14 Provisions for pensions and other employee benefits

Defined benefit plans

The Group’s pension obligations are based on direct and indirect pension commitments mainly in Germany, Greece, and Switzerland.

Deutsche Telekom’s pension obligations are as follows:

Defined benefit liabilities are disclosed under non-current liabilities in the consolidated statement of financial position. The defined benefit asset is recognized under other non-current assets in the consolidated statement of financial position.

The year-on-year decrease in pension provisions is mainly attributable to the transfer of the 12-percent stake in BT to Deutsche Telekom Trust e.V. (CTA) as plan assets completed on March 23, 2018.

Calculation of net defined benefit liabilities/assets:

Key assumptions for the measurement of the defined benefit obligations are the discount rate, the salary increase rate, the pension increase rate, and longevity. The table on the next page shows the assumptions on which the measurement of defined benefit obligations as of December 31 of the respective year are based. The assumptions made as of December 31 of the respective prior year are used to measure the expected pension expense (defined benefit cost) of a given financial year.

The following figures for the plans in Switzerland relate to T-Systems Schweiz AG and T-Systems Data Migration Consulting AG.

Assumptions for the measurement of defined benefit obligations as of December 31:

The following biometric assumptions were essential for the measurement of pension obligations:
Germany: Heubeck 2018G, Switzerland: BVG 2015 Generational, Greece (OTE S.A.): EVK2000. Based on the observation of rising life expectancy and the falling probability of invalidity in Germany, the life expectancy tables published by Heubeck were revised in 2018. This resulted in losses of EUR 66 million or 0.6 percent of the German obligations.

The aforementioned discount rates were used as of December 31, 2018 when calculating the present value of defined benefit obligations, taking into account future salary increases. These discount rates were set in line with the average weighted duration of the respective obligation.

In the eurozone, the discount rate is determined based on the yields of high-quality European corporate bonds with AA rating, mapped in a yield curve showing the corresponding spot rates. The underlying method is routinely reviewed and refined as required (e.g., further development of the bond markets, automation of the availability of corresponding data in terms of quantity and quality). The most recent refinement was made in October 2018 and only resulted in an insignificant change in the discount rate.

In order to adapt determination of the discount rate in Switzerland so that it approximates this system, the existing method was refined with effect from August 31, 2015. Instead of the swap yields previously used (for bonds with AAA rating), Swiss government bonds were taken as the basis for deriving a yield curve. Since the yield curve derived from the government bonds comprises a credit risk that is too low for accounting purposes, a further adjustment is made in the form of a risk premium (credit spread) based on high-quality Swiss corporate bonds. Since August 2015, this risk premium, which was previously applied as a constant for all durations, has been calculated separately for three duration intervals and used to determine the interest rate. As a result of further refinements made in May 2016, risk premiums are now calculated for all durations and discount rates on the basis of spot rates in the same way as for the eurozone.

Development of defined benefit obligations in the reporting year:

Taking the plan assets into consideration, the pension obligations were accounted for in full.

Distribution of obligations relating to Deutsche Telekom’s most significant plans as of December 31, 2018 and December 31, 2017:

The following analyses in terms of age structure and sensitivity analysis, as well as descriptions of plans and the risks associated with them relate to the relevant pension obligations (Germany, Switzerland, and Greece (OTE S.A.)).

Age structure:

Deutsche Telekom’s most significant plans are subject to the following status-related age structure.

