Provisions

The breakdown of the changes of the balance under this heading is as follows:

• 23.1

  Pensions and other defined benefit post-employment obligations

• Provisions for pensions and similar obligations – Defined benefit post-employment plans

  The Group’s defined benefit post-employment benefit obligations are as follows:

  1

  Part of the commitments with employees and former employees of CaixaBank are covered using insurance policies with Group or non-Group insurance companies, mainly from merger processes. In this case, CaixaBank is the insurance policyholder, and the contracts are managed by each insurance company, which also assumes the risks.

  2

  The rest of the obligations vested on the business in Spain arise from the CaixaBank Employment Pension Plan, which features various subplans. These subplans are integrated into two pension funds, namely the fund Pensions Caixa 30, a pension fund that which combines a greater number of holders and beneficiaries. The pension funds insure their defined benefit commitments through different insurance contracts, the policyholder of which is the Pension Plan Control Committee, the majority of which are with VidaCaixa. CaixaBank does not control the Pension funds into which these subplans are integrated, although it holds a minority representation on the Control Committees established in each of them.

  3

  Since most of the defined benefit commitments are covered through the pension funds or through insurance policies taken out directly by CaixaBank – the purpose of which is to ensure the provisions payable by the beneficiaries are equivalent to the provisions insured under the policies taken out – the Group is not exposed to market volatilities and unusual market movements. At different closures, the fair value of the policies taken out directly with VidaCaixa or other companies, and that of pension fund assets (mainly covered through insurance policies), is calculated with a uniform assessment methodology, as laid down in the accounting standard.

  If an insurance policy is a CaixaBank Employment Pension Plan asset and its flows exactly match the amount and timing of the benefits payable under the plan, the fair value of these insurance policies is deemed to be the present value of the related obligations. There will only be a defined benefit net liability when certain commitments are not insured by CaixaBank or the pension fund, for example, longevity queues for which the insurers have not been able to find financial instruments with a sufficiently long duration that replicate the guaranteed payments. Otherwise an asset would be produced as a net position.

  Whilst the insurance policies taken out with insurers external to the Group and the value of the assets held through the Pension Funds are presented in net form on the balance sheet, given that they are eligible assets of the plan and are used to settle the obligations assumed, the fair value of the other policies taken out directly by CaixaBank with VidaCaixa is eliminated in the consolidation process, with the integration of the financial investments of VidaCaixa under the policies in the various heading of the consolidated balance sheet.

  4

  Meanwhile, BPI has assumed all the obligations externalised in the “Fundo de Pensoes Banco BPI” pension fund, and recognises the present value of the obligations, net of the fair value of plan assets.

  The breakdown of the changes of the balance under this heading is as follows:

  Changes in provisions for penseions and similar obligations (Millions of euros)
  	Defined benefit obligations (A)			Fair value of assets involved (B)			Other assets (C)			Net (asset)/liability for long term commitments (A+B+C)
  	2019	2018	2017	2019	2018	2017	2019	2018	2017	2019	2018	2017
  Opening balance	(3,673)	(3,759)	(2,104)	3,230	3,168	1,567	(15)	(7)		(458)	(598)	(537)
  Interest cost (income)	(53)	(63)	(61)	51	59	56				(2)	(4)	(5)
  Components of cost of defined benefit recognised in profit or loss	(53)	(63)	(61)	51	59	56				(2)	(4)	(5)
  Actuarial (gains)/losses arising from demographic assumptions	(24)	51	(95)	179	48	145				155	99	50
  Actuarial gains/(Losses) arising from financial assumptions	(356)	(7)	(80)	92	16	23				(264)	9	(57)
  Components of cost of defined benefit recognised in equity	(380)	44	(175)	271	64	168				(109)	108	(7)
  Plan contributions				21	14	51				21	14	51
  Plan payments	189	169	123	(162)	(146)	(100)				27	23	23
  Payments	2	2	40	(2)	(2)	(41)						(1)
  Additions due to business combinations (Note 7)			(1,465)			1,431						(34)
  Transactions	(75)	(66)	(117)	70	73	36	5	(8)	(7)		(1)	(88)
  Other	116	105	(1,419)	(73)	(61)	1,377		(8)	(7)	48	36	(49)
  Closing balance	(3,990)	(3,673)	(3,759)	3,479	3,230	3,168	(15)	(15)	(7)	(521)	(458)	(598)
  Of which: Vested obligations	(3,286)	(3,068)	(3,147)
  Of which: Non-vested obligations	(704)	(605)	(612)
  Of which: investments in real estate assets				390	319	348
  Of which: investments in equity instruments				215	187	521
  Of which: investments in debt instruments				1,139	1,017	360
  Of which: arranged through insurance policies				1,659	1,568	1,551
  Of which: investments in other assets				76	139	388

