38 Provisions

Provisions for Pensions and Similar Obligations

Vonovia has pension obligations towards various employees which are based on the length of service. Defined benefit and defined contribution obligations – for which Vonovia guarantees a certain level of benefit – are financed through provisions for pensions. Vonovia has taken out reinsurance contracts for individual people.

Generally, they are pension benefits that depend on the final salary with percentage increases depending on the number of years of service.

The pension commitments cover 4,523 (Dec. 31, 2019: 3,866) eligible persons. The increase is due primarily to the fact that eligible persons for whom a final agreement on the reimbursement model was reached with the pension provider were included in the measurement of pensions for the first time.

Executives currently working for companies belonging to Vonovia have the opportunity to participate in the “Pension Instead of Cash Remuneration” model (Versorgungsbezüge anstelle von Barbezügen) in the version dated October 2003 (eligible persons: 307). Retirement, invalidity and surviving dependent benefits in the form of a lifelong pension are offered under this deferred compensation model. The retirement benefits can also be paid out as a one-time capital sum.

Overview of the most important basic data for existing pension plans (all of which have already been closed):

The current pensions according to the classic pension benefit regulations of Bochumer Verband are adjusted in line with Section 20 of those regulations. Section 20 is a rule which is based on Section 16 (1,2) of the German Occupational Pensions Improvement Act (BetrAVG) but which, according to a ruling of the Federal Labor Court of Germany, is an independent rule. Other company pensions are reviewed and adjusted under the terms of the agreement according to Section 16 (1,2) BetrAVG. On every review date, the development of the cost of living since the individual retirement date is reviewed and compensated for. Only in the aforementioned deferred compensation model is the option, available since January 1, 1999, used to raise the current pensions every year by 1% (Section 16 (3) No. 1 BetrAVG). No further risks are seen.

The company has decided to use the internal financing effect of the provisions for pensions and only to back a relatively small portion of the pension obligations with plan assets. Reinsurance policies have been taken out for former Management Board members against payment of a one-time insurance premium in order to provide additional protection against insolvency; these reinsurance policies were pledged to the eligible persons. They constitute plan assets, which are offset against the gross obligation. The fair value of the reinsurance policies for individual persons is higher than the extent of the obligations towards the respective person. This surplus of the fair values of the assets over the obligation is shown under non-current other assets. The conclusion of further reinsurance policies is not planned.

Pension plan obligations and the expenses necessary to cover these obligations are determined using the projected unit credit method prescribed by IAS 19. Both pensions known on the reporting date and vested rights as well as expected future increases in salaries and pensions are included in the measurement. The following actuarial assumptions were in each case made related to the end of the year and with economic effect for the following year.

Actuarial Assumptions

Due to a change at Bloomberg, the Bloomberg Barclays Classification System (“BCLASS”), rather than the Bloomberg Industry Classification System (“BICS”), will be used in the future as the basis for determining the portfolio of high-quality corporate bonds of the RATE:Link method of Willis Towers Watson that is relevant for the determination of interest rates. As a result of the refinement in the interest rate method, the actuarial interest rate as of December 31, 2020, has increased by around 30 basis points, reducing the defined benefit obligation (DBO) by € 32.0 million.

The 2018 G mortality tables of Prof. Dr. Klaus Heubeck have been taken for the biometric assumptions without any changes.

The defined benefit obligation (DBO) developed as follows:

The transfer is due to the final agreement on the reimbursement model reached with a pension provider.

The present value of the pension obligation is divided among the groups of eligible persons as follows:

Plan assets comprise solely reinsurance contracts. The fair value of the plan assets has developed as follows:

The actual return on plan assets amounted to € 0.6 million during the fiscal year (2019: € 0.8 million).

The following table shows a reconciliation of the defined benefit obligation to the pension obligation recognized in the balance sheet:

In 2020, actuarial losses of € 18.6 million (excluding deferred taxes) were recognized in other comprehensive income (2019: € 53.7 million).

The weighted average term of the defined benefit obligations is 16.1 years (Dec. 31, 2019: 15.8 years).

The following table contains the estimated, undiscounted pension payments of the coming five fiscal years and the total of those in the subsequent five fiscal years:

Sensitivity Analyses

An increase or decrease in the material actuarial assumptions would have led to the following defined benefit obligation as of December 31, 2020, providing the other assumptions did not change:

An increase in life expectancy of 4.9% would have resulted in an increase in the DBO of € 31.0 million as of December 31, 2020. This percentage rise corresponds to a one-year increase in the life expectancy of a man who was 65 at the reporting date.

If several assumptions are changed simultaneously, the cumulative effect is not necessarily the same as if there had been a change in just one of the assumptions.

The provisions for pensions include € 4.3 million (Dec. 31, 2019: € 4.4 million) for pension obligations which were transferred to third parties as part of an assumption of debt and which relate to vested rights and the payment of current pensions. A corresponding non-current receivable is shown under miscellaneous other assets.

Other Provisions

Reversals of provisions are generally offset against the expense items for which they were originally established.

The provisions for environmental remediation primarily refer to site remediation of locations of the former Raab Karcher companies. Remediation has either already begun or an agreement has been reached with the authorities as to how the damage is to be remedied. The cost estimates are based on expert opinions detailing the anticipated duration of the remediation work and the anticipated cost.

The personnel obligations are provisions for pre-retirement part-time work arrangements, provisions for bonuses, severance payments not relating to restructuring and other personnel expenses. The other personnel expenses include a provision for the long-term incentive plan (LTIP) determined in accordance with IFRS 2 of € 30.0 million (Dec. 31, 2019: € 23.7 million) (see chapter [E47] Share-Based Payments).

The cost items under miscellaneous other provisions include as material individual costs legal disputes in the amount of € 23.6 million (2019: € 14.1 million), litigation costs in the amount of € 10.7 million (2019: € 11.7 million), costs associated with company audits in the amount of € 6.0 million (2019: € 0.1 million), onerous contracts in the amount of € 2.1 million (2019: € 2.3 million) and, in the previous year, € 0.1 million costs in connection with tax returns.

The Group expects to settle most of the provision in the coming year.