UPM Annual Report 2018

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UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

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. The group classifies the transactions with net settlement features for tax obligations as equity-settled in its entirety. 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.

Present value of obligation and fair value of plan assets

Pension and other post-employment benefits 2018

Pension and other post-employment benefits 2017

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.

NET DEFINED BENEFIT LIABILITY/ (ASSET)

PRESENT VALUE OF OBLIGATION

FAIR VALUE OF PLAN ASSETS

PRESENT VALUE OF OBLIGATION

FAIR VALUE OF PLAN ASSETS

EURm

Carrying value, at 1 January

1,651

–1,028

623

1,573

–858

714

Current service cost

– –

–

13 30 14 57

Past service cost

151

–121

Interest expense (+) income (–)

31 49

–20 –20

11 29

–18

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

–5

–

–5

–14

–

–14

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

–90

–

–90

–

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:

–

–8

–

–8

–

–83

–59

–83

–78

Benefits paid

–68

– –

–75 –21

75 21

– –

2018

2017

Settlements paid

– –

–

OTHER COUNTRIES TOTAL FINLAND UK GERMANY

OTHER COUNTRIES TOTAL

Contributions by the employer

–40

–

–61

EURm

FINLAND UK GERMANY

Translation differences

–4

–1

–25

–8

Present value of funded obligations Fair value of plan assets Deficit (+)/surplus (-) Present value of unfunded obligations Net defined benefit liability (+)/asset (-) Net retirement benefit asset in the balance sheet Net retirement benefit liability in the balance sheet 1)

Carrying value, at 31 December

1,569

–956

612

1,651

–1,028

623

481 451 –518 –417 –38 34

33 –3 31

17 982 –18 –956

474 522 –557 –450 –83 73

34 –3 31

18 1,047 –19 –1,028

–1

– –

512

75 587

– –

526

79 604

–38 34

542

74 612

–83 73

557

77 623

Actuarial risks

–38

–

– –38

–83

–

–1 –84

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 14 million and in Germany by EUR 24 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.

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 (16 years) at the end of 2018. 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 29 million. In Germany the pensions have to be adjusted in accordance with the Consumer Price Index.

– 34

542

74 650

– 73

557

78 707

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 29 million (29 million) in 2018.

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% (82%) of group´s Finnish employees are insured with an insurance company and these arrangements qualify as defined contribution plans. Approximately 18% (18%) of employees are insured with TyEL foundation (UPM Sellutehtaiden eläkesäätiö, former 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.

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CONTENTS

ACCOUNTS

UPM ANNUAL REPORT 2018

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