G22 Provisions for pension and other non-current post-employment benefits

Sandvik provides direct pension solutions or participates in defined benefit, defined contribution and other plans for post-employment benefits to all employees. These plans are structured in accordance with local regulations and practices. The Group’s most significant defined-benefit pension plans are described below per country.

Sweden

The Swedish pension plan is funded through a foundation and is based on salary at the time of retirement. It is partly closed for new participants, meaning that only new employees born prior to 1979 have the option of joining the plan. Employees born after 1979 are encompassed by a defined contribution plan. There are no funding requirements for the defined benefit plan. Pension payments to retirees are made directly from Sandvik. The total value of the assets held by the Swedish foundation was SEK 3,624 million (3,101), which was SEK 136 million (271) higher than the capital value of the corresponding pension obligations for the entire foundation.

The commitment for family pension, also a defined-benefit plan, is insured with Alecta. Sufficient information to use defined-benefit accounting for this plan is not available, and therefore recognized as a defined-contribution plan. At the end of 2021, Alecta reported a preliminary plan surplus of 172 percent (148).

The Group’s share of Alecta’s saving premiums is 0.1 percent, the total share of active members in Alecta is 0.6 percent. For 2022, the expected contribution to Alecta is SEK 36 million (52).

The Group’s mutual responsibility as a credit insured company of PRI Pensionsgaranti in Sweden is classified as a contingent liability and amounts to SEK 71 million (64). This mutual responsibility can only be imposed in the instance that PRI Pensionsgaranti has consumed all of its assets, and it amounts to a maximum of 2 percent of the Group’s pension liability in Sweden.

UK

The main pension plan in the UK is funded through a foundation, which is closed for new participants, and the pension is based on salary at the time of retirement. The funding level is revalued every three years, and if this valuation indicates a requirement to increase the funding, the company pays money into the plan over a certain period of time. The plan is governed by Trustees who make investment decisions after having consulted with the company. As a part of the actuarial valuation, Sandvik and the Trustees have agreed to a plan to clear shortfall and meet the costs of the further build-up of benefits. Pension payments to retirees are made from the plan. The benefit accruals for the majority of the defined benefit plans were frozen effective August 31, 2021. Defined contribution plans replaced the defined benefit plans.

US

There are a number of pension plans in the US, including commitments for medical benefits. The largest pension plan covers 92 percent of the total commitment in the US. The pension is based on salary at the time of retirement and is closed for new participants. The funding level is revalued every year with a target of restoring the funding level over a seven-year period. Pension payments to retirees are primarily made from the plan. Those eligible for the pension plan are also eligible for the medical plan at retirement. The retiree medical plan offers a dollar amount for each service year based on the age at which someone retires. The benefit accruals for the majority of the defined benefit plans were frozen effective June 30, 2021. Defined contribution plans replaced the defined benefit plans.

Finland

In Finland, Sandvik sponsors a defined benefit pension plan funded in a foundation. The benefits offered include an old-age pension and disability pension. In addition to the benefits guaranteed by the Finnish subsidiary, there is also a defined contribution pension component. Pension payments to retirees are made from the plan.

Germany

In Germany, Sandvik has defined benefit pension plans. A few years ago, Sandvik formed a foundation, a Contractual Trust Agreement, which covers the current employees in most of Sandvik’s German companies. The pension commitments for retirees and paid-up policyholders remain unfunded. The pension is based on salary at the time of retirement and other parameters. There are no funding requirements and employees in the plan are required to contribute a certain percentage of their salary to the plan. Pension payments to retirees are mainly made from the Company.

Other

Other countries with material defined benefit pension plans are Canada, Japan and Austria.

(XLSX:) Download

Reconciliation of change in present value of defined benefit obligation for funded and unfunded plans
	2020	2021
Opening balance, January 1	31,845	33,038
Service cost	728	611
Past service cost	–	–357
Settlements	0	–2
Interest cost	632	539
Contributions by plan participants	30	29
Benefits paid	–1,210	–1,137
Remeasurements gain (loss) arising from:
– Financial assumptions	2,495	–1,785
– Demographic assumptions	206	–27
– Experience adjustments	482	16
Business combinations	–	85
Other	–2	98
Exchange differences	–2,167	1,689
Closing balance, December 31	33,038	32,799

(XLSX:) Download

Reconciliation of change in the fair value of plan assets
	2020	2021
Opening balance, January 1	24,757	24,803
Interest income	505	418
Settlement payments from plan assets	0	–148
Contribution by the employer	429	214
Benefits paid directly by employer	245	244
Settlements paid by employer	–	3
Contributions by plan participants	30	29
Benefits paid	–1,210	–1,137
Return on plan assets, excl amount included in interest	2,055	1,555
Effect of asset ceiling	–10	–915
Acquisition through business combinations	–	40
Other	–9	58
Exchange differences	–1,990	1,728
Closing balance, December 31	24,803	26,891

