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25. Pensions and similar obligations

GENERAL

The Fresenius Group recognizes pension costs and related pension liabilities for current and future benefits to qualified current and former employees of the Fresenius Group. Fresenius Group’s pension plans are structured differently according to the legal, economic and fiscal circumstances in each country. The Fresenius Group currently has two types of plans, defined benefit and defined contribution plans. In general, plan benefits in defined benefit plans are based on all or a portion of the employees’ years of services and final salary. Plan benefits in defined contribution plans are determined by the amount of contribution by the employee and the employer, both of which may be limited by legislation, and the returns earned on the investment of those contributions.

Upon retirement under defined benefit plans, the Fresenius Group is required to pay defined benefits to former employees when the defined benefits become due. Defined benefit plans may be funded or unfunded. The Fresenius Group has funded defined benefit plans in particular in the United States, Norway, the United Kingdom, the Netherlands and Austria. Unfunded defined benefit plans are located in Germany and France.

Actuarial assumptions generally determine benefit obligations under defined benefit plans. The actuarial calculations require the use of estimates. The main factors used in the actuarial calculations affecting the level of the benefit obligations are: assumptions on life expectancy, the discount rate and future salary and benefit levels. Under Fresenius Group’s funded plans, assets are set aside to meet future payment obligations. An estimated return on the plan assets is recognized as income in the respective period. Actuarial gains and losses are generated when there are variations in the actuarial assumptions and by differences between the actual and the estimated projected benefits obligations and the return on plan assets for that year. A company’s pension liability is impacted by these actuarial gains or losses.

In the case of Fresenius Group’s funded plans, the defined benefit obligation is offset against the fair value of plan assets. A pension liability is recognized in the consolidated statement of financial position if the defined benefit obligation exceeds the fair value of plan assets. An asset is recognized and reported under other assets in the consolidated statement of financial position if the fair value of plan assets exceeds the defined benefit obligation and if the Fresenius Group has a right of reimbursement against the fund or a right to reduce future payments to the fund.

Under defined contribution plans, the Fresenius Group pays defined contributions to an independent third party as directed by the employee during the employee’s service life which satisfies all obligations of the Fresenius Group to the employee. The employee retains all rights to the contributions made by the employee and to the vested portion of the Fresenius Group paid contributions upon leaving the Fresenius Group. The Fresenius Group has a main defined contribution plan in North America.

DEFINED BENEFIT PENSION PLANS

At December 31, 2011, the projected benefit obligation (PBO) of the Fresenius Group of €753 million (2010: €655 million) included €260 million (2010: €261 million) funded by plan assets and €496 million (2010: €394 million) covered by pension provisions. The current portion of the pension liability in an amount of €12 million is recognized in the consolidated statement of financial position within short-term accrued expenses and other short-term liabilities. The non-current portion of €484 million is recorded as pension liability.

58% of the pension liabilities in an amount of €496 million relate to the “Versorgungsordnung der Fresenius-Unternehmen” established in 1988 (Pension plan 1988), which applies for most of the German entities of the Fresenius Group except Fresenius Helios. The rest of the pension liabilities relates to individual plans from Fresenius Helios entities in Germany and non-German Group entities.

Plan benefits are generally based on an employee’s years of service and final salary. Consistent with predominant practice in Germany, the benefit obligations of the German entities of the Fresenius Group are unfunded. The German Pension Plan 1988 does not have a separate pension fund.

Fresenius Medical Care Holdings, Inc. (FMCH), a subsidiary of Fresenius Medical Care AG & Co. KGaA, has a defined benefit pension plan for its employees in the United States and supplemental executive retirement plans. During the first quarter of 2002, FMCH curtailed these pension plans. Under the curtailment amendment for substantially all employees eligible to participate in the plan, benefits have been frozen as of the curtailment date and no additional defined benefits for future services will be earned. FMCH has retained all employee benefit obligations as of the curtailment date. Each year, FMCH contributes at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. There was no minimum funding requirement for FMCH for the defined benefit plan in the year 2011. FMCH voluntarily contributed US$0.6 million (€0.4 million) during the year 2011. Expected funding for 2012 is US$10.8 million (€8.3 million).

Fresenius Group’s benefit obligations relating to fully or partly funded pension plans were €373 million. Benefit obligations relating to unfunded pension plans were €380 million.

The following table shows the changes in benefit obligations, the changes in plan assets and the funded status of the pension plans. Benefits paid as shown in the changes in benefit obligations represent payments made from both the funded and unfunded plans while the benefits paid as shown in the changes in plan assets include only benefit payments from Fresenius Group’s funded benefit plans.

