UPM Annual Report 2019

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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.

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.

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 2019

Pension and other post-employment benefits 2018

FINLAND

GERMANY

OTHER COUNTRIES

2019 0.74 1.31 1.31 0.53

2018 1.79 1.69 1.69 0.65

2019 2.05 3.00 n/a 2.95

2018 3.00 3.40 n/a 3.25

2019 0.93 1.70 2.50 1.70

2018 1.88 1.70 2.50 1.70

2019 1.23 1.70 2.44 0.95

2018 2.07 1.86 2.53 0.95

NET DEFINED BENEFIT LIABILITY/ (ASSET)

Discount rate % Inflation rate %

PRESENT VALUE OF OBLIGATION

FAIR VALUE OF PLAN ASSETS

EURm

Rate of salary increase % Rate of pension increase %

Carrying value, at 1 January

1,569

-956

612

1,651

-1,028

623

Expected average remaining working years of participants

Current service cost

— —

13.2

13.9

17.4

16.5

8.9

9.3

10.5

9.4

Past service cost

—

Interest expense (+) income (–)

34 47

-22 -22

12 25

31 49

-20 -20

11 29

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

2019 -148

2018 -121

2019

2018

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

Discount rate %

167 -19

137 -16

—

-5

—

-5

Rate of salary increase %

Rate of pension increase %

228

—

228

-90

—

-90

93 78

67 57

-84 n/a

-64

Life expectancy +1 year n/a A negative change indicates a decrease in the defined benefit obligation. A positive change indicates an increase in the defined benefit obligation.

-16

—

-16

—

-130

—

211

-130

-59

Plan assets by categories at 31 December

Benefits paid

-67

—

-68

—

Contributions by the employer

—

-30 -21

-30

— -4

-40

EURm

2019 2018 Quoted Unquoted Quoted Unquoted

Translation differences

-1

Carrying value, at 31 December

1,784

-1,092

691

1,569

-956

612

Money market Debt instruments Equity instruments

126

—

353 266

83 51 68

307 439

—

Property

Actuarial risks

Assets held by insurance companies

— 62 — 27

— 54 — 26

Defined benefit plans typically expose the group to the following actuarial risks:

being tied to Consumer Price Index during deferment. An increase of 0.5% in indexes will increase the liabilities by some EUR 39 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 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 23 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 22 million, in the UK by EUR 23 million and in Germany by EUR 31 million.

Other assets

Total 154 In 2019 plan assets include the company's ordinary shares with a fair value of EUR 2 million (1 million). In 2020 contributions of EUR 38 million are expected to be paid to group’s defined benefit plans. In 2019 contributions of EUR 30 million were paid to group’s defined benefit plans. 675 417 802

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 18 years (16 years) at the end of 2019. 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

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UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

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