Age structure of plan participants in the most significant pension plans at Deutsche Telekom ^a

Sensitivity analysis for the defined benefit obligations:

The following sensitivity analysis describes the effects of possible adjustments in the material actuarial assumptions for measurement on the defined benefit obligations determined as of December 31, 2018. A change in the measurement assumptions to the extent described below, with otherwise unchanged assumptions, would have impacted the defined benefit obligations as of December 31, 2018 as follows:

The sensitivity analysis was carried out separately for the discount rate, the salary increase rate, and the pension increase rate. For this purpose, further actuarial evaluations were made for both the increase and the decrease of the assumptions. The variations used in the assumptions were selected in such a way that the probability that the respective assumption will not move beyond the analysis range within one year is 60 to 90 percent. In this context, a decreasing pension increase rate is generally limited to 0 percent. It can be assumed that the life expectancy of the plan members will not change significantly within a year. Nevertheless, the effect of a change in life expectancy on the obligations was additionally determined from a risk perspective. Evaluations were carried out based on the assumption that the life expectancy of the plan members aged 65 would increase or decrease by one year (age shift method). The age shift was applied to the remaining plan members accordingly. Variations in the assumed retirement age or turnover rates would only have an immaterial effect, especially in Germany.

Global Pension Policy and description of the plans:

Deutsche Telekom manages its pension commitments based on the Group-wide Global Pension Policy. It ensures on a worldwide basis that Group minimum standards regarding the granting and management of company pension benefits are complied with, plans are harmonized, and financial and other risks to the core business are avoided or reduced. In addition, the policy provides guidelines for the implementation and management of pension commitments and defines requirements for the launch, adjustment, and closure of corresponding plans. The regulations and provisions laid down in this Group policy take into account the national differences in state pension and other commitments under labor, tax, and social law and the common business practices in the area of pension commitments.

Defined benefit plans based on final salaries in the Group have largely been replaced by plans with contribution-based promises to minimize the risks involved. In addition, a corporate CTA (Deutsche Telekom Trust e.V.) is used in Germany for additional funding of pension obligations. A CTA is a legally structured trust agreement to cover unfunded pension commitments with plan assets, and to provide greater protection against insolvency for these obligations.

As of the end of 2018, all existing obligations processed via the Deutsche Telekom Betriebsrenten-Service e.V. (DTBS) special pension fund (current pensions) were transferred to direct commitments and the Telekom Pension Fund (TPF). A new asset segment was set up in the TPF for these obligations. Part of the plan assets from DTBS were transferred to the CTA, and part to the new asset segment of the TPF as an initial allocation. To increase the funding rate of the German obligations in the Deutsche Telekom Group, the financial stake in BT was transferred to Deutsche Telekom Trust e.V. as plan assets.

In Germany there are commitments for pension and disability benefits for a majority of employees as well as pension benefits for their surviving dependents. As part of a reorganization of the company pension plan, a capital account plan was introduced across Germany in 1997 for active employees. Furthermore, in subsequent years, commitments acquired through company acquisitions were also transferred to the capital account plan scheme. The capital account plan is an employer-financed, contribution-based benefit promise. The salary-linked contributions granted annually are charged interest in advance for each year of provision up to age 60, calculated using age-based factors, converting the contribution into a guaranteed insured amount. The advance interest rate currently stands at 3.50 percent p. a. (target interest rate for the capital account plan).

Under the provisions of collective wage agreements, Deutsche Telekom reduced the interest granted on future contributions in its capital account plan in Germany in the 2016 financial year from 3.75 percent p.a. to the current level of 3.50 percent p.a. as past service cost by amending the plan. The option of changing the target interest rate makes it possible to achieve a yield on the contributions to the capital account that is in line with the capital market.

The period for providing contributions is initially limited to ten future contribution years. The contribution period will be extended automatically every year by a further year, unless terminated. The insured amounts accumulated over the period of active service are paid out if an insured event arises, primarily in the form of a lump sum. Hence there is only a limited longevity risk for these commitments. Based on the payment guidelines and the structure of the capital account plan, the employer can plan for this, and there is only a small risk inherent in the plan with regard to the volatility of remuneration dynamics.

