Financial Statements

25. Provisions for pensions and other post-employment benefits

The provisions for pensions and other post-employment benefits in Germany and other countries as of the reporting date are as shown in the following table:

	Pensions		Other post-employment benefits		Total
€ million	Dec. 31, 2006	Dec. 31, 2007	Dec. 31, 2006	Dec. 31, 2007	Dec. 31, 2006	Dec. 31, 2007
Germany	5,304	4,538	139	141	5,443	4,679
Other countries	587	438	513	384	1,100	822
Total	5,891	4,976	652	525	6,543	5,501

The expenses for defined benefit pension plans and other benefit obligations for the continuing and discontinued operations are comprised as follows:

Expenses for defined benefit pension plans	Germany		Other countries		Total
€ million	2006	2007	2006	2007	2006	2007
Current service cost	195	186	76	66	271	252
Past service cost	(8)	40	3	3	(5)	43
Interest cost	466	523	230	234	696	757
Expected return on plan assets	(270)	(315)	(262)	(272)	(532)	(587)
Plan curtailments	(2)	-	(20)	(27)	(22)	(27)
Plan settlements	-	-	(2)	4	(2)	4
Total	381	434	25	8	406	442

Expenses for other post-employment benefit obligations	Germany		Other countries		Total
€ million	2006	2007	2006	2007	2006	2007
Current service cost	19	10	24	27	43	37
Past service cost	-	-	(12)	(1)	(12)	(1)
Interest cost	4	6	51	50	55	56
Expected return on plan assets	-	-	(27)	(28)	(27)	(28)
Plan curtailments	-	-	(25)	(14)	(25)	(14)
Plan settlements	-	-	1	-	1	-
Total	23	16	12	34	35	50

Expenses for pension plans assigned to assets held for sale in 2006 comprised service cost of €14 million, interest cost of €20 million for entitlements earned in previous years, expected return on plan assets amounting to €10 million and income of €37 million from plan curtailments.

The status of unfunded and funded defined benefit obligations is as follows:

Click on the table to enlarge.

Of the defined benefit obligation for pensions, €4,762 million (2006: €5,067 million) relates to unfunded benefit obligations while €9,401 million (2006: €10,638 million) relates to funded benefit obligations. Of the defined benefit obligation for other post-employment benefits, €235 million (2006: €328 million) relates to unfunded benefit obligations while €624 million (2006: €675 million) relates to funded benefit obligations.

Of the funded pension plans, total overfunding of individual plans amounts to €546 million (2006: €89 million) while underfunding amounts to €214 million (2006: €870 million). Similarly, other funded post-employment benefit obligations of individual funds are underfunded by €285 million (2006: €318 million).

The Bayer Group has set up funded pension plans for its employees in many countries. Since the legal and tax requirements and economic conditions may vary considerably between countries, assets are managed according to country-specific principles.

Bayer-Pensionskasse VvaG (Bayer-Pensionskasse) in Germany is by far the most significant of the pension funds. This legally independent fund is a private insurance company and is therefore subject to the German Law on the Supervision of Private Insurance Companies. Since Bayer guarantees the commitments of Bayer-Pensionskasse, it is classified as a defined benefit plan for IFRS purposes. The fair value of the plan assets includes real estate leased by Bayer which is recognized at a fair value of €51 million (2006: €54 million). Bayer AG has undertaken to provide profit-sharing capital in the form of an interest-bearing loan totaling €150 million for the Bayer-Pensionskasse. The entire amount was drawn as of December 31, 2006 and 2007.

The investment policy of Bayer-Pensionskasse is geared to compliance with regulatory provisions and to the risk structure resulting from its obligations. In light of capital market movements, Bayer-Pensionskasse has therefore developed a strategic target investment portfolio aligned to its risk structure. Its investment strategy focuses principally on stringent management of downside risks rather than on maximizing absolute returns. It is anticipated that this investment policy can generate a return that enables it to meet its long-term commitments.

Our German pension plans generally hold stocks, bearer annuities and certain real-estate assets through special funds to reduce the administrative outlay. The plans own all of the share certificates of these special assets, which are administered in accordance with the German Investment Act. Their allocation provides for a balanced mix of investment segments. At the reporting date there was a slight weighting in favor of stocks, and the proportion of real estate in the portfolios was comparatively small.

A large proportion of the benefit obligations of Bayer Schering Pharma AG, Berlin, Germany, which was acquired in 2006, is covered by Schering Altersversorgung Treuhand Verein. Here, too, the investment strategy is geared to the structure of the corresponding obligations. It permits the use of derivatives; nearly all currency risks are fully hedged. With the aid of a risk management system, stress scenarios are simulated and other risk analyses are undertaken (e.g. value at risk).

For plan assets in other countries, too, the key investment strategy criteria are the structure of the benefit obligations and the risk profile. Other determinants are risk diversification, portfolio efficiency and a country-specific and global balance of opportunity and risk capable of ensuring the payment of all future benefits.

