Employees

(33) Provisions for employee benefits

Provisions for employee benefits are composed as follows:

Provisions for other employee benefits included 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 employees. Newly hired employees are only offered plans whose benefits are based on contributions and the return on their investments. Some of these plans require the employer to guarantee a minimum return on investment. Other plans are generally based on the employee’s years of service and salary. Pension obligations comprise both obligations from current pensions and accrued benefits for pensions payable in the future.

The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was derived as follows:

The increase in provisions was mainly due to the reduction in the discount rates in the euro area and Switzerland.

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 are not based on 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 by Merck. There were no statutory minimum funding obligations in Germany.

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 € 147 million in the year under review (2022: loss of € 395 million).

Covering the benefit obligations with financial assets represents a means of providing for future cash outflows, which are required by law in some countries (for example, Switzerland and the United Kingdom) and voluntarily in other countries (for example, Germany).

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 assets used by Group companies.

Employer contributions to plan assets and direct payments to plan beneficiaries for the next year are expected to amount to € 48 million (2022: € 42 million) and € 96 million (2022: € 95 million) respectively.

The expected payments of undiscounted benefits under the plans were as follows:

The weighted duration of defined benefit obligations amounted to 17 years (2022: 16 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 at Merck are aligned with target achievement based on key performance indicators as well as the long-term performance of Merck shares. Certain employees are eligible to receive a certain number of virtual shares – Merck share units (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 Merck shares 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 financial key performance indicators (KPIs). In addition to the financial KPIs, a sustainability factor is included in performance measurement for tranches issued from fiscal 2022 onward.

The calculation is based on the performance of the Merck share price 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 these financial 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.

For tranches issued from fiscal 2022 onward, the MSUs measured on the basis of financial targets are multiplied by a sustainability factor composed of the three sustainability criteria: “Dedicated to human progress”, “Partnering for sustainable business impact”, and “Reducing our ecological footprint”.

The weighting of the three sustainability criteria for the 2023 LTIP tranche is as follows:

• “Dedicated to human progress” 30 %
• “Partnering for sustainable business impact” 30 %
• “Reducing our ecological footprint” 40 %

The sustainability factor can range from 0.8 to 1.2. This means that, depending on the result of the financial KPIs (0 % to -150 %) and the sustainability factor, the eligible participants are granted between 0 % and 180 % of the MSUs they could be eligible to receive at the end of the respective performance cycle.

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 Merck shares 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 Merck share units (MSUs) for the individual tranches:

The value of the provisions as of December 31, 2023, was € 7 million (December 31, 2022: € 97 million). Net income of € 35 million was generated in fiscal 2023 (2022: net expenses of € 70 million). The three-year tranche issued in fiscal 2020 ended at the end of fiscal 2022; an amount of € 160 million was paid out in fiscal 2023. The three-year tranche issued in fiscal 2021 ended at the end of 2023 and was reclassified from current provisions for employee benefits to other current non-financial liabilities as of December 31, 2023. The tranche is expected to result in a payout of € 54 million in fiscal 2024. At the reporting date, the average closing price of Merck shares in Xetra^® trading over the last 60 trading days was € 149.40.