Actual return on plan assets	2,550	1,058
Consolidation ratio for funded plans %	79	90
Consolidation ratio for all plans including unfunded	75	85
Estimated contributions for the next year	616	396

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Information by country December 31, 2020

Sweden

Finland

Germany

Other

Total

Amounts included in the balance sheet

Present value of funded and unfunded obligations

8,854

8,172

7,750

3,989

2,692

1,581

33,038

– of which for actives

4,715

1,703

3,256

1,236

1,115

1,051

13,077

– of which for deferred vested

2,492

2,531

909

881

309

7,203

– of which for retirees

1,647

3,938

3,585

1,872

1,268

443

12,753

Plan assets

3,101

7,554

7,540

3,816

1,596

1,206

24,813

Asset ceiling

–

–10

–10

Total surplus (deficit)

–5,753

–618

–209

–174

–1,096

–385

–8,236

Pension plans recognized according to local rules

–

–273

Total Net liability

–

8,509

Provision for pensions

–

8,822

Overfunded pension plans recognized as asset, non-current receivable

–

313

Funding level, %

Net liability for medical plans

–

268

–

327

Average duration of the obligation, years

N/A

Amounts included in the income statement/Other comprehensive income

Total service cost

–333

–62

–146

–118

–42

–29

–729

Net interest

–80

–5

–12

–17

–14

–126

Remeasurements

–829

–419

145

–170

–1,146

Total expense for defined benefits (before tax)

416

356

–300

–154

–95

–2,001

Amounts included in the cash flow statement

Contributions by the employer

–146

–177

–36

–50

–19

–429

Benefits paid

–120

–23

–63

–39

–245

Settlements paid

–

Major assumptions for the valuation of the liability

Longevity, years¹⁾

N/A

N/A

Inflation, %

1.75

2.85

2.25

1.2

N/A

2.11

Discount rate, % (weighted average)

1.5

1.45

2.18

0.8

N/A

1.58

Future salary increase (weighted average)

2.69

2.5

N/A

2.87

1)	Expressed as the expected remaining life expectancy of a 65-year-old in number of years

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Information by country December 31, 2021

Sweden

Finland

Germany

Other

Total

Amounts included in the balance sheet

Present value of funded and unfunded obligations

8,181

8,327

7,653

4,154

2,727

1,757

32,799

– of which for actives

4,123

–

2,711

1,310

1,083

1,195

10,423

– of which for deferred vested

2,459

4,252

938

911

374

9,018

– of which for retirees

1,599

4,076

4,003

1,932

1,270

478

13,358

Plan assets

3,624

8,311

8,371

4,514

1,666

1,321

27,806

Asset ceiling

–

–905

–

–9

–915

Total surplus (deficit)

–4,558

–17

–188

360

–1,061

–445

–5,908

Pension plans recognized according to local rules

–

–229

Total Net liability

–

6,137

Provision for pensions

–

6,904

Overfunded pension plans recognized as asset, non-current receivable

–

768

Funding level, %

100

109

Net liability for medical plans

–

282

–

328

Average duration of the obligation, years

N/A

Amounts included in the income statement/Other comprehensive income

Total service cost

–288

–1

274

–120

–32

–85

–252

Net interest

–86

–9

–5

–1

–11

–12

–123

Remeasurements

1,447

548

–265

622

100

2,492

Total expense for defined benefits (before tax)

1,073

539

500

–2

2,117

Amounts included in the cash flow statement

Contributions by the employer

–

–117

–0

–29

–76

–214

Benefits paid

–122

–

–23

–

–62

–37

–244

Settlements paid

–

–138

–

–8

–145

Major assumptions for the valuation of the liability

Longevity, years¹⁾

N/A

N/A

Inflation, %

1.75

3.25

2.25

1.95

2.00

N/A

2.11

Discount rate, % (weighted average)

2.00

1.80

2.69

1.40

1.10

N/A

1.59

Future salary increase (weighted average)

3.00

N/A

3.00

2.95

3.00

N/A

2.88

1)	Expressed as the expected remaining life expectancy of a 65-year-old in number of years

Risks and cash flows

Three main categories of risks are associated with the Company’s defined-benefit pension plans. The first category is linked to future pension payments. Greater life expectancy, increased inflation assumptions and higher salaries can increase future pension payments and thus also the liability for the pension obligation. The second category refers to the assets in the foundations that are funded. Low returns may, in the future, lead to the assets being insufficient for covering future pension payments. The third and final category pertains to the measurement methods and accounting of defined-benefit pension plans, primarily regarding the discount rate utilized in the measurement of the present value of the pension obligations. This rate can fluctuate, leading to major changes in the recognized pension liability. The discount rate also affects the interest rate component of the pension liability and that is recognized in net financial items.

