DCSIMG
25 Post-employment benefits - Annual Report 2015 - DSM

25 Post-employment benefits

The group operates a number of defined benefit plans and defined contribution plans throughout the world, the assets of which are generally held in separately administered funds. The pension plans are generally funded by payments from employees and from the relevant group companies. The group also provides certain additional healthcare benefits to retired employees in the US.

Post-employment benefits relate to obligations that will be settled in the future and require assumptions to project benefit obligations. Post-employment benefit accounting is intended to reflect the recognition of post-employment benefits over the employee’s approximate service period, based on the terms of the plans and the investment and funding. The accounting requires management to make assumptions regarding variables such as discount rate, future salary increases, life expectancy, and future healthcare costs. Management consults with external actuaries regarding these assumptions at least annually for significant plans.

Changes in these key assumptions can have a significant impact on the projected defined benefit obligations, funding requirements and periodic costs incurred.

The charges for pension costs recognized in the income statement (note 4) relate to the following:

Table 1: Pension costs

Pension costs
 
2015
2014
     
Defined benefit plans:
   
Pension costs included in employee benefit costs:
   
- Current service costs pension plans
35
27
- Healthcare plans
1
1
- Other post-employment benefits
2
1
     
Defined contribution plans
84
77
Total pension costs included in employee benefits costs
122
106
     
- Pension costs included in Other operating income
(12)
(4)
     
Total Continuing operations
110
102
Discontinued operations
9
14
Pension costs included in Financial income and expense
11
12
Pension costs included in Exceptional items
(11)
(8)
     
Total
119
120

For 2016, costs (continuing operations) for the defined benefit plans relating to pensions will be €49 million (2015: €38 million).

Changes in Employee benefits liabilities recognized in the balance sheet are disclosed in the following overview:

Table 2: Employment benefits liabilities

Employment benefits liabilities
 
2015
2014
     
Balance at 1 January
524
360
     
Changes:
   
- Balance of actuarial
(gains) / losses
61
167
- Employee benefits costs
29
31
- Contributions by employer
(79)
(49)
- Acquisitions
1
-
- Disposals
(20)
-
- Exchange differences
21
14
- Reclassification from/to held for sale
-
1
- Other changes
3
-
     
Total changes
16
164
     
Balance at 31 December
540
524

The Employee benefits liabilities of €540 million (2014: €524 million) consist of €521 million related to pensions (2014: €478 million), €7 million related to healthcare and other costs (2014: €33 million), and €11 million related to other post-employment benefits (2014: €13 million).

Pensions

The DSM group companies have various pension plans, which are geared to the local regulations and practices in the countries in which they operate. As these plans are designed to comply with the statutory framework, tax legislation, local customs and economic situation of the countries concerned, it follows that the nature of the plans varies from country to country. The plans are based on local legal and contractual obligations.

DSM’s current policy is to offer defined contribution retirement benefit plans to new employees wherever possible. However, DSM still has a (small) number of defined benefit pension and healthcare schemes from the past. Generally, these schemes have been funded through external trusts or foundations, where DSM faces the potential risk of funding shortfalls. The most significant defined benefit schemes are:

  • Pension Plan at DSM Nutritional Products AG in Switzerland (DNP AG)
  • DSM UK Pension Scheme in the UK
  • Consolidated Pension Plan from DSM Services USA in the US
  • Pension Plan at DSM Nutritional Products GmbH in Germany (DNP GmbH)

For each plan the following characteristics are relevant:

DNP AG Pension Plan in Switzerland

The DNP AG Pension Plan is a typical Swiss Cash Balance plan. For accounting purposes this plan is qualified as a DB plan. It is a contribution based plan. There is no promise of indexation for on-going pensions. The Swiss state minimal requirements for occupational benefit plans have however to be respected; the Minimum Guaranteed Interest Return on the cash balance accounts for 2014-2015 was 1.75% for the mandatory portion (BVG/LPP). There is also a minimal conversion rate applicable.

The pension plan is managed and controlled by a DSM company pension fund. The board of Trustees consists of representatives of the employer and the employees who have an independent role.

The plan assets are collectively invested (no individual investment choice). The investment strategy is supported by an ALM study. The latest ALM study was done in 2012; a new study is planned for 2016.

The risk budget for the pension fund is determined as the acceptable probability of the coverage ratio to at least exceed a threshold ratio of 90% for any given investment strategy. This probability was set at 95%.

