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5.10 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-Gerling 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. The 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-Gerling 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.

Provisions for pensions are established in accordance with IAS 19 “Employee Benefits” using the projected unit credit method. The pension plans are defined benefit plans. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities. The commitments to employees in Germany predominantly comprise benefit obligations financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are recognised under other liabilities. The provisions for pensions in Germany and abroad were calculated on the basis of uniform standards defined by Talanx AG and subject to local economic conditions.

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 calculation of the provisions for pensions is based upon the following assumptions:

Measurement assumptions in % 2011 2010
  Germany Australia Germany Australia
Discount rate 4.84 4.00 4.57 5.00
Projected long-term yield on plan assets 7.00 7.00
Rate of compensation increase 2.75 5.00 2.75 5.00
Pension indexation 2.00 3.00 2.00 3.00

The change in the projected benefit obligation of the pension commitments as well as their breakdown into plans that are unfunded or are wholly or partially funded was as follows:

Change in the projected benefit obligation
in EUR thousand
2011 2010
Projected benefit obligation at the beginning of the year under review 109,962 93,462
Current service cost for the year under review 3,341 2,818
Interest cost 4,921 4,969
Deferred compensation 20
Actuarial gain/loss (10,643) 11,034
Currency translation 366 2,447
Benefits paid during the year (2,309) (3,466)
Past service cost 1,062 57
Effect of plan curtailments or settlements (82) (1,379)
Projected benefit obligation at 31 December of the year under review 106,618 109,962
Funding of the defined benefit obligation
in EUR thousand
2011 2010
Projected benefit obligation from unfunded plans 91,730 97,420
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 14,888 12,542
Projected benefit obligation at 31 December of the year under review 106,618 109,962
Fair value of plan assets 11,525 10,464
Funded status (present value of earned benefit entitlements less fund assets) 95,093 99,498

The fair value of the plan assets developed as follows:

Change in plan assets in EUR thousand 2011 2010
Fair value at 31 December of the previous year 10,464 9,317
Expected return on plan assets 777 710
Actuarial gain/loss (1,253) (448)
Currency translation 283 1,928
Employer contributions 1,257 1,507
Benefits paid during the year (3) (1,126)
Effect of plan curtailments or settlements (1,424)
Fair value of plan assets at 31 December of the year under review 11,525 10,464

The expected long-term return on plan assets was derived from the anticipated long-term yields of the individual asset classes and weighted pro rata. The plan assets consist exclusively of qualifying insurance policies as defined by IAS 19.

The following table presents a reconciliation of the funded status – calculated from the difference between the defined benefit obligations and the plan assets – with the provision for pensions recognised as at the balance sheet date.

Reconciliation of the net provision for pensions
in EUR thousand
2011 2010
Defined benefit obligations at 31 December of the year under review 106,618 109,962
Fair value of plan assets at 31 December of the year under review 11,525 10,464
Funded status 95,093 99,498
Unrealised actuarial gain/loss (6,650) (17,784)
Past service cost (254) (57)
Effect of the upper limit in IAS 19.58(b) 110
Net provisions for pensions at 31 December of the year under review 88,299 81,657

The recognised provision for pensions developed as follows in the year under review:

Change in the provision for pensions
in EUR thousand
2011 2010
Net provisions for pensions at 31 December of the previous year 81,657 77,497
Currency translation 83 (681)
Expense for the year under review 9,217 7,688
Amounts paid during the year (590) (344)
Benefits paid during the year (2,306) (2,340)
Other 238 (163)
Net provisions for pensions at 31 December of the year under review 88,299 81,657

The components of the net periodic pension cost for benefit plans were as follows:

Net periodic pension cost in EUR thousand 2011 2010
Current service cost for the year under review 3,341 2,818
Interest cost 4,893 4,908
Expected return on plan assets 738 640
Recognised actuarial gain/loss (1,695) (526)
Effect of plan curtailments or settlements (76)
Effect of the upper limit in IAS 19.58(b) (26)
Total 9,217 7,688

In determining the actuarial gains and losses to be recognised in the statement of income the corridor method provided for as an option in IAS 19 “Employee Benefits” is applied.

The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 6.9 million (EUR 6.0 million) under administrative expenses, EUR 1.6 million (EUR 1.0 million) under other expenses and EUR 0.8 million (EUR 0.7 million) under other investment expenses.

No actuarial gains (previous year: none) were recognised as at the balance sheet date in other comprehensive income.

The following amounts were recognised for the year under review and prior years under the accounting of defined benefit plans:

Amounts recognised
in EUR thousand
2011 2010 2009 2008 2007
Present value of defined benefit obligation 106,618 109,962 93,462 79,908 79,135
Fair value of plan assets 11,525 10,464 9,317 7,051 9,372
Surplus/(deficit) in the plan (95,093) (99,498) (84,145) (72,857) (69,763)
Experience adjustments on plan liabilities (6,650) (17,784) (6,647) (649) (3,410)
Experience adjustments on plan assets (374)

In the current financial year Hannover Re does not expect any contribution payments (previous year: none) under the pension plans set out above.

Defined contribution plans

In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee’s income or level of contributions. The expense recognised for these obligations in the year under review in accordance with IAS 19 “Employee Benefits” was EUR 5.7 million (EUR 4.2 million), of which EUR 0.8 million (EUR 0.0 million) was due to obligations to members of staff in key positions.

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