26. Pensions and other post-employment commitments

As stated in Note 2.2.12, the Group has assumed commitments with employees including defined contribution plans, defined benefit plans (see Glossary) and medical benefits.

Employees are covered by defined contribution plans in practically all of the countries in which the Group operates, with the plans in Spain and Mexico being the most significant. Most defined benefit plans are closed to new employees and with liabilities relating largely inactive employees, the most significant being those in Spain, Mexico and the United States. In Mexico, the Group provides post-retirement medical benefits to a closed group of employees and their family members.

The breakdown of the balance sheet net defined benefit liability for financial years 2013, 2012 and 2011 is provided below:

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Net defined benefit liability (asset) on the Balance Sheet	Millions of Euros
	2013	2012	2011
Pension commitments	4,266	4,463	4,004
Early retirement commitments	2,634	2,758	2,904
Medical benefits commitments	811	985	772
Total commitments	7,711	8,205	7,680
Pension plan assets	1,436	1,535	1,389
Medical benefit plan assets	938	895	733
Total plan assets	2,374	2,430	2,122
Total net liability / asset on the balance sheet	5,337	5,775	5,558
Of which:
Net asset on the balance sheet (1)	(175)	(2)	(19)
Net liability on the balance sheet (2)	5,512	5,777	5,577

(1) Recorded under the heading “Other Assets - Other” of the consolidated balance sheet (See note 22) (2) Recorded under the heading “Provisions - Provisions for pensions and similar obligations” of the consolidated balance sheet (See note 25)

The amounts relating to post-employment benefits charged to the profit and loss account and other comprehensive income for financial years 2013, 2012 and 2011 are as follows:

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Consolidated income statement impact	Notes	Millions of Euros
		2013	2012	2011
	Interest and similar expenses (*)	39.2	199	256	259
Interest expense		342	367	376
Interest income		(143)	(110)	(118)
Personnel expenses		150	138	131
Defined contribution plan expense	46.1	80	84	80
Defined benefit plan expense	46.1	70	54	51
Provisions (net)	48	373	433	360
Early retirement expense		336	276	297
Past service cost expense		6	17	13
Remeasurements (**)		-	97	(7)
Other provision expenses		31	43	57
Total impact on Income Statement: Debit (Credit)		722	827	751

(*) Interest and similar charges includes interest charges/credits, and for 2012 and 2011 the “Return on assets”. (**) Actuarial losses (gains) on remeasurement of the net defined benefit liability relating to early retirements in Spain and other similar benefits (see Note 2.2.12). Download Excel

Equity impact	Notes	Millions of Euros
		2013	2012	2011
Defined benefit plans		70	436	73
Post-employment medical benefits		(58)	26	(7)
Total impact on equity: Debit (Credit) (*)	25	12	462	67

(*) Actuarial gains (losses) on remeasurement of the net defined benefit liability relating to pension commitments .

26.1 Defined contribution commitments

Certain Group employees participate in defined contribution plans. These commitments are settled through contributions made by the employer into a separate entity responsible for the eventual payment of benefits. Some of these plans are contributory, allowing employees to make contributions which are then matched by the employer.

Employer contributions are paid and recognized in the consolidated income statement in the corresponding financial year (see Note 46.1), and no liability is therefore recognized in the accompanying consolidated balance sheet for this purpose.

26.2 Defined benefit plans

Defined benefit pension commitments relate mainly to employees who have already retired or taken early retirement from the Group, certain closed groups of active employees still accruing defined benefit pensions, and in-service death and disability benefits provided to most active employees. For the latter the Group pays the required premiums to fully insure the related liability.

