Notes to the Consolidated Balance Sheets

Provisions for pension liabilities and other post-employment benefits are shown in the following items of the statement of financial position:

Pension plans
The Continental Corporation offers its employees pension plans in the form of defined benefits and defined contributions, either as general or individual plans. The provisions cover the obligations from defined benefit plans, in particular in Germany, the U.S.A., Canada, the U.K., Austria, France, Mexico, Italy and Ireland.

Separate pension funds exist to fully or partially finance the company's pension obligations for many of the plans. These pension fund assets can only be used to settle pension obligations. The principal funds are in the U.S.A and the U.K., and Germany in the form of contractual trust arrangements (CTAs). These pension fund assets are netted against the related pension provisions, provided they qualify as plan assets as defined by IAS 19.

The plan assets also include, in particular in Germany, insurance annuity contracts. In addition, certain closed pension contribution funds in Germany are shown in the reconciliation of the total pension plans due to certain warranty risks.

The pension provisions increased by €43.5 million as against the previous year. The increase is essentially due to current pension expenses, which were not offset by the pension payments made or contributions to pension plans. Deferred pension charges representing the net assets from pension obligations and related funds increased by €29.1 million, largely as a result of contributions to pension funds in the U.S.A. and the U.K.

The pension obligations for Germany, the U.S.A. and Canada, the U.K. and other countries, as well as the amounts for the Continental Corporation as a whole, are shown in the following tables. The U.S.A. and Canada are abbreviated to USA/C.

The reconciliation of the changes in the defined benefit obligation from the beginning to the end of the year is as follows:

The reconciliation of the changes in the plan assets from the beginning to the end of the year is as follows:

€3,295.2 million (PY: €3,271.3 million) of the defined benefit obligation as of December 31, 2011, relates to plans that are fully or partially funded and €70.1 million (PY: €71.5 million) relates to plans that are unfunded.

Settlements in the year under review result from the restructuring of the Chatham location in Canada. The decrease in defined benefit obligation and the plan assets relates to the concluding payments to be made in 2012.

In the year under review, the changes due to changes in the consolidated companies relate to the acquisition of Modi Tyres Company Limited, Modipuram, India. In the previous year, the changes due to changes in the consolidated companies related to disposals of holdings in Benoac Fertigteile GmbH, Peine, Germany; ContiTech Formpolster GmbH, Hanover, Germany; and Continental Automotive Corporation Korea Ltd., Seoul, South Korea.

Plan assets in Germany include the CTA assets amounting to €274.9 million (PY: €273.3 million), pension contribution fund assets of €320.0 million (PY: €325.2 million) and insurance annuity contracts amounting to €89.2 million (PY: €87.8 million). €5.5 million (PY: €1.1 million) of the actuarial gains and losses on plan assets in Germany resulted from official retirement funds and -€12.2 million (PY: -€7.8 million) from the CTAs.

In the Continental Corporation there are pension funds for previously defined contributions in Germany that have been closed to new entrants since July 1, 1983, and March 1, 1984, respectively. As of December 31, 2011, the minimum net funding requirement was exceeded; Continental AG has no requirement to make additional contributions. The pension fund assets show a fair value of €320.0 million (PY: €325.2 million) as of December 31, 2011. The pension funds have tariffs with an interest rate of 3.50%, for which Continental AG is ultimately liable under the German Company Pensions Law (Betriebsrentengesetz). Under this law, the pension obligations constitute a defined benefit pension plan; this plan must be reported in line with the development of pension provisions. However, given that only the plan members are entitled to the assets and all income, the benefit obligations are recognized in the same amount as the existing assets at fair value.

The following table shows the reconciliation of the funded status to the amounts contained in the statement of financial position:

The net amount recognized in the balance sheet comprises the following balance sheet items:

The pension plan of Continental Automotive Trading UK Ltd., Birmingham, U.K., reports plan assets as of the end of the fiscal year that exceed the defined benefit obligation. The recognition of such an asset is limited to the present value of the benefits to the corporation (asset ceiling). As of December 31, 2011, this present value is €0.0 million (PY: €0.0 million).

The pension plan of Continental Automotive Canada, Inc., Mississauga, Canada, also reports plan assets that the Continental Corporation cannot fully utilize. As of December 31, 2011, this present value is €1.4 million (PY: €0.0 million).

The assumptions used in measuring the pension obligations, in particular the discount factors, long-term salary growth rates and the long-term rates of return on plan assets, are established separately for each country.

In the principal pension plans, the following weighted-average valuation factors as of December 31 of the year have been used:

Net pension cost can be summarized as follows:

Curtailments and settlements in 2010 and 2011 result in particular from the restructuring of the Chatham site in Canada, and the effects of closing the locations in Clairoix, France, and Huntsville, U.S.A.

A one percentage point increase or decrease in the discount rate used to discount pension obligations would have had the following impact on the pension obligations as of the end of the reporting period:

Changes in the discount rate as well as the salary and pension trends do not have a linear effect on the defined benefit obligations (DBO) owing to the financial models used (particularly due to the compounding of interest rates). For this reason, the net periodic pension cost derived from the pension obligations does not change as a result of an increase or decrease in the actuarial assumptions by the same amount.

