Note 15: Post-retirement benefit provisions

Post-retirement benefit provisions relate to defined benefit pension and other post-retirement benefits, including healthcare or welfare plans. We have a number of defined benefit pension plans. The largest pension plans are the ICI Pension Fund (ICIPF) and the AkzoNobel (CPS) Pension Scheme (CPS) in the UK which together account for 83 percent of defined benefit obligations (DBO) and 91 percent of plan assets. Other pension plans include the largely unfunded plans in Germany, the plans in the US and certain other smaller plans in the UK. The benefits of these pension plans are based primarily on years of service and employees’ compensation. The funding policy for the plans is consistent with local requirements in the countries of establishment. We also provide certain healthcare and life insurance benefits to retired employees, mainly in the US and the Netherlands.

Valuations of the obligations under the plans are carried out regularly by independent qualified actuaries. We accrue for the expected costs of providing such post-retirement benefits during the service years of the employees. Governance of the benefit plans is the responsibility of the Board Committee Pensions, a technical committee to the Board of Management. This committee provides oversight of the costs and risks of the plans including oversight of the impact of the plans on the company in terms of cash flow, pension expenses and the balance sheet, by the development and maintenance of policies on benefit design, funding, asset allocation and assumption setting.

Pension plans

Almost all of the defined benefit plans have been closed to new members since the early to mid-2000s, although in many plans long-serving employees continue to accrue benefits. For plans in the US, benefit accrual is frozen and employees participate in defined contribution plans for future service. In countries where plans are closed, new employees are eligible to join a defined contribution arrangement. In countries in high growth markets, pension schemes currently are not material. Unless mandated by law, it is our policy that any new plans are established as defined contribution plans.

The most significant risks that we run in relation to defined benefit plans are that investment returns fall short of expectations, decline in discount rates, that inflation exceeds expectations, and that retirees live longer than expected. The assets and liabilities of the funded plans are held outside of the company in a trust or a foundation, which is governed by a board of fiduciaries or trustees, depending on the legal arrangements in the country concerned. The primary objective with regard to the investment of pension plan assets is to ensure that each individual plan has sufficient funds available to satisfy future benefit obligations in accordance with local legal and legislative requirements. For this purpose, we work closely with plan fiduciaries to develop strategic asset allocation strategies. Asset liability modelling (ALM) studies are carried out periodically to analyse and understand the trade-off between expected investment returns, volatility of outcomes and the impact on cash contributions. We aim to strike a cautious balance between these factors in order to agree affordable contribution schedules with plan fiduciaries. Plan assets principally consist of long-term interest-earning investments and (investment funds with holdings primarily in) quoted equity securities. Our largest plans use derivatives (such as index futures, currency forward contracts and swaps) to reduce volatility of underlying variables, for efficient portfolio management and to improve the liability matching characteristics of the assets. However, derivatives are not used to gear our funds. Limits have been set on the use of derivatives which are periodically subject to review for compliance with the pension fund’s investment strategy. CPS has entered into an insurance contract with SwissRe to hedge longevity risk in respect of a portion of its pensioners (see the table at the end of this note).

In line with our pension/investment strategy, we seek to reduce risk in our pension plans over time. In 2013, our North American pension liabilities were significantly reduced by the following actions:

  • As a result of the Decorative Paints North America divestment in 2013, at the end of 2012 post-retirement balance sheet provisions of €107 million were classified as held for sale. The sale on April 1, 2013, resulted in the remeasurement and curtailment of US pension and other post-retirement liabilities (at a loss of €18 million) and the transfer to PPG of the Canadian pension and other post-retirement plans of Decorative Paints and former ICI
  • In September 2013, former employees with vested benefits in the US were offered the opportunity to take their benefits as a single lump sum immediately. Some 4,200 participants elected to take the cash sum reducing our liabilities by $113 million (€85 million) at a settlement loss of €4 million. This followed a similar exercise in December 2012
  • In December 2013, AkzoNobel settled pension entitlements of approximately 9,400 retirees and beneficiaries in the US by purchasing annuities from insurance company MetLife for an amount of $675 million (€490 million) thereby reducing the liabilities by $655 million (€475 million) with a €15 million settlement loss. To enable this transaction, AkzoNobel made a top-up contribution of $168 million (€127 million)

In addition, during 2012 and 2013 certain pension plans have been curtailed, which were not material. All of these actions generally will reduce expenses and employer contribution requirements into those plans in future years.