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Pension commitments	Millions of Euros
	2013			2012			2011
	Defined benefit obligation	Plan assets	Net liability (asset)	Defined benefit obligation	Plan assets	Net liability (asset)	Defined benefit obligation	Plan assets	Net liability (asset)
Balance at the beginning	7,817	2,042	5,775	7,301	1,743	5,558	7,652	1,671	5,980
Current service cost	70	-	70	54	1	53	51	-	51
Interest income or expense	342	143	199	354	124	229	371	112	259
Contributions by plan participants	1	1	-	-	-	-	-	-	-
Employer contributions	-	256	(256)	0	6	(5)	(1)	222	(223)
Past service costs (1)	342	-	342	276	-	276	310	-	310
Return on plan assets (2)	-	(286)	286	-	136	(136)	-	58	(58)
Remeasurements arising from changes in demographic assumptions	3	-	3	-	-	-	-	-	-
Remeasurements arising from changes in financial assumptions	(289)	-	(289)	533	25	508	58	3	56
Other actuarial gain and losses	4	-	4	48	-	48	8	4	4
Benefit payments	(888)	(70)	(817)	(881)	(68)	(813)	(1,045)	(251)	(794)
Settlement payments	(1)	(1)	-	-	-	-	(13)	-	(13)
Business combinations and disposals	-	-	-	65	-	65	(9)	(9)	-
Effect on changes in foreign exchange rates	(121)	(93)	(29)	55	57	(2)	(100)	(89)	(11)
Other effects	48	-	48	11	18	(7)	19	23	(3)
Balance at the end	7,327	1,990	5,337	7,817	2,042	5,775	7,301	1,743	5,558
Of which
Spain	5,393	-	5,393	5,620	-	5,620	5,502	-	5,502
Mexico	1,313	1,490	(177)	1,543	1,502	41	1,252	1,252	-
The United States	276	244	32	313	293	20	285	283	2

(1) Including gains and losses arising from settlements. (2) Excluding interest, which is recorded under "Interest income or expense".

The balance under the heading “Provisions - Provisions for pensions and similar obligations” of the accompanying consolidated balance sheet as of December 31, 2013 includes €241 million relating to post-employment benefit commitments of former members of the Board of Directors and the Bank’s Management Committee.

The most significant commitments are those in Spain and Mexico and, to a lesser extent, in the United States. The remaining commitments are located mostly in Portugal and South America. We include a detailed breakdown for Spain, México and the United States which, in aggregate, account for more than 90% of the total commitments. Both the costs and the present value of the commitments are determined by independent qualified actuaries using the “projected unit credit” method.

The following table sets out the key actuarial assumptions used in the valuation of these commitments:

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Actuarial Assumptions	2013			2012			2011
	Spain	Mexico	USA	Spain	Mexico	USA	Spain	Mexico	USA
Discount rate	3.50%	9.49%	4.86%	3.50%	8.20%	4.03%	4.50%	8.75%	4.28%
Rate of salary increase (*)	3.00%	4.75%	3.25%	3.00%	4.75%	3.50%	3.00%	4.75%	3.50%
Rate of pension increase		2.13%			2.13%			2.13%
Medical cost trend rate		6.75%			6.75%			6.75%
Mortality tables	PERM/F 2000P	EMSSA 97	RP 2000 Projected & adjusted	PERM/F 2000P	EMSSA 97	RP 2000 Projected & adjusted	PERM/F 2000P	EMSSA 97	RP 2000 Projected & adjusted

(*) In Spain, different salary increase assumptions are used with the minimum being 3%

Discount rates have been determined by reference to high quality corporate bonds (Note 2.2.12) of the appropriate currency (Euro in the case of Spain, Mexican peso for Mexico and USD for the United States).

Assumed retirement ages have been set by reference to the earliest age at which employees are entitled to retire, the contractually agreed age in the case of early retirements in Spain or by using retirement rates.

Changes in the main actuarial assumptions may affect the valuation of the commitments. The table below shows the sensitivity of the benefit obligations to changes in the key assumptions:

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Sensitivity analysis	Basis points change	Millions of Euros
		2013
		Increase	Decrease
Discount rate	50	(275)	301
Rate of salary increase	50	17	(17)
Rate of pension increase	50	16	(15)
Medical cost trend rate	100	148	(118)
Change in obligation from each additional year of longevity		87

The sensitivities provided above have been determined at the date of these consolidated financial statements, and reflect solely the impact of changing one individual assumption at a time, keeping the rest of the assumptions unchanged, thereby excluding the effects which may result from combined assumption changes.

In addition to the commitments to employees shown above, the Group has other less material commitments. These include long-service awards granted to certain groups of employees when they complete a given number of years of service.

As of December 31, 2013, 2012 and 2011, the actuarial liabilities for the outstanding awards amounted to €47, €50 and €43 million, respectively. These commitments are recorded under the heading "Other provisions" of the accompanying consolidated balance sheet (see Note 25).

Pension commitments

The majority of the defined benefit plans are fully funded, with plan assets held in funds legally separate from the Group sponsoring entity.

The plan assets related to these commitments are shown in the table below. These assets will be used directly to settle the vested obligations and meet the following conditions: they are not part of the Group sponsoring entity´s assets, they are available only to pay post-employment benefits, and they cannot be returned to the Group sponsoring entity.

