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Note 16: Post-retirement benefit provisions

Post-retirement benefit provisions relate to defined benefit pension and other post-retirement benefit plans, including healthcare or welfare plans. The largest defined benefit pension plans are the ICI Pension Fund (ICIPF) and the Akzo Nobel (CPS) Pension Scheme (CPS) in the UK which together account for 82 percent of defined benefit obligations (DBO) and 90 percent of plan assets. Both plans are part of continuing operations. Other pension plans include the largely unfunded plans in Germany and the plans in the US, which will be split into continuing and discontinued operations, and certain other smaller plans in the UK, included in continuing operations. 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, where plans will be split into continuing and discontinued operations, and in the Netherlands, where the plan remains in continued operations.

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 Executive Committee Pensions. 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. The committee develops and maintains 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, low 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 investment strategies. 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 insurance (annnuity) policies, 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. Limits have been set on the use of derivatives which are periodically subject to review for compliance with the pension fund’s investment strategy.

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 exceed estimated funding deficits.

Between 2014 and 2017, ICIPF and a smaller UK plan, the ICI Specialty Chemicals Pension Fund (ISCPF), have invested in annuity buy-in contracts that aim to hedge all key risks related to their pensioner populations. CPS has an insurance contract to hedge longevity risk in respect of a portion of its pensioners. In 2017, the Trustee of the ICIPF entered into three more annuity buy-in agreements with Scottish Widows Limited. Together they cover, in aggregate, £0.4 billion (€0.5 billion) of pensioner liabilities (local plan value). 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 of £67 million (€77 million). By purchasing bulk annuities, the ICIPF and ISCPF Trustees have both taken significant steps in actively de-risking liabilities and reducing the risk that AkzoNobel will be required to contribute additional cash in the future.

Of the costs recognized in the statement of income €38 million concerned continuing operations (2016: €67 million credit) and €22 million related to discontinued operations (2016: €22 million)

Remeasurement effects recognized in Other comprehensive income for continuing operations amounted to a €462 million gain (2016: €683 million loss) and for discontinued operations to a €24 million gain (2016: €56 million loss). Of the net cash flow €340 million was for continuing operations (2016: €369 million) and €47 million for discontinued operations (2016: €52 million).

The held for sale balance reflects a DBO of €883 million, plan assets of €278 million and an asset restriction amount of €1 million.

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. As AkzoNobel does not have access to sufficient information from Alecta to enable a defined benefit accounting treatment, it is accounted for as a defined contribution plan. Contributions in 2017 were €8 million (2016: €7 million). Alecta’s target funding ratio in 2017 was 140 percent. The most recently quoted ratio at December 2017 stood at 154 percent. There is also a small number of multi-employer plans in Germany in which AkzoNobel participates with annual contributions totaling €1 million. These are also accounted for as defined contribution plans. The expenses of all plans accounted for as defined contribution plans in AkzoNobel totaled €156 million (€88 million continuing operations, €68 million discontinued operations) in 2017 (2016: €152 million; €81 million continuing operations, €71 million discontinued operations).

Reconciliation balance sheet

The adjacent table details the annual movements for the total post-retirement benefit provisions. The closing net balance sheet provision comprises: Pension plans €163 million (2016: €990 million) and Other post-retirement benefit plans €247 million (2016: €278 million).

Reconciliation balance sheet

 

2016

2017

In € millions

DBO

Plan assets

Total

DBO

Plan assets

Total

Balance at the beginning of the period

(16,960)

16,080

(880)

(16,935)

15,671

(1,264)

 

 

 

 

 

 

 

Statement of income

 

 

 

 

 

 

Current service cost

(55)

(55)

(53)

(53)

Past service cost

109

109

12

12

Settlements

10

(9)

1

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

(523)

513

(10)

(394)

375

(19)

Cost recognized in statement of income

(459)

504

45

(435)

375

(60)

 

 

 

 

 

 

 

Remeasurements

 

 

 

 

 

 

Actuarial gain/(loss) due to liability experience

122

122

213

213

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

(2,624)

(2,624)

33

33

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

6

6

223

223

Actuarial loss due to buy-in

(637)

(637)

(77)

(77)

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

2,394

2,394

94

94

Remeasurement effects recognized in Other comprehensive income

(2,496)

1,757

(739)

469

17

486

 

 

 

 

 

 

 

Cash flow

 

 

 

 

 

 

Employer contributions

421

421

387

387

Employee contributions

(2)

2

(2)

2

Benefits and administration costs paid from plan assets

946

(946)

982

(982)

Net cash flow

944

(523)