The remaining pension plans primarily represent defined contribution plans. This includes, among others, the Pension Fund APF in the Netherlands and the 401k Plan in the US. The ITP2 plan in Sweden is financed through insurance with the Alecta insurance company and is classified as a multi-employer defined benefit plan. AkzoNobel does not have access to sufficient information from Alecta to enable a defined benefit accounting treatment and hence it is accounted for as a defined contribution plan. Contributions in 2013 were €10 million (2012: €10 million). Alecta’s target funding ratio in 2013 was 140 percent although the actual ratio at September 2013 stood at 153 percent. There are also a small number of multi-employer plans in the US in which AkzoNobel participates with annual contributions totaling less than €1 million. These are also accounted for as defined contribution plans. The expenses of plans classified as defined contribution plans in AkzoNobel totaled €172 million in 2013 (2012: €180 million).

Other post-retirement benefit plans

AkzoNobel provides certain healthcare and life insurance benefits to retired employees, mainly in the US and the Netherlands. The risks to which the US healthcare plans expose AkzoNobel include the risk of future increases in the cost of healthcare which would increase the cost of maintaining the plans. The benefit payments to retirees under the Dutch plan are frozen. Both plans expose AkzoNobel to the risk of a further decline in long-term corporate bond rates, which increases the plan obligations, and longevity risk as the plans generally pay lifetime benefits.

Reconciliation balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

In € millions

 

DBO

 

Plan assets

 

Funded status

 

DBO

 

Plan assets

 

Funded status

Balance at the beginning of the period

 

(15,345)

 

14,605

 

(740)

 

(16,674)

 

15,378

 

(1,296)

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of income

 

 

 

 

 

 

 

 

 

 

 

 

Current service cost

 

(61)

 

 

(61)

 

(68)

 

 

(68)

Past service cost/curtailments

 

(8)

 

 

(8)

 

13

 

 

13

Settlements

 

66

 

(58)

 

8

 

584

 

(602)

 

(18)

Net (interest)/ income on net defined benefit (liability)/asset

 

(707)

 

704

 

(3)

 

(602)

 

581

 

(21)

Cost recognized in statement of income

 

(710)

 

646

 

(64)

 

(73)

 

(21)

 

(94)

 

 

 

 

 

 

 

 

 

 

 

 

 

Remeasurements

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial gain/(loss) due to liability experience

 

22

 

 

22

 

(92)

 

 

(92)

Actuarial gain/(loss) due to liability financial assumption changes

 

(1,418)

 

 

(1,418)

 

9

 

 

9

Actuarial gain/(loss) due to liability demographic assumption changes

 

(2)

 

 

(2)

 

17

 

 

17

Return on plan assets greater/(less) than discount rate

 

 

104

 

104

 

 

(128)

 

(128)

Remeasurement effects recognized in other comprehensive income

 

(1,398)

 

104

 

(1,294)

 

(66)

 

(128)

 

(194)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow

 

 

 

 

 

 

 

 

 

 

 

 

Employer contributions

 

 

767

 

767

 

 

568

 

568

Employee contributions

 

(6)

 

6

 

 

(5)

 

5

 

Benefits and administration costs paid from plan assets

 

1,055

 

(1,055)

 

 

962

 

(962)

 

Net cash flow

 

1,049

 

(282)

 

767

 

957

 

(389)

 

568

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/divestments/transfers

 

37

 

(25)

 

12

 

319

 

(266)

 

53

Changes in exchange rates

 

(307)

 

330

 

23

 

349

 

(326)

 

23

Total other

 

(270)

 

305

 

35

 

668

 

(592)

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period

 

(16,674)

 

15,378

 

(1,296)

 

(15,188)

 

14,248

 

(940)

Asset restriction

 

 

 

(2)

 

 

 

(2)

Medicare receivable

 

 

 

(3)

 

 

 

(2)

Net balance sheet provision

 

(16,674)

 

15,378

 

(1,301)

 

(15,188)

 

14,248

 

(944)

 

 

 

 

 

 

 

 

 

 

 

 

 

In the balance sheet under

 

 

 

 

 

 

 

 

 

 

 

 

Other financial non-current assets

 

 

 

 

 

841

 

 

 

 

 

483

Post-retirement benefit provisions

 

 

 

 

 

(1,942)

 

 

 

 

 

(1,237)

Current portion of provisions

 

 

 

 

 

(93)

 

 

 

 

 

(184)

Liabilities

 

 

 

 

 

(107)

 

 

 

 

 

(6)

Net balance sheet provision

 

 

 

 

 

(1,301)

 

 

 

 

 

(944)

In addition to the expenses, administrative expenses are incurred, especially for the UK pension funds, of €12 million (2012: €11 million), which are included in operating income. In addition, we directly incurred asset management expenses of €6 million (2012: €5 million), which have been included in other comprehensive income, as was the €1 million reduction of the restriction of asset recognition in 2012.

