UPM Annual Report 2020

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.

Present value of obligation and fair value of plan assets

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:

Pension and other post-employment benefits 2020

Pension and other post-employment benefits 2019

NET DEFINED BENEFIT LIABILITY/ (ASSET)

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

1,784

-1,092

691

1,569

-956

612

14

— — —

14

13

— — —

13

Current service cost

2020

2019

-2 -6

-2 -6

— —

— —

Past service cost

OTHER COUN TRIES TOTAL FINLAND UK GERMANY

OTHER COUN

Gains and losses arising from settlements

20 27

-14 -14

7

34 47

-22 -22

12 25

EURm

FINLAND

UK GERMANY

TRIES TOTAL

Interest expense (+) income (–)

13

Present value of funded obligations

581 -606

539 -515

43

16 -16

1,180 -1,140

542 -579

509 -491

39

19 -20

1,108 -1,092

Total included in employee costs (Note 3.1) 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

Fair value of plan assets Deficit (+)/surplus (–) Present value of unfunded obligations

-3

-3

-3

-3

-25

24

40

39

-37

17

37

-1

16

163

163

228

228

606

74

679

596

79

675

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

-21

-21

-16

-16

-25

24

646

74

719

-37

17

633

78

691

-90

-90

-130

-130

-26

-26

-38

-38

140

-90 63 -33 26

50

211

-130

81

1

24

646

74

745

2

17

633

78

729

-63

-67

67 -30 -21

Benefits paid

1) Net retirement benefit liability in the balance sheet includes other long-term employee benefits of EUR 25 million (30 million) in 2020.

-33

-30

Contributions by the employer

-28

-2

24

3

Translation differences

Carrying value, at 31 December

1,859

-1,140

719

1,784

-1,092

691

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 81% (82%) of group´s Finnish employees are insured with an insurance company and these arrangements qualify as defined contribution plans. Approximately 19% (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. 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

Actuarial risks

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 13 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 25 million, in the UK by EUR 26 million and in Germany by EUR 34 million.

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 17 years (18 years) at the end of 2020. 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 43 million. In Germany the pensions have to be adjusted in accordance with the Consumer Price Index.

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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