In addition, in Germany there are various closed legacy commitments, which generally provide for old-age and disability benefits as well as benefits for surviving dependents in the form of life-long pensions. The commitments predominantly comprise the overall pension of the supplementary retirement pensions institution (Versorgungsanstalt der Deutschen Bundespost – VAP) that takes into account the statutory pension. Most of the plan members of these commitments are former employees with vested rights and retirees for whom the amount of benefits has already been determined. So the VAP overall pension scheme continues to apply to former employees who were already retired or who had left with vested claims in 1997.

To the extent that defined benefit plans in Germany grant annuities, the future adjustment for these pensions, except for insignificant exceptions, is bindingly defined in the existing benefit regulations. A change in the assumptions for the general pension trend in Germany therefore only has an immaterial impact on the defined benefit obligations.

As a change in life expectancy mainly impacts on the obligations from legacy pension commitments and, since 1997, commitments have been granted in the form of capital, the significance of the risk resulting from the change in life expectancy is expected to decline for the Group over subsequent years.

To cover pension obligations over the long term, Deutsche Telekom has transferred funds to a corporate CTA, a corporate special pension fund (Unterstützungskasse) (until 2018), and a corporate pension fund (from 2018).

As part of the company pension scheme in Switzerland for T-Systems Schweiz AG, there is a contribution-based benefit plan financed by employer and employee contributions, which is managed by the legally independent T-Systems pension fund. Following a restructuring of the Swiss companies and harmonization of the pension fund commitments as of January 1, 2014, T-Systems Data Migration Consulting AG has also since been included in the pension fund of T-Systems Schweiz AG. As is often the case in Switzerland, both companies grant higher benefits than legally required. The Swiss Federal Law on Occupational Retirement, Surviving Dependants’ and Disability Pension (Bundesgesetz über die berufliche Alters-, Hinterlassenen- und Invalidenvorsorge – BVG) sets out minimum requirements for the pay to be insured, the age-based contributions, and a minimum annuity factor for the obligatory portion of the accrued retirement assets to be annuitized. In addition, the Swiss Federal Council defines a minimum interest rate for the obligatory retirement assets (2018: 1.00 percent, 2019: 1.00 percent).

The foundation board (Stiftungsrat) presides over the Swiss pension fund. It ensures the day-to-day running of the pension fund and decides on fundamental aspects, such as the amount and the structure of the pension benefits and the asset investment strategy. The foundation board is equally comprised of employer and employees’ representatives. According to information provided by the pension fund, the average annual yield of the fund in the past amounted to approximately 1.25 percent.

Due to the minimum yield for the obligatory retirement assets, a risk exists for the plans in Switzerland that additional resources would have to be allocated to the pension fund if it were to be underfinanced. The pension fund offers the plan members the option to choose a life-long pension instead of a one-time payment. This option gives rise to longevity and investment risks, since at the time of retirement, assumptions must be made regarding life expectancy and return on assets. In 2016, the pension fund of T-Systems Schweiz AG had announced that it would lower its conversion rates as of 2017. This reduced the future annual retirement pensions and thus resulted in lower pension provisions in 2016 (past service cost due to plan amendments). From January 1, 2018, T-Systems Schweiz decided to apply the risk-sharing methodology, under which the measurement of obligations is changed such that employee participation in funding a possible deficit can be taken into account when measuring the employer’s obligation. The general option for employee participation in funding a deficit is covered by Art. 28 of the pension regulations.

In Greece (OTE S.A.), mandatory staff retirement indemnities are due in cases of premature termination by the employer and, to a lesser extent, upon retirement by the employee. These are paid out in the form of a lump sum and can amount to several times the employee’s last monthly pay (including cap), depending on the employee’s length of service. Due to a change in the law in 2012, the lump sum was capped at a maximum of twelve monthly salaries. The company also makes a voluntary top-up payment. In compliance with changes in the law, the minimum requirement of 35 years of service was eliminated as an eligibility requirement for early retirement benefits in 2017. Under the collective agreement concluded on March 22, 2018, employees are assigned to one of three pension commitments based on the date they joined the company (100 percent of the statutory benefits plus nine or seven monthly salaries or plus 40 percent of the statutory benefits).

