32 Employee benefits

Most employees are covered by retirement benefit plans sponsored by Group companies. The nature of such plans varies according to legal regulations, fiscal requirements and economic conditions of the countries in which the employees are employed. The Group operates both defined contribution plans and defined benefit plans.

32.1 Defined contribution plans

Post-employment benefit plans are classified as “defined contribution” plans if the Group pays fixed contributions into a separate fund or to a third-party financial institution and has no further legal or constructive obligation to pay further contributions. Therefore, no assets or liabilities are recognized in the Group balance sheet in respect of such plans, apart from regular prepayments and accruals of contributions. For the Belgian defined contribution plans, UCB is required by law to guarantee a minimum return on employee and employer contributions. As a consequence, these plans are considered defined benefit plans. Where reliable estimates can be made for material plans, they are valued using the projected unit credit method under IAS 19. These plans are aggregated with the results for other defined benefit plans.

32.2 Defined benefit plans

The Group operates several defined benefit plans. The benefits granted include mainly pension benefits, jubilee premiums and termination indemnities. The benefits are granted according to local market practice and regulations.

These plans are either unfunded or funded via outside pension funds or insurance companies. For (partially) funded plans, the assets of the plans are held separately in funds under the control of the trustees. Where a plan is unfunded, notably for the major defined benefit plans in Germany, a liability for the obligation is recorded in the Group balance sheet. For funded plans, the Group is liable for the deficits between the fair value of the plan assets and the present value of the benefit obligations. Accordingly, a liability (or an asset when the plan is over-funded) is recorded in the Group consolidated statement of financial position. Independent actuaries assess all main plans annually.

The Group analyses the Value at Risk on its balance sheet and profit and loss accounts linked to its defined benefits plans. Target risk level in terms of a one-year consolidated balance sheet and profit and loss Value at Risk measures are defined annually based on UCB risk tolerance thresholds.

For UCB, the main risks linked to its defined benefit obligations are discount rate, inflation and longevity. The majority of the risks lays within Belgium, Germany and the U.K. It should be noted that longevity is not considered as a risk for the plans in Belgium as benefits are either paid as a lump sum or externalized before being paid as an annuity.

Over the last years, UCB has performed various de-risking projects.

  • In the U.K., UCB completed the buy-out of three of its four pension schemes by securing the benefits of all members of the schemes with an insurance company. UCB does, therefore, no longer have any liabilities towards any members of those three schemes. The British Pension Scheme, the Dumfries Pension Scheme and the Bridgewater Pension Scheme were bought out, respectively, in October 2015, December 2017 and October 2018.
  • For the U.K. Celltech Pension and Insurance Scheme, the focus, since 2012, is on de-risking progressively from a 50% growth/50% bonds allocation to a 10% growth/90% bonds allocation. Today the growth/ bonds allocation is around 30%/70%.
  • In the U.S., UCB decided to terminate its U.S. Defined Benefit plan by offering lump sum to members and transferring the remaining liabilities to an insurance company. The termination of this plan was completed in December 2017. Finally, for the Belgian pension plan, the focus remains on the diversification of the assets. In 2015, the Belgian Pension Board implemented the Mercer “Global Investment Solution” in order to improve the diversification of the assets and investment managers while keeping a close control on risk.

The amount recognized in the consolidated statement of financial position arising from the Group’s obligation in respect of its defined benefit plan is as follows:

 

 

 

€ million

2018

2017

Present value of defined benefit obligation

996

1 040

Fair value of plan assets

-600

-629

Funded status – Deficit

396

411

Effect of asset ceiling

0

1

Net liability arising from defined benefit obligation

396

412

Add: Liability with respect to cash settled share-based payments (Note 27)

23

29

Total employee benefit liabilities

419

441

Of which:

 

 

Portion recognized in non-current liabilities

419

441

Portion recognized in non-current assets

0

0

 

 

 

94% of the net liability arising from defined benefit obligations is related to defined benefit pension obligations in Belgium, Germany and the U.K.

Movements in the present value of the defined benefit obligation in the current year were as follows:

 

 

 

€ million

2018

2017

At 1 January

1 040

1 124

Current service cost

58

55

Interest expense

18

22

Remeasurement gain(-)/loss

 

 

Effect of changes in demographic assumptions

-12

2

Effect of changes in financial assumptions

-46

-2

Effect of experience adjustments

18

-1

Past service cost and gain(-)/loss on settlements

-6

8

Effect of change in foreign exchange rates

1

-25

Benefit payments from the plan

-22

-36

Benefit payments from the employer

-6

-6

Settlement payments

-40

-99

Plan participants contributions

3

3

Other

-6

-5

At 31 December

996

1040

 

 

 

Movements in the fair value of plan assets in the current year were as follows:

 

 

 

€ million

2018

2017

At 1 January

629

675

Interest income

12

15

Remeasurement gain/loss(-)

 

 

Return on plan assets (excl. interest income)

-29

27

Changes in asset ceiling (excl. interest income)

0

0

Effect of change in foreign exchange rates

1

-20

Plan participants contributions

2

3

Employer contributions

62

72

Benefit payments from the plan

-28

-36

Settlement payments

-40

-99

Expenses, taxes and premiums paid

-8

-8

Change in scope

-1

0

At 31 December

600

629

 

 

 

The fair value of plan assets amounts to € 600 million (2017: € 629 million), representing 60% (2017: 61%) of the defined benefit obligation. The total deficit of € 396 million (2017: € 411 million) is expected to be eliminated over the estimated remaining average service period of the current membership.

