15 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 increase in provisions for pensions was mainly due to interest rate adjustments and the decline in the price of the BT share transferred to plan assets. An offsetting effect was generated by the transfer on August 14, 2019 of the stake in Ströer SE & Co. KGaA to Deutsche Telekom Trust e.V. (CTA) as plan assets.

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 following table 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 in 2018.

The aforementioned discount rates were used as of December 31, 2019 when calculating the present value of defined benefit obligations, taking into account future salary increases. The rates were determined in line with the average weighted duration of the respective obligation.

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).

As of March 31, 2019, Deutsche Telekom changed the method it uses to calculate the discount rate in the euro zone, Switzerland, and the United Kingdom for determining pension obligations in accordance with IAS 19. The changes result from a change in provider for the determination of the yield curves.

Under the new method, adjustments are made in relation to the selection of the bonds available on the market (previous data basis: Bloomberg; data basis after adjustment: Thomson Reuters) as well as in the determination of the yield curve from this data. The first step is to remove bonds with special options (e.g., put or call options) or other properties (e.g., low-volume bonds, bundled bonds) from the available portfolio. Then a regression curve is determined based on the bond market so as to identify potential outliers (calculated using the double standard deviation) and likewise remove these from the bond portfolio for determining the interest rate. The yield curve determined using this method is subsequently applied to the cash flows in the pension plans so as to determine an equivalent uniform discount rate.

The Group’s pension obligations are based on pension commitments mainly in Germany, Greece, and Switzerland. Without the change, the discount rate as of December 31, 2019 would have been 0.30 percentage points lower in Germany, 0.30 or 0.23 percentage points lower in Greece (OTE), and 0.07 percentage points lower in Switzerland. The defined benefit obligations would have been EUR 442 million higher and the service cost for 2020 EUR 11 million higher.

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 of plan participants in the most significant pension plans^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, 2019. 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, 2019 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. 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. The life expectancy of the remaining plan members was adjusted 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 stake in BT was transferred to Deutsche Telekom Trust e.V. as plan assets in 2018 and the stake in Ströer was transferred to the latter as plan assets in 2019.

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 earn 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).

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).

Under the company pension system in Switzerland, a defined benefit plan is in place that is financed by employer and employee contributions (within the meaning of IAS 19). This plan is granted 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 been included in T‑Systems Schweiz AG’s pension fund. 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 (2019: 1.00 percent, 2020: 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 composed of employer and employees’ representatives.

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. As of January 1, 2018, T‑Systems Schweiz decided to apply the risk-sharing method when measuring its pension obligations. The measurement of obligations was 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. 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.

Contributions by employer included shares in BT in 2018 and shares in Ströer in 2019, which were paid into the corporate CTA, and, in an offsetting effect, a refund from the CTA to Deutsche Telekom in 2018 for benefit payments made by the employer.

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 essentially 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 included shares amounting to EUR 3,706 thousand (December 31, 2018: EUR 3,168 thousand) and bonds amounting to EUR 6,688 thousand (December 31, 2018: EUR 2,974 thousand) issued by Deutsche Telekom AG and its subsidiaries.

Since 2018, benefit payments for direct pension commitments have also been funded using CTA assets. Furthermore, Deutsche Telekom reserves the right to claim reimbursement from CTA assets in the following year, as required, for payments made directly by the employer. The last time this happened was in 2018.

For 2020, Deutsche Telekom does not plan any allocations to plan assets at fair value in Germany. Deutsche Telekom is planning an international allocation of at least EUR 11 million in 2020.

Defined contribution plans

The employer’s contribution paid to the statutory pension scheme (Deutsche Rentenversicherung) in Germany in the 2019 financial year totaled EUR 0.4 billion (2018: EUR 0.4 billion; 2017: EUR 0.3 billion). Group-wide, EUR 145 million (2018: EUR 120 million, 2017: EUR 131 million) from current contributions for additional defined contribution plans was recognized in the consolidated income statement in 2019.

Civil-servant retirement arrangements at Deutsche Telekom

An expense of EUR 405 million was recognized in the 2019 financial year (2018: EUR 441 million; 2017: EUR 458 million) for the annual contribution to the Civil Service Pension Fund, which generally amounts 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 2.1 billion as of the reporting date (December 31, 2018: EUR 2.5 billion, December 31, 2017: EUR 3.1 billion) and is shown under other financial obligations.

For further information, please refer to Note 39 “Other financial obligations.”