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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 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 ExCo Pensions Committee. 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, a decline in discount rates, that inflation exceeds expectations, and that retirees live longer than expected. The assets and liabilities of each 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 trustees or fiduciaries to develop strategic asset allocation strategies. Asset liability modeling (ALM) studies are carried out periodically to analyze 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, insurance policies 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. Limits have been set on the use of derivatives which are periodically subject to review for compliance with the pension fund’s investment strategy. ICIPF invested in annuity contracts in 2014 that aim to hedge all key risks related to a certain part of the pensioner population and CPS has an insurance contract with SwissRe to hedge longevity risk in respect of a portion of its pensioners.

In line with our proactive pension risk management strategy, we seek to reduce risk in our pension plans over time. We continue to evaluate different potential de-risking strategies and opportunities on an ongoing basis. Some future de-risking transactions may have both cash flow and balance sheet impacts which may be substantial, as have some of the de-risking actions already taken. The cost of fully removing risk would likely exceed estimated funding deficits. In March 2014, the Trustee of ICIPF entered into two annuity buy-in agreements in line with their ongoing strategy of de-risking which is supported by AkzoNobel. The two agreements are with Legal & General plc and Prudential Retirement Income Limited and covered, in aggregate, £3.6 billion (€4.3 billion) of pensioner liabilities, which is broadly equivalent to one quarter of our pension liabilities and one third of the ICIPF liabilities. The buy-ins involved the purchase of bulk annuity policies under which the insurers will pay to ICIPF amounts equivalent to the benefits payable to a subset of current pensioners. The pension liabilities remain with ICIPF and the matching annuity policies are held within ICIPF. The accounting impact of the transaction is a lower valuation of the plan assets giving a reduction in Other comprehensive income of £640 million (€773 million). The Trustee of ICIPF transacted a further, smaller buy-in in November 2014 with Prudential Retirement Income Limited covering £0.3 billion (€0.4 billion) of pensions liabillities giving a reduction in Other comprehensive income of £55 million (€68 million). By purchasing these bulk annuities, the Trustee has taken a significant step in actively de-risking liabilities and reducing the risk that AkzoNobel will be required to contribute additional cash in the future.

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 2014 were €10 million (2013: €10 million). Alecta’s target funding ratio in 2014 was 140 percent although the most recently quoted ratio at September 2014 stood at 146 percent. There are also a small number of multi-employer plans in the US and Germany in which AkzoNobel participates with annual contributions in each case 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 €145 million in 2014 (2013: €172 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

In € millions

 

DBO

 

Plan assets

 

Total

 

DBO

 

Plan assets

 

Total

Balance at the beginning of the period

 

(16,674)

 

15,378

 

(1,296)

 

(15,188)

 

14,248

 

(940)

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of income

 

 

 

 

 

 

 

 

 

 

 

 

Current service cost

 

(68)

 

 

(68)

 

(57)

 

 

(57)

Past service cost/curtailments

 

13

 

 

13

 

(2)

 

 

(2)

Settlements

 

584

 

(602)

 

(18)

 

 

 

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

 

(602)

 

581

 

(21)

 

(643)

 

625

 

(18)

Cost recognized in statement of income

 

(73)

 

(21)

 

(94)

 

(702)

 

625

 

(77)

 

 

 

 

 

 

 

 

 

 

 

 

 

Remeasurements

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial gain/(loss) due to liability experience

 

(92)

 

 

(92)

 

68

 

 

68

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

 

9

 

 

9

 

(1,469)

 

 

(1,469)

Actuarial gain/(loss) due to liability demographics assumptions changes

 

17

 

 

17

 

132

 

 

132

Actuarial loss due to buy-in

 

 

 

 

 

(841)

 

(841)

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

 

 

(128)

 

(128)

 

 

1,528

 

1,528

Remeasurement effects recognized in Other comprehensive income

 

(66)

 

(128)

 

(194)

 

(1,269)

 

687

 

(582)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow

 

 

 

 

 

 

 

 

 

 

 

 

Employer contributions

 

 

568

 

568

 

 

425

 

425

Employee contributions

 

(5)

 

5

 

 

(4)

 

4

 

Benefits and administration costs paid from plan assets

 

962

 

(962)

 

 

948

 

(948)

 

Net cash flow

 

957

 

(389)

 

568

 

944

 

(519)

 

425

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions/divestments/transfers

 

319

 

(266)

 

53

 

10

 

(10)

 

Changes in exchange rates

 

349

 

(326)

 

23

 

(960)

 

958

 

(2)

Total other

 

668

 

(592)

 

76

 

(950)

 

948

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period

 

(15,188)

 

14,248

 

(940)

 

(17,165)

 

