UPM annual report 2014

UPM Annual Report 2014

111

112

CONTENTS

ACCOUNTS

Main risk areas related to defined benefit plans

The main risks related to the Group’s defined benefit plans are changes

in discount rate, asset volatility, inflation, changes in salaries and longev-

ities of the beneficiaries.

Discount rates

The discount rates are based on corporate bond yields as at reporting

date. A decrease in yields increases the defined benefit obligation. The

decrease of 0.5% in discount rate would increase Group’s defined benefit

obligation by EUR 149 million.

Asset volatility

The Group is exposed to changes of assets’ values especially in the

investments of the foundations and schemes in Finland and in the UK.

The asset values of these arrangements constitute 90% of total asset

values in defined benefit plans within Group.

Inflation risk

In Finland, the plan’s benefits in payment are tied to TyEL index which

depends 80% on inflation and 20% on common salary index. Higher

inflation increases the TyEL index which increases the employer’s pay-

ments to the pooling system. Index increments do not increase directly

the plan’s liabilities as they are covered through the pooling system.

In the UK the pensions in payment are tied to Retail Price Index

whilst being tied to Consumer Price Index during deferment. An

increase of 0.5% in indexes will increase the liabilities by some

EUR 35 million.

In Germany the pensions have to be adjusted in accordance with the

Consumer Price Index.

Salary risk

In Finland the salary risk is related to 8% of employees that are insured

through TyEL foundation.

As all UK defined benefit arrangements are closed to future accrual,

changes in salary levels have no impact on the funding position.

In Germany the salaries affect directly to benefit cost in part of the

plans and to part of the plans salary changes have no impact.

Life expectancy

Adjustments in mortality assumption have an impact on Group’s defined

benefit obligation. An increase in life expectancy by one year will in-

crease liabilities in Finland of EUR 16 million, in the UK of EUR

15 million and in Germany of EUR 24 million.

The significant weighted actuarial assumptions used as at 31 December

Finland

Germany

Other countries

2014

2013

2014

2013

2014

2013

2014

2013

Discount rate %

1.56

2.95

1.62

2.95

3.50

4.50

2.42

3.62

Inflation rate %

1.25

2.00

3.35

2.25

2.12

2.05

Rate of salary increase %

1.50

2.50

N/A N/A 2.46

2.63

Rate of pension increase %

2.21

2.26

2.00

3.20

3.25

1.00

1.10

Expected average remaining working years of participants

10.3

12.8

12.6

12.0

10.9

9.1

The sensitivity analysis of the defined benefit obligation to changes in the significant weighted assumptions

Impact on defined benefit obligation

Change in assumption

Increase in assumption

Decrease in assumption

Discount rate %

0.5%

Decrease by 8.1%

Increase by 9.4%

Rate of salary increase %

0.5%

Increase by 1.3%

Decrease by 1.2%

Rate of pension increase %

0.5%

Increase by 4.9%

Decrease by 4.6%

Life expectancy

Increase by 1 year

Increase by 3.6%

–

The weighted average duration of defined benefit obligation is 17.4 years.

The above analyses assume that assumption changes occur in isolation, holding all other assumptions constant. The same method (projected unit

method) has been applied when calculating the pension liability as well as these sensitivities.

The main categories of pension and other post-employment benefit plan assets

2014

2013

Quoted % Unquoted % Total % Quoted % Unquoted % Total %

Money market

Europe

–

Debt instruments

Europe

–

Other

–

Equity instruments

Europe

–

Other

–

Property

Europe

–

Total

100

In Finland, plan assets include the company's ordinary shares with a fair value of EUR 0.7 million (0.7 million). In 2015 contributions to the Group's

defined pension plans are expected to be EUR 33 million and to other post-employment plans EUR 2 million.

30 Provisions

EURm

Restructuring

provisions

Termination

provisions

Environmental

provisions

Emission rights

provision

Other

provisions

Total

At 1 Jan. 2014

189

Additional provisions and increases

to existing provisions

115

Utilised during year

–10

–55

–2

–8

–3

–78

Unused amounts reversed

–5

–

–2

–12

At 31 Dec. 2014

109

214

At 1 Jan. 2013

207

Additional provisions and increases

to existing provisions

–

115

Reclassification

–3

–

Utilised during year

–25

–62

–3

–9

–3

–102

Unused amounts reversed

–14

–13

–2

–

–2

–31

At 31 Dec. 2013

189

Provisions

Restructuring provisions include charges related primarily to mill clo-

sures. Termination provisions are concerned with planned mill closures

and operational restructuring primarily in Germany, Finland, France

and the UK. In Finland provisions include also unemployment arrange-

ments and disability pensions. Unemployment pension provisions are

recognised 2–3 years before the granting and settlement of the pension.

In 2014, additions in provisions relate mainly to planned capacity

closures in UPM Paper ENA. In November, UPM announced the plan

to permanently close four of its paper machines: PM3 at UPM Chapelle,

PM1 at UPM Shotton, PM5 at UPM Jämsänkoski and PM2 at UPM

Kaukas. In addition, the restructuring measures have started in the

UPM Raflatac segment in April.

In 2013, additions in provisions are mainly related to restructuring

of UPM Docelles mill and closures of paper machines Rauma PM3 and

Ettringen PM4 in UPM Paper ENA segment and the restructuring in the

UPM Raflatac segment. In addition, provisions were recognised due to

the streamlining of global functions and other actions under UPM’s

profit improvement programme.

Environmental provisions include expenses relating to closed mills

and the remediation of industrial landfills.

The Group takes part in government programmes aimed at reducing

greenhouse gas emissions. In 2014, the Group has recognised provisions

amounting to EUR 12 million (9 million) to cover the obligation to

return emission rights. The Group possesses emission rights worth

EUR 43 million (11 million) as intangible assets. In 2013 UPM has rec-

ognised current receivables of EUR 14 million due to the delayed distri-

bution of 2013 emission rights.

Allocation between non-current and current provisions

As at 31 December

EURm

2014

2013

Non-current provisions

112

Current provisions

102

106

Total

214

189

31 Interest-bearing liabilities

As at 31 December

EURm

2014

2013

Non-current interest-bearing liabilities

Bonds

1,081

955

Loans from financial institutions

1,335

1,655

Pension loans

241

323

Finance lease liabilities

100

270

Derivative financial instruments

100

Other loans

191

171

Other liabilities

3,058

3,485

Current interest-bearing liabilities

Current portion of non-current liabilities

290

512

Derivative financial instruments

Other liabilities

406

643

Total interest-bearing liabilities

3,464

4,128