The risks associated with these commitments are those which give rise to a deficit in the defined benefit plan. A deficit could arise from factors such as a decrease in the market value of equities, an increase in long-term interest rates leading to a decrease in the value of fixed income securities, or a deterioration of the economy resulting in more write-downs and credit rating downgrades.

The change in defined benefit plan obligations and plan assets during financial year 2013 was as follows:

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2013	Millions of Euros
	Defined benefit obligation			Plan assets			Net liability (asset)
	Spain	Mexico	USA	Spain	Mexico	USA	Spain	Mexico	USA	Total
Balance at the beginning	5,620	573	313	-	606	293	5,620	(33)	20	5,686
Current service cost	20	9	5	-	-	-	20	9	5	40
Interest income or expense	178	46	12	-	49	11	178	(3)	1	194
Contributions by plan participants	-	-	-	-	-	-	-	-	-	-
Employer contributions	-	-	-	-	64	-	-	(64)	-	(70)
Past service costs (1)	337	-	-	-	-	-	337	-	-	341
Return on plan assets (2)	-	-	-	-	(98)	(43)	-	98	43	146
Remeasurements arising from changes in demographic assumptions	-	-	3	-	-	-	-	-	3	3
Remeasurements arising from changes in financial assumptions	-	(59)	(34)	-	-	-	-	(59)	(34)	(93)
Other actuarial gain and losses	(4)	14	(2)	-	-	-	(4)	14	(2)	6
Benefit payments	(807)	(37)	(8)	-	(36)	(6)	(807)	(1)	(2)	(817)
Settlement payments	-	-	-	-	-	-	-	-	-	-
Business combinations and disposals	-	-	-	-	-	-	-	-	-	-
Effect on changes in foreign exchange rates	-	(32)	(13)	-	(33)	(12)	-	1	(1)	(20)
Other effects	49	-	(1)	-	-	1	49	-	(2)	48
Balance at the end	5,393	514	276	-	552	244	5,393	(38)	32	5,464
Of which
Vested benefit obligation relating to current employees	213						213
Vested benefit obligation relating to retired employees	5,180						5,180

The change in net defined benefit plan liabilities (assets) during financial years 2012 and 2011 was as follows:

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	Millions of Euros
	2012: Net liability (asset)			2011: Net liability (asset)
	Spain	Mexico	USA	Spain	Mexico	USA
Balance at the beginning	5,502	(29)	2	5,753	(11)	45
Current service cost	12	8	6	12	7	4
Interest income or expense	224	(3)	-	237	(1)	0
Contributions by plan participants	-	-	-	-	-	-
Employer contributions	-	(1)	-	-	(30)	(33)
Past service costs (1)	256	(11)	-	297	-	-
Return on plan assets (2)	-	(49)	(5)	-	(3)	(55)
Remeasurements arising from changes in demographic assumptions	-	-	-	-	-	-
Remeasurements arising from changes in financial assumptions	362	29	13	3	(1)	49
Other actuarial gain and losses	-	24	8	-	8	(4)
Benefit payments	(801)	-	(3)	(790)	-	(1)
Settlement payments	-	-	-	-	-	(3)
Business combinations and disposals	65	-	-	-	-	-
Effect on changes in foreign exchange rates	-	(1)	0	-	1	1
Other effects	-	-	(1)	(10)	1	(2)
Balance at the end	5,620	(33)	20	5,502	(29)	2
Of which
Vested benefit obligation relating to current employees	216	-	-	146	-	-
Vested benefit obligation relating to retired employees	5,403	-	-	5,356	-	-

In Spain, local regulation requires that pension and death benefit commitments must be funded, either through a qualified pension plan or an insurance contract.

Current pensions of BBVA employees are paid by the insurance companies with whom BBVA insures the benefits and to whom all premiums have been paid. These premiums are determined by the insurance companies using cash flow matching techniques, which ensure that payment of benefits will be made when required, guaranteeing both the actuarial and interest rate risks. These insurance policies meet the requirements of the accounting standard regarding the non-recoverability of contributions.

However, a significant part of the insurance contracts are held with BBVA Seguros, S.A., a related party consolidated within the BBVA Group financial statements. Consequently these policies cannot be considered plan assets under IAS 19 and are presented in the accompanying consolidated balance sheet under different headings of "assets", depending on the classification of their corresponding financial instruments. In this case the full value of the obligations associated with these policies has been recognized under the heading "Provisions – Provisions for pensions and similar obligations" of the accompanying consolidated balance sheet (see Note 25).

