Note 24 – Employee Benefit Liabilities

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

 

Notes

 

2018

 

2017

 

 

 

 

 

 

 

Defined benefit pension plans

 

24.1

 

475

 

538

Post-employment medical benefits

 

24.2

 

28

 

36

Non-current vacation accrual (Swiss entities)

 

 

 

3

 

3

Other employee benefit liabilities

 

 

 

1

 

1

Total

 

 

 

507

 

578

million CHF

 

Notes

 

2018

 

2017

 

 

 

 

 

 

 

Remeasurement for:

 

 

 

 

 

 

Defined-benefit pension plans

 

24.1

 

(5)

 

(120)

Post-employment medical benefits

 

24.2

 

(2)

 

1

Total

 

 

 

(7)

 

(119)

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 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. 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 2017–2018 is as follows:

million CHF

 

Defined benefit obligation

 

Fair value of plan assets

 

Net defined benefit liability

1

Thereof present value of funded defined-benefit obligation of CHF 3,236 million and present value of unfunded defined-benefit obligation of CHF 28 million

2

Thereof present value of funded defined-benefit obligation of CHF 3,108 million and present value of unfunded defined-benefit obligation of CHF 24 million

 

 

 

 

 

 

 

 

 

 

 

At 1 January 2017

 

 

 

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

 

 

 

 

– Financial assumptions

 

70

 

 

 

0

 

 

 

 

– Experience adjustment

 

40

 

47

 

0

 

0

 

47

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

 

 

 

13,264

 

 

 

(2,730)

 

534

 

 

 

 

 

 

 

 

 

 

 

Included in profit or loss

 

 

 

 

 

 

 

 

 

 

Current service cost

 

 

 

53

 

 

 

0

 

53

Past service credit

 

 

 

(7)

 

 

 

0

 

(7)

Interest expense / (income)

 

 

 

51

 

 

 

(42)

 

9

 

 

 

 

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

 

 

 

 

Actuarial loss / (gain) arising from:

 

 

 

 

 

 

 

 

 

 

– Demographic assumptions

 

(14)

 

 

 

0

 

 

 

 

– Financial assumptions

 

(121)

 

 

 

0

 

 

 

 

– Experience adjustment

 

32

 

(103)

 

0

 

0

 

(103)

Return on plan assets excluding interest income

 

 

 

0

 

 

 

98

 

98

Remeasurements loss / (gain)

 

 

 

(103)

 

 

 

98

 

(5)

Effect of movements in exchange rates

 

 

 

(33)

 

 

 

28

 

(5)

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Contributions paid:

 

 

 

 

 

 

 

 

 

 

– Employers

 

 

 

0

 

 

 

(109)

 

(109)

– Plan participants

 

 

 

22

 

 

 

(22)

 

0

Benefits paid

 

 

 

(111)

 

 

 

111

 

0

Reclassification to liabilities held for sale

 

 

 

(4)

 

 

 

2

 

(2)

 

 

 

 

 

 

 

 

 

 

 

At 31 December 2018

 

 

 

23,132

 

 

 

(2,664)

 

468

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

million CHF

 

2018
Total

 

2017
Total

 

 

 

 

 

Defined benefit pension plan asset

 

7

 

4

Defined benefit pension plan liability

 

(475)

 

(538)

Defined benefit pension plan liability classified as held for sale

 

(2)

 

0

As a result of a plan amendment of the Swiss plan in 2018 (reduction of the conversion rate), the Group recognized a past service credit of CHF 10 million.

In 2017, 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 84 million in contributions to defined-benefit pension plans in 2019.

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

million CHF

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

2017

 

 

CH

 

US

 

UK

 

Rest of the world

 

Total

 

CH

 

US

 

UK

 

Rest of the world

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Present value of defined-benefit obligation

 

1,888

 

504

 

664

 

76

 

3,132

 

1,887

 

551

 

743

 

83

 

3,264

Fair value of plan assets

 

(1,642)

 

(397)

 

(588)

 

(37)

 

(2,664)

 

(1,634)

 

(417)

 

(639)

 

(40)

 

(2,730)

Total net defined-benefit liability

 

246

 

107

 

76

 

39

 

468

 

253

 

134

 

104

 

43

 

534

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

in %

 

2018

 

2017

 

 

CH

 

US

 

UK

 

CH

 

US

 

UK

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

0.83

 

4.20

 

2.86

 

0.66

 

3.50

 

2.52

Future salary increases

 

1.00

 

0.00

 

3.41

 

1.00

 

0.00

 

3.35

Future pension increases

 

n.a.