The funded status has developed as follows:

€ in millions 2011 2010
Benefit obligations at the beginning of the year 655 556
Changes in entities consolidated 4 0
Foreign currency translation 12 16
Service cost 19 16
Prior service cost 0 2
Interest cost 35 33
Contributions by plan participants 1 1
Transfer of plan participants - -
Curtailments/settlements 0 -2
Actuarial losses 47 50
Benefits paid -20 -18
Amendments - 1
Benefit obligations at the end of the year 753 655
thereof vested 638 558
     
Fair value of plan assets at the beginning of the year 261 237
Changes in entities consolidated - 0
Foreign currency translation 6 14
Actual return on plan assets -4 13
Contributions by the employer 6 4
Contributions by plan participants 1 1
Settlements - -
Transfer of plan participants - 0
Benefits paid -10 -8
Fair value of plan assets at the end of the year 260 261
Funded status as of December 31 493 394

€ in millions 2011 2010
Benefit obligations at the beginning of the year 655 556
Changes in entities consolidated 4 0
Foreign currency translation 12 16
Service cost 19 16
Prior service cost 0 2
Interest cost 35 33
Contributions by plan participants 1 1
Transfer of plan participants - -
Curtailments/settlements 0 -2
Actuarial losses 47 50
Benefits paid -20 -18
Amendments - 1
Benefit obligations at the end of the year 753 655
thereof vested 638 558
     
Fair value of plan assets at the beginning of the year 261 237
Changes in entities consolidated - 0
Foreign currency translation 6 14
Actual return on plan assets -4 13
Contributions by the employer 6 4
Contributions by plan participants 1 1
Settlements - -
Transfer of plan participants - 0
Benefits paid -10 -8
Fair value of plan assets at the end of the year 260 261
Funded status as of December 31 493 394

As of December 31, 2011, the fair value of plan assets relating to one single pension plan exceeded the corresponding benefit obligations. The resulting amount of €3 million (2010: €0 million) was recognized as an asset. For all the remaining pension plans of the Fresenius Group, the benefit obligations exceeded the fair value of plan assets and resulted in a total amount of €496 million (2010: €394 million) recognized as a pension liability.

The discount rates for all plans are based upon yields of portfolios of equity and highly rated debt instruments with maturities that mirror the plan’s benefit obligation. Fresenius Group’s discount rate is the weighted average of these plans based upon their benefit obligations.

The following weighted-average assumptions were utilized in determining benefit obligations as of December 31:

in % 2011 2010
Discount rate 5.15 5.43
Rate of compensation increase 3.12 3.32
Rate of pension increase 1.71 1.73

in % 2011 2010
Discount rate 5.15 5.43
Rate of compensation increase 3.12 3.32
Rate of pension increase 1.71 1.73

At December 31, 2011, the accumulated benefit obligations for all defined benefit pension plans were €703 million (2010: €601 million).

The following table relates to pension plans with projected benefit obligations and accumulated benefit obligations in excess of plan assets:

€ in millions 2011 2010
Projected benefit obligation (PBO) 711 655
Accumulated benefit obligation (ABO) 667 601
Fair value of plan assets 215 261

€ in millions 2011 2010
Projected benefit obligation (PBO) 711 655
Accumulated benefit obligation (ABO) 667 601
Fair value of plan assets 215 261

The pre-tax changes of other comprehensive income (loss) relating to pension liabilities during the years 2011 and 2010 are shown in the following tables:

€ in millions As of Jan. 1, 2011 Reclassifications1 Additions Foreign currency translation As of Dec. 31, 2011
1 Effects recognized in the consolidated statement of income
Actuarial gains and losses -107 8 -68 -6 -173
Prior service cost 3 - - - 3
Transition obligation -1 - - - -1
Adjustments related to pension liabilities -105 8 -68 -6 -171

€ in millions As of Jan. 1, 2011 Reclassifications1 Additions Foreign currency translation As of Dec. 31, 2011
1 Effects recognized in the consolidated statement of income
Actuarial gains and losses -107 8 -68 -6 -173
Prior service cost 3 - - - 3
Transition obligation -1 - - - -1
Adjustments related to pension liabilities -105 8 -68 -6 -171

€ in millions As of Jan. 1, 2010 Reclassifications1 Additions Foreign currency translation As of Dec. 31, 2010
1 Effects recognized in the consolidated statement of income
Actuarial gains and losses -54 5 -54 -4 -107
Prior service cost 4 1 -2 - 3
Transition obligation -1 - - - -1
Adjustments related to pension liabilities -51 6 -56 -4 -105

€ in millions As of Jan. 1, 2010 Reclassifications1 Additions Foreign currency translation As of Dec. 31, 2010
1 Effects recognized in the consolidated statement of income
Actuarial gains and losses -54 5 -54 -4 -107
Prior service cost 4 1 -2 - 3
Transition obligation -1 - - - -1
Adjustments related to pension liabilities -51 6 -56 -4 -105

For the tax effects on other comprehensive income at December 31, 2011 see note 28, Other comprehensive income (loss).