On the other hand, some pension commitments have been funded through insurance contracts held with insurance companies not related to the Group, and can therefore be considered qualifying insurance policies and plan assets under IAS 19. In this case the accompanying consolidated balance sheet reflects the value of the obligations net of the value of the qualifying insurance policies. As of December 31, 2013, 2012 and 2011, the valuation of the aforementioned insurance contracts (€385, €389 and €379 million, respectively) exactly match the value of the corresponding obligations and therefore no amount for this item has been recorded in the accompanying consolidated balance sheet.

In relation to the early retirement commitments, in 2013, Group entities in Spain offered certain employees the option to take early retirement (that is, earlier than the age stipulated in the collective labor agreement in force). This offer was accepted by 1,055 employees (633 and 669 in 2012 and 2011, respectively).

In Mexico, there is a defined benefit plan for employees hired prior to 2001. Other employees participate in a defined contribution plan.

In The United States there are mainly two defined benefit plans. The bigger one closed to new employees, who instead of participating in a defined benefit plan participate in a defined contribution plan. External funds/trusts have been constituted locally to fund the plans

Medical benefit commitments

In Mexico there is a medical benefit plan for employees hired prior to 2007. New employees from 2007 are covered by medical insurance policy. An external trust has been constituted locally to fund the plan, the trust is managed in accordance with local legislation.

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Medical benefits commitments	Millions of Euros
	2013			2012			2011
	Defined benefit obligation	Plan assets	Net liability (asset)	Defined benefit obligation	Plan assets	Net liability (asset)	Defined benefit obligation	Plan assets	Net liability (asset)
Balance at the beginning	970	895	75	761	732	29	766	620	146
Current service cost	30	-	30	26	-	26	24	-	24
Interest income or expense	79	75	4	70	69	1	63	50	13
Contributions by plan participants	-	-	-	-	-	-	-	-	-
Employer contributions	-	186	(186)	-	2	(2)	-	124	(124)
Past service costs (1)	-	-	-	(7)	-	(7)	-	-	-
Return on plan assets (2)	-	(140)	140	-	82	(82)	-	-	-
Remeasurements arising from changes in demographic assumptions	-	-	-	-	-	-	-	-	-
Remeasurements arising from changes in financial assumptions	(195)	-	(195)	92	-	92	8	15	(7)
Other actuarial gain and losses	(2)	-	(2)	16	-	16	-	-	-
Benefit payments	(28)	(28)	-	(26)	(26)	-	(23)	(23)	-
Settlement payments	-	-	-	-	-	-	(10)	-	(10)
Business combinations and disposals	-	-	-	-	-	-	-	-	-
Effect on changes in foreign exchange rates	(54)	(49)	(6)	38	37	1	(67)	(54)	(13)
Other effects	(1)	(1)	-	-	-	-	-	-	-
Balance at the end	799	938	(140)	970	895	75	761	732	29

(1) Including gains and losses arising from settlements. (2) Excluding amounts included in "interest income or expense".

The valuation of these benefits and their accounting treatment in the accompanying consolidated financial statements follow the same methodology as that employed in the valuation of pension commitments.

Plan assets

To manage the assets associated with defined benefit plans, the companies of the BBVA Group have established investment policies designed according to criteria of prudence and minimizing the financial risks associated with plan assets.

The investment policy consists of investing in a low risk and diversified portfolio of assets with maturities consistent with the term of the benefit obligation and which, together with contributions made to the plan, will be sufficient to meet benefit payments when due, thus mitigating the plans‘ risks.

In those countries where plan assets are held in pension funds or trusts, the investment policy is developed consistently with local regulation. When selecting specific assets, current market conditions, the risk profile of the assets and their future market outlook are all taken into consideration. In all the cases, the selection of assets takes into consideration the term of the benefit obligations as well as short-term liquidity requirements.

As of December 31, 2013 the plan assets covering these commitments were almost entirely made up of fixed-income securities. The table below shows their allocation at the end of 2013:

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Plan assets breakdown	Plan assets breakdown
	2013
	Cash or cash equivalents	35
Other debt securities (Goverment bonds)	1.591
Asset-backed securities	101
Insurance contracts	385
Total	2.113
Of which:
Debt securities issued by BBVA	15

All of the debt securities in the table above have quoted market prices in active markets.

The estimated benefit payments over the next ten years for all the entities in Spain, Mexico and the United States are as follows:

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Estimated benefit payments	Millions of Euros
	2014	2015	2016	2017	2018	2019-2023
	Commitments in Spain	782	713	645	572	491	1,496
Commitments in Mexico	67	69	75	81	87	511
Commitments in The United States	11	11	12	12	13	78
Total	859	794	732	665	591	2,084