[51] Provisions for pensions and other post-employment benefits Audited

Depending on the legal, economic and fiscal circumstances prevailing in each country, different retirement benefit systems are provided for the employees of the Merck Group. Generally these systems are based on the years of service and salaries of the employees. Pension obligations of the Merck Group include both defined benefit and defined contribution plans and comprise both obligations from current pensions and accrued benefits for pensions payable in the future. In the Merck Group, defined benefit plans are funded and unfunded. Provisions also contain other post-employment benefits, such as accrued future health care costs for retirees in the United States.

In order to limit the risks of changing capital market conditions and demographic developments, for many years now Merck has been offering only defined contribution plans to newly hired employees.

The value recognized in the balance sheet for “pensions and other post-employment benefits” was derived as follows:

The calculation of the defined benefit obligations as well as the relevant plan assets was based on the following actuarial parameters:

There are average values weighted by the present value of the respective benefit obligation.

The defined benefit obligations of the Merck Group were based on the following types of benefits provided by the respective plan:

The main benefit rules are as follows:
Merck KGaA and Merck Pensions GmbH & Co. KG accounted for € 1,681.8 million (2011: € 1,368.8 million) of the defined benefit obligations and € 799.5 million (2011: € 523.8 million) of the plan assets. The benefits comprise old-age, disability and surviving dependent pensions. On the one hand, these obligations are based on benefit rules comprising benefit commitments dependent upon years of service and final salary from which newly hired employees have been excluded. On the other hand, the benefit rules applicable to employees newly hired since January 1, 2005 comprise a direct commitment in the form of a defined contribution obligation. The benefit entitlement results from the cumulative total of annually determined pension components that are calculated on the basis of a defined benefit expense and an age-dependent annuity table. Statutory minimum funding obligations do not exist.

The Merck Serono pension fund in Switzerland accounted for € 393.5 million (2011: € 372.8 million) of the defined benefit obligations and € 378.7 million (2011: € 364.4 million) of the plan assets. These obligations are based on the granting of old-age, disability and surviving dependents benefits, which include the legally required benefits. Both employer and employee contributions are paid into the pension fund. Statutory minimum funding obligations exist.

The Merck Pension Scheme in the United Kingdom accounted for € 303.2 million (2011: € 289.7 million) of the defined benefit obligations and € 284.0 million (2011: € 257.9 million) of the plan assets. These obligations result from a benefit plan which is based on years of service and final salary and was closed to newly hired employees in 2006. The agreed benefits comprise old-age, disability and surviving dependent benefits. The employer and the employees make contributions to the plan. Statutory minimum funding obligations also exist in the United Kingdom.

In the reporting period, the following items were recognized in income:

With the exception of the net balance of interest expense on the defined benefit obligations and interest income from the plan assets, which is recorded under the financial result, the relevant expenses for defined benefit and defined contribution pension systems are allocated to the individual functional areas.

During the reporting period, the present value of the defined pension obligations changed as follows:

In December 2011, Merck KGaA set up a Contractual Trust Arrangement (CTA) with Merck Pensionstreuhand e.V., Darmstadt. Accordingly, the benefit obligations of Merck KGaA were reclassified from the category “funded by provisions” to the category “funded”.

The following overview shows how the present value of all defined benefit obligations would have been influenced by changes to definitive actuarial assumptions:

The fair value of the plan assets changed in the reporting period as follows:

The actual return on plan assets amounted to € 116.6 million in 2012 (2011: income of € 26.2 million). As in the previous year, there were no effects of the asset ceiling in accordance with IAS 19.64.

The development of cumulative actuarial gains (+) and losses (–) was as follows:

Plan assets for funded benefit obligations primarily comprised fixed-income securities, liquid assets, and stocks. They did not include financial instruments issued by Merck Group companies or real estate used by Group companies.

The plan assets serve exclusively to meet the defined benefit obligations. Covering these benefit obligations with financial assets represents a means of providing for future cash outflows, which occur in some countries on the basis of legal requirements and in other countries (e.g. Germany) on a voluntary basis.

The ratio of the fair value of the plan assets to the present value of the defined benefit obligations is referred to as the degree of pension plan funding. If the benefit obligations exceed the plan assets, this represents underfunding of the pension fund.

It should be noted, however, that both the benefit obligations as well as the plan assets fluctuate over time. This could lead to an increase in underfunding. Depending on the statutory regulations, it could become necessary in some countries for the Merck Group to reduce underfunding through additions of liquid assets. The reasons for such fluctuations could include changes in market interest rates and thus the discount rate as well as adjustments to other actuarial assumptions (e.g. life expectancy, inflation rates, etc.)

In order to minimize such fluctuations, in managing its plan assets, the Merck Group also pays attention to potential fluctuations in liabilities. In the ideal case, assets and liabilities develop in opposite directions when exposed to exogenous factors, creating a natural defense against these factors. In order to achieve this effect, the corresponding use of financial instruments is considered in respect of individual pension plans.

The fair value of the plan assets can be allocated to the following categories:

Employer contributions to plan assets will probably amount to around € 37.4 million in 2013 (2012: € 39.0 million). The weighted duration amounted to 16 years.

The cost of ongoing contributions for defined contribution plans that are financed exclusively by external funds and for which the companies of the Merck Group are only obliged to pay the contributions amounted to € 19.9 million (2011: € 19.1 million). In addition, employer contributions amounting to € 54.9 million (2011: € 56.4 million) were transferred to the German statutory pension insurance system and € 33.9 million (2011: € 28.9 million) to statutory pension insurance systems abroad.