  The present value of defined benefit obligations was calculated using the following criteria:

  • The “projected unit credit” accrual method has been used, which considers each year of service as giving rise to one additional unit of benefit entitlement and measures each unit separately.
  • The estimated retirement age of each employee is the first age at which the employee has the right to retire or the age determined in the agreements, as applicable.
  • The actuarial and financial assumptions used in the measurement are unbiased and mutually compatible.

  The assumptions used in the calculations regarding business in Spain are as follows:

  Actuarial and financial assumptions in Spain
  	2019	2018	2017
  Discount rate of post-employment benefits (1)	0.98%	1.64%	1.66%
  Long-term benefit discount rate (1)	-0.02%	0.05%	0.12%
  Mortality tables	PERM-F/2000 - P	PERM-F/2000 - P	PERM-F/2000 - P
  Annual pension review rate (2)	0% - 2%	0% - 2%	0% - 2%
  Annual cumulative CPI (3)	1.90%	1.2% 2018; 1.8% 2019 and onwards	1.2% 2017; 1.8% 2018; 1.8% 2019 and onwards
  Annual salary increase rate	CPI + 0.5%	1.25% 2018 CPI + 0.5% 2019 and onwards	1.75% 2017; 2% 2018; CPI + 0.5% 2019 and onwards

  (1) ) Using a rate curve based on high-rated corporate bonds, with the same currency and terms as the commitments assumed. Rate informed on the basis of the weighted average term of these commitments.
  (2) Depending on each obligation.
  (3) Using the Spanish zero coupon inflation curve in 2019. Rate informed on the basis of the weighted average term of the commitments.

  The assumptions used in the calculations regarding BPI's business in Portugal are as follows:

  Actuarial and financial assumptions in Portugal
  	31-12-2019	31-12-2018	31-12-2017
  Discount rate (1)	1.34%	1.97%	2.00%
  Mortality tables for males	TV 88/90	TV 88/90	TV 88/90
  Mortality tables for females	TV 88/90 - 3 years	TV 88/90 - 3 years	TV 88/90 - 3 years
  Annual pension review rate	0.40%	0.50%	0.50%
  Annual salary increase rate	[0.9 - 1.9] %	[1 - 2] %	[1 - 2] %

  (1) Rate obtained by using a rate curve based on high-rated corporate bonds, with the same currency and terms as the commitments assumed.

  Actuarial valuation of the pension commitments attributed to businesses in Spain and Portugal is carried out by qualified actuaries independent of CaixaBank.

  Additionally, in order to preserve the governance of the valuation and the management of the risks inherent to the acceptance in these commitments, CaixaBank has established an activity framework where the ALCO manages hedging proposals for these risks and the Global Risk Committee approves any changes to the criteria to measure the liabilities reflected in these commitments for businesses in Spain.

  Below follows a sensitivity analysis of the value of obligations based on the main assumptions used in the actuarial valuation. To determine this sensitivity the calculation of the value of the obligations is replicated, changing the specific variable and maintaining the remaining actuarial and financial assumptions unchanged. One drawback of this method is that it is unlikely that a change will occur in one variable alone as some of the variables may be correlated:

  Analysis of the sensitivity of the obligations (Millions of euros)
  	Spain		Portugal
  	+50 pb	-50 pb	+50 pb	-50 pb
  Discount rate	(29)	32	(150)	171
  Annual pension review rate	10	(9)	231	(204)

  The estimate of the fair value of insurance contracts linked to pensions taken out directly by CaixaBank with VidaCaixa or other companies and of the value of the pension fund assets (also mainly insurance policies) takes into account the value of future guaranteed payments discounted from the same rate curve used for the obligations. Therefore, since the expected flows of payments are matched with those deriving from the policies, the possible fair changes – at the close of the financial year – in the discount rate would have a similar effect on the value of the Group's gross obligations and on the fair value of insurance contracts linked to pensions and the fair value of assets held through pension funds.

  Consistent with the provision of Note 2.12, the sensitivity of the obligations has only been calculated when certain commitments are not insured by CaixaBank or the pension fund, for example, certain aforementioned longevity queues for business in Spain.