DBO at funded and unfunded pension plans

 

 

 

 

 

In € millions

 

2012

 

2013

Wholly or partly funded plans

 

15,934

 

14,591

Unfunded plans

 

347

 

295

Total

 

16,281

 

14,886

Plan assets

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

In € millions

 

Total

 

% of total

 

Total

 

% of total

Equities

 

2,328

 

15

 

1,824

 

13

Debt - fixed interest government bonds

 

2,795

 

18

 

2,635

 

18

Debt - index-linked government bonds

 

2,760

 

18

 

2,816

 

20

Debt - corporate and other bonds

 

5,001

 

33

 

4,339

 

30

Cash and cash equivalents

 

924

 

6

 

1,117

 

8

Other

 

1,570

 

10

 

1,517

 

11

Total

 

15,378

 

100

 

14,248

 

100

Interest costs on DBO for both pensions and other post-retirement benefits together with the interest income on plan assets comprise the net financing expenses on post-retirement benefits of €21 million (2012: €3 million), see Note 4.

The equities and debt assets in the table above have quoted prices in active markets, although most are held through funds comprised of such instruments which are not actively traded themselves. Other plan assets include certain assets that are not quoted in active markets, such as real estate, insurance policies and private equity. Other assets included unquoted securities totalling €531 million (December 31, 2012: €557 million, of which €229 million is invested in real estate (December 31, 2012: €249 million). Plan assets did not directly include any of AkzoNobel’s own transferable financial instruments, nor any property occupied by or assets used by the company.

In the US, the Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced prescription drug benefits for retirees, as well as a federal subsidy to sponsors of post-retirement healthcare plans, which both began on January 1, 2006. We have recognized this reimbursement right as an asset under other financial non-current assets, measured at fair value amounting to €2 million at year-end 2013 (year-end 2012: €3 million).

Pension balances recorded under other financial non-current assets (December 31, 2013: €483 million; December 31, 2012: €841 million) could be recognized under IFRIC14 because economic benefits are available in the form of future refunds from the plan or reductions in future contributions to the plan, either during the life of the plan or on the (final) settlement of the plan liabilities.

Cash flows

In 2014, we expect to contribute €394 million to our defined benefit pension plans. This includes €96 million of regular pension contributions and €298 million for top-ups, of which £25 million (€30 million) will be paid out of the CPS escrow account (see explanation at the end of this note). We expect to pay a further €23 million for other post-retirement benefit plans. No allowance is made for any special one-off contributions that may arise in relation to new de-risking opportunities, like for example the pensioner settlement with MetLife in the US in 2013.

The figures in the table below are the estimated future benefit payments to be paid from the plans to beneficiaries over the next ten years.

In € millions

 

Pensions

 

Other post-retirement benefits

2014

 

892

 

23

2015

 

890

 

23

2016

 

898

 

23

2017

 

904

 

23

2018

 

911

 

22

2019-2023

 

4,650

 

104

Key figures and assumptions by plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2013

In € millions or %

 

ICIPF UK

 

CPS UK

 

Other pension plans

 

Other post- retirement benefits

 

Total

 

ICIPF UK

 

CPS UK

 

Other pension plans

 

Other post- retirement benefits

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total DBO

 

59%

 

19%

 

20%

 

2%

 

 

 

63%

 

20%

 

15%

 

2%

 

 

Defined benefit obligation at year-end

 

(9,738)

 

(3,147)

 

(3,396)

 

(393)

 

(16,674)

 

(9,576)

 

(3,051)

 

(2,259)

 

(302)

 

(15,188)

Fair value of plan assets year-end

 

10,523

 

2,804

 

2,051

 

 

15,378

 

10,007

 

2,941

 

1,300

 

 

14,248

Plan funded status

 

785

 

(343)

 

(1,345)

 

(393)

 

(1,296)

 

431

 

(110)

 

(959)

 

(302)

 

(940)

Restriction on asset recognition

 

 

 

(2)

 

 

(2)

 

 

 

(2)

 

 

(2)

Medicare receivable

 

 

 

 

(3)

 

(3)

 

 

 

 

(2)

 

(2)

Amounts recognized on the balance sheet

 

785

 

(343)

 

(1,347)

 

(396)

 

(1,301)