OTE S.A. is also obligated to make a one-time payment for the employees’ children when they reach the age of 25 (youth accounts). The benefit plan, which had previously been based on the level of the employee’s final monthly salary, was changed in November 2011 to a plan with a contribution-based promise financed by contributions by the employee and corresponding limited matching contributions by the employer.

The benefits granted by the staff retirement indemnities and youth account plans are paid out as a lump sum. For this reason there is no longevity risk.

Development of plan assets at fair value in the respective reporting year:

Contributions by employer in 2018 include shares in BT, which were paid into the corporate CTA, and, in an offsetting effect, a refund from the CTA to Deutsche Telekom for benefit payments made by the employer. In 2018, pension payments were made from the CTA on a pro-rata basis for the first time in Germany.

Breakdown of plan assets at fair value by investment category:

The investment policy and risk management is set in line with the risk and development characteristics of the pension obligations. On the basis of a systematic, integrated asset/liability management analysis, potential results from different investment portfolios, which can cover a large number of asset classes, are compared with the stochastically simulated development of the pension obligations, thereby explicitly considering the relative development of plan assets against the pension obligations. The investment strategy is mainly characterized by the objective of satisfying future obligations from granted pension commitments on time by systematically setting up and professionally managing a suitable portfolio for the plan assets. It aims to establish a widely diversified investment portfolio that generates a risk profile appropriate to the overall objective, by means of corresponding risk factors and diversification. The management of investments is subject to continuous monitoring to ensure active risk management. Cost-efficient investment management is effected by means of professional portfolio management involving external service providers.

At the reporting date, the plan assets at fair value include shares issued by Deutsche Telekom AG amounting to EUR 3,043 thousand (December 31, 2017: shares totaling EUR 3,349 thousand) and bonds in the amount of EUR 1,960 thousand of Deutsche Telekom International Finance B.V.

Development of the effect of the asset ceiling:

The defined benefit cost for each period is composed of the following items and reported in the indicated accounts of the income statement:

The consolidated statement of comprehensive income contains the following amounts:

Total benefit payments expected:

Benefits paid directly by the employer for which the assets of the CTA can generally be utilized are usually reimbursed to the employer from the CTA assets soon after payment. In previous years, Deutsche Telekom forwent such reimbursements, as this would have had a detrimental effect on the build-up of assets within the CTA in its first years. In 2018, Deutsche Telekom made benefit payments using the CTA funds for the first time and was reimbursed for payments made by the employer from the CTA assets.

For 2019, Deutsche Telekom does not plan any allocations to plan assets at fair value in Germany. Deutsche Telekom is also planning an international allocation of at least EUR 11 million in 2019.

Amounts for the current year and four preceding years of defined benefit obligations, plan assets, defined benefit obligations in excess of plan assets, and experience-based adjustments:

Defined contribution plans

The employer’s contribution paid to the statutory pension scheme (Deutsche Rentenversicherung) in Germany in the 2018 financial year totaled EUR 0.4 billion (2017: EUR 0.3 billion; 2016: EUR 0.3 billion). Group-wide, EUR 120 million (2017: EUR 131 million, 2016: EUR 109 million) from current contributions for additional defined contribution plans was recognized in the consolidated income statement in 2018.

Civil-servant retirement arrangements at Deutsche Telekom

An expense of EUR 441 million was recognized in the 2018 financial year (2017: EUR 458 million; 2016: EUR 516 million) for the annual contribution to the Civil Service Pension Fund generally amounting to 33 percent of the pensionable gross emoluments of active civil servants and the notional pensionable gross emoluments of civil servants on leave of absence. The present value of future payment obligations was EUR 2.5 billion at the reporting date (December 31, 2017: EUR 3.1 billion, December 31; 2015: EUR 3.6 billion) and is shown under other financial obligations (please refer to Note 38 “Other financial obligations”).