Note 19: 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% of defined benefit obligations (DBO) and 91% 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 investment returns falling short of expectations, low discount rates, inflation exceeding expectations, retirees living longer than expected and legislation changes. 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 regards 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 evaluate potential de-risking opportunities on an ongoing basis. Future de-risking transactions may have both cash flow and balance sheet impacts which may be substantial, as had some of the de-risking actions already taken. The cost of fully removing risk would exceed estimated funding deficits.

Between 2014 and 2021, 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. In 2021, the Trustee of the ICIPF entered into a further annuity buy-in agreement with Legal and General Assurance Society Limited. It covers, in aggregate, £127 million (€150 million) of pensioner liabilities (insurer valuation). The buy-in involved the purchase of a bulk annuity policy under which the insurer will pay to ICIPF 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. The accounting impact of the transaction is a lower valuation of the plan assets giving a reduction in Other of £25 million (€30 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.

CPS has an insurance contract to hedge longevity risk in respect of a portion of its pensioners.

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 were required to retrospectively equalize GMPs by uplifting pensions to the same level, as far as needed, for men and women. On November 20, 2020, the High Court ruled that pension schemes will need to revisit individual transfer payments made since May 17, 1990, to check if any additional value is due as a result of GMP equalization. As a result, in 2020 a past service cost of £5 million (€6 million) has been charged across the AkzoNobel pension schemes in the UK.

In setting the discount rate assumption for calculating the DBO of each plan, the so called Willis Towers Watson (WTW) RATE:Link model is used for the majority of the plans in the group. RATE:Link had previously been using a Bloomberg fixed income securities Bloomberg Industry Classification Standard (BICS) framework to provide the relevant inputs. However, due to a change in the Bloomberg BICS framework in 2020, this framework was no longer deemed suitable and RATE:Link now uses the Bloomberg Classification System (BCLASS) framework.

Although the curve-fitting methodology had not changed in 2020, the change in Bloomberg framework used by RATE:Link resulted in an estimated net €170 million remeasurement gain included in Other comprehensive income in 2020. The impact of the change in accounting estimate in relation to bond inclusion in 2020 is included in the reconciliation balance sheet table as a €270 million gain within the overall actuarial loss due to liability financial assumption changes in the DBO, partially offset by a €100 million reduction in the experience gain in plan assets in respect of the UK buy-in annuity policies in 2020.

On November 25, 2020, correspondence between the Chancellor of the Exchequer and the UK Statistics Authority (UKSA) was published regarding the future of the Retail Price Index (RPI) measurement of inflation. With effect from February 2030 onwards, increases in the RPI will be aligned with those under the Consumer Prices Index (CPI) with owner occupiers’ housing costs (CPIH). Broadly this is expected to result in RPI inflation being 1% lower in the longer term than under the existing methodology. The inflation assumption continues to be calculated using a market breakeven inflation rate and the CPI inflation assumption, on which the benefits of some plans are based, is set with reference to RPI. Until 2030, the CPI inflation assumption is calculated as 1% below RPI and from 2030 onwards as 0.1% below RPI. The impact has been recognized within remeasurements in Other comprehensive income in 2020. The impact on the actuarial loss due to liability financial assumption changes in the DBO is partially offset by an impact on the experience gain in plan assets in respect of the UK buy-in annuity policies and is not material.

On April 22, 2021, a court ruling resulted in a £20 million (€23 million) past service credit in one of the UK pension plans, the J.P. McDougall & Co Limited Staff Pension & Life Assurance Scheme. The court ruling rectified a deed change with respect to the retirement ages from which members will receive benefits. This past service credit was booked as an and included in Note 4 on .

The remaining pension plans primarily represent plans accounted for as 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 Tjänstepension Ömsesidigt (i.e. “Alecta pension insurance, mutual”) (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 defined benefit accounting treatment, it is accounted for as a defined contribution plan. Contributions in 2021 were €2 million (2020: €1 million). Alecta’s funding ratio is normally allowed to vary between 125% and 175%. The most recently quoted ratio at December 2021 stood at 172%. The expenses of all plans accounted for as defined contribution plans in AkzoNobel totaled €83 million in 2021 (2020: €82 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 closing net balance sheet position of €1,017 million (2020: €827 million) includes the pension plans (€1,143 million net asset; 2020: €963 million net asset) and other post-retirement plans (€126 million liability; 2020: €136 million liability).

