UPM Annual Report 2019

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In 2019, costs under the Finnish statutory pension scheme for the President and CEO amounted to EUR 465,000 (471,000) and payments under the voluntary pension plan amounted to EUR 1,459,000 (923,000). In 2019, costs under the Finnish and German statutory pension schemes for Group Executive Team (GET) members (excluding the President and CEO) amounted to EUR 924,000 (988,000) and payments under the voluntary pension plan amounted to EUR 947,000 (880,000). The remuneration of the President and CEO and other members of the Group Executive Team consists of the base salary and benefits, short-term incentives and long-term share-based incentives. In 2019 and 2018, the short-term incentive plan for the President and CEO and other members of the Group Executive Team was linked to the achievement of the predetermined financial targets of the group or business area as well as individual targets. The maximum incentives amount to a total of 100% of the annual base salary to the Business Area Executives and to a total of 70% of annual base salary to the other members 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 3.4 million (3.0 million). According to the service agreement, the President and CEO was entitled to retire in November 2020 at the age of 60. At the 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 schemes: the Performance Share Plan (PSP) for senior executives and the Deferred Bonus Plan (DBP) for other key employees.

request of the company's Board of Directors, the President and CEO will continue as the President and CEO until further notice. The President and CEO has a voluntary pension benefit in addition to the Finnish statutory pension scheme. The President and CEO's voluntary pension benefit is arranged through a defined benefit plan. Under the defined benefit plan, the target pension is 60% of the average indexed earnings from the last ten full calendar years of employment calculated according to the Finnish statutory pension scheme. The expenses of the President and CEO’s defined benefit pension plan in 2019 were EUR 1.0 million (0.9 million). The plan assets amounted to EUR 14.9 million (11.5 million) and the obligation amounted to EUR 15.0 million (11.7 million). The retirement age of other members of the Group Executive Team is 63. Other Group Executive Team members are under defined contribution plans. Should the company or the President and CEO give notice of termination of the service agreement, no severance pay will be paid in addition to the salary for the 12-month notice period. For GET members, 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 a GET member 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 service agreement within three months and each GET member within one month from closing the takeover and shall receive compensation equivalent to 24 months' base salary. Performance Share Plan The Performance Share Plan (PSP) is targeted at the President and CEO and other Group Executive Team (GET) members as well as other selected members of the management. Under the ongoing plans UPM shares are awarded based on 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.

DEFERRED BONUS PLANS No. of participants (at grant)

DBP 2016

DBP 2017

DBP 2018

DBP 2019

340 303

360 304

370 330

390 367

No. of participants (at 31 December 2019) Max no. of shares to be delivered (at grant)

770,000 350,261

525,000 291,340

450,000 294,665

460,000 165,711

Estimated no. of shares to be delivered at 31 December 2019 1)

Share delivery (year)

2019

2020

2021

2022

Earning criteria

Group/Business Area EBITDA

1) For DBP 2016 and DBP 2017, the gross number of shares actually earned

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.

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.

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:

2019

2018

OTHER COUNTRIES

EURm

FINLAND

UK GERMANY

TOTAL FINLAND

UK GERMANY

TOTAL

Present value of funded obligations

542 509 -579 -491

39 -3 37

19 1,108 481 451 -20 -1,092 -518 -417

33 -3 31

17 982 -18 -956

Fair value of plan assets Deficit (+)/surplus (-)

-37

-1

-38

-1

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)

— — 596

79 675 78 691

— — 512

75 587

-37

17 633

-38

34 542

612

PERFORMANCE SHARE PLANS

PSP 2016–2018 PSP 2017–2019 PSP 2018–2020 PSP 2019–2021

No. of participants at 31 December 2019

-38

— — — -38

-38

— — — -38

Actual achievement

100%

—

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

17 633

78 729

— 34 542

74 650

112,500 319,500 240,500 672,500

92,500 275,500 169,000 537,000

84,100

94,072 313,600 236,850 644,522

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 30 million (29 million) in 2019.

to other members of GET

264,400 181,000 529,500

to other selected members of management

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). 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.

Total max no. of shares to be delivered

Share delivery (year)

2019

2020

2021

2022

Earning criteria (weighting)

Total shareholder return (100%)

1) For PSP 2016–2018 and PSP 2017–2019, the gross number of shares actually earned.

Deferred Bonus Plan The Deferred Bonus Plan (DBP) is targeted at other selected key employees 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.

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UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

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