Note 24 – Employee Benefits Liabilities Audited

 

The tables below reconcile the Group’s employee benefit liabilities in the balance sheet as well as the related remeasurement in the statement of other comprehensive income:
 

million CHF

2017 2016
     
Defined benefit pension plans (see note 24.1) 538 673
Post-employment medical benefits (see note 24.2) 36 40
Non-current vacation accrual (Swiss entities) 3 3
Other employee benefit liabilities 1 1
Total 578 717


 

million CHF

2017 2016
     

Remeasurement for:

   
Defined-benefit pension plans (see note 24.1) (120) 36
Post-employment medical benefits (see note 24.2) 1 1
Total (119) 37

 

24.1 Defined-Benefit Pension Plans

 

The group operates defined-benefit pension plans in various countries, with the major plans being in Switzerland, Great Britain and the United States (as described below). For pension accounting purposes, these plans are considered as defined-benefit plans.

Pension Plan in Switzerland

 

The Group’s Swiss pension plan is governed by the Swiss Federal Law on Occupational Retirement, Survivors and Disability Pension Plans (BVG), and is funded through a legally separate trustee-administered pension fund (Pensionskasse der Lonza). The Board of Trustees is responsible for the investment of the assets, which cannot revert to the Company. The cash funding of these plans, which may from time to time involve special payments, is designed to ensure that present and future contributions should be sufficient to meet future liabilities.

The plan contains a cash balance benefit formula, accounted for as a defined-benefit plan. Employer and employee contributions are defined in the pension fund rules in terms of an age-related sliding scale of percentages of pay. Under Swiss law, the company guarantees the vested benefit amount as confirmed annually to members. Interest may be added to member balances at the discretion of the Board of Trustees. The risks linked to retirement benefits (disability and death) have been reinsured until 31 December 2020. The investment risk is not reinsured.

Retirement benefits are based on the accumulated retirement capital (made up of yearly contributions and the interest thereon), which can either be drawn as a life-long annuity or as a lump sum payment or a combination of both. The annuity is calculated by multiplying the retirement capital with the applicable conversion rate defined in the fund rules. The Board of Trustees may adjust the annuity at its discretion subject to the plan’s funded status including sufficient free funds as determined according to Swiss statutory valuation rules.

Retirement benefits and related plan assets of plan participants with a retirement date on or before 31 December 2007 were transferred to an insurance company. The insurance company guarantees these retirement benefits and bears the investment, death and disability risks.

Pension Plan in the UK

 

The Group operates two major plans in the UK, the Hickson UK Group Pension Scheme and the Lonza Biologics Pension Scheme. Both plans are closed to new entrants. In addition, both schemes are registered schemes under UK legislation, are contracted out of the State Second Pension and are subject to the scheme funding requirements outlined in UK legislation. The plans are managed by corporate trustee bodies, which oversee investment strategy and general regulatory compliance.

The Hickson UK Group Pension Scheme is the defined-benefit pension plan of the UK Arch Chemicals business. Pensions are linked to final salaries and service, and statutory inflation increases apply, except where contractually different. Ongoing contributions are sufficient to fund current accrual rates, and a deficit recovery plan has been in place for a number of years to recover any shortfall in funding.

The Lonza Biologics Pension Scheme provides pensions in retirement and death benefits to members. Pension benefits are linked to a member’s final salary at retirement and their length of service.

Pension Plans in the United States  

 

Lonza currently sponsors three qualified defined-benefit pension plans in the United States.  All of the defined-benefit pension plans are fully frozen with respect to future benefit accruals (with the exception of a small group of participants). All eligible U.S. employees currently participate in a defined-contribution retirement plan. All eligible U.S. employees currently participate in one of the two current defined-contribution retirement plans (it is anticipated that effective 1 January 2019, the two current defined contribution plans will be merged).

As of December 31, 2016, the Pension Plan of Arch Chemicals and the Employees’ Retirement Plan of Lonza Inc. purchased a Group Annuity Contract and transferred the related liability and plan assets for a selected group of retirees (approximately 1,500) from two of the pension plans to Voya Retirement Insurance and Annuity Company, resulting in a settlement gain of CHF 1 million.

Pension benefits for the majority of U.S. pension plan participants are generally based on final average pay and credited service as of the date of termination or as of the date benefit accruals were frozen (if earlier), and are payable as a lifetime pension. Participants in the Cash Balance formula under the Pension Plan of Arch Chemicals are covered under an account-based formula that is credited each year with interest based on the yield on ten-year U.S. Treasury securities.  Participants in these plans may commence benefit payments upon attainment of normal retirement age or, if applicable, as of an early retirement age (usually age 55) provided the criteria for early retirement have been met as of the participant’s termination of employment with the Company.  Participants in the Cash Balance plan may elect to commence benefits upon termination of employment either in a single lump sum or as a lifetime annuity, or they may defer payment to a later date.

Pension benefit payments from the qualified pension plans are paid from a trustee-administered fund. The qualified defined-benefit plans, whose assets are held in a master trust, are subject to minimum funding requirements and are subject to further regulation under the Internal Revenue Code and the Employees Retirement Income Security Act of 1974 (ERISA). Responsibility for governance of these qualified plans lies with a committee of pension plan fiduciaries appointed by Lonza. Actuarial valuations are completed each year for each plan to determine the contribution requirement. The minimum annual contribution for each plan is equal to the present value of benefits accrued each year (if any), plus expected administrative expenses of the plan to be paid from the trust, plus a rolling amortization of any prior underfunding. The plan sponsor may elect to contribute more than the minimum, in which case the excess amounts may under certain circumstances be used to offset future funding requirements.