To determine the discount rate, AA credit rated corporate bonds are used that correspond to the duration of the pension obligation. If there is no deep market for corporate bonds, government bonds are used as the basis for determining the discount rate. Mortgage bonds are used in Sweden to determine the discount rate.

A sensitivity analysis of the most important assumptions affecting the recognized pension liability is provided below. Note that this sensitivity analysis is not intended to be the expression of an opinion by the Company regarding the probability of such events occurring.

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Sensitivity analysis, change in pension provision
	SE	UK	US	FI	DE	Total
Life expectancy, +1 year	376	331	237	162	82	1,188
Discount rate –50 bps	1,029	779	540	397	115	2,860
Inflation rate + 50 bps	1,020	269	–285	14	63	1,082
Equities –20%	190	168	161	297	80	896

Plan assets

The fair value of plan assets on December 31, 2021 included loans of SEK 0 million (0) to Sandvik companies and the value of properties leased to Sandvik of SEK 204 million (200).

Class of assets, %

(XLSX:) Download

	2020	2021
Interest bearing securities	53	69.1
Shares	26	21.1
Properties	8	1.9
Other	10	5.4
Cash and cash equivalents	3	2.5
of which assets without quoted prices	0	0

Governance

The defined benefit and defined contribution plans are governed through Sandvik’s Pension Supervisory Board (PSB). PSB meets twice a year and has the following areas of responsibility:

Implement policies and directives
Ensure efficient administration of the major pension plans and efficient management of reserved plan assets
Approve establishment of new plans, material changes or closure of existing plan
Approve guidelines for management of assets

The Group Pension Committee (GPC) is another operating body, which is also preparatory to the PSB, that has representatives from countries with large defined-benefit plans and the relevant Group functions. The GPC’s task is to monitor developments in countries, submit proposals on changes to pension plans to the PSB and approve the principle of how actuarial assumptions are established. The GPC meets twice a year.

Investment strategy

The aims of the investment decisions made in the foundations managing plan assets are as follows:

Ensure that the plan assets are sufficient to cover the foundation’s future pension commitments
Achieve optimal returns while taking into account a reasonable level of risk

Each foundation is to have a written investment policy approved by GPC. Reviews are performed annually. The foundation makes its own decisions on its investment strategy and takes into consideration the composition of the pension commitments, requirements of cash and cash equivalents and available investment opportunities. The investment strategy is to be long term and in line with the guidelines established by PSB. An investment committee is to be in place.

Accounting principles

Defined-contribution plans

A defined-contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The size of the pension that the employee will ultimately receive in such cases depends on the size of the contributions that the entity pays to the plan or an insurance company and the return that the contributions yield. Obligations for contributions to defined-contribution pension plans are recognized as an employee benefit expense in profit or loss for the year as the employee renders services to the entity.

Defined-benefit plans

The Group’s net obligation in respect to defined-benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have vested in return for their service in the current and prior periods. This benefit is discounted to its present value. The discount rate is the yield on high-quality corporate bonds, mortgage bonds – or if there is no deep market for such bonds, government bonds – that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed annually by a qualified actuary. In addition, the fair value of any plan assets is assessed. This method of accounting is applied to the most significant defined-benefit plans in the Group. A number of plans, which neither individually nor in the aggregate are significant in relation to the Group’s total pension obligations, are still recognized in accordance with local regulations.

In measuring the present value of pension obligations and the fair value of plan assets, actuarial gains and losses may accrue either because the actual outcome differs from earlier assumptions (so-called experience adjustments) or the assumptions are changed. These actuarial gains and losses are recognized in the balance sheet and in profit or loss under other comprehensive income.

When the benefits under a plan are improved, the portion of the increased benefits that relate to past service by employees is recognized in profit or loss for the year. The amount of obligations recognized in the balance sheet for pensions and similar obligations reflects the present value of the obligations at the balance sheet date, less the fair value of any plan assets.

Critical estimates and key judgments

Post-employment benefits

Actuarial assumptions are used to measure pension obligations and they significantly affect the recognized net liability and the annual pension cost. One critical assumption – the discount rate – is essential for the measurement of both the expense of the year and the present value of the defined-benefit obligations’ current year. The discount rate is used both for calculating the present value of the obligation and as an estimate for the return on plan assets. The discount rate is reviewed quarterly, which affects the net liability, and annually, which also affects the expense for the coming year. All other assumptions, both financial and demographic are reviewed at least annually.

The financial risk management associated with the defined-benefit plans are presented in the Directors’ Report in the section Financial Risk Management.