UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

for new members and future accrual for old members. Part of the scheme is a defined contribution plan and is open to all current employees. The UK pension scheme operates under a single trust which is independent from the group. Germany In Germany employees within defined benefit arrangements are entitled to annual pensions on retirement based on their service and final salary. All significant defined benefit plans are closed for new employees.

most significant defined benefit pension plan in Finland for UPM. In Finland, the reform of TyEL will come into effect as of beginning of 2017. The effect of the reform to the defined benefit obligation of the TyEL foundation was recognised in 2015 as a past service cost amounting to EUR 4 million. UK In the UK, the group operates a legacy defined benefit scheme providing benefits that are linked to the salary level near retirement age or an earlier date of leaving service. The scheme is closed both

Key estimates and judgements Several actuarial assumptions are used in calculating the expense and liability related to the plans. Statistical information used may differ materially from actual results due to, among others, changing market and economic conditions, or changes in service period of plan participants. Significant differences in actual experience or significant changes in assumptions may affect the future amounts of the defined benefit obligation and future expense.

Actuarial assumptions The weighted average principal assumptions used in the valuations of the defined benefit obligations are detailed below:

Present value of obligation and fair value of plan assets

Pension and other post-employment benefits 2016

Pension and other post-employment benefits 2015

FINLAND

UK

GERMANY

OTHER COUNTRIES

2016 1.60 1.64 1.64 0.88

2015 2.13 1.59 1.59 0.88

2016 2.60 3.35

2015 3.60 3.25

2016 1.77 1.70 2.50 1.70

2015 2.20 1.70 2.50 1.70

2016 2.52 1.88 2.55 0.98

2015 2.94 2.05 2.42 1.01

NET DEFINED BENEFIT LIABILITY/ (ASSET)

NET DEFINED BENEFIT LIABILITY/ (ASSET)

PRESENT VALUE OF OBLIGATION

FAIR VALUE OF PLAN ASSETS

PRESENT VALUE OF OBLIGATION

FAIR VALUE OF PLAN ASSETS

Discount rate % Inflation rate %

EURm

Rate of salary increase % Rate of pension increase %

n/a

n/a

Carrying value, at 1 January

1,470

–851

619

1,581

–794

787

3.20

3.10

Expected average remaining working years of participants

11.8

13.7

13.6

13.0

10.6

11.0

10.5

10.5

Current service cost

12 –6 37 43

– –

12 –6 15 21

15

– –

15

Past service cost

2

2

Interest expense (+) income (–)

–22 –22

36 53

–21 –21

15 32

Total included in employee costs (Note 3.1)

Sensitivity analysis of defined benefit obligations The sensitivity analysis shows the effect of the change in assumption. The analysis assume that all other assumptions remain unchanged. The projected unit credit method has been applied when calculating the obligation as well as these sensitivities.

EURm

0.5% INCREASE 0.5% DECREASE 2016 2015 2016 2015

Actuarial gains and losses arising from changes in demographic assumptions Actuarial gains and losses arising from changes in financial assumptions Actuarial gains and losses arising from experience adjustments Return on plan assets, excluding amounts included in interest expense (+) income (–) Total remeasurement gains (–) and losses (+) included in other comprehensive income

–1

–

–1

13

–

13

Discount rate %

–125 –112 144

126 –15

Rate of salary increase % Rate of pension increase % Life expectancy + 1 year

18 77 53

17 69 45

–17

169

–

169

–158

–

–158

–75 –63

n/a

n/a

19

–

19

8

–

8

A negative change indicates a decrease in the defined benefit obligation. A positive change indicates an increase in the defined benefit obligation. to be updated

–

–67

–67

–

–16

–16

187

–67

120

–137

–16

–153

Benefits paid

–56

56

–

–59

59

–

Contributions by the employer

–

–33

–33 –12 714

–

–55 –24

–55

Plan assets by categories at 31 December

Plan assets by categories 2016

Translation differences

–71

59

32

8

EURm

2016 2015 Quoted Unquoted Quoted Unquoted

Carrying value, at 31 December

1,573

–858

1,470

–851

619

Other 4%

Assets held by insurance companies 8%

Money market 1%

Money market Debt instruments Equity instruments

11

– – –

8

– – –

Property 8%

Debt instruments 31%

267 411

267 436

Actuarial risks

In the UK, the pensions in payment are tied to Retail Price Index whilst being tied to Consumer Price Index during deferment. An increase of 0.5% in indexes will increase the liabilities by some EUR 38 million. In Germany the pensions have to be adjusted in accordance with the Consumer Price Index. Salary risk The present value of the net retirement benefit assets and liabilities is calculated by reference to the expected future salaries of plan participants. An increase in the salary of the plan participants would increase the plan liabilities. In Finland, the salary risk is minor as well as in UK, where the changes in salary levels have no impact on the funding position as all defined benefit arrangements in UK are closed to future accrual. In Germany, an increase of 0.5% in expected future salaries would increase the obligation by EUR 16 million. Life expectancy Adjustments in mortality assumption have an impact on group’s defined benefit obligation. An increase in life expectancy by one year will increase the obligation in Finland by EUR 13 million, in the UK by EUR 17 million and in Germany by EUR 21 million.

Property

36

33

42

34

Defined benefit plans typically expose the group to the following actuarial risks: Investment risk (asset volatility) The group is exposed to changes of assets’ values especially in the investments of the foundations and schemes in Finland and in the UK. The asset values of these arrangements constitute 96% of total asset values in defined benefit plans within group. Interest risk Discount rates used in calculations are based on high-quality corporate bond yield curves in currency in which the benefits are paid. A decrease in the discount rate would increase the plan liabilities. The maturities of yields are reflecting the durations of the underlying obligations. The weighted average duration of group’s defined benefit obligation is 17 years (17 years) at the end of 2016. Inflation risk In the Finnish plan, the inflation risk is not significant as changes in the inflation assumption are mainly covered by the TyEL pooling system.

Assets held by insurance companies

– –

64 35

– –

64

to be updated

Other Total

–

Equity instruments 48%

726

132

753

98

Plan assets include the company’s shares with a fair value of EUR 1 million (1 million).

Plan assets by categories 2015

Assets held by insurance companies 8%

Money market 1%

In 2017 contributions of EUR 47 million are expected to be paid to group’s defined benefit plans. In 2016 contributions of EUR 33 million were paid to group’s defined benefit plans.

Debt instruments 31%

Property 9%

Equity instruments 51%

CONTENTS

ACCOUNTS

120

121

UPM Annual Report 2016

UPM Annual Report 2016