421

980

(593)

387

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Acquisitions/divestments/transfers

(3)

(2)

(5)

(5)

7

2

Changes in exchange rates

2,039

(2,145)

(106)

599

(556)

43

Total other

2,036

(2,147)

(111)

594

(549)

45

 

 

 

 

 

 

 

Balance at the end of the period

(16,935)

15,671

(1,264)

(15,327)

14,921

(406)

Asset restriction

 

 

(4)

 

 

(4)

Net balance sheet provision

 

 

(1,268)

 

 

(410)

 

 

 

 

 

 

 

In the balance sheet under

 

 

 

 

 

 

Other financial non-current assets

 

 

220

 

 

895

Post-retirement benefit provisions

 

 

(1,380)

 

 

(643)

Current portion of provisions

 

 

(108)

 

 

(56)

Held for sale

 

 

 

 

(606)

Net balance sheet provision

 

 

(1,268)

 

 

(410)

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 discount rates, which increases the plan obligations, and longevity risk as the plans generally pay lifetime benefits.

Administrative expenses

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 €12 million (2016: €15 million), which are included in , all concerning continuing operations. In addition, we directly incurred asset management expenses of €6 million (2016: €9 million), which have been included in Other .

Interest costs

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 post-retirement benefits of €19 million (€7 million continuing operations, €12 million discontinued operations) (2016: €10 million; €6 million credit continuing operations, €16 million charge discontinued operations), see Note 6.

DBO at funded and unfunded pension plans

In € millions

2016

2017

Wholly or partly funded plans

16,311

14,784

Unfunded plans

346

296

Total

16,657

15,080

Plan assets

The equities and government bond debt assets in the table below have quoted prices in active markets, although most are held through funds comprised of such instruments which are not actively traded themselves. The UK buy-in annuity policies are unquoted plan assets. The other categories of plan assets include certain assets that are not quoted in active markets. Such unquoted securities totaled €1,045 million (2016: €971 million) and include investments in real estate, totaling €340 million (2016: €322 million) and other investments in infrastructure, catastrophe bonds, insurance policies and high-yield credit strategies. 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.

Plan assets

 

2016

2017

In € millions

Total

Percentage of total

Total

Percentage of total

Equities

1,091

7

964

6

Debt – fixed interest government bonds

768

5

1,022

7

Debt – index-linked government bonds

1,782

11

2,183

15

Debt – corporate and other bonds

915

6

1,016

7

UK buy-in annuity policies

8,357

53

8,030

54

Cash and cash equivalents

593

4

170

1

Other

2,165

14

1,536

10

Total

15,671

100

14,921

100

Pension plans in asset position

Pension balances recorded under Other financial non-current assets totaled €895 million (2016: €220 million) and fully concern continuing operations. The increase in 2017 was primarily due to €259 million of top-up pension contributions and €417 million of net actuarial gains in the relevant plans. These assets could be recognized under IFRIC 14 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.

Key figures and assumptions by plan

 

2016

2017

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

61%

21%

16%

2%

 

61%

21%

16%

2%

 

 

 

 

 

 

 

 

 

 

 

 

Defined Benefit Obligation

(10,317)

(3,623)

(2,717)

(278)

(16,935)

(9,298)

(3,283)

(2,499)

(247)

(15,327)

Fair value of plan assets

10,317

3,818

1,536

15,671

9,609

3,810

1,502

14,921

Plan funded status

195

(1,181)

(278)

(1,264)

311

527

(997)

(247)

(406)

Restriction on asset recognition

(4)

(4)

(4)

(4)

Amounts recognized on the balance sheet

195

(1,185)

(278)

(1,268)

311

527

(1,001)

(247)

(410)

 

 

 

 

 

 

 

 

 

 

 

Percentage of total current service cost

16%

18%

62%

4%

 

14%

20%

62%

4%

 

Current service cost

9

10

34

2

55

7

10

34

2

53

Employer contributions

217

73

109

22

421

184

91

92

20

387

 

 

 

 

 

 

 

 

 

 

 

Discount rate

2.5%

2.5%

2.3%

3.4%

2.5%

2.4%

2.5%

2.4%

3.4%

2.5%

Rate of compensation increase

1.4%

1.4%

1.8%

1.6%

1.4%

1.4%

2.2%

1.8%

Inflation

3.3%

3.3%

2.0%

3.1%

3.2%

3.2%

1.9%

3.0%

Pension increases

3.0%

2.3%

2.0%

2.7%

3.0%

2.2%

1.9%

2.6%

Healthcare cost trend rate for next year

 

 

 

