32 Employee benefits

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 mainly include pension benefits and jubilee premiums. 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 analyzes 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 and inflation. The majority of the risks lays within Belgium, Germany, Switzerland and the U.K.

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

  • 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 25%/75%.
  • In Belgium, the Belgian pension plan has been closed to new entrants and a new cash balance pension plan has been implemented as from 1 January 2020 addressing some risk features inherent to its design. An ALM study has also been conducted in 2019 to reassess the investment portfolio in line with the liability profiles. While the allocation of 40% in bonds or other defensive investments and 60% in equities or other more aggressive investments has been retained, some slight adjustments to the asset classes have been made.
  • In Switzerland, the focus has been on the diversification of the assets. This resulted in the implementation of the Mercer “Global Investment Solution” in 2019 with a view 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

2019

2018

Present value of defined benefit obligation

1 076

996

Fair value of plan assets

−715

−600

Funded status – Deficit

361

396

Effect of asset ceiling

1

0

Net liability arising from defined benefit obligation

362

396

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

20

23

Total employee benefit liabilities

382

419

Of which:

 

 

Portion recognized in non-current liabilities

382

419

Portion recognized in non-current assets

0

0

 

 

 

90% 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

2019

2018

At 1 January

996

1 040

Current service cost

58

58

Interest expense

20

18

Remeasurement gain/loss (−)

 

 

Effect of changes in demographic assumptions

−14

−12

Effect of changes in financial assumptions

30

−46

Effect of experience adjustments

3

18

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

−2

−6

Effect of change in foreign exchange rates

20

1

Benefit payments from the plan

−26

−22

Benefit payments from the employer

−5

−6

Settlement payments

0

−40

Plan participants contributions

3

3

Other

−7

−6

At 31 December

1 076

996

 

 

 

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

 

 

 

€ million

2019

2018

At 1 January

600

629

Interest income

14

12

Remeasurement gain/loss(−)

 

 

Return on plan assets (excl. interest income)

51

−29

Changes in asset ceiling (excl. interest income)

0

0

Effect of change in foreign exchange rates

16

1

Plan participants contributions

3

2

Employer contributions

71

62

Benefit payments from the plan

−31

−28

Settlement payments

0

−40

Expenses, taxes and premiums paid

−9

−8

Change in scope

0

−1

At 31 December

715

600

 

 

 

The fair value of plan assets amounts to € 715 million (2018: € 600 million), representing 66% (2018: 60%) of the defined benefit obligation. The total deficit of € 361 million (2018: € 396 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

2019

2018

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

56

52

Net interest cost

7

6

Remeasurement of other long-term benefits

−4

1

Administrative expenses and taxes

1

2

Components of defined benefit costs recorded in income statement

60

61

Remeasurements gain (−)/loss

 

 

Effect of changes in demographic assumptions

−13

−11

Effect of changes in financial assumptions

33

−46

Effect of experience adjustments

3

16

Return on plan assets (excluding interest income)

−51

29

Changes in the asset ceiling (excluding interest income)

0

0

Components of defined benefit costs recorded in OCI

−28

−12

Total components of defined benefit cost

32

49

 

 

 

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. 81% 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 € 28 million in 2019 compared to a gain of € 12 million in 2018. The gain in 2019 is mainly resulting from a higher return on plan assets and change in salary increase assumptions offset by a decrease in discount rates. 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

2019

2018

Cost of sales

16

12

Marketing and selling expenses

7

12

Research and development expenses

22

30

General and administrative expenses

15

7

Total

60

61

 

 

 

The actual return on plan assets is € 51 million (2018: € −29 million) and the actual return on reimbursement rights is € 0 million (2018: € 0 million).

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

 

 

 

€ million

2019

2018

Cash and cash equivalent

15

20

Equity instruments

173

143

Europe

52

46

U.S.

13

14

Rest of the World

108

83

Debt instruments

240

224

Corporate bonds

79

110

Government bonds

41

52

Other

120

62

Properties

17

11

Qualifying insurance policies

96

90

Investment funds

156

94

Other

18

18

Total

715

600

 

 

 

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.

Other

 

2019

2018

2019

2018

2019

2018

Discount rate

1.26%

1.94%

2.05%

2.90%

0.16%

0.83%

Inflation

1.75%

1.75%

3.00%

3.30%

N/A

N/A

 

 

 

 

 

 

 

Significant actuarial assumptions for the determination of the defined obligation are discount rate and inflation. The sensitivity analyzes 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 € 82 million (increase by € 92 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 € 21 million (decrease by € 20 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 16.22 years (2018: 15.74 years). This number can be subdivided into the duration related to:

  • Eurozone: 14.55 years (2018: 14.16 years);
  • U.K.: 18.48 years (2018: 18.71 years);
  • Other: 19.73 years (2018: 18.39 years).

The Group expects to make a contribution of € 73 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. In Belgium, the last ALM study was performed in 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.