15,989

 

(1,176)

Asset restriction

 

 

 

(2)

 

 

 

(2)

Medicare receivable

 

 

 

(2)

 

 

 

(3)

Net balance sheet provision

 

(15,188)

 

14,248

 

(944)

 

(17,165)

 

15,989

 

(1,181)

 

 

 

 

 

 

 

 

 

 

 

 

 

In the balance sheet under

 

 

 

 

 

 

 

 

 

 

 

 

Other financial non-current assets

 

 

 

 

 

483

 

 

 

 

 

409

Post-retirement benefit provisions

 

 

 

 

 

(1,237)

 

 

 

 

 

(1,488)

Current portion of provisions

 

 

 

 

 

(184)

 

 

 

 

 

(102)

Liabilities held for sale

 

 

 

 

 

(6)

 

 

 

 

 

Net balance sheet provision

 

 

 

 

 

(944)

 

 

 

 

 

(1,181)

In addition to the expenses borne by the funds themselves, some expenses are borne directly by AkzoNobel. Administrative expenses are incurred, especially for the UK pension funds, of €17 million (2013: €12 million), which are included in Operating income. In addition, we directly incurred asset management expenses of €7 million (2013: €6 million), which have been included in Other comprehensive income.

DBO at funded and unfunded pension plans

 

 

 

 

 

In € millions

 

2013

 

2014

Wholly or partly funded plans

 

14,591

 

16,481

Unfunded plans

 

295

 

350

Total

 

14,886

 

16,831

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 related to pensions of €18 million (2013: €21 million), see Note 5.

Plan assets

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

In € millions

 

Total

 

Percentage of total

 

Total

 

Percentage of total

Equities

 

1,824

 

13

 

1,566

 

10

Debt - fixed interest government bonds

 

2,635

 

18

 

1,222

 

8

Debt - index-linked government bonds

 

2,816

 

20

 

3,701

 

23

Debt - corporate and other bonds

 

4,339

 

30

 

1,645

 

10

Insurance contracts

 

213

 

1

 

4,405

 

28

Cash and cash equivalents

 

1,117

 

8

 

1,516

 

9

Other

 

1,304

 

10

 

1,934

 

12

Total

 

14,248

 

100

 

15,989

 

100

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 totaling €654 million (2013: €531 million), of which €314 million is invested in real estate (2013: €229 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 €3 million (2013: €2 million).

Pension balances recorded under Other financial non-current assets totaled €409 million (2013: €483 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 2015, we expect to contribute €431 million to our defined benefit pension plans. This includes €99 million of regular pension contributions and €332 million for top-ups, of which £25 million (€32 million) will be paid out of the CPS escrow account (see explanation in Key plan details). We expect to pay a further €24 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.

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.

Future benefit payments

 

 

 

 

 

In € millions

 

Pensions

 

Other post-retirement benefits

2015

 

970

 

24

2016

 

964

 

24

2017

 

968

 

24

2018

 

973

 

23

2019

 

980

 

23

2020-2024

 

4,993

 

106

Key figures and assumptions by plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2014

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

 

63%

 

20%

 

15%

 

2%

 

 

 

62%

 

21%

 

15%

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined Benefit Obligation at year-end

 

(9,576)

 

(3,051)

 

(2,259)

 

(302)

 

(15,188)

 

(10,633)

 

(3,548)

 

(2,650)

 

(334)

 

(17,165)

Fair value of plan assets at year-end

 

10,007

 

2,941

 

1,300

 

 

14,248

 

10,870

 

3,606

 

1,513

 

 

15,989

Plan funded status

 

431

 

(110)

 

(959)

 

(302)

 

(940)

 

237

 

58

 

(1,137)

 

(334)

 

(1,176)

Restriction on asset recognition

 

 

 

(2)

 

 

(2)

 

 

 

(2)

 

 

(2)

Medicare receivable

 

 

 

 

(2)

 

(2)

 

 

 

 

(3)

 

(3)

Amounts recognized on the balance sheet

 

431

 

(110)

 

(961)

 

(304)

 

(944)

 

237

 

58

 

(1,139)

 

(337)

 

(1,181)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total current service cost

 

13%

 

22%

 

57%

 

8%

 

 

 

16%

 

22%

 

55%

 

7%

 

 

Current service cost

 

9

 

15

 

38

 

6

 

68

 

9

 

13

 

31

 

4

 

57

Employer contributions

 

170

 

91

 

281

 

26

 

568

 

230

 

93

 

79

 

23

 

425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

4.3%

 

4.4%

 

3.9%

 

4.2%

 

4.2%

 

3.4%

 

3.6%

 

2.8%

 

3.3%

 

3.4%

Rate of compensation increase

 

