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 5) relate to the following:

Pension costs

 
2016
2015
   
Defined benefit plans:
  
Pension costs included in employee benefit costs:
  
- Current service costs pension plans
35
35
- Healthcare plans
-
1
- Other post-employment benefits
1
2
   
Defined contribution plans
95
84
Total pension costs included in employee benefits costs
131
122
   
- Pension costs included in Other operating income
(16)1
(12)
   
Total Continuing operations
115
110
Discontinued operations
-
9
Pension costs included in Net finance costs
10
11
Pension costs included in APM adjustments
1
(11)
   
Total
126
119

1 Curtailment gains because of plan freezes in the UK and the US

For 2017, costs (continuing operations) for the defined benefit plans relating to pensions will be €38 million(2016: €36 million).

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

Employment benefits liabilities

 
2016
2015
   
Balance at 1 January
540
524
   
Changes:
  
- Balance of actuarial
(gains) / losses
8
61
- Employee benefits costs
32
29
- Contributions by employer
(49)
(79)
- Acquisitions
-
1
- Disposals
-
(20)
- Exchange differences
(1)
21
- Reclassification from/to held for sale
-
-
- Other changes
-
3
   
Total changes
(10)
16
   
Balance at 31 December
530
540

The Employee benefits liabilities of €530 million (2015: €540 million) consist of €509 million related to pensions (2015: €521 million), €7 million related to healthcare and other costs (2015: €7 million), and €14 million related to other post-employment benefits (2015: €12 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 defined benefit 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 2016 was 1.25% (2015: 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). In 2016 an Asset Liability Management (ALM) study was performed which has led to an adjustment of the investment strategy.

The current funding level, based on local standards, is 115% (estimate 31 December 2016), which is above the legally required minimum funding level.

DSM UK Pension Scheme

The DSM UK Pension Scheme is closed per 30 September 2016 for all pension accruals. An unconditional indexation policy is applicable for the vested pension rights. 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 impact of the plan freeze on the pension fund strategy will be discussed in 2017.

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 94% (estimate 31 December 2016). In the UK, funding requirements are a result of the triennial valuation. A new valuation was performed in 2016, resulting in the continuation of the annual recovery contributions (GBP 1 million) and the company guarantee of GBP 14 million.

Consolidated Plan in the US

The Consolidated Plan in the US has been closed to new entrants since 2014. As of 31 December 2016, the plan was closed for pension accrual of the non-unionized employees. New accrual is only applicable for a small group of unionized employees.

There is no indexation applicable for the vested pension rights. DSM will continue to pay (recovery) contributions into this pension scheme. 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 has been 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 ensure that the asset will be de-risked if the funding level improves. The impact of the plan freeze on the pension fund strategy will be discussed in the course of 2017. 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% (30 November 2016), whereas the funding level on local standards (Pension Protection Act) is 114% (estimate 30 November 2016). The minimum required funding level on local standards is 80% on the basis of this Act.

DNP GmbH Pension Plan in Germany

The DNP GmbH Pension Plan in Germany has been closed to new entrants as of 31 December 2008. Accrual is still applicable for employees who have been participating in the plan since 2008. The pension plan is a final pay pension plan (averaged over the 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 reimbursements will be paid out by DNP GmbH.

The most important unfunded plans are in Germany. They amount to €312 million (2015: €296 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:

Present value of defined benefit obligations

 
2016
2015
   
Balance at 1 January
1,745
1,564
   
Changes:
  
- Service costs
35
37
- Interest costs
32
34
- Contributions
14
14
- Actuarial (gains)/losses
65
43
- Past service costs
-
(4)
- Curtailments/termination benefits
(15)
(9)
- Acquisitions/disposals
 
(2)
- Exchange differences
(11)
131
- Settlements
-
-
- Benefits paid
(59)
(63)
   
Balance at 31 December
1,806
1,745

Fair value of plan assets

 
2016
2015
   
Balance at 1 January
1,224
1,086
   
Changes:
  
- Interest income on plan assets
23
24
- Actuarial gains/(losses)
60
(22)
   
Actual return on plan assets
83
2
- Contributions by employer
33
57
- Contributions by employees
14
14
- Disbursement
(46)
(50)
- Exchange differences
(10)
112
- Settlements
-
-
- Other
-
3
   
Balance at 31 December
1,298
1,224

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

Remeasurement effects as included in Other comprehensive income

 
2016
2015
   
Defined benefit obligation major pension plans
  
Actuarial (gain)/loss due to experience
(15)
39
Actuarial (gain)/loss due to demographic assumption
(16)
(2)
Actuarial (gain)/loss due to financial assumption changes
96
6
 
65
43
   
Plan assets major pension plans
  
Change in irrecoverable surplus other than interest
(1)
-
Return on plan assets (greater)/less then discount rate
60
(22)
 
59
(22)
   
Total actuarial (gain)/loss
6
65
   
Actuarial (gain)/loss other plans
2
(4)
   
Total actuarial (gain)/loss
8
61

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

Net assets/liabilities

 
2016
2015
   
Present value of funded obligations
(1,484)
(1,440)
Fair value of plan assets
1,298
1,224
   
 
(186)
(216)
Present value of unfunded obligations
(322)
(305)
   
Funded status
(508)
(521)
Effect of asset ceiling
(1)
-
   
Net assets/liabilities1
(509)
(521)
   
Of which:
  
- Liabilities (Employee benefits liabilities)
(509)
(521)
- Assets (Prepaid pension costs)
-
-

1 Excluding less material plans with a net liability of €21 million (2015: €19 million)

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

Changes in net assets/liabilities

 
2016
2015
   
Balance at 1 January
(521)
(478)
Expense recognized in the income statement
(29)
(32)
Actuarial gains/(losses) recognized directly in Other comprehensive income during the year
(6)
(65)
Contributions paid by employer
33
58
Disbursements and settlements paid by employer
13
12
Acquisitions/disposals
-
2
Exchange differences
2
(19)
Other
(1)
1
   
Balance at 31 December1
(509)
(521)

1 Excluding less material plans with a net liability of €21 million (2015: €19 million)

In 2017, DSM is expected to contribute €27 million (actual 2016: €33 million) to its major defined benefit plans.

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

Pension-plan assets by category

 
2016
2015
   
Bonds
53%
53%
Equities
32%
33%
Property
12%
11%
Other
3%
3%

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:

Costs major defined benefit plans

 
2016
2015
   
Current service costs
35
37
Net interest costs
10
10
Past service costs in Other operating income
(16)
(4)
Costs included in APM adjustments
1
(11)
   
Costs related to defined benefit plans
30
32

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

Actuarial assumptions for plans outside the Netherlands

 
2016
2015
   
Discount rate
1.63%
1.98%
Price inflation
1.57%
1.70%
Salary increase
2.08%
2.40%
Pension increase
0.88-2.15%
0.87-2.1%

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

Major defined benefit plans per year

 
2016
2015
2014
2013
2012
      
Defined benefit obligations
(1,806)
(1,745)
(1,564)
(1,316)
(1,317)
Plan assets
1,297
1,224
1,086
958
931
      
Funded status of asset/(liability)
(509)
(521)
(478)
(358)
(386)
      
Experience adjustments on plan assets, gain/(loss)
60
(22)
61
7
55
Experience adjustments on plan liabilities, gain/(loss)
15
(39)
(1)
16
(27)
Gain/(loss) on liabilities due to changes in assumptions
(80)
(4)
(222)
(25)
(157)

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 3.6% in the defined benefit obligation
  • A 0.25% increase/decrease in the expected increase in salaries/wages would lead to an increase/decrease of 0.4% 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.