5.1%

5.1%

 

 

 

5.0%

5.0%

Rate to which cost trend rate is assumed to decline

 

 

 

4.0%

4.0%

 

 

 

4.0%

4.0%

Year that rate reaches the ultimate trend

 

 

 

2024

2024

 

 

 

2024

2024

 

 

 

 

 

 

 

 

 

 

 

Life expectancy (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 60

 

 

 

 

 

 

 

 

 

 

Males

27.1

27.0

25.6

26.2

26.8

26.8

26.4

25.6

26.1

26.5

Females

29.6

29.5

28.6

28.3

29.4

28.3

28.7

28.6

28.2

28.4

 

 

 

 

 

 

 

 

 

 

 

Currently aged 45, from age 60

 

 

 

 

 

 

 

 

 

 

Males

28.4

28.4

27.2

27.4

28.2

28.0

27.6

27.2

27.3

27.8

Females

31.1

31.0

30.2

29.5

30.9

29.5

29.9

30.1

29.4

29.7

Cash flows

In 2018, we expect to contribute €269 million (2017: €367 million) to our defined benefit pension plans. We expect to pay a further €19 million (2017: €20 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.

Cash flows

 

Pensions

Other post-retirement

In € millions

Contin­uing opera­tions

2017
Discon­tinued opera­tions

Contin­uing opera­tions

2018
Discon­tinued opera­tions

Contin­uing opera­tions

2017
Discon­tinued opera­tions

Contin­uing opera­tions

2018
Discon­tinued opera­tions

Regular contributions

56

36

54

35

14

6

14

5

Top-ups

270

5

178

2

Total

326

41

232

37

14

6

14

5

Future benefit payments

In € millions

Pensions

Other post retirement benefits

2018

970

19

2019

964

19

2020

972

18

2021

978

18

2022

986

17

2023 – 2027

5,058

77

Sensitivity of DBO to change in assumptions 2017

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 compensation increases, pensions in payment and pensions in deferment.

Discount rate: 0.5% decrease

606

276

185

13

1,080

Price inflation: 0.5% increase*

313

148

104

-

565

Life expectancy: one year increase from age 60

645

107

103

10

865

Healthcare cost trend rate: 0.5% increase

4

4

 

 

 

 

 

 

Maturity information

 

 

 

 

 

Weighted average duration of DBO (years)

12.9

16.4

14.5

10.2

13.8

The sensitivity 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 are not reflected in this analysis, as they would normally be reflected in plan asset changes rather than DBO changes.

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 (which include the de-risking instruments) would, to a significant extent, be expected to offset movements in the DBO resulting from changes in the given assumptions. The annuity buy-in contracts cover 99 percent of pensioner liabilities (2016: 96 percent) and 82 percent of total liabilities at ICIPF (2016: 76 percent). The longevity hedge contract covers 58 percent of pensioner liabilities (2016: 66 percent) and 36 percent of total liabilities at CPS (2016: 38 percent).

Key plan details for the two largest pension plans1

 

ICI Pension Fund, UK

Akzo Nobel (CPS) Pension Scheme, UK

1

Amounts in euro are a convenience translation using the December 31, 2017, exchange rate.

2

Based on local valuation regulations.

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 Dependents’ pensions on death of employee/pensioner
Options for ill health early retirement

Retirement pension for employee Dependents’ 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

Plans are set up under a trust and are tax approved

Governance

Trustee directors:
Five member-nominated trustees
Five appointed with the agreement of Law Debenture
One independent (Law Debenture)

Trustee directors:
Four member-nominated trustees
Four company-nominated trustees
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

Normally every three years

Normally every three years

Latest completed valuation

March 31, 2014

March 31, 2015

Funding deficit2 at latest completed valuation

£850 million (€959 million)

£84 million (€95 million) including the escrow account

Recovery plan

£125 million (€141 million) per annum in 2018 to 2021, paid in January each year

£21 million (€24 million) per annum in 2018 and 2019, with £13 million (€15 million) in 2020, paid in March each year

Next funding review

March 31, 2017

March 31, 2017

Asset allocation at March 31, 2017
Matching:
Return seeking:



93%
7%
Buy-in annuity contracts cover 99% of pensioner liabilities and 79% of total liabilities



61%
39%
The longevity hedge contract covers 58% of pensioner liabilities and 36% of total liabilities

Membership at March 31, 2017
Active
Deferred
Pensioner
Total

267
8,129
42,933
51,329

467
7,986
18,712
27,165

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.

Operating income

Operating income is defined in accordance with IFRS and includes the relevant incidentals.

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.