The amounts recognized in the consolidated income statement and in the consolidated statement of comprehensive income in respect of those defined benefit plans are as follows:

 

 

 

€ million

2018

2017

Total service cost (incl. past service cost and gain (-)/loss from settlements)

52

63

Net interest cost

6

7

Remeasurement of other long-term benefits

1

0

Administrative expenses and taxes

2

2

Components of defined benefit costs recorded in income statement

61

72

Remeasurements gain (-)/loss

 

 

Effect of changes in demographic assumptions

-11

2

Effect of changes in financial assumptions

-46

-2

Effect of experience adjustments

16

-1

Return on plan assets (excluding interest income)

29

-26

Changes in the asset ceiling (excluding interest income)

0

0

Components of defined benefit costs recorded in OCI

-12

-27

Total components of defined benefit cost

49

45

 

 

 

The total service cost, the net interest expense, the remeasurement of other long-term benefits, administrative expenses and taxes for the year are included in the employee benefit expenses in the consolidated income statement. 93% of the defined benefit costs recorded in the income statement are relating to defined benefit pension plans in Belgium and U.K. The remeasurement on the net defined benefit liability is included in the statement of comprehensive income as part of other comprehensive income. Total remeasurements amount to a gain of € 12 million in 2018 compared to a gain of € 27 million in 2017. The gain in 2018 is mainly resulting from an increase in discount rates and an update of the mortality table in the U.K. offset by a lower return on plan assets.

The split of the recognized expense by functional line is as follows:

 

 

 

€ million

2018

2017

Cost of sales

12

15

Marketing and selling expenses

12

8

Research and development expenses

30

26

General and administrative expenses

7

23

Other income and expenses

0

0

Total

61

72

 

 

 

The actual return on plan assets is €–29 million (2017: € 27 million) and the actual return on reimbursement rights is € 0 million (2017: € 0 million).

The major categories of plan assets at the end of the reporting period, are as follows:

 

 

 

€ million

2018

2017

Cash and cash equivalent

20

12

Equity instruments

143

143

Europe

46

57

U.S.

14

32

Rest of the World

83

54

Debt instruments

224

195

Corporate bonds

110

83

Government bonds

52

46

Other

62

66

Properties

11

9

Qualifying insurance policies

90

133

Investment funds

94

113

Other

18

24

Total

600

629

 

 

 

Virtually all equity and debt instruments have quoted prices in active markets. Properties can be classified as Level 3 instruments based on the definitions in IFRS 13 Fair Value Measurement.

The assets held in the funds do not contain any direct investment in UCB Group shares, nor any property occupied by, or other assets used by the Group, though this does not exclude UCB shares being included in mutual investment fund type investments. The principal weighted average actuarial assumptions used for the purposes of the actuarial valuations were as follows:

 

 

 

 

 

 

 

 

 

 

Eurozone

U.K.

U.S.

Other

 

2018

2017

2018

2017

2018

2017

2018

2017

Discount rate

1.94%

1.61%

2.90%

2.60%

N/A

3.40%

0.83%

0.68%

Inflation

1.75%

1.75%

3.30%

3.20%

N/A

N/A

N/A

N/A

 

 

 

 

 

 

 

 

 

Significant actuarial assumptions for the determination of the defined obligation are discount rate and inflation. The sensitivity analyses below have been determined based on reasonably possible changes of the assumptions occurring at the end of the reporting period.

  • If the discount rate would be 50 basis points higher (lower), the defined benefit obligation would decrease by € 73 million (increase by € 82 million) if all other assumptions were held constant.
  • If the inflation rate would increase (decrease) by 25 basis points, the defined benefit obligation would increase by € 22 million (decrease by € 21 million) if all other assumptions were held constant.

The figures above do not take account of any interrelationship between the assumptions, especially between the discount rate, expected salary increases and inflation rates.

The Group’s subsidiaries should fund the entitlements expected to be earned on a yearly basis. Funding usually follows local actuarial requirements and, in this framework, the discount rate is set on a risk-free rate.

Underfunding linked to past service are met by setting up recovery plans and investment strategies based on plan’s demographics, appropriate time periods for amortization of past service liability, projected salary increase and the financial capabilities of the local company.

The average duration of the benefit obligation at the end of the reporting period is 15.74 years (2017: 16.95 years). This number can be subdivided into the duration related to:

  • Eurozone: 14.16 years (2017: 15.32 years);
  • U.K.: 18.71 years (2017: 19.74 years);
  • Other: 18.39 years (2017: 19.33 years).

The Group expects to make a contribution of € 64 million to the defined benefit plans during the next financial year.

ALM (asset-liability matching) studies are typically performed every 3 years. Within those studies, investment strategies are analyzed in terms of risk-and-return profiles. An ALM study was completed in Switzerland in 2018, which resulted in a slight reallocation of the assets. In Belgium, the last ALM study was performed in 2016. A new ALM study will be performed in the course of 2019.

In setting up the long-term investment strategy of the scheme, the investment committee focuses on some key principles defined by the Group such as:

  • maintaining a balance between the level of contributions acceptable to UCB and the level of investment risk relative to the liabilities;
  • reducing the volatility through investment diversification; and
  • the degree of investment risk should depend on the financial state of the schemes and liability profiles.