The current funding level, based on local standards, is 116% (estimate September 2015), which is above the legally required minimum funding level.

DSM UK Pension Scheme

The DSM UK Pension Scheme is an average pay pension plan for benefits accrued post 31 December 2011 (final pay for benefits accrued prior to 1 January 2012) with an unconditional indexation policy. The pension plan is managed and controlled by a DSM company pension fund. The board of Trustees consists of representatives of the employer and the employees who have an independent role.

In 2015, an ALM study was performed to support the development of a de-risking strategy.

The current funding level, based on local standards, is 83% (estimate September 2015). In the UK, funding requirements are a result of the triennial valuation. The latest valuation was performed at year-end 2012. This resulted in an annual recovery contribution (GBP 1 million) and a company guarantee of GBP 14 million. A new valuation will be performed in the course of 2016 (based on the year-end 2015 position).

Consolidated Plan in the US

The Consolidated Plan in the US is closed to new entrants as of 31 December 2004. Accrual is still applicable for participants who have chosen to stay in this plan. The 2015 disposal of the Bulk Chemicals activities has led to a 50% reduction of the active participants in this plan.

The pension plan is a (smoothed) final pay benefit plan without indexation; only the employer is required to contribute to the plan. The pension plan is managed and controlled by a DSM company pension fund. The board of Trustees consists of representatives of the employer and the employees who have an independent role. Since 2011, there is a separate investment strategy for the closed plan (liability related to divested businesses/companies) and the open plan (liability related to the current businesses/companies). The investment strategy for the closed plan has a very low risk profile, whereas the investment strategy for the open plan anticipates on expected future returns on equity. This investment strategy is supported by an ALM study which was carried out in 2014. For both the open and the closed plan there is a de-risking strategy applicable to assure that the asset will be de-risked if the funding level improves. The internal funding policy of this plan is based on IFRS valuation. This implies a stricter funding policy than the minimum requirements on local funding. The current IFRS funding level is 84% (31 December 2015), whereas the funding level on local standards (PPA) is 111% (estimate 31 December 2015). The minimum required funding level on local standards is 80% on a PPA-basis.

DNP GmbH Pension Plan in Germany

The DNP GmbH Pension Plan in Germany is closed to new entrants as of 31 December 2008. Accrual is still applicable for employees who are participating in the plan since 2008. The pension plan is a final pay pension plan (averaged over last 12 months prior to retirement) and service related benefit. The liability is on the balance sheet of DNP GmbH. No assets are allocated to this liability. All the reimbursements will be paid out by DNP GmbH.

The most important unfunded plans are in Germany. They amount to €296 million (2014: €294 million).

The changes in the present value of the defined benefit obligations and in the fair value of plan assets of the major plans are listed below:

Table 3: Present value of defined benefit obligations

Present value of defined benefit obligations
 
2015
2014
     
Balance at 1 January
1,564
1,279
     
Changes:
   
- Service costs
37
26
- Interest costs
34
40
- Contributions
14
13
- Actuarial (gains)/losses
43
223
- Past service costs
(4)
-
- Curtailments/termination benefits
(9)
(8)
- Acquisitions/disposals
(2)
-
- Exchange differences
131
59
- Settlements
-
(16)
- Benefits paid
(63)
(52)
     
Balance at 31 December
1,745
1,564

Table 4: Fair value of plan assets

Fair value of plan assets
 
2015
2014
     
Balance at 1 January
1,086
958
     
Changes:
   
- Interest income on plan assets
24
29
- Actuarial gains/(losses)
(22)
61
     
Actual return on plan assets
2
90
- Contributions by employer
57
33
- Contributions by employees
14
13
- Disbursement
(50)
(40)
- Exchange differences
112
48
- Settlements
-
(16)
- Other
3
-
     
Balance at 31 December
1,224
1,086

The actuarial gains/losses as included in the previous tables can be specified as follows:

Table 5: Remeasurement effects as included in Other comprehensive income

Remeasurement effects as included in Other comprehensive income
 
2015
2014
     
Defined benefit obligation major pension plans
   
Actuarial (gain)/loss due to experience
39
1
Actuarial (gain)/loss due to demographic assumption
(2)
40
Actuarial (gain)/loss due to financial assumption changes
6
182
 
43
223
     
Plan assets major pension plans
   
Return on plan assets (greater)/less then discount rate
(22)
61
     
Total actuarial (gain)/loss
65
162
     
Actuarial gains/losses other plans
(4)
5
     
Total actuarial (gain)/loss
61
167

The amounts recognized of these major plans in the balance sheet are as follows:

