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3.8 Pension assets
Accounting policies
The Group operates both defined contribution pension plans and defined benefit pension plans. The contributions payable under defined contribution plans are recognised as expenses in the income statement for the period to which the payments relate. In defined contribution plans, the Group does not have a legal or constructive obligation to pay further contributions, in case the payment recipient is unable to pay the retirement benefits.
In defined benefit plans, the Group may incur obligations or assets after the payment of the contribution. The pension obligation represents the present value of future cash flows from the benefits payable. The present value of pension obligations has been calculated using the projected unit credit method. Pension costs are expensed during employees' service lives based on actuarial calculations. The discount rate assumed in calculating the present value of the pension obligation is the market yield of high-quality corporate bonds. Their maturity substantially corresponds to the maturity of the pension liability. The assets corresponding to the pension obligation of the retirement benefit plan are carried at fair values at the balance sheet date. Actuarial gains and losses are recognised in comprehensive income in the income statement.
The Group operates several pension plans in different operating countries. In Finland, the statutory pension provision of personnel is provided through pension insurance companies and the voluntary supplementary pension provision is mainly provided through Kesko Pension Fund. The statutory pension provision provided through pension insurance companies is a defined contribution plan. The supplementary pension provision provided through Kesko Pension Fund is a defined benefit plan.
As regards to foreign subsidiaries, the former pension plan operated in Norway was classified as a defined benefit plan. The related liability expired during the financial year (net debt in financial year 2016 was €0.2 million). The defined benefit plan in Norway is not included in the tables below, because its impact on the consolidated amounts is insignificant. The pension plans in the other foreign subsidiaries are managed in accordance with local regulations and practices in each country and they are defined contribution plans.
Kesko Pension Fund
Kesko Pension Fund is a pension provider of its members providing supplementary retirement benefits to employees who are beneficiaries of the Pension Fund's department A. Department A was closed on 9 May 1998. As the conditions set out in the Fund's rules are met, beneficiaries between 60 and 65 years of age are granted an old-age pension. The amount of retirement benefit granted by the Fund is the difference between the employee's retirement benefit based on his/her pensionable salary calculated in accordance with the Fund's rules and the statutory pension. In addition to the individually calculated pensionable salary, the retirement benefit amount of each beneficiary is impacted by the duration of his/her membership of the Pension Fund. At the end of 2017, the Pension Fund had 2,651 beneficiaries, of whom 608 were active employees and 2,043 were retired employees. Kesko Group's contribution to the Pension Fund's obligation is 96.9% (96.7%). The notes present Kesko Group's interest in the Pension Fund except for the analysis of assets by category and the maturity analysis of the obligation.
In addition to its rules, the Pension Fund's operations are regulated by the Employee Benefit Funds Act, the decrees under the Act and official instructions, and the Fund's operations are controlled by the Financial Supervisory Authority. The regulations include stipulations on the calculation of pension obligation and its coverage, for example. The pension obligation shall be fully covered by the plan assets, any temporary deficit is only allowed exceptionally. In addition, the regulations include detailed stipulations on the acceptability of the covering assets and the diversification of investment risks.
Kesko Group does not expect to pay contributions to the Pension Fund in 2018.
The defined benefit asset recognised in the balance sheet is determined as follows:
€ million 2017 2016
Present value of defined benefit obligation -266.6 -302.3
Fair value of plan assets 474.1 467.1
Net assets recognised in the balance sheet 207.5 164.7
Movement in the net assets recognised in the balance sheet:
As at 1 January 164.7 176.4
Income/cost recognised in the income statement -3.2 0.3
Remeasurement 45.0 -14.0
Contributions to plan and plan costs 1.1 2.0
As at 31 December 207.5 164.7
€ million Present value of defined benefit obligation Fair value of plan assets Total
As at 1 January 2017 -302.3 467.1 164.7
Current service cost -4.8 -4.8
Past service cost -1.3 -1.3
Gains or losses on settlement 0.4 0.4
Interest cost/income -4.4 6.9 2.5
-10.0 6.9 -3.2
Remeasurement
Return on plan assets 13.2 13.2
Gain/loss from changes in demographic assumptions 0.0
Gain/loss from changes in financial assumptions 29.0 29.0
Experience gains/losses 2.8 2.8
31.8 13.2 45.0
Contributions to plan and plan costs 1.1 1.1
Benefit payments 14.1 -14.1 0.0
As at 31 December 2017 -266.6 474.1 207.5
€ million Present value of defined benefit obligation Fair value of plan assets Total
As at 1 January 2016 -266.4 442.8 176.4
Current service cost -3.8 -3.8
Interest cost/income -6.0 10.0 4.1
-9.7 10.0 0.3
Remeasurement
Return on plan assets 26.8 26.8
Gain/loss from changes in demographic assumptions 0.0
Gain/loss from changes in financial assumptions -41.4 -41.4
Experience gains/losses 0.7 0.7
-40.7 26.8 -14.0
Contributions to plan and plan costs 2.0 2.0
Benefit payments 14.7 -14.7 0.0
As at 31 December 2016 -302.3 467.1 164.7
Plan assets were comprised as follows in 2017
€ million Quoted Unquoted Total
Europe
Equity instruments 97.3 60.0 157.3
Debt instruments 25.0 31.3 56.3
Investment funds 117.5 15.9 133.4
Properties 87.6 87.6
United States
Equity instruments 5.3 5.3
Investment funds 35.1 35.1
Other countries
Investment funds 14.0 14.0
Total 294.2 194.8 489.0
Plan assets were comprised as follows in 2016
€ million Quoted Unquoted Total
Europe
Equity instruments 100.3 56.5 156.8
Debt instruments 26.5 37.0 63.5
Investment funds 37.6 17.2 54.8
Properties 147.4 147.4
United States
Equity instruments 4.7 4.7
Investment funds 32.8 32.8
Other countries
Investment funds 22.7 22.7
Total 224.6 258.1 482.7
€ million 2017 2016
Kesko Corporation shares included in fair value 21.9 23.0
Properties leased by Kesko Group included in fair value 122.2 179.5
Principal actuarial assumptions:
2017 2016
Discount rate 2.08% 1.50%
Salary growth rate 2.23% 2.30%
Inflation 1.69% 1.80%
Pension growth rate 1.97% 2.10%
Average service expectancy, years 9 10
Weighted average duration of pension obligations and expected maturity analysis of undiscounted pension obligations
2017 2016
Weighted average duration of pension obligations, years 14 16
Expected maturity analysis of undiscounted pension obligations, € million
Less than 1 year 14.9 15.0
Between 1−10 years 117.8 118.6
Between 10−20 years 107.7 112.4
Between 20−30 years 73.3 78.0
Over 30 years 63.8 70.7
Total 377.5 394.6
Finnish pension reform
The statutory pension provision in Finland has been amended, effective from 1 January 2017. The objective of the amendments is to extend working life so that the financing of the statutory earnings-related pension scheme and sufficient pension provision can be ensured also going forward.
