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6.10 Provisions for pensions and other post-employment benefit obligations
Pension commitments are given in accordance with the relevant version of the pension plan as amended. The 1968 pension plan provides for retirement, disability, widows’ and orphans’ benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from 31 January 1981.
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants’ benefits. The scheme is based upon annual determination of the pension contributions, which are calculated according to the pensionable employment income and the company’s performance. The pension plan was closed to new participants with effect from 31 March 1999.
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. The employee- funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI Lebensversicherung AG, Cologne.
As at 1 July 2000 the 2000 pension plan came into force for the entire Group. Under this plan, new employees included in the group of beneficiaries are granted an indirect commitment from HDI Unterstützungskasse e. V. This pension plan provides for retirement, disability and surviving dependants’ benefits.
Effective 1 December 2002 Group employees have an opportunity to accumulate additional old-age provision at unchanged conditions by way of deferred compensation through membership of HDI Pensionskasse AG.
In addition to these pension plans, managerial staff and members of the Executive Board, in particular, enjoy individual commitments as well as commitments given under the benefits plan of the Bochumer Verband.
The commitments to employees in Germany predominantly comprise benefit obligations financed by the Group companies. The pension plans are unfunded. The provisions for pensions in Germany and abroad were calculated on the basis of uniform standards according to prevailing economic circumstances.
Provisions for pensions are established in accordance with actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows’ benefits. The amount of the commitments is determined according to length of service and salary level.
The defined benefit plans expose Hannover Re to the following actuarial risks:
- longevity
- currency
- interest rate
- disablement
- pension progression
- rate of compensation increase
Longevity entails the risk that the mortality contained in the actuarial bases does not correspond to the actual mortality and that pension payments have to be rendered and funded for a longer duration than had been assumed.
Disablement entails the risk that the assumed number of retirements from the subportfolio of eligible beneficiaries on grounds of disability does not correspond to the actual experience and for this reason increased benefit obligations have to be met.
The pension progression entails the risk that the anticipated development of the consumer price index factored into the trend assumptions was too low and that increased benefit obligations arise on account of the pension indexation required by law.
The rate of compensation increase entails the risk that the increases in pensionable salaries factored into the trend assumptions on a parallel basis do not adequately reflect the actual developments. In addition, in the case of plans under which the determinative income components above and below the income threshold for contributions to the statutory pension insurance scheme are differently weighted for the purpose of calculating the benefit, there is a risk of a diverging trend in the future with respect to salary and income threshold.
The calculation of the provisions for pensions is based upon the following assumptions:
| Measurement assumptions | ||||||
| 2016 | 2015 | |||||
|---|---|---|---|---|---|---|
| in % | Germany | Australia | United Kingdom | Germany | Australia | |
| Discount rate | 1.65 | 3.62 | 2.70 | 2.36 | 3.60 | |
| Rate of compensation increase | 1.59 | 3.00 | 2.35 | 2.50 | 3.50 | |
| Pension indexation | 2.17 | 3.00 | 2.15 | 1.86 | 3.00 | |
The movements in the net pension liability for the Group’s various defined benefit plans were as follows:
| Movements in net liability from defined benefit pension plans | ||||||
|---|---|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| in EUR thousand | Defined benefit obligation | Fair value of plan assets | Impact of minimum funding requirement / asset ceiling | |||
| Position at 1 January of the financial year | 154,832 | 187,034 | 4,533 | 15,533 | – | – |
| Recognised in profit or loss | ||||||
| Current service costs | 3,169 | 4,274 | – | – | – | – |
| Past service cost and plan curtailments | – | 1,285 | – | – | – | – |
| Net interest component | 3,459 | 2,636 | 133 | 37 | – | – |
| 6,628 | 8,195 | 133 | 37 | – | – | |
| Recognised in cumulative other comprehensive income | ||||||
| Actuarial gain (–) / loss (+) from change in biometric assumptions | – | – | – | – | – | – |
| Actuarial gain (–) / loss (+) from change in financial assumptions | 21,998 | (17,840) | – | – | – | – |
| Experience gains (–) / losses (+) | 17,755 | (1,034) | – | – | – | – |
| Return on plan assets, excluding amounts included in interest income | – | – | 11,904 | 123 | – | – |
| Change in asset ceiling | – | – | – | – | 40 | – |
| Exchange differences | (431) | 47 | (403) | 14 | – | – |
| 39,322 | (18,827) | 11,501 | 137 | 40 | – | |
| Other changes | ||||||
| Employer contributions | – | – | 123 | 5,084 | – | – |
| Employee contributions and deferred compensation | 27 | – | 382 | – | – | – |
| Benefit payments | (4,701) | (20,191) | (2) | (16,247) | – | – |
| Additions and disposals | 11,605 | (1,155) | 10,311 | (225) | – | – |
| Effects of plan settlements | (92) | (224) | – | 214 | – | – |
| 6,839 | (21,570) | 10,814 | (11,174) | – | – | |
| Position at 31 December of the financial year | 207,621 | 154,832 | 26,981 | 4,533 | 40 | – |
The plan assets consist exclusively of qualifying insurance policies as defined by IAS 19.
The actuarial gains and losses from the change in financial assumptions for defined benefit obligations were chiefly influenced in the financial year just ended by the decrease in the discount rate compared to the previous year.
As a consequence of developments on the capital markets, funding of the minimum adjustment to current benefits from the surplus participation can no longer be anticipated. From a longer-term perspective, a required excess interest share of at least 1% p. a. can no longer be assumed. For this reason, certain pension commitments given through provident funds were actuarially measured for the first time in the year under review in accordance with the requirements for defined benefit plans. The modified measurement of these pension commitments is reflected in the rise in experience losses to EUR 17.8 million (experience gain of EUR 1.0 million). This reclassification further gives rise to an increase in the return on plan assets to EUR 11.9 million (EUR 0.1 million).
The additions shown under the “Other changes” reflect the acquisition of CGI in the 2016 financial year.
The reconciliation of the projected benefit obligations with the recognised provisions for pensions is as follows:
| Provisions for pensions | ||
| in EUR thousand | 2016 | 2015 |
|---|---|---|
| Projected benefit obligations at 31 December of the financial year | 207,621 | 154,832 |
| Fair value of plan assets at 31 December of the financial year | 26,981 | 4,533 |
| Effect of minimum funding requirement on asset ceiling | 40 | – |
| Recognised pension obligations at 31 December of the financial year | 180,680 | 150,299 |
| Provisions for pensions | 180,680 | 150,299 |
In the current financial year Hannover Re anticipates contribution payments of EUR 2.4 million under the plans set out above. The weighted average duration of the defined benefit obligation is 17.9 (17.5) years.
Sensitivity analysis
An increase or decrease in the key actuarial assumptions would have the following effect on the present value of the defined benefit obligation as at the balance sheet date:
| Effect on the defined benefit obligation | |||
| in EUR thousand | Parameter increase | Parameter decrease | |
|---|---|---|---|
| Discount rate | (+/-0.5%) | -15,848 | 20,409 |
| Rate of compensation increase | (+/-0.25%) | 1,034 | -1,013 |
| Pension indexation | (+/-0.25%) | 6,106 | -5,818 |
Furthermore, a change is possible with respect to the assumed mortality rates and lifespans. The underlying mortality tables were adjusted by reducing the mortalities by 10% in order to determine the longevity risk. Extending the lifespans in this way would have produced a EUR 6.9 million (EUR 5.0 million) higher pension commitment at the end of the financial year.