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, the United States, 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 increase in provisions for pensions compared with the prior year was mainly due to the decline in the price of the shares in BT, which had been transferred to plan assets, as well as discount rate adjustments, which resulted in an actuarial loss of EUR 1.4 billion from the remeasurement of defined benefit plans. In addition, the carrying amount increased by EUR 0.8 billion due to the change in the composition of the Group in connection with the business combination of T‑Mobile US and Sprint.

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 life expectancy. 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 discount rate as of April 1, 2020 was used for the first-time inclusion of the obligations and to measure the expected pension expense in the United States.

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, United States: Pri-2012 tables.

The aforementioned discount rates were used as of December 31, 2020 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 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 resulted 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.

In 2019, the Group’s pension obligations were 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) for the plan for staff retirement indemnities and the plan for youth accounts respectively, and 0.07 percentage points lower in Switzerland. In 2019, the defined benefit obligations would have been EUR 442 million higher and the service cost for 2020 EUR 11 million higher.

The following comments on the age structure and sensitivity analysis, as well as descriptions of plans and the risks associated with them, relate to the relevant pension obligations (Germany, United States, and Switzerland).

Age structure of plan participants in the most significant pension plans

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, 2020. 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, 2020 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 for 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.

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 % 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 October 2020, Deutsche Telekom and the ver.di trade union agreed to restructure the collectively agreed risk benefits (death in the active phase and/or disability) in the company pension scheme for employees covered by collective agreements in Germany. Under the existing structure, the pension credit accrued through the capital account plan is paid out in the case of a risk event. The revised rules will abolish this in favor of paying out a sum equivalent to an annual target salary of the employee. This provides a better outcome than the existing structure in particular for employees with a shorter length of service with the company. Grandfather clauses have been included for employees who have worked for the company for longer periods and part-time employees. These changes will take effect in October 2021. As a result of the change from an annual (pro rata) contribution to payment of a lump sum, the employer will in future grant the risk benefit irrespective of the employee’s length of service with the company. Future risk benefit payments will thus directly be recognized as expenses in the payout year. Provisions recognized according to the current rules under provisions for pensions and other employee benefits for entitlements after the restructuring takes effect were measured under the new rules using the discount rate at the transition date and reversed through profit or loss in the fourth quarter of 2020. This discount rate was also used to measure the pension expense from the remaining provisions for pensions and other employee benefits for the remainder of the financial year.

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 and a corporate pension fund. In 2020, further subsidiaries of Deutsche Telekom AG in Germany concluded CTAs.

The main pension plans in the United States comprise medical plans, life insurance (for pensioners and active employees) and pension commitments which were included in Deutsche Telekom’s consolidated financial statements for the first time upon the acquisition of Sprint as of April 1, 2020.

The pension commitments in the United States mainly relate to two defined contribution plans: the Sprint Retirement Pension Plan (SRPP) and the Supplemental Executive Retirement Plan (SERP). The benefit amount under the SRPP is calculated primarily on the basis of 1.5 % of the plan member’s average salary up to December 31, 2005. Furthermore, the additional SERP was set up for contributions above the tax exemption limits for the relevant eligible persons. Both plans have been frozen since December 31, 2005, such that plan participants have not been able to earn any more vested rights since that date.

The SRPP is financed through a pension fund within the framework of U.S. regulations. The level of financing of the SRPP is regularly reviewed, with the company paying additional contributions into the pension fund on top of the minimum contributions if necessary, depending on the financing status.

Under the medical plans, the Company grants allowances for medical care after retirement to top up statutory benefits. In addition to the existing pensioners, there is a group of active employees who are near retirement, who can also access benefits from these plans. The commitments have been almost entirely frozen and replaced by contribution plans (401(k) plans) for future vested rights.

Under the life insurance policies, the Company pays a benefit in the event of the death of a pensioner (basic coverage for pensioners prior to 2004) of 50 % of the final allowable income drawn (taking into account a cap for the maximum amount payable) as well as other coverage for a small group of employees who are still active.

In addition, the Company grants defined benefit plans for individuals abroad. The majority of these benefits comprise benefits prescribed by law in the respective countries or also benefits under the FAP (Financial Accumulation Plan – a capital account plan). Almost all of these individual commitments have likewise been frozen.

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. As is often the case in Switzerland, the 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 (2020: 1.00 %, 2021: 1.00 %).

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.

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

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 4,573 thousand (December 31, 2019: EUR 3,706 thousand) and bonds amounting to EUR 7,942 thousand (December 31, 2019: EUR 6,688 thousand) issued by Deutsche Telekom AG and its subsidiaries.

Total benefit payments expected

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 2021, 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 82 million in 2021.

Defined contribution plans

The employer’s contribution paid to the statutory pension scheme (Deutsche Rentenversicherung) in Germany in the 2020 financial year totaled EUR 0.4 billion (2019: EUR 0.4 billion; 2018: EUR 0.4 billion). Group-wide, EUR 164 million (2019: EUR 145 million, 2018: EUR 120 million) from current contributions for additional defined contribution plans was recognized in the consolidated income statement in 2020.

Civil-servant retirement arrangements at Deutsche Telekom

An expense of EUR 374 million was recognized in the 2020 financial year (2019: EUR 405 million; 2018: EUR 441 million) for the annual contribution to the Civil Service Pension Fund, which generally amounts to 33 % 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 1.8 billion as of the reporting date (December 31, 2019: EUR 2.1 billion, December 31, 2018: EUR 2.5 billion) and is shown under other financial obligations.

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