12 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:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
Defined benefit liability 8,375 8,451
Defined benefit asset (15) (14)
Net defined benefit liability (asset) 8,360 8,437
Of which: provisions for direct commitments 7,968 7,944
Of which: provisions for indirect commitments 392 493

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.

Calculation of net defined benefit liabilities/assets:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
Present value of the obligations fully or partially funded by plan assets 8,026 8,175
Plan assets at fair value (3,102) (2,990)
Defined benefit obligations in excess of plan assets 4,924 5,185
Present value of the unfunded obligations 3,436 3,252
Defined benefit liability (asset) according to IAS 19.63 8,360 8,437
Effect of asset ceiling (according to IAS 19.64) 0 0
Net defined benefit liability (asset) 8,360 8,437
millions of €
  2017 2016
Net defined benefit liability (asset) as of January 1 8,437 8,014
Service cost 266 230
Net interest expense (income) on the net defined benefit liability (asset) 136 166
Remeasurement effects (116) 660
Pension benefits paid directly by the employer (347) (343)
Employer contributions to plan assets (10) (264)
Changes attributable to business combinations/transfers of operation/ acquisitions and disposals (1) (25)
Administration costs actually incurred (paid from plan assets) 0 0
Exchange rate fluctuations for plans in foreign currency (5) (1)
Net defined benefit liability (asset) as of December 31 8,360 8,437

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.

From 2014, the following figures for the plans in Switzerland relate to ­T-Systems Schweiz AG and T - Systems Data Migration Consulting AG (previously only T-Systems Schweiz AG).

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

%
    2017 2016 2015
Discount rate Germany 1.61 1.62 2.11
  Switzerland 0.64 0.62 0.83
  Greece (OTE S.A.) 1.66 a/0.92 b 1.62 a/0.92 b 2.13 a/1.39 b
Salary increase rate Germany 2.40 2.40 2.50
  Switzerland 1.00 1.00 1.25
  Greece (OTE S.A.) 1.00 c 1.00 d 1.00 e
Pension increase rate Germany (general) 1.50 1.50 1.50
  Germany (according to articles of association) 1.00 1.00 1.00
  Switzerland 0.10 0.10 0.10
  Greece (OTE S.A.) n. a. n. a. n. a.
         
a The discount rate relates to the plans for staff retirement indemnities and, until 2015, for phone credits (see the plan description).
b The discount rate relates to the plan for youth accounts (see the plan description).
c The following assumptions were made in 2017 concerning the development of salaries: 2018: 0.00 percent, 2019: 0.00 percent. An increase of 1.00 percent is assumed for the years from 2020 onward.
d The following assumptions were made in 2016 concerning the development of salaries in subsequent years: 2017: 0.00 percent, 2018: 0.00 percent, 2019: 0.00 percent, 2020: 0.00 percent. An increase of 1.00 percent is assumed for the years from 2021 onward.
e The following assumptions were made in 2015 concerning the development of salaries in subsequent years: 2016: 0.00 percent, 2017: 0.00 percent, 2018: 5.50 percent. An increase of 1.00 percent is assumed for the years from 2019 onward.
years
    Dec. 31, 2017 Dec. 31, 2016
Duration Germany 13.6 14.0
  Switzerland 16.7 16.8
  Greece (OTE S.A.) 14.2/6.1 14.4 a/6.4 b
       
a The duration relates to the plans for staff retirement indemnities (see the plan description).
b The duration relates to the plan for youth accounts (see the plan description).

The following biometric assumptions were essential for the measurement of pension obligations: Germany: Heubeck 2005G, Switzerland: BVG 2015 Generational, Greece (OTE S.A.): EVK2000.