The Fresenius Group expects the following amounts to be amortized from other comprehensive income into net periodic pension cost in the year 2012:

€ in millions 2012
Actuarial gains and losses 15
Prior service cost -
Transition obligation -

€ in millions 2012
Actuarial gains and losses 15
Prior service cost -
Transition obligation -

Defined benefit pension plans’ net periodic benefit costs of €45 million (2010: €36 million) were comprised of the following components:

€ in millions 2011 2010
Service cost 19 16
Interest cost 35 33
Expected return on plan assets -17 -17
Amortization of unrealized actuarial losses, net 8 5
Amortization of prior service costs - 1
Amortization of transition obligations - -
Settlement loss 0 -2
Net periodic benefit cost 45 36

€ in millions 2011 2010
Service cost 19 16
Interest cost 35 33
Expected return on plan assets -17 -17
Amortization of unrealized actuarial losses, net 8 5
Amortization of prior service costs - 1
Amortization of transition obligations - -
Settlement loss 0 -2
Net periodic benefit cost 45 36

Net periodic benefit cost is allocated as personnel expense within cost of sales or selling, general and administrative expenses as well as research and development expenses. The allocation depends upon the area in which the beneficiary is employed.

The following weighted-average assumptions were used in determining net periodic benefit cost for the year ended December 31:

in % 2011 2010
Discount rate 5.40 5.86
Expected return of plan assets 5.50 5.58
Rate of compensation increase 3.30 3.30

in % 2011 2010
Discount rate 5.40 5.86
Expected return of plan assets 5.50 5.58
Rate of compensation increase 3.30 3.30

Changes in the discount factor, inflation and mortality assumptions used for the actuarial computation resulted in actuarial losses in 2011 which increased the fair value of the defined benefit obligation. Unrecognized actuarial losses were €173 million (2010: €107 million).

The following table shows the expected benefit payments for the next 10 years:

for the fiscal years € in millions
2012 23
2013 24
2014 26
2015 28
2016 32
2017 to 2021 187
Total expected benefit payments 320

for the fiscal years € in millions
2012 23
2013 24
2014 26
2015 28
2016 32
2017 to 2021 187
Total expected benefit payments 320

The Fresenius Group uses December 31, 2011 as the measurement date in determining the funded status of all plans.

The major part of pension liabilities relates to Germany. At December 31, 2011, 70% of the pension liabilities were recognized in Germany, 30% in the rest of Europe and North America.

60% of the beneficiaries were located in North America, 30% in Germany and the remainder throughout the rest of Europe and other continents.

The fair values of plan assets by categories were as follows:


  December 31, 2011 December 31, 2010
€ in millions Quoted prices in active markets for identical assets Level 1 Significant observable inputs Level 2 Total Quoted prices in active markets for identical assets Level 1 Significant observable inputs Level 2 Total
1 This category mainly comprises low-cost equity index funds not actively managed that track the S & P 500, S & P 400, Russell 2000, the MSCI Emerging Markets Index and the Morgan Stanley International EAFE Index.
2 This category primarily comprises fixed income investments by the U.S. government and government sponsored entities.
3 This category primarily represents investment grade bonds of U.S. issuers from diverse industries.
4 This category mainly comprises private placement bonds as well as collateralized mortgage obligations and funds that invest in treasury obligations directly or in treasury backed obligations.
5 This category mainly represents cash, money market funds as well as mutual funds comprised of high grade corporate bonds.
Categories of plan assets            
Equity investments 31 43 74 32 49 81
Index funds1 27 43 70 23 49 72
Other equity investments 4 0 4 9 0 9
Fixed income investments 50 113 163 41 118 159
Government securities2 25 2 27 20 2 22
Corporate bonds3 13 111 124 13 114 127
Other fixed income investments4 12 - 12 8 2 10
Other5 21 2 23 18 3 21
Total 102 158 260 91 170 261

  December 31, 2011 December 31, 2010
€ in millions Quoted prices in active markets for identical assets Level 1 Significant observable inputs Level 2 Total Quoted prices in active markets for identical assets Level 1 Significant observable inputs Level 2 Total
1 This category mainly comprises low-cost equity index funds not actively managed that track the S & P 500, S & P 400, Russell 2000, the MSCI Emerging Markets Index and the Morgan Stanley International EAFE Index.
2 This category primarily comprises fixed income investments by the U.S. government and government sponsored entities.
3 This category primarily represents investment grade bonds of U.S. issuers from diverse industries.
4 This category mainly comprises private placement bonds as well as collateralized mortgage obligations and funds that invest in treasury obligations directly or in treasury backed obligations.
5 This category mainly represents cash, money market funds as well as mutual funds comprised of high grade corporate bonds.
Categories of plan assets            
Equity investments 31 43 74 32 49 81
Index funds1 27 43 70 23 49 72
Other equity investments 4 0 4 9 0 9
Fixed income investments 50 113 163 41 118 159
Government securities2 25 2 27 20 2 22
Corporate bonds3 13 111 124 13 114 127
Other fixed income investments4 12 - 12 8 2 10
Other5 21 2 23 18 3 21
Total 102 158 260 91 170 261

The methods and inputs used to measure the fair value of plan assets are as follows:

Index funds are valued based on market quotes.

