UPM Annual Report 2017

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of the Group Executive Team. For the President and CEO the maximum annual incentive amounts to 150% of the annual base salary. The expenses recognised in income statement in respect of share- based payments for the Group Executive Team were EUR 7.8 million (9.2 million). In accordance with the executive contract, the retirement age of the President and CEO Jussi Pesonen is 60. For the President and CEO, the target pension is 60% of the average indexed earnings from the last ten years of employment calculated according to the Finnish statutory pension scheme. The cost of lowering the retirement age to 60 is covered by supplementing the statutory pension with a voluntary defined benefit pension plan. Should the President and CEO leave the company before reaching the age of 60, an immediate vesting right corresponding to 100% of the earned pension (pro rata) will be applied. The expenses of the President and CEO’s defined benefit pension plan in 2017 were EUR 0.6 million (0.5 million). The plan assets amounted to EUR 10.9 million (2.6 million) and the obligation amounted to EUR 10.4 million (1.8 million).

The retirement age of other members of the Group Executive Team is 63. Other Group Executive Team members are under defined contribution plans. If notice of termination is given to the President and CEO, severance pay of 24 months' base salary will be paid in addition to the salary for the six-month notice period. Should the President and CEO give notice of termination to the company, no severance pay will be paid in addition to the salary for the notice period. For other members of the Group Executive Team, the period for severance pay is 12 months in addition to the six months’ salary for the notice period, unless notice is given for reasons that are solely attributable to the executive. Should other member of the Group Executive Team give notice of termination to the company, no severance pay will be paid in addition to the salary for the notice period. If there is a change of control in the company, the President and CEO may terminate his executive contract within three months and other members of the Group Executive Team within one month from the date of the event that triggered the change of control and shall receive compensation equivalent to 24 months' base salary.

Accounting policies The group’s long-term share incentive plans are recognised as equity- settled or cash-settled share-based payment transactions depending on the settlement. Shares are valued using the market rate on the grant date. The settlement is a combination of shares and cash. The group may obtain the necessary shares by using its treasury shares or may purchase shares from the market. PSP and DBP share deliveries are executed by using already existing shares and the plans, therefore, have no dilutive effect.

The indicated actuals and estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent the gross amount of the rewards of which the applicable taxes will be deducted before the shares are delivered to the participants. The amount of estimated payroll tax accruals accounted for as share- based payment liabilities at 31 December 2017 were EUR 26.2 million (22.7 million).

3.4 Retirement benefit obligations The group operates various pension schemes in accordance with local conditions and practices in the countries of operations. Retirement benefits are employee benefits that are payable usually after the termination of employment, such as pensions and post-employment medical care. The pension plans are generally funded through

payments to insurance companies or to trustee-administered funds or foundations and classified as defined contribution plans or defined benefit plans. Defined benefit assets and liabilities recognised in the balance sheet are presented below:

3.3 Share-based payments UPM offers rewards and recognition with an emphasis on high performance. All UPM’s employees belong to a unified annual Short Term Incentive (STI) scheme. In addition, UPM has two long-term incentive plans: the Performance Share Plan (PSP) for senior executives and the Deferred Bonus Plan (DBP) for other key employees.

Performance Share Plan The Performance Share Plan (PSP) is targeted at Group Executive Team (GET) members and other selected members of the management. Under the ongoing plans the UPM shares are awarded based on the total shareholder return during a three-year earning period. The earned shares are delivered after the earning period has ended. Total shareholder return takes into account share price appreciation and paid dividends.

2017

2016

OTHER COUNTRIES TOTAL

EURm

FINLAND UK GERMANY

Present value of funded obligations Fair value of plan assets

474 522 –557 –450 –83 73

34 –3 31

327 563 –396 –426 –70 137

34 –3 31

18 1,047 –19 –1,028

963

–33 –858

Deficit (+)/surplus (-)

–1

104

Present value of unfunded obligations

–

526

79 604

–

520

610

PERFORMANCE SHARE PLANS

PSP 2014-2016

PSP 2015-2017

PSP 2016-2018

PSP 2017-2019

Net defined benefit liability (+)/ asset (-) Net retirement benefit asset in the balance sheet Net retirement benefit liability in the balance sheet 1)

No. of participants at 31 December 2017

–83 73

557

77 623

–70 137

552

714

Actual achievement

100%

100 %

–

Max no. of shares to be delivered 1) to the President and CEO

–83

–

–70

–

–1

–84

–1

–71

116,785 352,689 280,284 749,758

107,196 325,876 252,980 686,052

112,500 360,000 263,000 735,500

92,500 308,500 240,000 641,000

to other members of GET to other key individuals

–

557

78 707

– 137

552

95 784

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 29 million (33 million) in 2017.

Total max no. of shares to be delivered

Share delivery (year)

2017

2018

2019

2020

Earning criteria (weighting)

Total shareholder return (100%)

About 95% of the group’s defined benefit arrangements exist in Finland, in the UK and in Germany. The group has defined benefit obligations also in Austria, Holland, France, Canada and in the US. Approximately a quarter of UPM´s employees are active members of defined benefit arrangement plans. Finland In Finland employers are obliged to insure their employees for statutory benefits, as determined in Employee’s Pension Act (TyEL). TyEL provides the employee with insurance protection for old age, disability and death. The benefits can be insured with an insurance company or the employer can establish a fund or a foundation to manage the statutory benefits. Approximately 82% (90%) of group´s Finnish employees are insured with an insurance company and these arrangements qualify as defined contribution plans. Approximately 18% (10%) of employees are insured with TyEL foundation (Kymin eläkesäätiö). The TyEL foundation is administered by the representatives of both the employer and the employees. The foundation has named an authorised representative to take care of its regular operations. The plan is supervised by Financial Supervisory Authority. The foundation

is classified as a defined benefit plan for the benefits that must be funded nationally and is the most significant defined benefit pension plan in Finland for UPM. In 2017, past service costs include EUR 30 million relating to the reorganisation of pension schemes in Finland. 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 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.

1) For PSP 2014–2016 and PSP 2015–2017, the gross number of shares actually earned.

Deferred Bonus Plan The Deferred Bonus Plan (DBP) is targeted at other selected key employees of the group and it consists of annually commencing plans. Each plan consists of a one-year earning period and a two-year restriction period. UPM shares are awarded based on achievement of

group or group and business area EBITDA targets. Prior to share delivery, the share rewards earned are adjusted with dividends and other capital distributions, if any, paid to all shareholders during the restriction period.

DEFERRED BONUS PLANS No. of participants (at grant)

DBP 2014

DBP 2015

DBP 2016

DBP 2017

395 367

350 321

340 323

360 350

No. of participants (at 31 December 2017) Max no. of shares to be delivered (at grant)

950,000 317,125

800,000 382,497

770,000 363,851

525,000 334,986

Estimated no. of shares to be delivered at 31 December 2017 1)

Share delivery (year)

2017

2018

2019

2020

Earning criteria

Group/Business area EBITDA

1) For DBP 2014 and DBP 2015, the gross number of shares actually earned.

CONTENTS

ACCOUNTS

126

127

UPM Annual Report 2017

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