termination and curtailment of plans –15 –15
Interest expense 96 50 35 181
Retirement benefits paid out of plan assets/out of reimbursement rights –36 –54 –53 –143
Employer's payments for pension obligations –104 –26 –13 –143
Past service cost (+)/gain (–) 4 –1 –3
At December 31, 2012 2,684 1,226 940 4,850
of which: unfunded obligations 100 298 103 501
of which: funded obligations 2,584 821 837 4,242
of which: obligations covered by reimbursement rights 107 107

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Fair value of plan assets at December 31, 2012
in million eurosGermany USA Other countries Total
At January 1, 2012 1,933728642 3,303
Changes in the Group
Translation differences– 16 4– 12
Employer contributions to pension funds2358047362
Employee contributions11
Retirement benefits paid out of plan assets–36–45 –53 –134
Interest income on plan assets882724139
Plan administration costs
Remeasurements in equity1534840241
At December 31, 2012 2,373822705 3,900

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Fair value of reimbursement rights at December 31, 2012
in million eurosGermany USA Other countries Total
At January 1, 2012 84 84
Changes in the Group
Translation differences –2 –2
Employer contributions 6 6
Employee contributions
Retirement benefits paid out of reimbursement rights –9 –9
Interest income on plan assets 4 4
Remeasurements in equity 6 6
At December 31, 2012 89 89

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Net liability from pension obligations at December 31, 2012
in million eurosGermany USA Other countries Total
At January 1, 2012 336 446 216 998
Recognized through profit and loss      
Current service cost 37 19 27 83
Gains (–) / losses (+) arising from the termination and curtailment of plans –15 –15
Plan administration costs1
Interest expense 8 19 11 38
Recognized in equity in other comprehensive income
Actuarial gains (–) / losses (+) 418 89 115 622
Interest income on plan assets –153 –48 –40 –241
Interest income on reimbursement rights –6 –6
Change in effect of asset ceiling –7 –7
Other items recognized in equity        
Employer's payments –339 –112 –60 –511
Changes in the Group
Translation differences –2 –4 –6
Past service cost1 4 –1 –3
Change in effect of asset ceiling including reimbursement rights 5 5
Recognized provision for pension obligations at December 31, 2012 311 409 240 960

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Present value of pension obligations at December 31, 2013
in Mio EuroGermany USA Other countries Total
At January 1, 2013 2,684 1,226 940 4,850
Changes in the Group
Translation differences –38 –25 –63
Actuarial gains (–)/losses (+) 1 –109 11 –97
of which: from changes in demographic assumptions 23 23
of which: from changes in financial assumptions 2 –120 13 –105
of which: from experience adjustments –1 –12 –2 –15
Current service cost 44 19 30 93
Employee contributions to pension funds 3 2 5
Gains (–)/losses (+) arising from the termination and curtailment of plans –1 –1
Interest expense 78 44 30 152
Retirement benefits paid out of plan assets/out of reimbursement rights –118 –156 –41 –315
Employer's payments for pension obligations –18 –24 –13 –55
At December 31, 2013 2,674 962 933 4,569
of which: unfunded obligations 83 267 103 453
of which: funded obligations 2,591 648 830 4,069
of which: obligations covered by reimbursement rights 47 47

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Fair value of plan assets at December 31, 2013
in million eurosGermany USA Other countries Total
At January 1, 2013 2,373 822 705 3,900
Changes in the Group
Translation differences –30 –16 –46
Employer contributions to pension funds 28 34 62
Employee contributions 3 2 5
Retirement benefits paid out of plan assets –118 –149 –41 –308
Interest income on plan assets 72 29 23 124
Plan administration costs –3 –3
Remeasurements in equity 57 –21 –18 18
At December 31, 2013 2,415 648 689 3,752

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Fair value of reimbursement rights at December 31, 2013
in million eurosGermany USA Other countries Total
At January 1, 2013 89 89
Changes in the Group
Translation differences –4 –4
Employer contributions 8 8
Employee contributions
Retirement benefits paid out of reimbursement rights –7 –7
Interest income on plan assets 4 4
Remeasurements in equity 6 6
At December 31, 2013 96 96

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Net liability from pension obligations at December 31, 2013
in million eurosGermany USA Other countries Total
At January 1, 2013 311 409 240 960
Recognized through profit and loss      
Current service cost 44 19 30 93
Gains (–) / losses (+) arising from the termination and curtailment of plans –1 –1
Plan administration costs 3 3
Interest expense 6 11 7 24
Recognized in equity in other comprehensive income        
Actuarial gains (–) / losses (+) 1 –109 11 –97
Interest income on plan assets –57 21 18 –18
Interest income on reimbursement rights –6 –6
Change in effect of asset ceiling –2 –2
Other items recognized in equity        
Employer's payments –46 –32 –47 –125
Changes in the Group
Translation differences –4 –9 –13
Change in past service cost –5 1 –4
Change in effect of asset ceiling including reimbursement rights 7 –1 6
Recognized provision for pension obligations at December 31, 2013 259 314 247 820

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A total of 67,600 plan participants qualify for benefits under our pension programs. The total present value (defined benefit obligation – DBO) is comprised of:

     

  • 1,572 million euros for active employees
  •  

  • 676 million euros for former employees with vested benefits
  •  

  • 2,321 million euros for retirees
  •  

The average weighted duration of pension obligations is 14 years for Germany, 9 years for the USA and 20 years for other countries.