The weighted parameters used to value the plan assets to cover pensions and other post-employment benefit obligations were allocated as follows at year-end:

Plan assets to cover pension obligations as of December 31	Germany		Other countries
%	2006	2007	2006	2007
Equity securities	13.36	0.72	50.84	45.72
Debt securities	41.68	36.21	40.46	44.61
Special securities funds	26.13	42.14	0.01	0.00
Real estate and special real estate funds	8.92	8.66	3.03	3.12
Other	9.91	12.27	5.66	6.55
Total	100.00	100.00	100.00	100.00

Plan assets to cover other post-employment benefit obligations as of December 31	Germany		Other countries
%	2006	2007	2006	2007
Equity securities	-	-	56.80	51.73
Debt securities	-	-	35.30	41.04
Special securities funds	-	-	-	-
Real estate and special real estate funds	-	-	-	-
Other	-	-	7.90	7.23
Total	-	-	100.00	100.00

At the closing dates, plan assets included roughly the same weightings of Bayer shares as the major stock indices.

Obligations in Germany to pay early retirement benefits are entirely unfunded.

The following weighted parameters were used to value the pension obligations as of December 31 and the expense of pensions and other post-employment benefits in the respective year:

Parameters for pension obligations	Germany		Other countries		Total
%	2006	2007	2006	2007	2006	2007
Pension obligations
Discount rate	4.60	5.50	5.65	6.45	4.90	5.75
Projected future remuneration increases	2.60	2.85	4.10	4.65	2.85	3.10
Projected future benefit increases	1.50	1.75	2.45	3.25	1.60	1.95
Other post-employment benefit obligations
Discount rate	4.30	5.10	6.25	6.85	6.00	6.55

Parameters for pension expense	Germany		Other countries		Total
%	2006	2007	2006	2007	2006	2007
Pension obligations
Discount rate	4.25	4.60	5.50	5.65	4.60	4.90
Projected future remuneration increases	2.50	2.60	4.00	4.10	2.75	2.85
Projected future benefit increases	1.25	1.50	2.75	2.45	1.45	1.60
Expected return on plan assets	5.25	5.25	7.50	7.85	6.10	6.20
Other post-employment benefit obligations
Discount rate	3.25	4.30	6.00	6.25	5.65	6.00
Expected return on plan assets	-	-	8.25	8.25	8.25	8.25

Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact pension and other post-employment benefit obligations as of year end 2007 as follows:

	Germany		Other countries		Total
€ million	0.5 percentage point increase	0.5 percentage point decrease	0.5 percentage point increase	0.5 percentage point decrease	0.5 percentage point increase	0.5 percentage point decrease
Pension obligations
Change in discount rate	(773)	868	(247)	272	(1,020)	1,140
Change in projected future remuneration increases	146	(141)	35	(33)	181	(174)
Change in projected future benefit increases	548	(502)	68	(56)	616	(558)
Other post-employment benefit obligations
Change in discount rate	(1)	1	(36)	40	(37)	41

Altering individual parameters by 0.5 percentage points while leaving the other parameters unchanged would impact pension expense as of year end 2007 as follows:

	Germany		Other countries		Total
€ million	0.5 percentage point increase	0.5 percentage point decrease	0.5 percentage point increase	0.5 percentage point decrease	0.5 percentage point increase	0.5 percentage point decrease
Pension obligations
Change in discount rate	(12)	12	(1)	0	(13)	12
Change in projected future remuneration increases	13	(12)	4	(4)	17	(16)
Change in projected future benefit increases	41	(37)	5	(4)	46	(41)
Change in expected return on plan assets	(31)	31	(18)	18	(49)	49
Other post-employment benefit obligations
Change in discount rate	0	0	(1)	1	(1)	1
Change in expected return on plan assets	-	-	(2)	2	(2)	2

Provisions are also set up for the obligations of Group companies, particularly in the United States, to provide post-employment benefits in the form of health care cost payments to retirees. The valuation of health care costs is based on the assumption that they will increase at a rate of 11 percent (assumption in 2006: 11 percent), which should decline to 9 percent by 2009 (assumption in 2006: 9 percent by 2008). The table shows the impact of a one percentage point change in the assumed rate of cost increases:

	Increase of one percentage point	Decrease of one percentage point
€ million
Impact on other post-employment benefit obligations	77	(65)
Impact on pension expense	9	(7)

The following employer contributions were made in 2007 and 2006, and are expected to be made in 2008, in connection with defined benefit obligations:

	Germany			Other countries
€ million	2006	2007	2008 projected	2006	2007	2008 projected
Pension obligations	325	415	368	173	139	69
Other post-employment benefit obligations	46	48	45	38	33	34
Total	371	463	413	211	172	103

Pensions and other post-employment benefits payable in the future are estimated as follows:

	Germany		Other countries		Total
€ million	Pension obligations	Other post-employment benefit obligations	Pension obligations	Other post-employment benefit obligations	Pension obligations	Other post-employment benefit obligations
2008	539	45	182	41	721	86
2009	551	42	190	44	741	86
2010	572	31	201	47	773	78
2011	590	12	215	49	805	61
2012	612	3	226	52	838	55
2013–2017	3,445	9	1,273	291	4,718	300

The actuarial gains and losses related to defined benefit obligations and plan assets, recognized in a separate statement of recognized income and expense outside of profit or loss, are as follows:

Click on the table to enlarge.

In Germany, no unrealized gains/losses exist in relation to other post-employment benefit obligations.

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