Employees

(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 two different direct commitments for employees newly hired since January 1, 2005, that is not based on the final salary. The benefit entitlement for new members from January 1, 2005, to December 31, 2020, resulted from the cumulative total of annually determined pension components calculated on the basis of a defined benefit expense and an age-based annuity table. The benefit entitlement for new members from January 1, 2021, resulted from the performance of salary-based employer contributions and voluntary employee contributions, topped up by the employer, to an external fund. A minimum return on contributions has been guaranteed. Statutory minimum funding obligations did not exist.

Pension obligations in Switzerland mainly comprised retirement, disability and surviving dependent benefits regulated by law. The employer and the employees made contributions to the plans. Statutory minimum funding obligations existed.

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 from 2006 onward. The agreed benefits comprised retirement, disability and surviving dependent benefits. The employer and the employees made contributions to the plans. Statutory minimum funding obligations existed.

The development of the net defined benefit liability was as follows:

The actual income from plan assets amounted to € 164 million in the year under review (2020: € 108 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 was 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 for the next year are expected to amount to € 37 million (2020: € 32 million) and € 84 million (2020: € 81 million) respectively.

The expected payments of undiscounted benefits were as follows:

The weighted duration of defined benefit obligations amounted to 21 years (2020: 22 years).

Other employee benefit provisions

Other employee benefit provisions developed as follows:

Share-based payments

These share-based compensation programs with cash settlement in place within 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).

The calculation is based on the performance of the share price 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 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, 2021, was € 348 million (December 31, 2020: € 213 million). Net expenses of € 249 million were incurred in fiscal 2021 (2020: net expenses of € 149 million). The three-year tranche issued in fiscal 2018 ended at the end of 2020; an amount of € 110 million was paid out in fiscal 2021. The three-year tranche issued in fiscal 2019 ended at the end of 2021; a payout of € 163 million is expected for fiscal 2022. At the reporting date, the average closing prices of the shares of Merck KGaA, Darmstadt, Germany, in Xetra^® trading over the last 60 trading days was € 207.24.