The aforementioned discount rates were used as of December 31, 2017 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. 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:

millions of €
  2017 2016
Defined benefit obligations as of January 1 11,427 10,753
Current service cost 265 259
Interest cost 184 223
Remeasurement effects (11) 698
Of which: experience-based adjustments (12) (15)
Of which: adjusted financial assumptions 18 721
Of which: adjusted demographic assumptions (17) (8)
Total benefits actually paid (378) (375)
Contributions by plan participants 4 5
Changes attributable to business combinations/transfers of operation/acquisitions and disposals (1) (25)
Past service cost (due to plan amendments) 2 (27)
Past service cost (due to curtailments) (9) (4)
Settlements 8 (56)
Taxes to be paid as part of pensions
Exchange rate fluctuations for plans in foreign currency (29) (24)
Defined benefit obligations as of December 31 11,462 11,427
Of which: active plan participants 5,350 5,245
Of which: plan participants with vested pension rights who left the Group 2,130 2,144
Of which: benefit recipients 3,982 4,038

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, 2017 and December 31, 2016:

millions of €
  Dec. 31, 2017 Dec. 31, 2016
  Germany Switzerland Greece (OTE S.A.) Other plans Germany Switzerland Greece (OTE S.A.) Other plans
Defined benefit obligations 10,688 221 239 314 10,608 251 248 320
Plan assets at fair value (2,677) (208) (217) (2,576) (205) (209)
Effect of asset ceiling
Net defined benefit liability (asset) 8,011 13 239 97 8,032 46 248 111

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.

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, 2017. 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, 2017 as follows:

millions of €
  Increase (decrease) of the defined benefit obligations as of Dec. 31, 2017
  Germany Switzerland Greece (OTE S.A.)
Increase of discount rate by 100 basis points (1,219) (25) (26)
Decrease of discount rate by 100 basis points 1,490 42 31
       
Increase of salary increase rate by 50 basis points 7 3 9
Decrease of salary increase rate by 50 basis points (6) (3) (9)
       
Increase of pension increase rate by 25 basis points 5 6 0
Decrease of pension increase rate by 25 basis points (5) (2) 0
       
Life expectancy increase by 1 year 270 6 0
Life expectancy decrease by 1 year (269) (6) 0
millions of €
  Increase (decrease) of the defined benefit obligations as of Dec. 31, 2016
       
  Germany Switzerland Greece (OTE S.A.)
Increase of discount rate by 100 basis points (1,251) (29) (27)
Decrease of discount rate by 100 basis points 1,536 47 32
       
Increase of salary increase rate by 50 basis points 7 3 16
Decrease of salary increase rate by 50 basis points (6) (4) (15)
       
Increase of pension increase rate by 25 basis points 6 6 0
Decrease of pension increase rate by 25 basis points (5) (2) 0
       
Life expectancy increase by 1 year 275 7 0
Life expectancy decrease by 1 year (276) (7) 0

Separate sensitivity analyses were carried out 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 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 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 and a company special pension fund (Unterstützungskasse).

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 (2017: 1.00 percent, 2018: 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 employee 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).

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 as 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 is 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.

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. Employees and retirees were also entitled to phone credits until 2015. OTE S.A.’s payment obligation depends on the price of the telephone unit and the level of credit utilization by those entitled to them. The volume of the obligation (credit) is capped. Measured against the total amount of pension benefits paid by OTE S.A., the scope of these obligations is relatively small. OTE S.A. closed the phone credits plan at the start of 2016 and no longer grants any phone credits.

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

millions of €
  2017 2016
Plan assets at fair value as of January 1 2,990 2,744
Changes attributable to business combinations/transfers of operation/acquisitions and disposals 0 0
Interest income on plan assets (calculated using the discount rate) 48 57
Amount by which the actual return exceeds (falls short of) the interest income on plan assets (remeasurement) 105 33
Contributions by employer 10 264
Contributions by plan participants 4 5
Benefits actually paid from plan assets (31) (32)
Settlements 0 (58)
Administration costs 0 0
Tax payments
Exchange rate fluctuations for plans in foreign currency (24) (23)
Plan assets at fair value as of December 31 3,102 2,990

Contributions by employer as of December 31, 2017 do not include a ­payment to a corporate CTA in Germany on account of the payment planned for 2018 (December 31, 2016: EUR 250 million). Actual income from plan assets at fair value was substantially higher compared with the prior year.