4.3%

 

4.4%

 

2.9%

 

 

4.1%

 

3.9%

 

4.0%

 

2.7%

 

 

3.8%

Inflation

 

3.3%

 

3.4%

 

2.1%

 

 

3.2%

 

2.9%

 

3.0%

 

2.0%

 

 

2.8%

Pension increases

 

3.1%

 

2.4%

 

1.9%

 

 

2.7%

 

2.8%

 

2.1%

 

2.1%

 

 

2.5%

Healthcare cost trend rate for next year

 

 

 

 

5.5%

 

5.5%

 

 

 

 

5.3%

 

5.3%

Rate to which cost trend rate is assumed to decline

 

 

 

 

3.8%

 

3.8%

 

 

 

 

3.9%

 

3.9%

Year that rate reaches the ultimate trend

 

 

 

 

2019-2032

 

2019-2032

 

 

 

 

2019-2032

 

2019-2032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life expectancy (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Males

 

26.8

 

26.7

 

25.0

 

24.9

 

26.5

 

26.7

 

26.8

 

25.2

 

24.8

 

26.5

Females

 

29.3

 

28.4

 

28.1

 

26.7

 

28.9

 

29.0

 

28.4

 

28.3

 

26.7

 

28.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 45, from age 60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Males

 

28.0

 

27.9

 

26.6

 

26.0

 

27.7

 

27.8

 

28.0

 

26.8

 

26.1

 

27.7

Females

 

30.5

 

29.6

 

29.6

 

27.3

 

30.1

 

30.3

 

29.7

 

29.8

 

27.6

 

30.0

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

 

747

 

323

 

202

 

18

 

1,290

Price inflation: 0.5% increase 1

 

446

 

204

 

115

 

 

765

Life expectancy: one year increase from age 60

 

489

 

123

 

77

 

11

 

700

Healthcare cost trend rate: 0.5% increase

 

 

 

 

4

 

4

 

 

 

 

 

 

 

 

 

 

 

Maturity information

 

 

 

 

 

 

 

 

 

 

Weighted average duration of DBO (years)

 

13.4

 

17.3

 

15.1

 

10.5

 

14.4

The effect on DBO shown allows for an alternative value for each assumption while the other actuarial assumptions remain unchanged. While 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 each plan. The sensitivity analysis is intended to illustrate the inherent uncertainty in the valuation 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 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 a significant extent, be expected to offset movements in the DBO resulting from changes in the given assumptions.

Key plan details for the two largest pension plans

 

 

 

 

 

In € millions

 

ICI Pension Fund, UK (ICIPF)

 

AkzoNobel (CPS) Pension Scheme, UK (CPS)

Type of plan

 

Defined benefit, based upon years
of service and final salary

 

Defined benefit, based upon years
of service and final salary

Benefits

 

Retirement pension for employee

 

Retirement pension for employee

 

 

Dependents’ pensions on death of employee/pensioner

 

Dependents’ pensions on death of employee/pensioner

 

 

Options for ill health early retirement

 

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

 

Plans are set up under a trust
and are tax approved

Governance

 

Trustee directors:

 

Trustee directors:

 

 

Five members nominated

 

Four members nominated

 

 

One independent (Law Debenture)

 

Four companies nominated

 

 

Five appointed with the agreement
of Law Debenture

 

One 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

 

Every three years

Latest valuation

 

March 31, 2011

 

March 31, 2012

Funding deficit at latest valuation

 

£1.0 billion (€1.3 billion)

 

£220 million (€282 million) allowing for the escrow account

Recovery plan

 

£178.5 million (€229 million) per annum to 2017 inclusive paid in January each year. As a result of the 2014 buy-in transactions a one-time additional £125 million (€160 million) will likely be added as part of the next valuation.

 

£42 million (€54 million) per annum to 2018 inclusive, plus £25 million (€32 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, 2014

 

£0.85 billion (€1.1 billion)
(2013: £1.1 billion (€1.3 billion))

 

£0.2 billion (€0.26 billion)
(2013: £0.25 billion (€0.30 billion))

Estimated solvency deficit at March 31, 2013

 

£2.2 billion (€2.8 billion)

 

£1.6 billion (€2.0 billion)

Strategic asset allocation

 

 

 

 

Matching

 

80%

 

58%

Return seeking

 

20%

 

42%

Other

 

Buy-in annuity contracts cover
49% of pensioner liabilities

 

Longevity hedge contract covers
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 2014 is £93 million (€119 million)

Membership at March 31, 2014

 

 

 

 

Active

 

417

 

624

Deferred

 

9,816

 

9,782

Pensioner

 

47,586

 

19,803

Total

 

57,819

 

30,209