Other equity investments are valued at their market prices as of the date of the statement of financial position.

Government bonds are valued based on both market prices and market quotes.

Corporate bonds and other bonds are valued based on market quotes as of the date of the statement of financial position.

Cash is stated at nominal value which equals the fair value.

U.S. Treasury money market funds as well as other money market and mutual funds are valued at their market prices.

Plan investment policy and strategy

For the North American funded plan, the Fresenius Group periodically reviews the assumptions for long-term expected return on pension plan assets. As part of the assumptions review, a range of reasonable expected investment returns for the pension plan as a whole was determined based on an analysis of expected future returns for each asset class weighted by the allocation of the assets. The range of returns developed relies both on forecasts, which include the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator, and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. As a result, the expected rate of return on pension plan assets of the North American pension plan was 7.5% for the year 2011.

The overall investment strategy for the North American pension plan is to achieve a mix of approximately 96% of investments for long-term growth and 4% for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers.

The target allocations for plan assets in North America are 35% equity securities and 65% long-term U.S. bonds. The investment policy considers that there will be a time horizon for invested funds of more than five years. The total portfolio will be measured against a policy index that reflects the asset class benchmarks and the target asset allocation. The plan policy does not allow investments in securities of Fresenius Medical Care AG & Co. KGaA or other related party securities. The performance benchmarks for the separate asset classes include: S & P 500 Index, S & P 400 Index, Russell 2000 Growth Index, MSCI EAFE Index, MSCI Emerging Markets Index, Barclays Capital Long Term Government Index and Barclays Capital 20 Year U.S. Treasury Strip Index.

The following schedule describes Fresenius Group’s allocation for its funded plans.

in % Allocation 2011 Allocation 2010 Target allocation
Equity investments 28.47 31.12 36.08
Fixed income investments 62.58 60.73 59.64
Other incl. real estate 8.95 8.15 4.28
Total 100.00 100.00 100.00

in % Allocation 2011 Allocation 2010 Target allocation
Equity investments 28.47 31.12 36.08
Fixed income investments 62.58 60.73 59.64
Other incl. real estate 8.95 8.15 4.28
Total 100.00 100.00 100.00

The overall expected long-term rate of return on assets of the Fresenius Group amounts to 6.62% compounded annually. Contributions to plan assets for the fiscal year 2012 are expected to amount to €13 million.

DEFINED CONTRIBUTION PLANS

Fresenius Group’s total expense under defined contribution plans for 2011 was €63 million (2010: €63 million). Of this amount, €31 million related to contributions by the Fresenius Group to the Rheinische Zusatzversorgungskasse (a supplementary pension fund) and to other public supplementary pension funds for employees of Fresenius Helios. Further €24 million related to contributions to the North American savings plan, which employees of FMCH can join.

Following applicable collective bargaining agreements, the Group pays contributions for a given number of employees of Fresenius Helios to the Rheinische Zusatzversorgungskasse (a supplementary pension fund) and to other public supplementary pension funds (together referred to as ZVK ÖD) to complement statutory retirement pensions. Given that employees from multiple participating entities are insured by these ZVK ÖDs, these plans are Multi-Employer plans. Employees are entitled to the benefits defined in the statutes regardless of the contributed amounts.

The plan operates on a pay-as-you-earn system based on applying a collection rate to given parts of gross remuneration.

Paid contributions are accounted for as personnel expenses within cost of sales and selling, general and administrative expenses and amounted to €31 million in 2011 (2010: €32 million). Thereof €15 million were payments to the Rheinische Zusatzversorgungskasse (2010: €15 million).

Further disclosures are either irrelevant or immaterial for plans in supplementary pension funds or the necessary information cannot be obtained from the ZVK ÖDs without undue cost and effort.

Under the North American savings plan, employees can deposit up to 75% of their pay up to an annual maximum of US$16,500 if under 50 years old (US$22,000 if 50 or over). Fresenius Medical Care will match 50% of the employee deposit up to a maximum Company contribution of 3% of the employee’s pay. Fresenius Medical Care’s total expense under this defined contribution plan for the years ended December 31, 2011 and 2010 was €24 million and €24 million, respectively.

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26. Noncontrolling interest

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