In determining net liability, we take into account amounts that are not recognized due to asset ceiling restrictions. If the fair valuefair value
Amount at which an asset or a liability might be exchanged or a debt paid in an arm’s length transaction between knowledgeable, willing parties.
of the plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
exceeds the obligations arising from the pension benefits, an asset is recognized only if the reporting entity can also derive economic benefit from these assets, for example in the form of return flows or a future reduction in contributions (“asset ceiling” per IAS 19.58 ff.). In the reporting period, we recorded an amount of 0 million euros (previous year: 2 million euros).

Within our consolidated statement of income, current service costs are allocated on the basis of cost of sales to the respective cost item. Only the net of interest expense for the present value of obligations and interest income from plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
is reported in the interest result. All gains/losses from the termination and curtailment of plans have been recognized in other operating income/charges. The employer’s contributions in respect of state pension provisions are included as “Social security contributions and staff welfare costs” under Note 32. In 2013, payments into the plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
amounted to 62 million euros (previous year: 362 million euros).

The reimbursement rights covering a portion of the pension obligations in the USA are assets that do not fulfill the definition of plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
as stated in IAS 19.

The reimbursement rights indicated are available to the Group in order to cover the expenditures required to fulfill the respective pension obligations. Reimbursement rights and the associated pension obligations must, according to IAS 19, be shown unnetted in the statement of financial position.

Payments into pension funds in fiscal 2014 are expected to total 30 million euros.

Analysis of plan assets
December 31, 2012 December 31, 2013
in million euros Quotation on
active markets
No quotation
on active
markets
Total Quotation on
active markets
No quotation
on active
markets
Total
Shares 896 896 1,038 1,038
Europe 358 358 454 454
USA 156 156 167 167
Others 382 382 417 417
Bonds and hedging
instruments
2,455 –96 2,359 2,410 –11 2,399
Government bonds 747 747 739 739
Corporate bonds 1,708 1,708 1,671 1,671
Derivatives –96 –96 –11 –11
Alternative investments 56 184 240 3 151 154
Cash 214 214 71 71
Liabilities1 –20 –20 –120 –120
Other assets 211 211 210 210
Total 3,470 430 3,900 3,451 301 3,752

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The objective of the investment strategy for the global plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
is the long-term security of pension payments. This is ensured by comprehensive risk management that takes into account the asset and liability portfolios of the defined benefit pension plans. Henkel pursues a liability-driven investment (LDI) approach in order to achieve the investment objective. This approach takes into account the structure of the pension obligations and manages the cover ratio of the pension plans. In order to improve the funding ratio, Henkel invests plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
in a diversified portfolio whose expected long-term yield is above the interest costs of the pension obligations.

In order to cover the risks arising from trends in wages, salaries and life expectancies, and to close the potential deficit between plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
and pension obligations over the long term, additional investments are made in a return-enhancing portfolioreturn-enhancing portfolio
Contains investments in equities and alternative investments, and serves to improve the overall return of the pension plan assets over the long term in order to raise the coverage ratio of pension funds. In addition, a broader investment horizon increases the level of investment diversification.
as an add-on instrument that contains assets such as equities, private equity, commodities and real estate. In principle, the target portfolio structure of the plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
is determined in asset-liability studies. These studies are conducted regularly with the help of external advisors who assist Henkel in the investment of plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
. They examine the actual portfolio structure taking into account current capital market conditions, investment principles and the obligation structure, and can suggest that adjustments be made to the portfolio.

The expected long-term yield for individual plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
is derived from the target portfolio structure and the expected long-term yields for the individual asset classes.

Major plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
are administered by external fund managers in Germany and the USA. These countries pursue the above investment strategies and are monitored centrally. At December 31, 2013, other assets making up the plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
included the present value of a non-current receivable of 47 million euros (previous year: 47 million euros) relating to claims pertaining to a hereditary building lease assigned by Henkel AG & Co. KGaAKGaA
Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders).
to Henkel Trust e.V. Also shown here is a claim of 132 million euros against BASF Personal Care & Nutrition GmbH (formerly Cognis GmbH) for indemnification of pension obligations (previous year: 140 million euros). This claim represents the nominal value which is equivalent to the market price. In the reporting year, as in the previous year, we held no direct investments and no treasury shares with respect to plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
in the portfolio.