Table 6: Net liabilities/assets

Net liabilities/assets
 
2015
2014
     
Present value of funded obligations
(1,440)
(1,261)
Fair value of plan assets
1,224
1,086
     
 
(216)
(175)
Present value of unfunded obligations
(305)
(303)
     
Funded status
(521)
(478)
Effect of asset ceiling
-
-
     
Net liabilities/net assets1
(521)
(478)
     
Of which:
   
- Liabilities (Employee benefits liabilities)
(521)
(478)
- Assets (Prepaid pension costs)
-
-
1 Excluding less material plans with a net liability of €19 million (2014: €46 million)

The changes in the net assets / liabilities recognized in the balance sheet are as follows:

Table 7: Changes in net assets/liabilities

Changes in net assets/liabilities
 
2015
2014
     
Balance at 1 January
(478)
(321)
Expense recognized in the income statement
(32)
(29)
Actuarial gains/(losses) recognized directly in Other comprehensive income during the year
(65)
(162)
Contributions paid by employer
58
33
Disbursements and settlements paid by employer
12
12
Acquisitions/disposals
2
-
Exchange differences
(19)
(11)
Other
1
-
     
Balance at 31 December
(521)
(478)

In 2016, DSM is expected to contribute €45 million (actual 2015: €58 million) to its defined benefit plans.

The major categories of pension-plan assets as a percentage of total plan assets are as follows:

Table 8: Pension-plan assets by category

Pension-plan assets by category
 
2015
2014
     
Bonds
53%
55%
Equities
33%
34%
Property
11%
7%
Other
3%
4%

The pension-plan assets include neither ordinary DSM shares nor property occupied by DSM.

The total expense recognized in the income statement is as follows:

Table 9: Costs major defined benefit plans

Costs major defined benefit plans
 
2015
2014
     
Current service costs
37
30
Net interest costs
10
11
Past service costs in Other operating income
(4)
(4)
Costs included in exceptional items
(11)
(8)
     
Costs related to defined benefit plans
32
29

The main actuarial assumptions for the year (weighted averages) are:

Table 10: Actuarial assumptions for plans outside the Netherlands

Actuarial assumptions for plans outside the Netherlands
 
2015
20141
     
Discount rate
1.98%
2.07%
Price inflation
1.70%
1.73%
Salary increase
2.40%
2.43%
Pension increase
0.87-2.1%
0.93-2.2%
1 In the Netherlands there is only one defined benefit plan which is immaterial for the group

Year-end amounts for the current and previous periods are as follows:

Table 11: Major defined benefit plans per year

Major defined benefit plans per year
 
2015
2014
2013
2012
2011
           
Defined benefit obligations
(1,745)
(1,564)
(1,316)
(1,317)
(1,105)
Plan assets
1,224
1,086
958
931
817
           
Funded status of asset/(liability)
(521)
(478)
(358)
(386)
(288)
           
Experience adjustments on plan assets, gain/(loss)
(22)
61
7
55
(18)
Experience adjustments on plan liabilities, gain/(loss)
(39)
(1)
16
(27)
(8)
Gain/(loss) on liabilities due to changes in assumptions
(4)
(222)
(25)
(157)
(12)
Sensitivities of significant actuarial assumptions

The discount rate, the future increase in wages and salaries and the pension increase rate were identified as significant actuarial assumptions. The following impacts on the defined benefit obligation are to be expected:

  • A 0.25% increase/decrease in the discount rate would lead to a decrease/increase of 3.5% in the defined benefit obligation
  • A 0.25% increase/decrease in the expected increase in salaries/wages would lead to an increase/decrease of 0.5% in the defined benefit obligation
  • A 0.25% increase/decrease in the expected rate of pension increase would lead to an increase/decrease of less than 1.0% in the defined benefit obligation

The sensitivity analysis is based on realistically possible changes as of the end of the reporting year. Each change in a significant actuarial assumption was analyzed separately as part of the test. Interdependencies were not taken into account.

Healthcare and other costs

In some countries, particularly in the US, group companies provide retired employees and their surviving dependants with post-employment benefits other than pensions, mainly allowances for healthcare expenses and life-insurance premiums. Some of these are unfunded; in these cases, approved expense claims are reimbursed out of the financial resources of the group companies concerned. These plans are not sufficiently material to warrant the individual disclosures required by IAS 19.