The movement in the net defined-benefit liability over 2016–2017 is as follows:
 

million CHF Defined-benefit obligation Fair value of plan assets Net defined-benefit liability
       
At 1 January 2016 3,066 (2,372) 694
       

Included in profit or loss

     
Current service cost 46 0 46
Gain on settlements (58) 57 (1)
Interest expense / (income) 63 (48) 15
       

Included in other comprehensive income

     
Actuarial loss / (gain) arising from:      
– Demographic assumptions (19) 0 (19)
– Financial assumptions 202 0 202
– Experience adjustment 44 0 44
Return on plan assets excluding interest income 0 (191) (191)
Remeasurements loss / (gain) 227 (191) 36
       
Effect of movements in exchange rates (75) 71 (4)
       

Other

     
Contributions paid:      
– Employers 0 (97) (97)
– Plan participants 18 (18) 0
Benefits paid (117) 117 0
Reclassification to liabilities held for sale (25) 9 (16)
At 31 December 2016 1 3,145 (2,472) 673
       

Included in profit or loss

     
Current service cost 51 0 51
Gains on settlements (4) 0 (4)
Interest expense / (income) 55 (42) 13
       

Included in other comprehensive income

     
Actuarial loss / (gain) arising from:      
– Demographic assumptions (63) 0 (63)
– Financial assumptions 70 0 70
– Experience adjustment 40 0 40
Return on plan assets excluding interest income 0 (167) (167)
Remeasurements loss / (gain) 47 (167) (120)
       
Effect of movements in exchange rates 19 (16) 3
       

Other

     
Contributions paid:      
– Employers 0 (111) (111)
– Plan participants 20 (20) 0
Benefits paid (131) 131 0
Business combinations 62 (33) 29
At 31 December 2017  23,264 (2,730) 534

The defined-benefit pension plans are reported as follows in the balance sheet:

million CHF

2017
Total
2016
Total
     
Defined-benefit pension plan asset 4 0
Defined-benefit pension plan liability (538) (673)



Lonza offered a one-time “window” program to deferred vested participants in the U.S. pensions plans, permitting them to elect a one-time immediate lump sum payment (or immediate annuity) of their retirement benefit in lieu of a lifetime annuity beginning at retirement age, which resulted in a gain on settlement of CHF 4 million.

The Group expects to pay CHF 90 million in contributions to defined-benefit pension plans in 2018.

The defined-benefit obligation and plan assets are disaggregated by country as follows:

 

The significant actuarial assumptions at the reporting date (expressed as weighted averages) were as follows:

 

Assumptions regarding future mortality are based on actuarial advice in accordance with published statistics and experience in each territory1. These assumptions translate into an average life expectancy in years for a pensioner retiring at age 65:

   

The sensitivity of the defined-benefit obligation to changes in the relevant actuarial assumptions is:

 

The above sensitivity analyses are based on a change in an assumption while keeping all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined-benefit obligation to significant actuarial assumptions the same method (present value of the defined-benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognized within the balance sheet.

The methods and types of assumptions used in preparing the sensitivity analyses did not change compared with the previous period.

At 31 December the weighted average duration of the defined-benefit obligation for the major plans as well as the Group in total is:

in years 2017 2016
     
Group 15.9 15.8
CH 15.3 14.8
UK 19.7 20.8
US 12.2 12.1

 

Plan assets comprise:

million CHF 2017 2016
  Quoted Unquoted Total % Quoted Unquoted Total %
                 
Equity instruments 1,334 0 1,334 48 708 0 708 28
Debt instruments                
Investment-grade (AAA to BBB) 891 0 891   1,007 0 1,007  
Non-investment-grade (below BBB) 32 0 32   39 0 39  
  923 0 923 34 1,046 0 1,046 42
                 
Real-estate 33 95 128 5 112 78 190 8
Cash and cash equivalents 104 0 104 4 90 0 90 4
Other 215 26 241 9 420 18 438 18
                 
Total 2,609 121 2,730 100% 2,376 96 2,472 100%

 

24.2 Post-Employment Medical Benefits

 

Lonza’s post-employment medical benefit plans are not funded and are provided under defined-benefit plans. They consist of post-retirement healthcare benefits in the United States, such as drug coverage and other medical benefits, as well as limited death benefits.

The post-retirement healthcare plans are not open to new members and grandfathered participants must meet specific age / service requirements to participate.

The movements in the defined-benefit obligation are as follows:

million CHF 2017 2016
     
At 1 January 40 38
     

Included in profit or loss

   
Current service cost 1 1
Past service credit (3) 0
Interest expense 1 1
     

Included in other comprehensive income

   
Remeasurements loss / (gain)    
Actuarial loss / (gain) arising from:    
– Demographic assumptions 0 (1)
– Financial assumptions 2 1
– Experience adjustment (1) 1
Total remeasurements loss / (gain) 1 1
     

Effect of movements in exchange rates

(1) 1
     

Other

   
Benefits paid (3) (2)
At 31 December 36 40

 

In 2017 one of the plans was amended. Following the elimination of certain benefits the Group recognized a past service credit of CHF 3 million.

The significant actuarial assumptions were as follows:

in % 2017 2016
     
Discount rate 3.50 3.99
Medical-cost trend rate 6.20 6.60

 

The sensitivity of the defined-benefit obligation to changes in the relevant actuarial assumptions is:

 

For the medical plan the same mortality assumptions are applied as for the pension plans in the United States (see 24.1). In addition, the sensitivity analyses are based on the same methodology as for the pension plans.