 

0.00

 

2.47

 

n.a.

 

0.00

 

2.44

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:

1 For the Pension Plan in Switzerland BVG 2015 mortality tables were applied.

in years

 

2018

 

2017

 

 

CH

 

US

 

UK

 

CH

 

US

 

UK

 

 

 

 

 

 

 

 

 

 

 

 

 

Retiring at the end of the reporting period

 

 

 

 

 

 

 

 

 

 

 

 

– Male

 

21.7

 

21.0

 

21.4

 

21.6

 

21.6

 

21.6

– Female

 

23.5

 

23.0

 

24.1

 

23.4

 

24.2

 

24.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Retiring 20 years after the end of the reporting period

 

 

 

 

 

 

 

 

 

 

 

 

– Male

 

23.2

 

22.0

 

23.1

 

23.1

 

23.4

 

23.4

– Female

 

25.0

 

24.0

 

25.8

 

24.9

 

26.0

 

26.0

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

effect in million CHF

 

 

 

31 12 2018

 

31 12 2017

 

 

Change in assumption

 

Increase

 

Decrease

 

Increase

 

Decrease

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

0.25%

 

(113)

 

121

 

(125)

 

134

Future salary

 

0.25%

 

13

 

(13)

 

17

 

(17)

Life expectancy

 

1 year

 

109

 

(110)

 

114

 

(116)

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

 

2018

 

2017

 

 

 

 

 

Group

 

15.2

 

15.9

CH

 

15.1

 

15.3

UK

 

18.9

 

19.7

US

 

11.0

 

12.2

Plan assets comprise:

million CHF

 

2018

 

2017

 

 

Quoted

 

Unquoted

 

Total

 

%

 

Quoted

 

Unquoted

 

Total

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity instruments

 

652

 

0

 

652

 

24

 

755

 

0

 

755

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

– Investment-grade (AAA to BBB)

 

1,146

 

0

 

1,146

 

 

 

1,149

 

0

 

1,149

 

 

– Non-investment-grade (below BBB)

 

37

 

0

 

37

 

 

 

33

 

0

 

33

 

 

Total debt instruments

 

1,183

 

0

 

1,183

 

44

 

1,182

 

0

 

1,182

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

122

 

106

 

228

 

9

 

111

 

95

 

206

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

77

 

0

 

77

 

3

 

68

 

0

 

68

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

496

 

28

 

524

 

20

 

493

 

26

 

519

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

2,530

 

134

 

2,664

 

100

 

2,609

 

121

 

2,730

 

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

 

2018

 

2017

 

 

 

 

 

At 1 January

 

36

 

40

 

 

 

 

 

Included in profit or loss

 

 

 

 

Current service cost

 

1

 

1

Past service credit

 

(4)

 

(3)

Interest expense

 

1

 

1

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

Remeasurements loss / (gain)

 

 

 

 

Actuarial loss / (gain) arising from:

 

 

 

 

– Demographic assumptions

 

0

 

0

– Financial assumptions

 

(2)

 

2

– Experience adjustment

 

0

 

(1)

Total remeasurements loss / (gain)

 

(2)

 

1

 

 

 

 

 

Effect of movements in exchange rates

 

0

 

(1)

 

 

 

 

 

Other

 

 

 

 

Contributions paid by:

 

 

 

 

– Employers

 

0

 

0

– Plan participants

 

0

 

0

Benefits paid

 

(3)

 

(3)

 

 

 

 

 

Reclassification to liabilities held for sale

 

(1)

 

0

 

 

 

 

 

At 31 December

 

28

 

36

In 2018 and 2017, the plans were amended. Following the elimination of certain benefits, the Group recognized a past service credit of CHF 4 million (2017: CHF 3 million).

The significant actuarial assumptions were as follows:

in %

 

2018

 

2017

 

 

 

 

 

Discount rate

 

4.20

 

3.50

Medical-cost trend rate

 

7.00

 

6.20

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

effect in million CHF

 

 

 

 

 

31 12 2018

 

 

 

31 12 2017

 

 

Change in assumption

 

Increase

 

Decrease

 

Increase

 

Decrease

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

0.25%

 

(1)

 

1

 

(1)

 

1

Medical-cost trend rate

 

1.00%

 

1

 

(1)

 

3

 

(3)

Life expectancy

 

1 year

 

0

 

0

 

1

 

(1)

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.