  The estimated payment of the provisions planned for the next 10 years is stated below:

  Estimated payments of post employment (Millions of euros)
  	2020	2021	2022	2023	2024	2025 - 2029
  Spain (1)	27	27	27	27	27	128
  Portugal	56	56	56	56	55	270

  (1) Excluding insured provisions to be paid directly by VidaCaixa to the Pension Funds.

• 23.2

  Provisions for other employee remuneration

• The Group has funds to cover the commitments of its discontinuation programmes, both in terms of salaries and other social costs, from the moment of termination until reaching the age established in the agreements. Funds are also in place covering length of service bonuses and other obligations with existing personnel. The main training programmes for which funds are kept are as follows:

  Voluntary redundancy schemes (Millions of euros)
  	Year recognised	Number of people	Initial provision
  Labour agreement 17-07-2014	2014	434	182
  Labour agreement for Barclays Bank personnel restructuring 2015	2015	968	187
  Labour agreement 29-06-2015 (territorial reorganisation of the workforce)	2015	700	284
  Paid early retirements and resignations 16-04-2016	2016	371	160
  Labour agreement 29-07-2016	2016	401	121
  Paid early retirements and resignations 10-01-2017	2017	350	152
  Labour agreement 27-04-2017 - BPI	2017	613	107
  Labour agreement 28-04-2017 - Discontinuations 2017	2017	630	311
  Labour agreement 28-04-2017 - Discontinuations 2018	2018	151	67
  Labour agreement 08-05-2019	2019	2,023	978

  On 31 January 2020, a Labour Agreement on Incentivised Voluntary Terminations was reached, which would affect a potential group of 376 employees formed of employees born in and before 1962, who work in Barcelona and Teruel. The budgetary allowance of approximately EUR 100 million outlined in the operational plan for these incentivised voluntary terminations is based on percentages of adhesion to previous incentivised voluntary termination processes, and it is estimated that 209 people would join the programme. The provision will be recorded in the first quarter of 2020.

  The breakdown of the changes of the balance under this heading is as follows:

  Reconciliation of balances of other long term employee benefits (Millions of euros)
  	Net (asset)/liability for defined benefit obligations
  	2019	2018	2017
  Opening balance	1,072	1,223	973
  Included in profit or loss
  Service cost for the current year	2	5	(2)
  Service cost for the current year	978	78	472
  Interest net cost (income)	1	2	2
  Revaluations (gains)/losses	(2)	(5)	(8)
  Components of cost of defined benefit recognised in profit or loss	979	80	464
  Other
  Plan payments	(324)	(231)	(213)
  Additions due to business combinations (Note 7)			3
  Transactions	(17)		(4)
  Total other	(341)	(231)	(214)
  Closing balance	1,710	1,072	1,223
  Of which: With pre-retired personnel	449	633	731
  Of which: Termination benefits	962	229	253
  Of which: Supplementary guarantees and special agreements	181	91	122
  Of which: Length of service bonuses and other	60	59	56
  Of which: Other commitments deriving from Barclays Bank	58	60	61

• 23.3

  Provisions for pending legal issues and tax litigation

• Given the nature of these obligations, the expected timing of outflows of funds embodying economic benefits, should they arise, is uncertain.

  Provisions for pending legal issues

  The Group is subject to claims. Therefore, it is party to certain legal proceedings arising from the normal course of its business, including claims in connection with lending activities, relationships with employees and other commercial or tax matters. Accordingly, the outcome and expected schedule of outflows of funds from court proceedings must be considered uncertain.

  At 31 December 2019, the Group considers that it had reliably estimated the obligations arising from each proceeding and had recognised, where appropriate, sufficient provisions to reasonably cover the liabilities that may arise as a result of these tax and legal situations. It also considers that any responsibility arising from these procedures will not, when considered individually, have a material adverse effect on the Group’s businesses, financial position or results of operations.

  

  Reference rate for mortgages in Spain

  In relation to the reference rate for mortgages in Spain, a preliminary ruling has been submitted to the Court of Justice of the European Union (CJEU) that challenges the validity of the mortgage loan contracts subject to the official reference rate – called IRPH (Spanish reference rate for mortgages) –, due to an alleged lack of transparency.

  The legal matter of the debate is the transparency test based on article 4.2 of Directive 93/13, in cases when the borrower is a consumer. Given that the IRPH is the price of the contract and it is included in the definition of the main purpose of the contract, it must be written using clear and understandable language to enable the consumer to use clear and comprehensible criteria to assess the economic consequences on them deriving from the contract.