Breakdown of plan assets at fair value by investment category:

millions of €
  Dec. 31, 2017 Of which: price in an active market Of which: price without an active market
Equity securities 1,312 1,312 0
Debt securities 1,244 1,244 0
Real estate 56 56 0
Derivatives 0 0 0
Investment funds 0 0 0
Asset-backed securities 0 0 0
Structured debt instruments 350 350 0
Cash and cash equivalents 2 2 0
Other 138 101 37
Plan assets at fair value 3,102 3,065 37
millions of €
  Dec. 31, 2016 Of which: price in an active market Of which: price without an active market
Equity securities 795 795 0
Debt securities 1,870 1,870 0
Real estate 56 56 0
Derivatives 1 1 0
Investment funds 0 0 0
Asset-backed securities 0 0 0
Structured debt instruments 0 0 0
Cash and cash equivalents 135 135 0
Other 133 96 37
Plan assets at fair value 2,990 2,953 37

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 (ALM) 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 philosophy 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. The investment strategy 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 3,349 thousand (December 31, 2016: shares totaling EUR 1,364 thousand). No other own financial instruments were included in the years shown.

Development of the effect of the asset ceiling:

millions of €
  2017 2016
effect of Asset ceiling as of January 1 0 5
Interest expense on asset ceiling (recognized in the income statement) 0 0
Changes in asset ceiling ((gains) losses recognized in equity) 0 (5)
Currency gain (loss) 0 0
Effect of Asset ceiling as of December 31 0 0

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

millions of €
  Disclosure in income statement 2017 2016 2015
Current service cost Personnel costs 265 259 287
Past service cost (due to plan amendments) Personnel costs 2 (27) (3)
Past service cost (due to curtailments) Personnel costs (9) (4) (3)
Settlements Personnel costs 8 2 4
Service cost   266 230 285
Interest cost Other financial income (expense) 184 223 207
Interest income on plan assets (calculated using the discount rate) Other financial income (expense) (48) (57) (50)
Interest expense on the effect of the asset ceiling Other financial income (expense) 0 0 0
Net interest expense (income) on net defined benefit liability (asset)   136 166 157
defined benefit cost   402 396 442
Administration costs actually incurred (paid from plan assets) Personnel costs 0 0 0
Total amounts recognized in profit or loss   402 396 442

The consolidated statement of comprehensive income contains the following amounts:

millions of €
  2017 2016 2015
Remeasurement ((gain) LOSS recognized in other comprehensive income in the financial year) (116) 660 (230)
Of which: remeasurement due to a change in defined benefit obligations (11) 698 (312)
Of which: remeasurement due to a change in plan assets (105) (33) 82
Of which: remeasurement due to changes in the effect of asset ceiling (according to IAS 19.64) (5) 0

Total benefit payments expected:

millions of €
  2018 2019 2020 2021 2022
Benefits paid from pension provisions 353 392 414 457 433
Benefits paid from plan assets 30 31 31 36 33
Total benefits expected 383 423 445 493 466

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. Such reimbursements are currently not yet made as this would have a detrimental effect on the build-up of assets within the CTA in its first years.

To build up the plan assets, Deutsche Telekom is planning an allocation of its interests in the UK company BT at the fair value at this time to the CTA in Germany in 2018. Deutsche Telekom is also planning an international allocation of at least EUR 11 million in 2018.

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:

millions of €
  Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013
Defined benefit obligations 11,462 11,427 10,753 10,940 8,965
Plan assets at fair value (3,102) (2,990) (2,744) (2,498) (1,973)
Defined benefit obligations in excess of plan assets 8,360 8,437 8,009 8,442 6,992
%
           
Adjustments 2017 2016 2015 2014 2013
Experience-based increase (decrease) of defined benefit obligations (0.1) (0.1) 0.0 (0.1) 0.3
Experience-based increase (decrease) of plan assets 3.4 1.1 (3.0) 8.3 0.7

Defined contribution plans

The employer’s contribution paid to the statutory pension scheme (Deutsche Rentenversicherung) in Germany in the 2017 financial year totaled EUR 0.3 billion (2016: EUR 0.3 billion; 2015: EUR 0.3 billion). Group-wide, EUR 131 million (2016: EUR 109 million; 2015: EUR 94 million) from current contributions for additional defined contribution plans was recognized in the consolidated income statement in 2017.

Civil-servant retirement arrangements at Deutsche Telekom

An expense of EUR 458 million was recognized in the 2017 financial year (2016: EUR 516 million; 2015: EUR 538 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 3.1 billion at the reporting date (December 31, 2016: EUR 3.6 billion; December 31, 2015: EUR 4.2 billion) and is shown under other financial obligations (please refer to Note 34 “Other financial obligations”).