 

431

 

(110)

 

(961)

 

(304)

 

(944)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total current service cost

 

15%

 

21%

 

51%

 

13%

 

 

 

13%

 

22%

 

56%

 

9%

 

 

Current service cost

 

9

 

13

 

31

 

8

 

61

 

9

 

15

 

38

 

6

 

68

Employer contributions

 

433

 

146

 

159

 

29

 

767

 

170

 

91

 

281

 

26

 

568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

4.1%

 

4.1%

 

3.4%

 

3.5%

 

3.9%

 

4.3%

 

4.4%

 

3.9%

 

4.2%

 

4.2%

Rate of compensation increase

 

3.6%

 

3.8%

 

2.3%

 

 

3.4%

 

4.3%

 

4.4%

 

2.9%

 

 

4.1%

Inflation

 

2.6%

 

2.8%

 

1.5%

 

 

2.4%

 

3.3%

 

3.4%

 

2.1%

 

 

3.2%

Pension increases

 

2.6%

 

2.3%

 

1.5%

 

 

2.3%

 

3.1%

 

2.4%

 

1.9%

 

 

2.7%

Healthcare cost trend rate for next year

 

 

 

 

 

 

 

5.9%

 

5.9%

 

 

 

 

 

 

 

5.5%

 

5.5%

Rate to which cost trend rate is assumed to decline

 

 

 

 

 

 

 

3.8%

 

3.8%

 

 

 

 

 

 

 

3.8%

 

3.8%

Year that rate reaches the ultimate trend rate

 

 

 

 

 

 

 

2019-2032

 

2019-2032

 

 

 

 

 

 

 

2019-2032

 

2019-2032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life expectancy (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Males

 

26.7

 

26.5

 

24.2

 

24.1

 

26.1

 

26.8

 

26.7

 

25.0

 

24.9

 

26.5

Females

 

29.3

 

28.4

 

27.1

 

26.3

 

28.6

 

29.3

 

28.4

 

28.1

 

26.7

 

28.9

Currently aged 45, from age 60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Males

 

27.8

 

27.7

 

25.3

 

24.4

 

27.2

 

28.0

 

27.9

 

26.6

 

26.0

 

27.7

Females

 

30.6

 

29.7

 

28.2

 

26.3

 

29.8

 

30.5

 

29.6

 

29.6

 

27.3

 

30.1

Sensitivity of DBO to change in assumptions

 

 

 

 

 

 

 

 

 

 

 

In € millions

 

ICIPF UK

 

CPS UK

 

Other pension plans

 

Other post-retirement benefits

 

Total

1

The sensitivity to price inflation assumption includes corresponding changes to all inflation-related assumption compensation increases, pensions in payment and pensions in determent.

Discount rate: 0.5% decrease

 

632

 

266

 

167

 

16

 

1,081

Price inflation: 0.5% increase1

 

368

 

168

 

92

 

 

628

Life expectancy: 1 year increase from age 60

 

412

 

105

 

59

 

5

 

581

Healthcare cost trend rate: 0.5% increase

 

 

 

 

 

 

 

7

 

7

 

 

 

 

 

 

 

 

 

 

 

Maturity information

 

 

 

 

 

 

 

 

 

 

Weighted average duration of DBO (years)

 

13.0

 

17.1

 

14.4

 

9.5

 

13.9

The effect on DBO shown allows for an alternative value for each assumption while the other actuarial assumptions remain unchanged. Whilst this table illustrates the overall impact on DBO of the changes shown, the significance of the impact and the range of reasonably possible alternative assumptions may differ between the different plans that comprise the total DBO; in particular the plans differ in benefit design, currency and average term, meaning that different assumptions have different levels of significance for different plans. The sensitivity analysis is intended to illustrate the inherent uncertainty in the evaluation of the DBO under market conditions at the measurement date. Its results cannot be extrapolated due to non-linear effects that changes in the key actuarial assumptions may have on the overall total DBO. Furthermore, the analysis does not indicate a probability of such changes occurring and it does not necessarily represent our view of expected future changes in DBO. Any management actions that may be taken to mitigate the inherent risks in the post-retirement defined benefit plans or changes in asset values are not reflected in this analysis.

The sensitivities in the table only apply to the DBO and not to the net amounts recognized in the balance sheet. Movements in the fair value of plan assets would, to some extent, be expected to offset movements in the DBO resulting from changes in the given assumptions.