Pension funds
The structure of the corporation's plan assets is based on an asset/liability management study that includes the forecast pension obligations and the corresponding plan assets. Investment committees regularly review the investment decisions taken, the underlying expected returns of the individual asset classes reflecting empirical values, as well as the selection of the external fund managers.

The portfolio structures of the pension plan assets at the measurement date for fiscal years 2011 and 2010, as well as the planned portfolio structure for fiscal year 2012, are as follows:

The expected long-term return on plan assets of the individual asset types for 2011 and 2010 is as follows:

The reference date for plan asset measurement is December 31.

Employer contributions to pension funds
The following table shows the cash contributions made by the company to the pension funds for 2011 and 2010 as well as the expected contributions for 2012:

The following overview contains the pension benefit payments made in the reporting year and the previous year, as well as the undiscounted, expected pension benefit payments for the next ten years:

The expected pension payments from 2012 onwards relate to lump-sum amounts in connection with fixed service cost benefit plans, as well as annual pension benefits. For the purposes of estimating the future payments, in those cases where employees have an option to immediately receive their benefits in cash on retirement or to opt for monthly pension payments, it has been assumed that in all cases the lump-sum will be chosen. Furthermore, the earliest eligible date for retirement has been assumed when determining future pension payments. The actual retirement date could occur later. Therefore the actual payments in future years for present plan members could be lower than the amounts assumed. The final payments for the location Chatham, Canada, will be made in 2012.

For the current and four preceding reporting periods, the amounts of the defined benefit obligation, plan assets, deficit, as well as the experience adjustments to plan liabilities and to plan assets are as follows:

The increase in the deficit as against the previous year results particularly from the slight decrease in the return on plan assets and the increase in current pension expenses.

Other post-employment benefits
Certain subsidiaries – primarily in the U.S.A. and Canada – grant eligible employees healthcare and life insurance on retirement if they have fulfilled certain conditions relating to age and years of service. The amount and entitlement can be altered. Certain retirement benefits, in particular for pensions and healthcare costs, are provided in the U.S.A. for hourly-paid workers at unionized tire plants under the terms of collective pay agreements.

No separate plan assets have been set up for these obligations.

The reconciliation of the changes in the defined benefit obligation and the financing status from the beginning to the end of the year is as follows:

In particular, the decline in the defined benefit obligation results from settlements in connection with the restructuring of the site in Huntsville, U.S.A.

At the end of 2006, all hourly workers at the U.S. tire operations and retirees were notified that their maximum amount of medical coverage would be reduced further starting at the beginning of 2007. As a result of this amendment, these beneficiaries now have a standardized level of medical coverage. These plan amendments resulted in a release of provisions in 2006 for post-employment obligations of €108.8 million. Certain affected individuals filed a class-action lawsuit contesting this measure at the end of 2006.

Due to a judicially approved settlement, which ended the legal proceedings, the company had to make a one-time payment totaling €43.5 million as compensation. Most of the payment was made in 2008, with payment of the remainder spread over the following seven years. The remaining provision of €7.7 million as of December 31, 2011 (PY: €9.7 million) is recognized under the provisions for obligations similar to pensions.

The assumptions used for the discount rate and cost increases to calculate the healthcare and life insurance benefits vary according to conditions in the U.S.A. and Canada.

The following weighted average valuation factors at December 31 were used:

The net cost of healthcare and life insurance benefit obligations can be broken down as follows:

In the year under review, income from settlements related to the restructuring of the site in Huntsville, U.S.A., and led to a net gain from the healthcare and life insurance obligations in 2011. In the previous year, the income from curtailments and settlements resulted from a tire location in the U.S.A.

The following table shows the effects of a 1% increase or decrease in the cost trend for healthcare and life insurance obligations:

A one percentage-point increase or decrease in the discount rate specified above for calculating the net cost of healthcare and life insurance benefit obligations would have had the following effect on net cost:

The following table shows the payments made for other post-employment benefits in the reporting year and the previous year, as well as the undiscounted, expected benefit payments for the next ten years:

The amounts for the defined benefit obligation, deficit and experience adjustments to plan liabilities for the current and four preceding reporting periods are as follows:

Provisions for obligations similar to pensions
Some companies of the corporation have made commitments to employees for a fixed percentage of the employees' compensation. These entitlements are paid out when the employment relationship is terminated. In the fiscal year, the expenses for these obligations were €1.6 million (PY: €0.9 million).

The provision for obligations similar to pensions fell by €1.2 million in fiscal 2011. This essentially results from payments under a plan similar to a pension recognized in the U.S.A. for executive staff. The remainder from the agreement reached with the U.S. union in 2008 on a compensatory payment of €7.7 million (PY: €9.7 million) will be paid over the next four years.

Defined contribution pension plans
Not including social security contributions, the expenses for the defined contribution pension plans to which Continental Corporation contributes amounted to €31.1 million in the fiscal year (PY: €37.9 million). The decline as against the previous year mainly results from the lower contributions to defined contribution pension plans in the U.S.A.

top