Reconciliation balance sheet

 

2020

2021

In € millions

DBO

Plan assets

Total

DBO

Plan assets

Total

Balance at the beginning of the period

(14,616)

15,287

671

(14,184)

15,014

830

 

 

 

 

 

 

 

Statement of income

 

 

 

 

 

 

Current service cost

(33)

(33)

(32)

(32)

Past service cost

(5)

(5)

22

22

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

(262)

276

14

(193)

206

13

Cost recognized in statement of income

(300)

276

(24)

(203)

206

3

 

 

 

 

 

 

 

Remeasurements recognized in Other comprehensive income

 

 

 

 

 

 

Actuarial (loss)/gain due to liability experience

148

148

(123)

(123)

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

(915)

(915)

289

289

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

(74)

(74)

56

56

Actuarial loss due to buy-in

(23)

(23)

(30)

(30)

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

981

981

(202)

(202)

Remeasurement effects recognized in Other comprehensive income

(841)

958

117

222

(232)

(10)

 

 

 

 

 

 

 

Cash flow

 

 

 

 

 

 

Employer contributions

114

114

94

94

Employee contributions

(2)

2

(2)

2

Benefits and administration costs paid from plan assets

859

(859)

852

(852)

Net cash flow

857

(743)

114

850

(756)

94

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Acquisitions/divestments/transfers

(2)

2

1

(1)

Changes in exchange rates

718

(766)

(48)

(996)

1,099

103

Total other

716

(764)

(48)

(995)

1,098

103

 

 

 

 

 

 

 

Balance at the end of the period

(14,184)

15,014

830

(14,310)

15,330

1,020

Asset restriction

 

 

(3)

 

 

(3)

Net balance sheet position

 

 

827

 

 

1,017

 

 

 

 

 

 

 

Presentation of Net balance sheet position

 

 

 

 

 

 

Other financial non-current assets

 

 

1,543

 

 

1,638

Post-retirement benefit provisions

 

 

(664)

 

 

(578)

Current portion of provisions

 

 

(52)

 

 

(43)

Net balance sheet position

 

 

827

 

 

1,017

DBO at funded and unfunded pension plans*

In € millions, at December 31

2020

2021

Wholly or partly funded plans

13,854

14,005

Unfunded plans

194

179

Total

14,048

14,184

*

Excludes other post-retirement benefit plans.

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 €22 million (2020: €18 million), which are included in . In addition, we directly incurred asset management expenses of €3 million (2020: €2 million), which have been included in other comprehensive income.

Interest costs

Interest costs on the DBO for both pensions and other post-retirement benefits, together with the interest income on plan assets, comprise the net financing income related to postretirement benefits of €13 million (2020: €14 million), refer to Note 8.

Pension plans in asset position

Pension balances recorded under Financial non-current assets totaled €1,638 million (2020: €1,543 million). The €95 million increase in 2021 was due to €117 million of exchange rate translation gains, €48 million of employer contributions and net income of €14 million, partially offset by €84 million of net actuarial losses 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 have quoted prices in active markets, although most are held through funds comprised of such instruments which are not actively traded themselves. The total value of plan assets not quoted in active markets is €8,420 million (2020: €8,354 million), including the UK buy-in annuity policies totaling €7,698 million (2020: €7,595 million), investments in real estate, totaling €469 million (2020: €381 million) and other investments in infrastructure, catastrophe bonds, insurance policies and high- yield credit strategies. The UK buy-in annuity policies have a value that is equal to the DBO of the pensioners covered by the policies. 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

 

2020

2021

In € millions, at December 31

Total

Percentage of total

Total

Percentage of total

Equities

366

2

332

2

Debt – fixed interest government bonds

1,315

9

1,444

9

Debt – index-linked government bonds

3,121

21

3,221

21

Debt – corporate and other bonds

1,798

12

1,770

12

UK buy-in annuity policies

7,595

51

7,698

50

Cash and cash equivalents

215

1

204

1

Other

604

4

661

5

Total

15,014

100

15,330

100

Cash flows

In 2022, we expect to contribute €56 million (2021: €88 million) to our defined benefit pension plans, including £4 million (€5 million) of top-up contributions to the CPS plan, paid from an escrow account, in line with the agreed recovery plan following the March 31, 2020 triennial valuation. We expect to pay a further €11 million (2021: €11 million) to our 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.

Cash flows

 

Pensions

Other post-retirement benefits

In € millions

2021

2022

2021

2022

Regular contributions

43

43

10

11

Top-ups

41

13

Total

84

56

10

11

Sensitivity of DBO

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. At ICIPF, the annuity buy-in contracts cover 99% of pensioner liabilities (2020: 99%) and 84% of total liabilities (2020: 83%).

At CPS, the longevity hedge contract covers 48% of pensioner liabilities (2020: 49%) and 30% of total liabilities (2020: 30%).

Sensitivity of DBO to change in assumptions

In € millions

ICIPF
UK

CPS
UK

Other pension plans

Other post-retirement benefits

Total

Discount rate: 0.5% decrease

542

300

140

6

988

Price inflation: 0.5% increase*

291

169

73

533

Life expectancy: one year increase from age 60

705

135

75

6

921

 

 

 

 

 

 

Maturity information

 

 

 

 

 

Weighted average duration of DBO (years)

11.8

15.3

14.8

9.3

13.1

*

The sensitivity to price inflation assumption includes corresponding changes to all inflation-related compensation increases, pensions in payment and pensions in deferment.

