Note 14: Post-retirement benefit provisions

Post-retirement benefit provisions

Post-retirement benefits comprise defined benefit pensions 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 and the AkzoNobel (CPS) Pension Scheme in the UK which together account for 79 percent of our pension plan defined benefit obligations. 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 regularly by independent qualified actuaries.

We also provide certain healthcare and life insurance benefits to retired employees, mainly in the US and the Netherlands. We accrue for the expected costs of providing such post-retirement benefits during the service years of the employees.

In line with our pension risk management policy, in May 2012 a longevity swap was transacted with a third party by the AkzoNobel (CPS) Pension Scheme. The insurance contract covers €1.75 billion of UK pension liabilities relating to almost 17,000 current pensioners and their dependants and helps protect AkzoNobel against future increases in life expectancy. Later in 2012 a program in the US was implemented, offering certain deferred members payment of benefits as a lump sum in December 2012. This is expected to reduce employer contribution requirements into those plans in future years. A number of smaller pension plans have been curtailed during the year, including plans in Canada, South Africa and Pakistan. As a result of the announced Decorative Paints divestment in 2013, €51 million of post-retirement balance sheet provisions with an associated funded status of €111 million are classified as held for sale at the end of 2012.

The remaining plans primarily represent defined contribution plans. This includes, among others, the Pension Fund APF in the Netherlands. 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 2012 were €10 million (2011: €10 million). Alecta’s target funding ratio in 2012 was 140 percent although the actual ratio at September 2012 stood at 123 percent. There is also a small number of multi-employer plans in the US in which AkzoNobel participates with annual contributions totalling 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 €180 million in 2012 (2011: €154 million).

Interest costs on defined benefit obligations for both pensions and other post-retirement benefits together with the expected return on plan assets in the net periodic costs table together comprise the net financing expenses on post-retirement benefits of €65 million (2011: €59 million), see Note 4.

Plan assets

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 long-term interest-earning investments, quoted equity securities and real estate. At year-end 2012 and 2011, 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 year-end 2012 and 2011, and the target allocation for 2013 for the pension plans by asset category are as follows:

At year-end 2012, an amount of £133 million (€163 million; 2011: £143 million or €170 million) remained in an escrow account on behalf of the AkzoNobel (CPS) Pension Scheme in the UK. The present minimum annual funding of this pension fund from the escrow account is £25 million (€31 million). The current portion is included in trade and other receivables, and the non-current part in other financial non-current assets. For the latter see also Note 9.

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

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:

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 €3 million at year-end 2012 (year-end 2011: €4 million).

Cash flows

We expect to contribute €388 million to our defined benefit pension plans in 2013. This includes a top-up payment of £135 million (€165 million) for the ICI Pension Fund. For other post-retirement benefit plans the contribution for 2013 is expected to be €26 million.

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.

The amendments to IAS 19 “Employee Benefits” have become effective as of January 1, 2013 and will be applied in our 2013 financial reports. We have made a preliminary assessment of the effect of the implementation of these amendments on our consolidated financial statements for 2012, as follows in the table below.