UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

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 2017

Pension and other post-employment benefits 2016

FINLAND

UK

GERMANY

OTHER COUNTRIES

NET DEFINED BENEFIT LIABILITY/ (ASSET)

NET DEFINED BENEFIT LIABILITY/ (ASSET)

PRESENT VALUE OF OBLIGATION

PRESENT VALUE OF OBLIGATION

2017 1.55 1.80 1.80 0.67

2016 1.60 1.64 1.64 0.88

2017 2.50 3.40

2016 2.60 3.35

2017 1.65 1.70 2.50 1.70

2016 1.77 1.70 2.50 1.70

2017 1.83 1.91 2.55 0.95

2016 2.52 1.88 2.55 0.98

FAIR VALUE OF PLAN ASSETS

FAIR VALUE OF PLAN ASSETS

EURm

Discount rate % Inflation rate %

Carrying value, at 1 January

1,573

–858

714

1,470

–851

619

Rate of salary increase % Rate of pension increase %

n/a

n/a

3.25

3.20

Current service cost

13

–

13 30 14 57

12 –6 37 43

– –

12 –6 15 21

Expected average remaining working years of participants

Past service cost

151

–121

13.1

11.8

16.3

13.6

9.8

10.6

9.0

10.5

Interest expense (+) income (–)

32

–18

–22 –22

Total included in employee costs (Note 3.1)

195

–138

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

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.

–14

–

–14

–1

–

–1

26

–

26

169

–

169

–8

–

–8

19

–

19

–

–83

–83

–

–67

–67

Other assets 3% Plan assets by categories 2017

4

–83

–78

187

–67

120

Plan assets by categories at 31 December

Assets held by insurance companies 6%

Money market 7%

Benefits paid

–75 –21

75 21

– –

–56

56

– –

EURm

2017 2016 Quoted Unquoted Quoted Unquoted

Settlements paid

– –

–

Property 9%

Debt instruments 33%

Contributions by the employer

–

–61

–61

–33

–33 –12 714

Translation differences

–25

17

–8

–71

59

Money market Debt instruments Equity instruments

67

– 7 –

11

– – –

Carrying value, at 31 December

1,651

–1,028

623

1,573

–858

338 439

267 411

Equity instruments 42%

Property

48

41

36

33

Assets held by insurance companies

– –

57 30

– –

64 35

Other assets

Total

892

136

726

132

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

Plan assets by categories 2016

Actuarial risks

Other assets 4%

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 the UK, where the changes in salary levels have no impact on the funding position as all defined benefit arrangements in the UK are closed to future accrual. In Germany, an increase of 0.5% in expected future salaries would increase the obligation by EUR 18 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 18 million, in the UK by EUR 16 million and in Germany by EUR 25 million. Key estimates and judgements Several actuarial assumptions are used in calculating the expense and liability related to the defined benefit 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.

Money market 1%

Assets held by insurance companies 8%

In 2018 contributions of EUR 40 million are expected to be paid to group’s defined benefit plans. In 2017 contributions of EUR 61 million were paid to group’s defined benefit plans.

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 98% 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 16 years (17 years) at the end of 2017. 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. 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 35 million. In Germany the pensions have to be adjusted in accordance with the Consumer Price Index.

Debt instruments 31%

Property 8%

Equity instruments 48%

EURm

0.5% INCREASE 0.5% DECREASE 2017 2016 2017 2016 –131 –125 150 144

Discount rate %

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

21 74 60

18 77 53

–19 –71 n/a

–17 –75 n/a

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

CONTENTS

ACCOUNTS

128

129

UPM Annual Report 2017

UPM Annual Report 2017