UPM Annual Report 2016

120-121 / 176

ACCOUNTS
UPM Annual Report 2016 UPM Annual Report 2016 120 121
In brief Strategy Businesses Stakeholders Governance Accounts
CONTENTS
Pension and other
post-employment benefits 2016
Pension and other
post-employment benefits 2015
EURm
PRESENT
VALUE OF
OBLIGATION
FAIR VALUE
OF PLAN
ASSETS
NET DEFINED
BENEFIT
LIABILITY/
(ASSET)
PRESENT
VALUE OF
OBLIGATION
FAIR VALUE
OF PLAN
ASSETS
NET DEFINED
BENEFIT
LIABILITY/
(ASSET)
Carrying value, at 1 January 1,470 –851 619 1,581 –794 787
Current service cost 12 – 12 15 – 15
Past service cost –6 – –6 2 – 2
Interest expense (+) income (–) 37 –22 15 36 –21 15
Total included in employee costs (Note 3.1) 43 –22 21 53 –21 32
Actuarial gains and losses arising from changes in
demographic assumptions –1 – –1 13 – 13
Actuarial gains and losses arising from changes in
financial assumptions 169 – 169 –158 – –158
Actuarial gains and losses arising from experience
adjustments 19 – 19 8 – 8
Return on plan assets, excluding amounts included in
interest expense (+) income (–) – –67 –67 – –16 –16
Total remeasurement gains (–) and losses (+) included in
other comprehensive income 187 –67 120 –137 –16 –153
Benefits paid –56 56 – –59 59 –
Contributions by the employer – –33 –33 – –55 –55
Translation differences –71 59 –12 32 –24 8
Carrying value, at 31 December 1,573 –858 714 1,470 –851 619
Present value of obligation and fair value of plan assets
most significant defined benefit pension plan in Finland for UPM.
In Finland, the reform of TyEL will come into effect as of beginning
of 2017. The effect of the reform to the defined benefit obligation of
the TyEL foundation was recognised in 2015 as a past service cost
amounting to EUR 4 million.
UK
In the UK, the group operates a legacy defined benefit scheme
providing benefits that are linked to the salary level near retirement
age or an earlier date of leaving service. The scheme is closed both
for new members and future accrual for old members. Part of the
scheme is a defined contribution plan and is open to all current
employees. The UK pension scheme operates under a single trust
which is independent from the group.
Germany
In Germany employees within defined benefit arrangements are
entitled to annual pensions on retirement based on their service and
final salary. All significant defined benefit plans are closed for new
employees.
Actuarial risks
Defined benefit plans typically expose the group to the following
actuarial risks:
Investment risk (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 96% of total asset
values in defined benefit plans within group.
Interest risk
Discount rates used in calculations are based on high-quality
corporate bond yield curves in currency in which the benefits are
paid. A decrease in the discount rate would increase the plan
liabilities. The maturities of yields are reflecting the durations of the
underlying obligations. The weighted average duration of group’s
defined benefit obligation is 17 years (17 years) at the end of 2016.
Inflation risk
In the Finnish plan, the inflation risk is not significant as changes in the
inflation assumption are mainly covered by the TyEL 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 38 million. In Germany the pensions have to be adjusted in
accordance with the Consumer Price Index.
Salary risk
The present value of the net retirement benefit assets and liabilities
is calculated by reference to the expected future salaries of plan
participants. An increase in the salary of the plan participants would
increase the plan liabilities. In Finland, the salary risk is minor as well
as in UK, where the changes in salary levels have no impact on the
funding position as all defined benefit arrangements in UK are
closed to future accrual. In Germany, an increase of 0.5% in
expected future salaries would increase the obligation by EUR 16
million.
Life expectancy
Adjustments in mortality assumption have an impact on group’s
defined benefit obligation. An increase in life expectancy by one
year will increase the obligation in Finland by EUR 13 million,
in the UK by EUR 17 million and in Germany by EUR 21 million.
FINLAND UK GERMANY OTHER COUNTRIES
2016 2015 2016 2015 2016 2015 2016 2015
Discount rate % 1.60 2.13 2.60 3.60 1.77 2.20 2.52 2.94
Inflation rate % 1.64 1.59 3.35 3.25 1.70 1.70 1.88 2.05
Rate of salary increase % 1.64 1.59 n/a n/a 2.50 2.50 2.55 2.42
Rate of pension increase % 0.88 0.88 3.20 3.10 1.70 1.70 0.98 1.01
Expected average remaining working years of
participants 11.8 13.7 13.6 13.0 10.6 11.0 10.5 10.5
EURm 0.5% INCREASE 0.5% DECREASE
2016 2015 2016 2015
Discount rate % –125 –112 144 126
Rate of salary increase % 18 17 –17 –15
Rate of pension increase % 77 69 –75 –63
Life expectancy + 1 year 53 45 n/a n/a
A negative change indicates a decrease in the defined benefit obligation.
A positive change indicates an increase in the defined benefit obligation.
to be updated
Money market 1%
Debt instruments
31%
Equity instruments 48%
Property 8%
Plan assets by categories 2016
Assets held by
insurance companies 8%
Other 4%
to be updated
Money market 1%
Debt instruments
31%
Equity instruments 51%
Property 9%
Plan assets by categories 2015
Assets held by
insurance companies 8%
EURm 2016 2015
Quoted Unquoted Quoted Unquoted
Money market 11 – 8 –
Debt instruments 267 – 267 –
Equity instruments 411 – 436 –
Property 36 33 42 34
Assets held by
insurance companies – 64 – 64
Other – 35 – –
Total 726 132 753 98
Plan assets include the company’s shares with a fair value of EUR 1 million
(1 million).
In 2017 contributions of EUR 47 million are expected to be paid to
group’s defined benefit plans. In 2016 contributions of EUR 33 million
were paid to group’s defined benefit plans.
Actuarial assumptions
The weighted average principal assumptions used in the valuations of the defined benefit obligations are detailed below:
Sensitivity analysis of defined benefit obligations
The sensitivity analysis shows the effect of the change in assumption.
The analysis assume that all other assumptions remain unchanged.
The projected unit credit method has been applied when calculating
the obligation as well as these sensitivities.
Plan assets by categories at 31 December
Key estimates and judgements
Several actuarial assumptions are used in calculating the expense
and liability related to the plans. Statistical information used may
differ materially from actual results due to, among others, changing
market and economic conditions, or changes in service period of
plan participants. Significant differences in actual experience or
significant changes in assumptions may affect the future amounts
of the defined benefit obligation and future expense.