In € millions

 

ICIPF

 

CPS

Type of plan

 

Defined benefit, based upon years of service and final salary

Benefits

 

Retirement pension for employee

 

 

Dependants pensions on death of employee / pensioner

 

 

Options for ill health early retirement

Pension increases (main benefit section)

 

Annually linked to UK RPI with a maximum of 5 percent

 

Annually linked to UK CPI with a maximum of 5 percent

Plan structure

 

Plans are set up under a trust and are tax approved

 

 

Governance

 

Trustee directors:

 

 

 

 

5 member nominated

 

5 member nominated

 

 

1 independent (Law Debenture)

 

5 company nominated

 

 

5 appointed with the agreement of Law Debenture

 

1 independent (Law Debenture)

Regulatory framework

 

The plans are tax approved and assets are held in trust for the benefit of participants. The trustees have a legal duty to manage the trust in the best interests of participants. Investment strategy is controlled by the trustees in consultation with the company.

Funding basis

 

A plan specific basis must be agreed with each trustee board in accordance with UK Regulations. The basis is not the same as the IFRS calculation as it uses more prudent assumptions about life expectancy and the discount rates reflect prudent estimates of the expected return on assets actually held, thus the trustees’ investment strategies will impact the discounted value of liabilities.

Frequency of funding reviews

 

Every three years

 

 

Latest valuation

 

March 31, 2011

 

March 31, 2012

Deficit at previous valuation

 

£1.0 billion (€1.2 billion)

 

£220 million (€264 million) allowing for the escrow account

Recovery plan

 

£178.5 million (€214 million) per annum to 2017 inclusive paid in January each year

 

£42 million (€50 million) per annum to 2018 inclusive, plus £25 million (€30 million) per annum to 2017 from the escrow account paid in March each year

Next funding review

 

March 31, 2014

 

March 31, 2015

Estimated funding deficit at December 31, 2013

 

£1.1 billion (€1.3 billion)

 

£0.25 million (€0.3 million)

Strategic asset allocation
Matching

 

80%

 

58%

Return seeking

 

20%

 

42%

Other

 

Not applicable

 

Longevity hedge contract with SwissRe to cover 40% of pensioner liabilities

Escrow account

 

Not applicable

 

Pre-funded account established in 2007 to fund existing deficit. It pays a minimum of £25 million per annum to CPS until it is exhausted (no later than 2017). Value at year-end 2013 is £108 million (€130 million)

Membership

 

 

 

 

Active

 

459

 

753

Deferred

 

10,713

 

19,992

Pensioner

 

49,765

 

20,659

Total

 

60,937

 

41,404

Effect of the implementation of the revised IAS 19

 

 

 

 

 

In € millions

 

Original

 

Restated

 

 

 

 

 

Balance sheet January 1, 2012

 

 

 

 

Deferred tax assets

 

813

 

907

Other financial non-current assets

 

1,187

 

1,559

Post-retirement benefit provisions

 

1,156

 

1,831

Deferred tax liabilities

 

567

 

541

Shareholders’ equity

 

9,212

 

9,031

Non-controlling interests

 

531

 

529

 

 

 

 

 

Statement of income 2012

 

 

 

 

Operating income

 

(1,244)

 

(1,198)

Financing expenses related to pensions

 

(65)

 

(3)

Income tax

 

(172)

 

(203)

Profit/(loss) for the period

 

(2,106)

 

(2,029)

Attributable to

 

 

 

 

Shareholders of the company

 

(2,169)

 

(2,092)

Non-controlling interests

 

63

 

63

Earnings per share from total operations (in €)

 

 

 

 

Basic

 

(9.14)

 

(8.82)

Diluted

 

(9.14)

 

(8.82)

 

 

 

 

 

Statement of comprehensive income 2012

 

 

 

 

Actuarial gains and losses, and other items relating to pensions and other post-retirement benefits

 

 

(1,298)

Exchange differences arising on translations of foreign operations

 

8

 

34

Income tax relating to other comprehensive income

 

 

249

Other comprehensive income for the period

 

6

 

(1,017)

Comprehensive income for the period

 

(2,100)

 

(3,046)

Attributable to

 

 

 

 

Shareholders of the company

 

(2,146)

 

(3,093)

Non-controlling interests

 

46

 

47

 

 

 

 

 

Balance sheet December 31, 2012

 

 

 

 

Deferred tax assets

 

830

 

1,146

Other financial non-current assets

 

1,748

 

1,297

Post-retirement benefit provisions

 

1,126

 

2,142

Deferred tax liabilities

 

442

 

420

Shareholders’ equity

 

6,892

 

5,764

Non-controlling interests

 

465

 

464