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Last Update: 03/12/2009
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Part of the audited Consolidated Financial Statements and Management´s Analysis

20 -- Provisions for pensions and similar obligations

In addition to state pension plans, most employees are entitled to Company pension benefits from either defined contribution or defined benefit plans. Benefits generally depend on years of service, contributions or compensation, and take into consideration the legal framework of labor, tax and social security laws of the countries where companies are located. To control the risks of changing market conditions, as well as increasing life-expectancies, over the last few years new employees have been increasingly offered defined contribution plans.

For BASF SE and other German subsidiaries, a basic level of benefits is provided by the legally independent funded plan, BASF Pensionskasse VVaG, which is financed by contributions of employees and the Company and the return on its assets. BASF SE will ensure the necessary contributions to adequately finance the benefits promised by BASF Pensionskasse VVaG. In mid-2004, the defined benefit plan of BASF Pensionskasse VVaG was closed for new hired employees and a new defined contribution plan was introduced. Additional occupational pension commitments at German Group companies are financed almost exclusively via pension provisions.

In the case of non-German subsidiaries, pension benefits are covered in some cases by pension provisions, but mainly by external insurance companies or pension funds.

The measurement date for the pension plans is set as December 31. The most recent actuarial mortality tables are used.

The valuations using the projected unit credit method per IAS 19 were carried out under the following assumptions:

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Assumptions used to determine the defined benefit obligation as of December 31 (weighted average in %)

 

 

 

Germany

 

Foreign

 

2008

2007

 

2008

2007

Discount rate

6.00

5.25

 

5.84

5.82

Projected increase of wages and salaries

2.75

2.75

 

4.37

4.50

Projected pension increase

2.00

2.00

 

0.57

0.68

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Assumptions used to determine expenses for pension plans
(weighted average in %)

 

 

 

Germany

 

Foreign

 

2008

2007

 

2008

2007

Discount rate

5.25

4.50

 

5.82

5.31

Projected increase of wages and salaries

2.75

2.50

 

4.50

4.46

Projected pension increase

2.00

1.75

 

0.68

0.56

Expected return on plan assets

5.18

4.93

 

7.20

7.35

The assumptions used to ascertain the defined benefit obligation as of December 31, are used in the following year to determine the expenses for pension plans.

Similar obligations refer to commitments by BASF North American Group companies to provide for the costs of medical and life insurance benefits for employees and eligible dependents after retirement. They are based upon an actuarial valuation, considering the future cost trend and a discount rate of 6.0% in 2008 (2007: 6.25%).

The assumptions regarding the overall expected long-term rate of return are based on forecasts of expected individual asset class returns and the desired portfolio structure. The forecasts are based on long-term historical average returns and take into consideration the current yield level and the inflation trend. In 2008, the discount rate used in this calculation was adjusted to account for developments in the capital markets.

The target asset allocation has been defined by using asset liability studies and is reviewed regularly. Accordingly, plan assets are aligned with long-term pension liabilities, taking into consideration investment risks and adherence to government regulations. The existing portfolio structure is oriented towards the target asset allo-cation. In addition, current market views are taken into consideration. In order to mitigate risks and maximize returns, a widely spread global portfolio of individual asset classes is held.

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Portfolio structure of plan assets (%)

 

 

 

Target allocation

 

Share of plan assets

 

2009

 

2008

2007

Shares

29

 

22

30

Bonds

60

 

66

60

Property

4

 

4

3

Other

7

 

8

7

Total

100

 

100

100

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Development of defined benefit obligation (million €)

 

 

 

2008

2007

Defined benefit obligation as of January 1

11,914

12,693

Service cost

243

270

Interest cost

630

588

Benefits paid

(637)

(660)

Participants’ contributions

40

41

Actuarial gains

(874)

(722)

Settlements and other plan changes

42

.

Exchange differences

12

(296)

Defined benefit obligation as of December 31

11,370

11,914

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Development of plan assets (million €)

 

 

2008

2007

Plan assets as of January 1

12,012

12,079

Expected return on plan assets

675

660

Actuarial losses

(2,159)

(119)

Employer contributions

119

131

Participants’ contributions

40

41

Benefits paid

(443)

(516)

Other changes

58

6

Exchange differences

11

(270)

Plan assets as of December 31

10,313

12,012

On December 31, 2008, plan assets contained securities issued by BASF Group companies with a market value of €10 million (December 31, 2007: €16 million). The market value of the properties of legally independent pension funds rented to BASF Group companies amounted to €51 million both on December 31, 2008 and 2007.

No material transactions took place between the legally independent pension funds and BASF Group companies in 2008.

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Reconciliation of funded status to provisions for pensions and similar obligations (million €)

 

 

2008

2007

Plan assets as of December 31

10,313

12,012

Less defined benefit obligation as of December 31

11,370

11,914

Funded status of pension plans

(1,057)

98

Unrecognized past service cost

.

.

Asset ceiling in accordance with IAS 19.58

(34)

(538)

Provisions for similar obligations

(456)

(436)

Net obligation recognized on the balance sheet

(1,547)

(876)

Thereof defined benefit assets

165

417

Thereof provisions for pensions

(1,256)

(857)

Thereof provisions for similar obligations

(456)

(436)

The change in the asset ceiling is primarily attributable to the reduction in the funded status at BASF Pensionskasse VVaG. Actuarial gains and losses are recognized directly in retained earnings in the reporting period in which they occur. Past service costs are amortized over the average service period of the entitled employees until the benefits become vested. Actuarial losses of €1,285 million in 2008 and actuarial gains of €583 million in 2007 were recognized in retained earnings. Since the introduction of this accounting policy, a total actuarial loss of €1,983 million has been charged against retained earnings, not taking deferred taxes into account.

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Current funding situation of the plans (million €)

 

 

 

 

2008

 

2007

 

Defined benefit obligation

Plan assets

 

Defined
benefit obligation

Plan assets

Unfunded pension plans

611

 

643

Partially funded pension plans

2,803

2,158

 

2,495

2,340

Total of pension plans that are not
fully funded

3,414

2,158

 

3,138

2,340

Fully funded pension plans

7,956

8,155

 

8,776

9,672

 

11,370

10,313

 

11,914

12,012

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Deviation between actuarial assumptions and the actual development
(million €)

 

 

2008

2007

2006

2005

2004

Defined benefit obligation

11,370

11,914

12,693

11,908

9,814

Thereof impact of experience adjustments

36

(138)

(59)

20

23

Plan assets

10,313

12,012

12,079

11,015

6,204

Thereof impact of experience adjustments

(2,159)

(119)

159

438

193

Funded status

(1,057)

98

(615)

(892)

(3,610)

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Expected payments resulting from pension obligations existing as of December 31, 2008 (million €)

 

2009

628

2010

678

2011

689

2012

696

2013

736

2014 through 2018

4,241

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Composition of expenses for pension plans (million €)

 

 

2008

2007

Service cost

243

270

Amortization of past service cost

.

8

Settlement gains

(23)

(3)

Expenses for similar obligations

4

6

Expenses for defined benefit plans charged to
income from operations

224

281

Interest cost

630

588

Expected return on plan assets

(675)

(660)

Expenses for similar obligations

23

25

Income from defined benefit plans in the
financial result

(22)

(47)

Expenses for defined contribution plans charged
to income from operations

86

78

Expenses for pension plans

288

312

In 2008, contributions to public pension plans were €392 million (2007: €364 million).

The estimated contribution payments for defined benefit plans for 2009 are €126 million.

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