AkzoNobel 2008 Report - Note 18 Provisions

Movements in provisions

In € millions	Total	Pensions and other post-retirement benefits	Restructuring of activities	Environmental costs	Other

Balance at January 1, 2008	2,116	1,391	97	228	400
Additions made during the year	521	180	207	37	97
Utilization	(945)	(604)	(162)	(44)	(135)
Amounts reversed during the year	(76)	–	(9)	(25)	(42)
Unwind of discount	40	–	–	22	18
Acquisitions/divestments	1,345	596	51	148	550
Pension plans changing to net asset position	142	142	–	–	–
Changes in exchange rates	(226)	(79)	(19)	(48)	(80)

Balance at December 31, 2008	2,917	1,626	165	318	808

Non-current portion of provisions	2,072	1,433	34	253	352
Current portion of provisions	845	193	131	65	456

Total	2,917	1,626	165	318	808

Provisions for pensions and other post-retirement benefits

We have a number of defined benefit pension plans. The largest plans by far are the ICI Pension Fund and the AkzoNobel (CPS) Pension Scheme in the UK. The benefits of these and other 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. Obligations under the defined benefit plans are systematically provided for by depositing funds with trustees or separate foundations, under insurance policies, or by balance sheet provisions. Plan assets principally consist of long-term interest-earning investments, quoted equity securities and real estate. Valuations of the obligations under the pension and other post-retirement plans are carried out by independent actuaries.

We also provide certain healthcare and life insurance benefits for most of our retired employees, mainly in the US and the Netherlands. We accrue for the expected costs of providing such post-retirement benefits during the years that the employee renders the necessary services.

The main changes in 2008 related to our pension obligations were:

The obligations for pensions and other post-retirement benefits have increased substantially due to the acquisition of ICI on January 2, 2008.
In July 2008, we settled our pension obligations in Sweden with Alecta for an amount of €115 million, which resulted in a net curtailment and settlement loss of €10 million before tax, including wage taxes.
We settled a dispute on a post-retirement healthcare plan in the Netherlands and incurred additional costs of €28 million. In 2007 we already incurred additional costs of €66 million.

The table below shows a summary of the changes in the pension and the other post-retirement benefit obligations and plan assets for 2008 and 2007.

Movements in provisions for pension and other post-retirement benefit obligations

In € millions

Pensions

Other post-retirement benefits

2008

2007

2008

2007

¹	Pension prepayments for an amount of €34 million are not recognized as they do not meet the recognition criteria of IAS 19 and IFRIC 14.

Defined benefit obligation

Balance at beginning of year

(4,628)

(5,760)

(286)

(292)

Acquisitions/divestments

(11,477)

579

(136)

Settlements/curtailments

136

–

Plan amendment

(21)

(6)

(28)

(66)

Service costs

(76)

(7)

Contribution by employees

(7)

(8)

(2)

Interest costs

(827)

(271)

(24)

(16)

Benefits paid

968

306

Actuarial gains/(losses)

1,477

256

–

Changes in exchange rates

2,987

330

(5)

Defined benefit obligation at year-end

(11,468)

(4,628)

(441)

(286)

Plan assets

Balance at beginning of year

3,502

3,942

–

Acquisitions/divestments

11,093

(441)

–

Settlements

(111)

(1)

–

Contribution by employer

560

343

Contribution by employees

–

Benefits paid

(968)

(306)

(47)

(20)

Expected return on plan assets

802

247

–

Actuarial gains

(1,445)

(29)

–

Changes in exchange rates

(2,960)

(261)

–

Plan assets at year-end

10,480

3,502

–

Funded status

(988)

(1,126)

(441)

(286)

Unrecognized net loss/(gain)

(11)

Unrecognized past service costs

–

(13)

(15)

Restriction on asset recognition

(34)

–

Medicare receivable

–

(32)

(35)

Net balance pension provisions

(987)

(1,044)

(497)

(347)

Recorded under:

Provisions for pensions and other post-retirement benefits

(1,129)

(1,044)

(497)

(347)

Other financial non-current assets

142¹

–

Total

(987)

(1,044)

(497)

(347)

Funded and unfunded pension plans

In € millions
	2008	2007

Wholly or partly funded plans	11,145	4,269
Unfunded plans	323	359

Total	11,468	4,628

Funded status in earlier years at December 31

In € millions	Pensions			Other post-retirement benefits
	2006	2005	2004	2006	2005	2004

Defined benefit obligation	(5,760)	(5,510)	(8,975)	(292)	(508)	(514)
Plan assets	3,942	3,596	6,781	–	–	–

Funded status	(1,818)	(1,914)	(2,194)	(292)	(508)	(514)

The difference between the actual and the expected return on plan assets was a loss of €1,445 million in 2008, a loss of €29 million in 2007, a gain of €214 million in 2006, of €736 million in 2005 and of €228 million in 2004. The 2008, 2007 and 2006 actuarial gains and losses on the defined benefit obligation break down as follows:

Actuarial gains and losses

In € millions		Pensions		Other post-retirement benefits
	2008	2007	2006	2008	2007	2006

Due to experience	(147)	90	2	(5)	(3)	74
Due to change in assumptions	1,624	166	(199)	5	6	19

Total	1,477	256	(197)	–	3	93

Net periodic pension cost

In € millions	Pensions		Other post-retirement benefits
	2008	2007	2008	2007

Service costs for benefits earned during the period	(76)	(76)	(7)	(7)
Interest costs on defined benefit obligations	(827)	(271)	(24)	(16)
Expected return on plan assets	802	247	–	–
Amortization of unrecognized losses/(gains)	(32)	(4)	–	–
Amortization of past service costs	(20)	–	(25)	(63)
Change of restriction of asset recognition	31	–	–	–
Settlement/curtailment gain	(4)	26	–	5

Total	(126)	(78)	(56)	(81)

The remaining plans primarily represent defined contribution plans. This includes, among others, the AkzoNobel Pension Fund in the Netherlands. Expenses for these plans totaled €112 million in 2008 (2007: €140 million).