In the financial year 2016, the rules of the Pension Fund were changed to the effect that the Pension Fund's supplementary retirement benefit does not compensate for the lowering of the statutory pension provision resulting from the rise of the statutory pension age. The effect of the change in the rules was a €2 million decrease in the defined benefit obligation, which was recorded in the financial statements at 31 December 2016.
Risks related to pension plan
Asset related risks
The Pension Fund's investment assets comprise properties, shares and equity funds, private equity funds and both long-term and short-term money market investments. The Pension Fund's investment policy defines the investment restrictions pertaining to classes of assets and the allowed investees. The investment plan, annually confirmed by the Pension Fund board, sets the investment allocation and return targets for the year ahead. The objective of investing activity is to secure a return on the investments and their convertibility into cash, as well as ensuring appropriate diversity and diversification of investments. On an annual basis, the objective is to exceed the Pension Fund's obligation expenses and costs, so that contributions need not be charged to the members. The long-term target return on investment activity is 5.0%. The risks involved in investment activity are managed by continuously monitoring market developments and analysing the adequacy of the return and risk potential of the investments. The returns compared to chosen reference indices and the breakdown of investments are reported on a monthly basis. In 2017, the realised return on investing activity was 3.8%.
If the return on investment assets underperforms the discount rate applied to the calculation of the present value of defined pension obligation, a deficit in the plan may arise. The diversification of assets is aimed to reduce this risk in varying financial conditions. If a deficit is created in the pension plan, such that the pension obligation is not fully covered, Pension Fund members are obligated to pay contributions to the Fund in order to cover the obligation. Calculated in compliance with the IAS 19 standard, the amount of plan assets exceeded the plan obligation by €206.9 million as at 31 December 2017. Local rules concerning the Pension Fund may also create a contribution obligation in situations in which the IAS 19 obligation is fully covered. In such a case, the amount of contributions charged increases the amount of pension assets according to IAS 19.
Obligation related risks
In addition to the general level of interest rates, the defined benefit obligation is impacted by changes in the statutory pension provision, future salary increases, index-based pension increases and changes in life expectancy. The pension promise made to the Fund's beneficiaries is tied to the amount of pensionable salary and it is a lifelong benefit. The total pension amount consists of the statutory pension and the supplementary pension provided by the Fund. Salary increases will increase the future pension amount. Changes in statutory pension provision, such as an increase in the retirement age or a reduction of pension provision, which are compensated to pensioners by the supplementary pension and, consequently, the changes would increase the defined benefit obligation. The amount of future pensions is adjusted annually with an index-based increase in accordance with the terms and conditions of the plan. The extension of life expectancy will result in an increase in plan obligation.
Changes in the general level of interest rates and the market yield of high-quality bonds have an impact on the present value of the defined benefit obligation. When the level of interest rates falls, the present value of the defined benefit obligation rises. Because the Pension Fund's investment assets are invested and their return targets are set for long terms, changes in the annual return on investments do not necessarily correlate in the short term with changes in the discount rate applied to the defined benefit obligation.
Sensitivity analysis
The sensitivity of the defined benefit obligation to changes in the principal assumptions is presented in the following table.
Actuarial assumption Change in assumption Impact on defined benefit obligation, increase Impact on defined benefit obligation, decrease
2017
Discount rate 0.50% -6.80% 7.60%
Salary growth rate 0.50% 1.30% -1.20%
Pension growth rate 0.50% 6.00% -5.50%
2016
Discount rate 0.50% -7.30% 8.30%
Salary growth rate 0.50% 1.50% -1.40%
Pension growth rate 0.50% 6.40% -5.80%
The impacts of sensitivity analysis have been calculated so that the impact of a change in the assumption is calculated while assuming that all other assumptions are constant. In practice, this is unlikely to occur, and changes in some of the assumptions may correlate with each other. The sensitivity of the defined benefit obligation has been calculated using the same method as when calculating the pension obligation recognised within the statement of financial position.