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Note 20 Post-employment benefits

Accounting principles

Employee benefits

The Group operates a number of defined benefit and contribution plans throughout the world, the assets of which are generally held in separate trustee administered funds. Such pension and post-retirement plans are generally funded by payments from employees and by the relevant group companies, taking into account the recommendations of independent qualified actuaries. Employer contributions to the defined contribution pension plans are charged to the Consolidated income statement in the year they relate to.

For defined benefit plans, accounting values are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the Consolidated Income Statement to spread the regular cost over the service lives of employees in accordance with the advice of qualified actuaries who carry out a full valuation of the plan every year in all major pension countries. The pension obligation is measured as the present value of the estimated future cash outflows using interest rates of highly rated corporate bonds or government securities, as appropriate, that match the currency and expected duration of the related liability.

The Group immediately recognises all actuarial gains and losses arising from defined benefit plans directly in equity, as disclosed in its Consolidated Statement of Comprehensive Income. Past service costs are identified at the time of any amendments to the plans and are recognised immediately in the Consolidated income statement regardless of vesting requirements. In the group’s Consolidated statement of financial position, the full liability for all plan deficits is recorded. 


 

The Group has established a number of pension and other benefit plans for its operations throughout the world, the cost of which amounted to EUR 166 (EUR 165) million in 2017, as shown in Note 6 Personnel expenses. The majority of the plans are defined contribution schemes, the charge for which amounted to EUR 154 (EUR 153) million.

In accordance with their respective pension arrangements, Group Leadership Team members may retire at 65 years of age with pensions consistent with local practices in their respective home countries. The retirement age for other management teams in companies in the Stora Enso group follows local law and practices, though some management team members have the right to retire earlier, between 60 and 65 years. The retirement age for other staff either follows national retirement ages or is determined by local labour agreements. In the latter case, there may be certain pre-retirement liabilities accruing to the company to cover the income of the early retirees between the age at which they ceased working and the national retirement age.

Stora Enso’s total defined benefit obligations for current and former members of staff amount to EUR 1 139 (EUR 1 223) million, though assets of EUR 762 (EUR 787) million have been put aside in various pension schemes to cover these liabilities. The net funding position of the defined benefit plans is shown in full in the Statement of Financial Position and amounted to EUR 377 million in 2017, a decrease of EUR 59 million on the previous year’s liability of EUR 436 million. The decrease was mainly caused by experience gains in both assets and liabilities totalling EUR 48 million. Interest costs are entered under financial costs. The 2017 defined benefit expense in the Income Statement amounts to EUR 19 million and the actuarial gains recorded in other comprehensive income amount to EUR 61 million. The 2016 defined benefit expense in the Income Statement amounted to EUR 20 million and the actuarial losses recorded in other comprehensive income amounted to EUR 62 million.

Actuarial gains/losses recognised directly in equity
Year Ended 31 December
Total Operations
EUR million 2017 2016
Actuarial gains/losses 61 -62
Deferred tax thereon -10 15
Total 51 -47

Group policy for funding deficits is intended to satisfy local statutory funding requirements for tax deductible contributions together with adjusting the discount factors used in the actuarial calculations for market rates. However, the emphasis of the Group is to provide defined contribution schemes for its post-employment benefits, thus all aspects of the provision and accounting for defined benefit schemes are evaluated. The net liability in the Group Statement of financial position reflects the actual deficits in the defined benefit plans. Details of the pension arrangements, assets and investment policies in the Group’s main operating countries are shown below.

 

 

 

Finland

The Group funds its Finnish pension obligations mainly through defined contribution schemes, the charge in the Income Statement being EUR 72 (EUR 72) million. By contrast, the remaining obligations covered by defined benefit schemes resulted in a charge of EUR 1 (EUR 1) million excluding finance costs. Pension cover since 2001 has been organised entirely through local insurance companies. The total defined benefit obligation amounts to EUR 318 (EUR 342) million and the assets to EUR 294 (EUR 323) million, leaving a net liability of EUR 24 (EUR 19) million. As state pensions in Finland provide by far the greatest proportion of pensions, Group liabilities are proportionately much smaller than in comparable countries.

Plan assets in Finland are managed by insurance companies. Details of the exact structure and investment strategy surrounding plan assets are not available to participating employers as the assets actually belong to the insurance companies themselves. The assets are managed in accordance with EU regulations, and also national requirements, under which there is an obligation to pay guaranteed benefits irrespective of market conditions.