Key figures and assumptions by plan

 

2020

2021

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%

25%

13%

1%

100%

61%

26%

12%

1%

100%

 

 

 

 

 

 

 

 

 

 

 

Defined Benefit Obligation at year-end

(8,716)

(3,503)

(1,829)

(136)

(14,184)

(8,702)

(3,686)

(1,796)

(126)

(14,310)

Fair value of plan assets at year-end

9,579

4,101

1,334

15,014

9,563

4,353

1,414

15,330

Plan funded status

863

598

(495)

(136)

830

861

667

(382)

(126)

1,020

Restriction on asset recognition

(3)

(3)

(3)

(3)

Amounts recognized on the balance sheet

863

598

(498)

(136)

827

861

667

(385)

(126)

1,017

 

 

 

 

 

 

 

 

 

 

 

Percentage of total current service cost

9%

24%

67%

100%

9%

28%

63%

100%

Current service cost

(3)

(8)

(22)

(33)

(3)

(9)

(20)

(32)

Employer contributions

4

37

60

13

114

3

37

44

10

94

 

 

 

 

 

 

 

 

 

 

 

Discount rate

1.3%

1.4%

1.4%

2.6%

1.3%

1.8%

1.9%

1.8%

3.3%

1.9%

Rate of compensation increase

1.5%

1.3%

1.9%

1.5%

1.5%

1.4%

2.0%

1.5%

Inflation

2.9%

2.9%

2.0%

2.8%

3.5%

3.4%

2.3%

3.3%

Pension increases

2.8%

2.4%

2.0%

2.6%

3.2%

2.8%

2.3%

3.0%

 

 

 

 

 

 

 

 

 

 

 

Life expectancy (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currently aged 60

 

 

 

 

 

 

 

 

 

 

Males

26.4

26.2

26.1

25.7

26.3

26.2

26.2

26.2

25.8

26.2

Females

28.0

29.0

28.5

27.6

28.3

27.7

29.0

28.8

27.8

28.2

 

 

 

 

 

 

 

 

 

 

 

Currently aged 45, from age 60

 

 

 

 

 

 

 

 

 

 

Males

27.5

27.3

27.4

26.8

27.4

27.3

27.3

27.6

26.9

27.3

Females

29.2

30.1

29.9

28.6

29.5

28.9

30.2

30.0

28.8

29.4

Key plan details for the two largest pension plans1

 

ICI Pension Fund, UK

Akzo Nobel (CPS) Pension Scheme, UK

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%

Annually linked to UK CPI with a maximum of 5%

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

Trustee directors:
Four member-nominated
Three company-nominated
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 the 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, 2020

March 31, 2020

Funding deficit at latest completed valuation1,2

£23 million (€27 million) surplus

£62 million (€74 million) deficit

Recovery plan

As there were sufficient assets to cover the Fund’s technical provisions, a recovery plan is not required

£26 million (€31 million) in 2021 and £4 million (€5 million) in 2022, paid in March in each year from an escrow account, originally pre-funded with £142 million (€161 million)3 in February 2019

Next funding review

March 31, 2023 (due to be completed before June 30, 2024)

March 31, 2023 (due to be completed before June 30, 2024)

Asset allocation at March 31, 2021 Matching:
Return seeking:


99.8%
0.2%
Buy-in annuity contracts cover 99% of pensioner liabilities and 84% of total liabilities


84%
16%
The longevity hedge contract covers 48% of pensioner liabilities and 30% of total liabilities

Membership at March 31, 2021
Active
Deferred
Pensioner
Total


95
5,783
36,456
42,334


304
5,993
16,989
23,286

1

Amounts in euro are a convenience translation using the December 31, 2021, exchange rate, unless indicated otherwise.

2

Based on local valuation regulations.

3

Actual rate at time of transfer.

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

2022

872

11

2023

882

11

2024

888

10

2025

894

10

2026

901

9

2027 – 2031

4,628

41

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.

Identified items

Identified items are special charges and benefits, results on acquisitions and divestments, major restructuring and impairment charges and charges related to major legal, environmental and tax cases.

Alternative performance measures (APM)

AkzoNobel uses APM adjustments to the IFRS measures to provide supplementary information on the reporting of the underlying developments of the business. APM include, but are not limited to, adjusted operating income, (adjusted) EBITDA, adjusted earnings per share, ROS and ROI.

Operating income

Operating income is defined in accordance with IFRS and includes the relevant identified items. Adjusted operating income excludes identified items.