  Although the European Commission considers that transparency requires a full explanation of the characteristics of the index and how it works, comparisons shown of available or official indexes, the historical evolution and the forecast of mortgage indexes set out in detail, etc., the Kingdom of Spain, the United Kingdom and the banking institution that is part of the procedure deem an official index to be public, transparent, and supervised by the statutory authorities and the essential legal instrument required for comparing prices in Spain is the APR (annual percentage rate), comprising the total price and the financial burden of the loan that is formed by the expenses, fees, index and differential applied. .

  The aforementioned preliminary ruling was made by a Magistrates Court several months after the Spanish High Court passed its judgment declaring that these contracts were valid, on 14 December 2017.

  On 10 September 2019 the advocate general issued an opinion which, in light of the aspirations of the European Commission, confirms the transparency of the index and the absence of the need to provide future scenarios of possible performance of the same and comparisons between different indexes, highlighting the need to contribute regulated pre-contractual information to the current regulations.

  The recent opinion of the advocate general, the existence of the prior judgment made by the Spanish High Court, the fact that the IRPH is an official reference rate, published and managed by the Bank of Spain, the existence of jurisprudence of the CJEU that confirms the transparency of the contracts linked to other official reference rates, and the existence of an APR (which is compulsorily reported to consumers, and which enables an understanding of the financial burden and the comparison of different mortgage offers, regardless of the reference index applied), are facts that, with the currently available information, result in a low probability of an adverse final judgment.

  Similarly, is difficult to quantify, in advance, the impact of a judgment of the CJEU which, dissociating from the opinion of the advocate general and following the thesis of the European Commission, was ultimately unfavourable, since it would depend on a set of highly uncertain factors, among which the most relevant are as follows: i) what the rule to replace the aforementioned index should be (in other words, how the loan interest should be calculated), ii) whether it should be applied retroactively or not and until what date (if the CJEU ruling concludes that it must be applied retroactively), iii) as well as any well-founded claims filed as regards the lack of transparency. In such an adverse scenario, the impact would be material.

  On 31 December 2019, the total amount of mortgages up to date with payments indexed to the IRPH (mortgage base rate) with individuals is approximately EUR 6,060 million (the majority of which are with consumers).

  Ongoing investigation in Spanish Central Court (Juzgado de Instrucción Central) No.2 (Preliminary Proceedings 16/18)

  In April 2018, the Anti-Corruption Prosecutor's Office started legal proceedings against CaixaBank, the Entity's former head of Regulatory Compliance and 11 employees, for events that could be deemed to constitute a money laundering offence, primarily due to the activity carried out in 10 branches of CaixaBank by alleged members of certain organisations formed of Chinese nationals, who allegedly conducted fraud against the Spanish Treasury between 2011 and 2015. The procedure is currently in its investigation phase and neither CaixaBank nor its legal advisers consider the risk associated with these criminal proceedings as being likely to arise. The potential impact of these events is not currently considered material, although CaixaBank is exposed to reputational risk due to these ongoing proceedings.

  Ongoing investigation in Spanish Central Court (Juzgado de Instrucción Central) No.5 (Preliminary Proceedings 67/18)

  As a result of a private prosecution, a set of corporate transactions in 2015 and 2016, together with an asset transaction, as alleged by the referred prosecution, are under investigation, being the later however non-existent (since it was never granted).Without prejudice to the reputational damage resulting from any judicial investigation, it is not considered as probable that an economical risk linked to this criminal proceeding would materialise or cause a negative effect.

  Provisions for taxes

  The detail of the balance of this heading in the balance sheet is as follows:

  Breakdown for provisions for taxes (Millions of euros)
  	31-12-2019	31-12-2018	31-12-2017
  Income tax assessments for years 2004 to 2006	33	33	33
  Income tax assessments for years 2007 to 2009	12	12	12
  Income tax assessments for years 2010 to 2012	13	13	15
  Tax on deposits	18	18	53
  Others	206	209	186
  Total	282	285	299

  The main tax procedures ongoing at 2019 year-end are as follows:

  1

  In 2017, the review actions for 2010 to 2012 were completed with no significant impact. Disputed Corporation Tax assessments are under appeal with the National Criminal Court, and disputed value-added tax assessments have been subject to an appeal against the decision of the tax authorities with the Central Economic-Administrative Court.

  2

  In 2011, the Tax Inspection Bureau started to review 'la Caixa' in relation to financial years 2007 to 2009 for the main taxes applicable, which was completed in 2013. Disputed tax assessments are under appeal with the Spanish High Court.