Germany

German pension costs amounted to EUR 7 (EUR 9) million, of which EUR  6 (EUR 8) million related to defined contribution schemes and EUR 1 (EUR 1) million to defined benefits excluding finance costs. The total defined benefit obligation is EUR 258 (EUR 284) million, nearly all of which is unfunded as total assets come to only EUR 7 (EUR 7) million. The net liability decreased from EUR 277 million to EUR 251 million. The decrease in net liability arose mainly from an increase in the discount rate and changes in experience. Defined benefit pension plans are mainly accounted for in the Statement of financial position through book reserves with some minor plans using insurance companies or independent trustees. Retirement benefits are based on years worked and salaries received during the pensionable service and the commencement of pension payments are linked to the national pension scheme’s retirement age. Pensions are paid directly by the companies themselves to their former employees, this amounting to cash costs of EUR 0 (EUR 1) million; the security for the pensioners is provided by the legal requirement that the book reserves held in the Statement of financial position are insured up to certain limits.

Sweden

In Sweden, most blue-collar workers are covered by defined contribution schemes, the charge in the Income statement being EUR 56 (EUR 54) million, with defined benefit schemes covering mainly white-collar staff.

Total defined benefit obligations amounted to EUR 352 (EUR 378) million and the assets came to EUR 298 (EUR 295) million, leaving a net liability of EUR 54 million at the year end, compared with a net liability of EUR 83 million the year before. This reduction in net liability arose from an increase in the discount rate and changes in financial assumptions and experience. Stora Enso has undertaken to pay all local legal pension liabilities for the main ITP scheme to the foundation, thus the remaining liability relates to other small schemes.

The long-term investment return target for the foundation is a 3% real return after tax. Stora Enso’s Swedish pension fund conducts an annual asset/liability study to optimise its risk parameters.

Other countries

Total defined benefit obligations in the remaining countries amounted to EUR 211 (EUR 219) million and the assets to EUR 163 (EUR 162) million. The net liability came to EUR 48 (EUR 57) million. Obligations and assets were material only in the United Kingdom, at EUR 145 (EUR 150) million and EUR 129 (EUR 127) million, respectively, leaving a net liability of EUR 16 (EUR 23) million at the end of 2017. The reduction in net liability arose from changes in actuarial assumptions.

 

 

Group

Net defined benefit obligation reconciliation
Year Ended 31 December
EUR million 2017 2016
Present Value of Defined Benefit Obligation
Defined benefit obligation at 1 January 1 223 1 203
Translation difference -17 -35
Interest on liabilities 20 28
Current service cost 13 12
Actuarial gains and losses on defined benefit obligation arising from changes in demographic assumptions -3 -
Actuarial gains and losses on defined benefit obligation arising from changes in financial assumptions -10 118
Actuarial gains and losses on defined benefit obligation arising from experience adjustments -24 -19
Benefit payments -63 -64
Net disposals/acquisitions -1 -20
Other 1 -
Defined benefit obligation at 31 December 1 139 1 223
Fair Value of Plan Asset
Fair value of plan asset at 1 January -787 -825
Translation difference 13 33
Expected return on plan assets -14 -20
Actuarial gain/loss on plan assets -24 -37
Employer contributions 3 14
Benefit payments 47 47
Net disposals/acquisitions - 1
Fair value of plan asset at 31 December -762 -787
Net Defined Benefit Obligation 377 436
Amounts Recognised on the Statement of Financial Position – Defined Benefit Plans
As at 31 December
Total Defined Benefit Plans Defined Benefit Pension Plans Other Post-Employment Benefits
EUR million 2017 2016 2017 2016 2017 2016
Present value of funded obligations 851 909 851 908 - 1
Present value of unfunded obligations 288 314 264 289 24 25
Defined benefit obligations (DBO) 1 139 1 223 1 115 1 197 24 26
Fair value of plan assets 762 787 762 786 - 1
Net Liability in Defined Benefit Plans 377 436 353 411 24 25
Amounts Recognised in the Income Statement
Year Ended 31 December
Total Defined Benefit Plans Defined Benefit Pension Plans Other Post-Employment Benefits
EUR million 2017 2016 2017 2016 2017 2016
Operating costs
Current service cost 13 12 12 12 1 -
Finance cost
Net interest on net defined benefit liability 6 8 6 7 - 1
Cost recognised in Income Statement 19 20 18 19 1 1
Statement of Actuarial Gains and Losses
Year Ended 31 December
EUR million 2017 2016
Gain/loss on pension scheme assets 24 37
Gain/loss arising on pension scheme liabilities 37 -99
Total Gain/loss 61 -62
Defined Benefit Plans: Country Assumptions Used in Calculating Benefit Obligations
Year Ended 31 December
Finland Germany Sweden
2017 2016 2017 2016 2017 2016
Discount rate % 1.4 1.2 1.5 1.2 2.5 2.2
Future salary increase % 2.5 2.6 2.5 2.5 2.7 2.5
Future pension increase % 1.8 1.5 1.8 1.8 1.8 1.6
Average current retirement age 64.0 63.9 63.0 63.0 65.0 65.0
Weighted average life expectancy 87.0 89.0 86.0 85.0 89.3 89.3
Sensitivity of the Defined Benefit Pension Obligation
Impact on Defined Benefit Obligation
Change in assumption Increase in assumption Decrease in assumption
Discount rate 0.50% Decrease by 6.7% Increase by 7.5%
Salary growth rate 0.50% Increase by 1.5% Decrease by 1.3%
Pension growth rate 0.50% Increase by 5.7% Decrease by 5.3%
Increase by 1 year in assumption Decrease by 1 year in assumption
Life expectancy Increase by 3.4% Decrease by 3.4%

