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

 
2017
2016
   
Defined benefit plans:
  
Pension costs included in employee benefit costs:
  
- Current service costs pension plans
28
35
- Other post-employment benefits
2
1
   
Defined contribution plans
82
95
Total pension costs included in employee benefits costs
112
131
   
- Pension costs included in Other operating income
(20)1
(16)1
   
Total in operating profit
92
115
Pension costs included in financial income and expense
8
10
Pension costs included in APM adjustments
-
1
   
Total
100
126
   
Of which:
  
- Defined contribution plans
82
95
- Defined benefit plans
18
31

1 Curtailment gains because of plan amendments in the UK, US and Switzerland.

For 2018, costs for the defined benefit plans relating to pensions are expected to be €33 million(2017: €30 million).

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

Employee benefits net liabilities

 
2017
2016
   
Balance at 1 January
530
540
   
Changes:
  
- Balance of actuarial
(gains)/losses
(70)
8
- Employee benefits costs
18
32
- Contributions by employer
(70)
(49)
- Exchange differences
(14)
(1)
   
Total changes
(136)
(10)
   
Balance at 31 December
394
530

The Employee net benefits liabilities of €394 million (2016: €530 million) consist of €374 million related to pensions (2016: €509 million), €6 million related to healthcare and other costs (2016: €7 million) and €14 million related to other post-employment benefits (2016: €14 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; and
  • 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 2017 was 1.0% (2016: 1.25%) for the mandatory portion (BVG/LPP). There is also a minimal conversion rate applicable. The weighted average duration of the defined benefit obligation is 12.9 years (2016: 13.0) which could be seen as an indication of the maturity profile of the 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. In 2017, the Trustees implemented a reduction of the conversion rate for the accounts related to the higher income (in the first quarter) and the accounts related to the lower income (in the fourth quarter). This has reduced the pension liabilities in Switzerland. 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 (estimated) funding level, based on local standards, is 119% (2016: 113%), which is above the legally required minimum funding level.

DSM UK Pension Scheme

The DSM UK Pension Scheme was closed as of 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. In 2017, the 2015 valuation was finalized resulting in the continuation of the annual recovery contribution (GBP 1 million) and the company guarantee of GBP 14 million. A strategic workgroup was established to redesign the long-term de-risking strategy for the DSM UK Pension Scheme with the objective to align the company's intentions and the Trustees responsibility with respect to this plan. The weighted average duration of the defined benefit obligation is 20.7 years (2016: 22.1) which could be seen as an indication of the maturity profile of the scheme. In 2017, the Trustees and DSM jointly decided to adjust the benefit indexation in the historic APC sections of the scheme. This decision has reduced the pension liability in the UK. The current funding level, based on local standards, is estimated at 103% (2016: 94%).

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. In 2017, DSM provided a one-time funding of USD 22 million into the scheme to reduce the deficit and avoid the payment of the variable part of PBGC (guarantee) contributions. 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 2017, the Trustees provided a lump sum window to terminated vested participants which has resulted in a reduction of pension liabilities.

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. 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 97% (2016: 87%), whereas the funding level on local standards (Pension Protection Act) is estimated at 129% (2016: 114%). 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 the local company. The weighted average duration of the defined benefit obligation is 15.6 years (2016: 15.6) which could be seen as an indication of the maturity profile of the scheme.

The most important unfunded plans are in Germany for which the associated liability amounts €297 million (2016: €312 million). In 2017, DSM agreed on a lump sum payment of €7 million to a group of pensioners to settle their pension liability.

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

 
2017
2016
   
Balance at 1 January
1,806
1,745
   
Changes:
  
- Service costs
28
35
- Interest costs
28
32
- Contributions
13
14
- Actuarial (gains)/losses
45
65
- Past service costs
(17)
-
- Curtailments/termination benefits
1
(15)
- Exchange differences
(129)
(11)
- Settlements
(25)
-
- Benefits paid
(75)
(59)
   
Balance at 31 December
1,675
1,806

Fair value of plan assets

 
2017
2016
   
Balance at 1 January
1,298
1,224
   
Changes:
  
- Interest income on plan assets
20
23
- Actuarial gains/(losses)
115
60
   
Actual return on plan assets
135
83
- Contributions by employer
49
33
- Contributions by employees
13
14
- Disbursement
(62)
(46)
- Exchange differences
(117)
(10)
- Settlements
(15)
-
   
Balance at 31 December
1,301
1,298

The fair value of the plan asset consists of 99% of quoted assets (2016: 99%).

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

Remeasurement effects as included in Other comprehensive income

 
2017
2016
   
Defined benefit obligation major pension plans
  
Actuarial (gain)/loss due to experience
24
(15)
Actuarial (gain)/loss due to demographic assumption
(7)
(16)
Actuarial (gain)/loss due to financial assumption changes
28
96
 
45
65
   
Plan assets major pension plans
  
Change in irrecoverable surplus other than interest
(1)
(1)
Return on plan assets (greater)/less than discount rate
116
60
 
115
59
   
Actuarial (gain)/loss major plans
(70)
6
   
Actuarial (gain)/loss other plans
(13)
2
   
Total actuarial (gain)/loss
(83)
8

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

Net assets/liabilities

 
2017
2016
   
Major plans:
  
Present value of funded obligations
(1,370)
(1,484)
Fair value of plan assets
1,301
1,298
   
 
(69)
(186)
Present value of unfunded obligations
(305)
(322)
   
Funded status
(374)
(508)
Effect of asset ceiling
-
(1)
   
Net liabilities/assets major plans
(374)
(509)
   
Net liabilities/assets other plans
(20)
(21)
   
Total net liabilities/assets
(394)
(530)
   
Of which:
  
- Liabilities (Employee benefits liabilities)
(395)
(530)
- Assets (Prepaid pension costs)
1
-

In 2018, DSM is expected to contribute €26 million (actual 2017: €49 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

 
2017
2016
   
Bonds
43%
53%
Equities
35%
32%
Property
18%
12%
Other
4%
3%

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

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

Actuarial assumptions for major plans outside the Netherlands

 
2017
2016
   
Discount rate
1.49%
1.63%
Price inflation
1.71%
1.57%
Salary increase
2.29%
2.08%
Pension increase
0.87-2.10%
0.88-2.15%

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

Major defined benefit plans per year

 
2017
2016
2015
2014
2013
      
Defined benefit obligations
(1,675)
(1,806)
(1,745)
(1,564)
(1,316)
Plan assets
1,301
1,297
1,224
1,086
958
      
Funded status of asset/(liability)
(374)
(509)
(521)
(478)
(358)
      
Experience adjustments on plan assets, gain/(loss)
115
60
(22)
61
7
Experience adjustments on plan liabilities, gain/(loss)
(24)
15
(39)
(1)
16
Gain/(loss) on liabilities due to changes in assumptions
(21)
(80)
(4)
(222)
(25)

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% (2016: 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 0.3% (2016: 0.4%) in the defined benefit obligation; and
  • A 0.25% increase/decrease in the expected rate of pension increase would lead to an increase/decrease of less than 1.1% (2016:1.0%) 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 dependents 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.