  3

  In 2008, the Tax Inspection Bureau started to review 'la Caixa' in relation to financial years 2004 to 2006 for the main taxes applicable, which was completed in 2010. Disputed tax assessments are under appeal with the Spanish High Court.

  The Group has allocated provisions to cover the maximum contingencies that may arise in relation to income tax and VAT assessments signed under protest.

• 23.4

  Provision for guarantees and commitments given

• This heading includes the provisions for credit risk of the guarantees and contingent commitments given (Note 26).

• 23.5

  Other provisions

• The content of the main sections of this heading is set out below. The expected timing of outflows of funds embodying economic benefits, should they arise, is uncertain.

  Losses from agreements not formalised and other risks

  Class action brought by the ADICAE association (floor clauses)

  The legal procedure in which class action for discontinuance was carried out by ADICAE (the Association of Banking and Insurance Consumers) in application of the floor causes that exist in some of the entity's mortgages, are currently in the phase of Reversal and Procedural Infringement before the Spanish Supreme Court.

  As stated in the previous financial statements, the risk associated with this matter was managed with specific coverage of EUR 625 million, and a team and specific procedures were developed to comply with the requests filed under the framework of Royal Decree-Law 1/2017, of 20 January, on urgent measures to protect consumers against floor causes.

  The disbursements accumulated in 2019 and associated with this procedure have reached EUR 102 million.

  With the available information, the risk derived from the disbursements that could arise due to these litigation proceedings is reasonably covered by the corresponding provisions.

  Procedures of the Portuguese Resolution Fund (PRF)

  On 3 August 2014, the Bank of Portugal applied a resolution procedure to Banco Espírito Santo, SA (BES) through the transfer of its net assets and under the management of Novo Banco, SA (Novo Banco). Within the framework of this procedure, the PRF completed a capital increase in Novo Banco for an amount of EUR 4,900 million, becoming the sole shareholder. The increase was financed through loans to the FRP for an amount of EUR 4,600 million, EUR 3,900 million of which was granted by the Portuguese State and EUR 700 million granted by a banking syndicate through the Portuguese financial institutions, including BPI with EUR 116 million.

  On 19 December 2015, the Bank of Portugal initiated a procedure to put Banco Internacional do Funchal (Banif) into resolution, which came to a head with i) the partial sale of its assets for EUR 150 million to Banco Santander Totta, S.A.; and ii) the contribution of the rest of its assets that were not sold to Oitante, SA. The resolution was financed through the issuance of EUR 746 million of debt, guaranteed by the PRF and the Portuguese State as a counter-guarantee. The operation also included the ultimate guarantee of the Portuguese State amounting to EUR 2,255 million intended to cover future contingencies.

  For the reimbursement of the PRF obligations with the Portuguese State (in the form of loans and guarantees) in relation to resolution measures adopted, the FRP has contributed ordinary instruments through the various contributions of the banking sector. Along these lines, the conditions of the loans with the PRF have been amended to bring them in line with the collection of the aforementioned contributions; there is no foreseen need to turn to additional contributions from the banking sector.

  In 2017, the Bank of Portugal chose Lone Star to conclude the sale of Novo Banco, after which the PRF would hold 25% of the share capital and certain contingent capital mechanisms would be established by the shareholders. To cover the contingent risk, the PRF has the financial means of the Portuguese State, the reimbursement of which – where applicable – would have repercussions on the contributory efforts of the banking sector.

  At this time, it is not possible to estimate the possible effects for the Resolution Funds deriving from: i) the sale of the shareholding in Novo Bank; ii) the application of the principle that none of the creditors of a credit institution under resolution may assume a loss greater than that which it would have assumed if that entity had gone into liquidation; iii) the guarantee granted to the bonds issued by Oitante and iv) other liabilities that – it is concluded – must be assumed by PRF.

  Notwithstanding the possibility considered in the applicable law for the collection of special contributions, given the renegotiation of the terms of the loans granted to the PRF, which include BPI, and the public statement made by the PRF and the Office of the Minister of Finance of Portugal, declaring that this possibility will not be used, the consolidated financial statements of 2019 reflect the expectation of the Administrators that the Bank will not have make special contributions or any other type of extraordinary contributions to finance the resolution measures applied to BES and Banif or any other contingent liability or liabilities assumed by the PRF.

  Any change in this regard may have material implications for the financial statements of the Group.