Interest rate risk: The obligations are assessed using market rates of high-quality corporate or government bonds to discount the obligations and are therefore subject to any volatility in the movement of the market rate. The net interest income or expense recognised in profit and loss are also calculated using the market rate of interest.

Mortality risk: In the event that members live longer than assumed, the obligations may be understated originally and a deficit may emerge if funding has not adequately provided for the increased life expectancy.

Duration of Pension Plans
Years Finland Sweden Germany UK
At 31 December 2016 10.0 15.8 13.5 18.5
At 31 December 2017 10.0 15.5 12.9 17.2

Defined Benefit Plan Summary by Country as at 31 December 2017
As at 31 December 2017
EUR million Finland Germany Sweden Other Total
Present value of funded obligations 318 18 331 184 851
Present value of unfunded obligations - 240 21 27 288
Defined benefit obligations (DBO) 318 258 352 211 1 139
Fair value of plan assets 294 7 298 163 762
Net liability in the defined benefit plans 24 251 54 48 377
Net Liability in the Balance Sheet 24 251 54 48 377
Represented by
Defined benefit pension plans 24 251 54 24 353
Other post-employment benefits - - - 24 24
Net Liability in the Balance Sheet 24 251 54 48 377
Defined Benefit Plan Summary by Country as at 31 December 2016
As at 31 December 2016
EUR million Finland Germany Sweden Other Total
Present value of funded obligations 342 19 356 192 909
Present value of unfunded obligations - 265 22 27 314
Defined benefit obligations (DBO) 342 284 378 219 1 223
Fair value of plan assets 323 7 295 162 787
Net liability in the defined benefit plans 19 277 83 57 436
Net Liability in the Balance Sheet 19 277 83 57 436
Represented by
Defined benefit pension plans 19 277 83 32 411
Other post-employment benefits - - - 25 25
Net Liability in the Balance Sheet 19 277 83 57 436
Plan Assets
As at 31 December
2017 2016
EUR million Value % Value %
Equity 261 34.2 268 34.0
Government bonds 40 5.3 82 10.4
Corporate bonds 211 27.7 258 32.8
Debt 251 33.0 340 43.2
Property 66 8.6 68 8.7
Cash 38 5.0 53 6.8
Others 146 19.2 58 7.3
Total Pension Fund Assets 762 100.0 787 100.0
Plan assets do not include any real estate or other assets occupied by the group or the Company's own financial instruments. The breakdown of Finnish pension assets EUR 294 (323) million is not disclosed separately as actual asset allocations can only be estimated based on known target values published by the insurance companies concerned.

The two main financial factors affecting group pension liabilities are changes in interest rates and inflation expectations, so the aim of asset investment allocations is to neutralise these effects and maximise returns.

In 2018 contributions of EUR 21 million are expected to be paid.

In 2017 reimbursements of EUR 3 (EUR 14) million were paid.

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