Weighted average assumptions for pensions

In %	Pensions		Other post-retirement benefits
	2008	2007	2008	2007

Pension benefit obligation at December 31:
- Discount rate	6.3	5.7	6.0	5.8
- Rate of compensation increase	3.5	4.4

Net periodic pension costs:
- Discount rate	5.8	4.9	5.8	5.6
- Rate of compensation increase	4.4	4.2
- Expected return on plan assets	6.0	6.4

The table below illustrates the weighted average life expectancy of the persons participating in the defined benefit pension plans.

Life expectancy

In years	at December 31
	2008	2007

Currently aged 60
Male	25.4	25.3
Female	27.5	27.9

Currently aged 45, at age 60
Male	26.8	26.7
Female	28.8	29.4

The assumptions for the expected return on plan assets were based on a review of the historical returns of the asset classes in which the assets of the pension plans are invested. The historical returns on these asset classes were weighted based on the expected long-term allocation of the assets of the pension plans.

The primary objective with regard to the investment of pension plan assets is ensuring that each individual scheme has sufficient funds available to satisfy future benefit obligations. For this purpose so-called asset and liability management (ALM) studies are made periodically at each pension fund under responsibility of the fund managers. For each of the pension plans an appropriate mix is determined on the basis of the outcome of these ALM studies, taking into account the national rules and regulations.

Pension plan assets principally consist of quoted equity securities, long-term interest-earning investments and real estate. On December 31, 2008 and 2007, plan assets did not include financial instruments issued by the company, nor any property occupied or other assets used by it. The weighted average pension plan asset allocation at December 31, 2008 and 2007, and the target allocation for 2009 for the pension plans by asset category are as follows:

Plan asset allocation

In %	Target allocation	Plan assets at December 31
	2009	2008	2007

Equity securities	20 – 25	23	47
Long-term interest earning investments	70 – 75	72	39
Real estate	1 – 5	2	8
Other	0 – 3	3	6

Total	100	100	100

At year-end 2008, an amount of £184 million (€189 million; 2007: £198 million or €269 million) has been placed on an escrow account on behalf of the AkzoNobel (CPS) Pension Scheme in the UK. The minimum annual funding of this pension fund from the escrow account is £25 million. The amount on the escrow account does not qualify as plan asset under the definition of IAS 19 and therefore it is not included in the plan asset numbers as disclosed in this note. The current portion is included in other short-term receivables, and the non-current part in other financial non-current assets. For the latter see also note 13.

Weighted average assumptions for the other post-retirement benefit plans were as follows:

Weighted average assumptions

In %/year
		2008	2007

Assumed healthcare cost trend rates at December 31:
-	Healthcare cost trend rate assumed for next year	6.3	8.0
-	Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.0	5.0
-	Year that the rate reaches the ultimate trend rate	2014 – 2016	2014

Assumed healthcare cost trend rates can have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have the following effects:

Sensitivity healthcare cost trends

In € millions	1% point increase	1% point decrease

(Increase)/decrease on total of service and interest cost	(1)	1
(Increase)/decrease on post-retirement benefit obligations	(17)	16

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. On December 31, 2008, this value was €32 million (December 31, 2007: €35 million).

Cash flows

We expect to contribute €304 million to our defined benefit pension plans in 2009. This includes additional payments of £172 million for the ICI Pension Fund and £25 million for the AkzoNobel (CPS) Pension Scheme paid out of the escrow account, both in the UK. For other post-retirement benefit plans the contribution for 2009 is expected to be €42 million.

Expected benefit payments

In € millions	Pensions	Other post- retirement benefits

2009	836	42
2010	825	37
2011	831	36
2012	820	36
2013	827	35
2014 – 2018	4,219	157

Provisions for restructuring of activities

Provisions for restructuring of activities comprise accruals for certain employee benefits and for costs which are directly associated with plans to exit specific activities and closing down of facilities. For all restructurings a detailed formal plan exists and the implementation of the plan has started or the plan has been announced before the balance sheet date. Most restructuring activities relate to relatively smaller restructurings and are expected to be completed within two years from the balance sheet date. However, for certain plans, payments of termination benefits to former employees may take several years longer.

Provisions for environmental costs

For details on environmental exposures, see note 22.

Other provisions

Other provisions relate to a great variety of risks and commitments, including provisions for antitrust cases, claims, other long-term employee benefits such as long-service leave and jubilee payments. With the acquisition of ICI, we recognized other provisions for an amount of €550 million, mainly related to insurance, antitrust and other litigations, as further explained in note 22. At year-end 2008, the provision for antitrust cases amounted to €289 million on December 31, 2008 (December 31, 2007: €190 million).

The majority of the cash outflows related to other provisions are expected to be within one to five years. In calculating the other provisions, a pre-tax discount rate of on average 5 percent has been used.