(33) Provisions for employee benefits

(33) Provisions for employee benefits

Provisions for employee benefits are composed as follows:

Provisions for other employee benefits include provisions for share-based payments, which are discussed in greater detail in the section on share-based payments in this note.

Provisions for pensions and other post-employment benefits

Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement benefit systems are provided for the employees. Generally, these systems are based on the years of service and salaries of the employees. Pension obligations comprise both obligations from current pensions and accrued benefits for pensions payable in the future.

In order to limit the risks of changing capital market conditions and other developments, for the past number of years newly hired employees have been offered plans that are not based on final salary.

The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was derived as follows:

The defined benefit obligations were based on the following types of benefits provided by the respective plan:

The vast majority of defined benefit obligations of German entities were attributable to plans that encompass old-age, disability, and surviving dependent pensions. These obligations were based on benefit rules comprising benefit commitments dependent on years of service and final salary, as well as a direct commitment for employees newly hired since January 1, 2005 that is not based on the final salary. The benefit entitlement resulted from the cumulative total of annually determined pension components that were calculated based on a defined benefit expense and an age-dependent annuity table. Statutory minimum funding obligations did not exist.

Pension obligations in Switzerland mainly comprised old-age, disability, and surviving dependent benefits regulated by law. The employer and the employees made contributions to the plans. The Group had to observe the existing statutory minimum funding obligations.

Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of service and final salary and were closed to newly hired employees in 2006. The agreed benefits comprised old-age, disability, and surviving dependent benefits. The employer and the employees made contributions to the plans. The Group had to observe the existing statutory minimum funding obligations.

The following table shows the development of the net defined benefit liability:

The actual income from plan assets amounted to € 108 million in the year under review (2019: € 245 million).

Covering the benefit obligations with financial assets represents a means of providing for future cash outflows, which are required in some countries (for example Switzerland and the United Kingdom) on the basis of legal requirements and in other countries (for example Germany) on a voluntary basis.

The fair value of the plan assets can be allocated to the following categories:

Plan assets did not directly include financial instruments issued by Group companies or real estate used by Group companies.

Employer contributions to plan assets and direct payments to plan beneficiaries are expected to amount to € 32 million (2019: € 37 million) and € 81 million (2019: € 79 million) respectively, next year.

The expected payments of undiscounted benefits are as follows:

The weighted duration of defined benefit obligations amounted to 22 years (2019: 22 years).

Other employee benefit provisions

Other employee benefit provisions developed as follows:

Share-based payments

Sensitivities were determined on the basis of the respective parameters in question, with all other measurement assumptions remaining unchanged. The 2018 tranche reported under current provisions will not be subject to any value fluctuations between December 31, 2020, and the payout date and was therefore excluded from the sensitivity analysis (December 31, 2019: exclusion of 2017 tranche).

These share-based compensation programs with cash settlement in place at the Group are aligned with target achievement based on key performance indicators as well as the long-term performance of the shares of Merck KGaA, Darmstadt, Germany. Certain employees are eligible to receive a certain number of virtual shares – Share Units of Merck KGaA, Darmstadt, Germany (MSUs) – at the end of a three-year performance cycle. The number of MSUs that could be received depends on the individual grant defined for the respective person and the average closing price of the shares of Merck KGaA, Darmstadt, Germany in Xetra^® trading during the last 60 trading days prior to January 1 of the respective performance cycle (reference price). When the three-year performance cycle ends, the number of MSUs to then be granted is determined based on the development of defined key performance indicators (KPIs).

These KPIs are the performance of the share price of of Merck KGaA, Darmstadt, Germany, compared to the performance of the DAX^® with a weighting of 50%, the development of the EBITDA pre margin during the performance cycle as a proportion of a defined target value with a weighting of 25%, and the development of organic sales growth as a proportion of a defined target value, also with a weighting of 25%.

Depending on the development of the KPIs, at the end of the respective performance cycle the eligible participants are granted between 0% and 150% of the MSUs they could be eligible to receive. A cash payment is made based on the MSUs granted after the three-year performance cycle has ended. The value of a granted MSU, which is relevant for payment, corresponds to the average closing price of the shares of Merck KGaA, Darmstadt, Germany in Xetra^® trading during the last 60 trading days prior to the end of the performance cycle. The payout amounts of the respective tranches are limited to two and a half times the individual grant.

The Executive Board members have their own Long-Term Incentive Plan, the conditions of which largely correspond to the Long-Term Incentive Plan described here. A description of the plan for the Executive Board can be found in the compensation report, which is part of the Combined Management Report.

The following table presents the key parameters as well as the development of the potential number of Share Units of Merck KGaA, Darmstadt, Germany (MSUs) for the individual tranches.

The value of the provisions as of December 31, 2020, was € 213 million (December 31, 2019: € 113 million). Net expenses of € 149 million were incurred in fiscal 2020 (2019: net expenses of € 60 million). The three-year tranche issued in 2017 ended at the end of 2019; an amount of € 48 million was paid out in 2020. The three-year tranche issued in fiscal 2018 ended at the end of 2020; a payout of € 112 million is expected for 2021.