UPM Annual Report 2020

4. Capital employed UPM’s capital employed primarily relates to its production facilities and both forest and energy assets. UPM aims to capture growth opportunities in its existing business portfolio and invest in projects with attractive and sustainable returns.

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.

Key estimates and judgements

Accounting policies

Several actuarial assumptions are used in calculating the expense and liability related to the defined benefit plans. Statistical information

Defined benefit pension plans Plan benefits depend on salary and length of service. The defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the term of the related pension liability. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The cost of providing pensions is charged to the income statement as employee costs so as to spread the cost over the service lives of employees. Changes in actuarial assumptions and actuarial gains and losses arising from experience adjustments are charged or credited in other comprehensive income in the period in which they arise. Past service costs and gains or losses on settlement are recognised immediately in income when they occur. Defined contribution plans For defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. Other post-employment obligations Some group companies provide post-employment medical and other benefits to their retirees. The entitlement to healthcare benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.

Actuarial assumptions The weighted average principal assumptions used in the valuations of the defined benefit obligations are detailed below:

Capital employed

FINLAND

UK

GERMANY

OTHER COUNTRIES

2020 0.33 1.33 1.33 0.62

2019 0.74 1.31 1.31 0.53

2020 1.35 2.95

2019 2.05 3.00

2020 0.37 1.70 2.50 1.70

2019 0.93 1.70 2.50 1.70

2020 0.67 1.83 2.54 0.87

2019 1.23 1.70 2.44 0.95

2020 2019

Discount rate % Inflation rate %

Property, plant and equipment

4,316

4,083

Leased assets Forest assets

561

590

—

—

Rate of salary increase % Rate of pension increase %

2,077 1,936

2,097 2,145

2.90

2.95

Energy shareholdings

Expected average remaining working years of participants

Goodwill and other intangible assets

592

564

14.1

13.2

11.6

17.4

8.1

8.9

8.6

10.5

Operating working capital

1,247

1,451

Provisions

-222 -744

-144 -721

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.

Net retirement benefit assets and liabilities

EURm

0.5% INCREASE 0.5% DECREASE 2020 2019 2020 2019

Cash and cash equivalents Other assets and liabilities

1,720

1,536

215 -143

7

-156

-148

173

167

Discount rate %

Net deferred tax assets and liabilities Assets classified as held for sale

-153

15 92 86

26 93 78

-13 -88

-19 -84

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

—

18

Total

11,555

11,474

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

Plan assets by categories 2020

Other assets 2%

Assets held by insurance companies 5%

Plan assets by categories at 31 December

Money market 24%

EURm

2020 2019 Quoted Unquoted Quoted Unquoted

Property 10%

177 225 295

97

33

126

Money market Debt instruments Equity instruments

Equity instruments 30%

107

353 266

83 51 68 62 27

Debt instruments 29%

39 94 62 24

21

23

Property

Assets held by insurance companies

— —

— —

Other assets

Plan assets by categories 2019

Total 417 In 2020 plan assets include the company's ordinary shares with a fair value of EUR 2 million (2 million). In 2021 contributions of EUR 34 million are expected to be paid to group’s defined benefit plans. In 2020 contributions of EUR 33 million were paid to group’s defined benefit plans. 718 423 675

Other assets 2%

Assets held by insurance companies 6%

Money market 15%

Property 8%

Equity instruments 29%

Debt instruments 40%

168

UPM ANNUAL REPORT 2020 UPM FINANCIAL REPORT 2020 53 169

UPM ANNUAL REPORT 2020

UPM FINANCIAL REPORT 2020 52