Risks associated with pension obligations

Our internal pension risk management monitors the risks of all pension plans Group-wide in compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
with local legal regulations. As part of the monitoring process, guidelines on the control and management of risks are adopted and continuously developed; these guidelines mainly govern external funding, portfolio structure and actuarial assumptions. The objective of the financing strategy within the Group is to ensure that plan assetsplan assets
Pension fund investment vehicles per definition under IAS 19 “Employee Benefits.”
cover 90 to 100 percent of the present value of the funded pension obligations. The contributions and investment strategies are intended to ensure nearly complete coverage of the plans for the duration of the pension obligations.

Henkel’s pension obligations are exposed to various market risks. These risks are counteracted by the degree of external funding and the structure of pension benefits. The risks relate primarily to changes in market interest rates, inflation, and life expectancy, as well as general market fluctuations. Pension obligations based on contractual provisions in Germany generally entail lifelong benefits payable in the event of death or disability or when the employee reaches a retirement age. In order to reduce the risks arising from the payment of lifelong benefits as well as inflation, pension benefits have been gradually converted since 2004 to what are known as modular benefits with a pension option in which the benefit is initially divided into an annuity and lump-sum benefit portion. Newly hired employees since 2011 receive a benefit based primarily on the lump-sum benefit. Generally, lump-sum benefits may also be paid out as an annuity through a pension fund. All benefits in Germany are financed through a provident fund (Vorsorgefonds) established for the purpose of the occupational pension plan. Benefits for new employees since 2011 as well as a portion of the entitlements vested since 2004 are linked to the performance of this provident fund, resulting in a reduction in overall risk to the Group. The described adjustments reduce the financial risk from pension commitments within the pension structure. By linking the benefit to the capital investment, the net risk is also largely eliminated. An increase in the long-term inflation assumption would mainly affect the expected increases in pensions and the expected increase in pension-eligible salaries.

The pension obligations in the USA are based primarily on three retirement plans that are all closed to new employees. New employees receive a pension benefit based on a defined contribution plan. The pension benefits generally have a lump-sum option which is usually exercised. When a pension becomes payable, the amount of the lump-sum payment is determined on the basis of current market interest rates. As a result, the impact of a change to the interest rate used in the calculation is low compared to pension commitments entailing lifelong benefits. Additionally, in the USA, pensions paid once are not adjusted by amount, thus there are no direct risks during the pension payment period arising from pending adjustments. Inflation risks therefore result mainly from the salary adjustments awarded.

In addition to the pension obligation risks already presented, there are specific risks associated with multi-employer plans. In the Henkel Group, these are mainly related to the USA. The contributions to these plans are raised mainly through an allocation process based on the pension-eligible income of active employees. Restructuring contributions may also be made in order to close gaps in coverage. The risks of such plans arise largely from higher future contributions to close coverage gaps or through discontinuation by other companies obligated to make contributions.

The impact of changes to assumptions in medical benefits for employees and retirees in the USA are shown in the sensitivities analysis overleaf.

The analysis of our Group-wide pension obligations revealed no extraordinary risks.

Cash flows and sensitivities

In the next five financial years, the following payments from pension plans are expected:

Future payments for pension benefits
in million euros Germany USA Other countries Total
2014 142 105 31 278
2015 132 84 30 246
2016 131 82 30 243
2017 130 80 29 239
2018 130 79 31 240
 

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The future level of the funded status and thus of the pension obligations depends on the development of the discount rate, among other factors. Companies based in Germany and the USA account for 80 percent of our pension obligations. The medical costs for employees of our subsidiaries in the USA which are incurred after retirement are also recognized in the pension obligations for defined benefit plansdefined benefit plans
Post-employment benefit plans other than defined contribution plans.
. A rate of increase of 7.5 percent (previous year: 8.0 percent) was assumed for the medical costs. We expect this rate of increase to fall gradually to 4.5 percent by 2028 (previous year: 5.0 percent by 2018). The effects of a change in material actuarial assumptions for the present value of pension obligations are as follows:

Sensitivities – Present value of pension obligations at December 31, 2013
in million euros Germany USA Other countries Total
Present value of obligations 2,674 962 933 4,569
in the event of:        
Increase in the discount rate by 0.5 pp 2,496 927 849 4,272
Reduction of the discount rate by 0.5 pp 2,862 1,002 1,029 4,893
Rise in future income increases by 0.5 pp 2,675 967 955 4,597
Reduction of future income increases by 0.5 pp 2,673 958 911 4,542
Rise in retirement benefits increases by 0.5 pp 2,810 962 990 4,762
Reduction of retirement benefits increases by 0.5 pp 2,547 962 883 4,392
Rise in medical costs by 0.5 pp 2,674 966 934 4,574
Reduction of medical costs by 0.5 pp 2,674 960 932 4,566

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The extension of life expectancy in Germany by one year would increase the present value of pension obligations by 4 percent. This would have a more limited effect in the USA because a significant share of the pension plans is based on lump-sum benefits.

It should be noted with respect to the sensitivities presented that, due to mathematical effects, the percentage change is not and does not need to be linear. Thus the percentage increases and decreases do not vary with the same absolute amount. Each sensitivity is independently calculated and is not subject to scenario analysis.