Note 17: 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 in the UK which together account for 87 percent of defined benefit obligations (DBO) and 91 percent of plan assets. Other pension plans include among others 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 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 (annuity) 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 2018, 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 2018, the Trustee of the ICIPF entered into a further annuity buy-in agreement with Legal and General Assurance Society Limited and the Trustee of the ISCPF entered into a further annuity buy-in agreement with Pension Insurance Corporation PLC. Together they cover, in aggregate, £138 million (€154 million) of pensioner liabilities (local plan value). The buy-ins involved the purchase of bulk annuity policies under which the insurers will pay to ICIPF and ISCPF amounts equivalent to the benefits payable to members who have recently become pensioners. The pension liabilities remain with, and the matching annuity policies are held within, ICIPF and ISCPF. The accounting impact of the transactions is a lower valuation of the plan assets giving a reduction in Other of £28 million (€31 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.

In October 2018, the UK High Court provided clarity for trustees and employers on providing equal pension benefits for men and women where they are in receipt of Guaranteed Minimum Pensions (GMPs) as a result of the Lloyds Banking Group judgment. According to this judgment, pension schemes must retrospectively equalize GMPs by uplifting pensions to the same level, as far as needed, for men and women. As a result, a past service cost of £51 million (€57 million) has been charged across the AkzoNobel pension schemes in the UK in 2018.

Of the costs recognized in the statement of income in the table below, €90 million concerned continuing operations (2017: €38 million) and €nil related to discontinued operations (2017: €22 million).

Remeasurement effects recognized in Other comprehensive income for continuing operations amounted to a €45 million loss (2017: €462 million gain) and for discontinued operations to a €27 million gain, however not included in this table (2017: €24 million gain). Of the net cash flow €257 million was for continuing operations (2017: €340 million) and €nil for discontinued operations (2017: €47 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 2018 were €2 million (2017: €2 million). Alecta’s funding ratio in 2018 is normally allowed to vary between 125% and 175%. The most recently quoted ratio at September 2018 stood at 159 percent. The expenses of all plans accounted for as defined contribution plans in AkzoNobel totaled €87 million in 2018 (2017: €88 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 discount rates, which increases the plan obligations, and longevity risk as the plans generally pay lifetime benefits.

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 €442 million net asset (2017: €361 million net asset) and Other post-retirement benefit plans €145 million liability (2017: €165 million).

Reconciliation balance sheet

 

2017

2018

In € millions

DBO

Plan assets

Total

DBO

Plan assets

Total

Balance at the beginning of the period

(16,935)

15,671

(1,264)

(14,444)

14,643

199

 

 

 

 

 

 

 

Statement of income

 

 

 

 

 

 

Current service cost

(53)

(53)

(36)

(36)

Past service cost

12

12

(64)

(64)

Settlements

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

(394)

375

(19)

(345)

355

10

Cost recognized in statement of income

(435)

375

(60)

(445)

355

(90)

 

 

 

 

 

 

 

Remeasurements

 

 

 

 

 

 

Actuarial gain/(loss) due to liability experience

213

213

(39)

(39)

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

33

33

430

430

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

223

223

74

74

Actuarial loss due to buy-in

(77)

(77)

(31)

(31)

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

94

94

(479)

(479)

Remeasurement effects recognized in Other comprehensive income

469

17

486

465

(510)

(45)

 

 

 

 

 

 

 

Cash flow

 

 

 

 

 

 

Employer contributions

387

387

257

257

Employee contributions

(2)

2

(2)

2

Benefits and administration costs paid from plan assets

982

(982)

927

(927)

Net cash flow

980

(593)

387

925

(668)

257

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Acquisitions/divestments/transfers

(5)

7

2

2

(2)

Changes in exchange rates

599

(556)

43

143

(164)

(21)

Total other

594

(549)

45

145

(166)

(21)

 

 

 

 

 

 

 

Classified as held for sale

883

(278)

605

Balance at the end of the period

(14,444)

14,643

199

(13,354)

13,654

300

Asset restriction

 

 

(3)

 

 

(3)

Net balance sheet provision

 

 

196

 

 

297

 

 

 

 

 

 

 

In the balance sheet under

 

 

 

 

 

 

Other financial non-current assets

 

 

895

 

 

947

Post-retirement benefit provisions

 

 

(643)

 

 

(603)

Current portion of provisions

 

 

(56)

 

 

(47)

Net balance sheet provision

 

 

196

 

 

297

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 €14 million (2017: €12 million), which are included in . In addition, we directly incurred asset management expenses of €5 million (2017: €6 million), which have been included in Other comprehensive income.

Interest costs

Interest costs on DBO for both pensions and other postretirement benefits together with the interest income on plan assets comprise the net financing expenses related to post-retirement benefits of €10 million credit for continuing operations (2017: €19 million charge; €7 million charge continuing operations, €12 million charge discontinued operations), see Note 7.

Pension plans in asset position

Pension balances recorded under Other financial non-current assets totaled €947 million (2017: €895 million). The increase in 2018 was primarily due to €172 million of top-up pension contributions offset by €78 million of net actuarial losses and €57 million of past service costs for GMPs 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.

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 €1,038 million (2017: €1,045 million) and include investments in real estate, totaling €362 million (2017: €340 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

 

2017

2018

In € millions

Total

Percentage of total

Total

Percentage of total

Equities

925

6

552

4

Debt - fixed interest government bonds

996

7

784

6

Debt - index-linked government bonds

2,183

15

2,390

18

Debt - corporate and other bonds

932

6

888

7

UK buy-in annuity policies

8,030

55

7,496

55

Cash and cash equivalents

155

1

212

2

Other

1,422

10

1,332

8

Total

14,643

100

13,654

100

Cash flows

In 2019, we expect to contribute €552 million (2018: €243 million) to our defined benefit pension plans. We expect to pay a further €13 million (2018: €14 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 increase in expected contributions in 2019 is mainly the result of the recently concluded agreement on the ICIPF triennial funding valuation at March 31, 2017 and the resulting recovery plan.

Cash flows

 

Pensions

Other post-retirement benefits

In € millions

2018

2019

2018

2019

Regular contributions

56

52

14

13

Top-ups

187

500

Total

243

552

14

13

Future benefit payments

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

2019

912

13

2020

911

12

2021

918

12

2022

925

11

2023

935

11

2024-2028

4,786

49

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% of pensioner liabilities (2017: 99%) and 84% of total liabilities at ICIPF (2017: 82%). The longevity hedge contract covers 57% of pensioner liabilities (2017: 58%) and 35% of total liabilities at CPS (2017: 36%).

DBO at funded and unfunded pension plans*

In € millions

2017

2018

*

Excludes other post-retirement benefit plans.

Wholly or partly funded plans

14,092

13,032

Unfunded plans

187

177

Total

14,279

13,209

Sensitivity of DBO to change in assumptions

In € millions

ICIPF
UK

CPS
UK

Other pension plans

Other post-retirement benefits

Total

*

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

528

251

126

7

912

Price inflation: 0.5% increase*

292

140

66

498

Life expectancy: one year increase from age 60

568

105

60

7

740

 

 

 

 

 

 

Maturity information

 

 

 

 

 

Weighted average duration of DBO (years)

12.4

16.0

15.3

9.4

13.5

Key figures and assumptions by plan

 

2017

2018

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%

 

64%

23%

12%

1%

 

 

 

 

 

 

 

 

 

 

 

 

Defined Benefit Obligation at year-end

(9,298)

(3,283)

(1,698)

(165)

(14,444)

(8,508)

(3,083)

(1,618)

(145)

(13,354)

Fair value of plan assets at year-end

9,609

3,810

1,224

14,643

8,876

3,601

1,177

13,654

Plan funded status

311

527

(474)

(165)

199

368

518

(441)

(145)

300

Restriction on asset recognition

(3)

(3)

(3)

(3)

Amounts recognized on the balance sheet

311

527

(477)

(165)

196

368

518

(444)

(145)

297

 

 

 

 

 

 

 

 

 

 

 

Percentage of total current service cost

16%

23%

59%

2%

 

12%

26%

62%

0%

 

Current service cost

7

10

26

1

44

4

9

23

36

Employer contributions

184

91

51

15

341

154

34

55

14

257

 

 

 

 

 

 

 

 

 

 

 

Discount rate

2.4%

2.5%

2.4%

3.4%

2.5%

2.7%

2.8%

2.8%

3.9%

2.7%

Rate of compensation increase

1.4%

1.4%

2.2%

1.8%

1.5%

1.4%

2.6%

2.0%

Inflation

3.2%

3.2%

1.9%

3.0%

3.2%

3.2%

2.2%

3.1%

Pension increases

3.0%

2.2%

1.9%

2.6%

3.0%

2.3%

2.1%

2.7%

 

 

 

 

 

 

 

 

 

 

 

Life expectancy (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 60

 

 

 

 

 

 

 

 

 

 

Males

26.8

26.4

25.6

26.1

26.5

26.7

26.4

26.1

26.1

26.5

Females

28.3

28.7

28.6

28.2

28.4

28.2

28.7

28.5

28.0

28.4

 

 

 

 

 

 

 

 

 

 

 

Currently aged 45, from age 60

 

 

 

 

 

 

 

 

 

 

Males

28.0

27.6

27.2

27.3

27.8

27.8

27.5

27.5

27.3

27.7

Females

29.5

29.9

30.1

29.4

29.7

29.5

29.9

29.8

29.3

29.6

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, 2018, 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, 2017

March 31, 2017

Funding deficit2 at latest completed valuation

£604 million (€673 million)

£123 million (€137 million)

Recovery plan

£125 million (€139 million) in January 2019 and £290 million (€323 million) in March 2019, following experience gains since the March 31, 2017 valuation date

£26 million (€29 million) per annum in 2019 to 2022, paid in March each year from an escrow account pre-funded with £142 million (€158 million) in February 2019

Next funding review

March 31, 2020

March 31, 2020

Asset allocation at March 31, 2018
Matching:
Return seeking:


96%
4%
Buy-in annuity contracts cover 99% of pensioner liabilities and 82% of total liabilities


66%
34%
The longevity hedge contract covers 57% of pensioner liabilities and 35% of total liabilities

Membership at March 31, 2018
Active
Deferred
Pensioner
Total

200
7,481
41,323
49,004

420
7,365
18,197
25,982

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 identified items to the extent these relate to lines included in operating income.