NOTE F31 Provisions

In total provisions decrease by €379 million.

The main events of 2017 are:

• a net decrease in provisions of €192 million for additions, reversals and uses. The use of €408 million (cash-out) includes €386 million for continuing operations, of which €208 million for employee benefits, €55 million for restructuring plans, and €81 million for environmental items,
• an increase from discounting for €100 million,
• remeasurement of employee benefits obligation for €(95) million,
• currency translation differences for €(137) million, and
• the transfer of liabilities from continuing operations to liabilities associated with assets held for sale for €(74) million relating mainly to employee benefits obligations in connection with Polyamides.

Management expects provisions (other than employee benefits) to be used (cash outlays) as follows:

F31.A. Provisions for employee benefits

Overview

A. Defined contribution plans

For defined contribution plans, Solvay pays contributions to publicly or privately administered pension funds or insurance companies. For 2017, the expense amounted to €55 million as against €56 million for 2016.

B. Defined benefit plans

Defined benefit plans can either be funded via outside pension funds or insurance companies (“funded plans”) or financed within the Group (“unfunded plans”).

The net liability results from the net of the provisions and the capitalized pensions assets.

B.1. Management of risks

Over recent years, the Group has reduced its exposure to defined benefit plan obligations stemming from future services by converting existing plans into pension plans with a lower risk profile (hybrid plans, cash balance plans, and defined contribution plans) or by closing them to new entrants.

Solvay continuously monitors its risk exposure, focusing on the following risks:

Asset volatility

Equity instruments, though expected to outperform corporate bonds in the long-term, create volatility and risk in the short term. To mitigate this risk, the allocation to equity instruments is monitored using Assets and Liabilities Management techniques, to ensure it remains appropriate given the long-term objectives of the Group and of the respective schemes.

Changes in bond yields

A decrease in corporate bond yields will increase the carrying amount of the plan’s liabilities. For funded schemes this impact will be offset partially by an increase in the fair value of the plan assets.

Inflation risk

The defined benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). A limited proportion of the assets is either unaffected by or only loosely correlated with inflation, meaning that an increase in inflation will also increase the deficit.

Life expectancy

The majority of the schemes’ obligations are to provide benefits for the life of the member. Increases in life expectancy will therefore increase the plans’ liabilities.

Currency risk

This risk is limited, as major plans in foreign currency are funded and most of their assets are denominated in the currency in which benefit payments will take place.

Regulatory risk

For partly or fully unfunded plans, the Group is exposed to the risk of external funding following regulatory constraints. This should not impact the defined benefit obligation but could expose the Group to a potential significant cash outlay.

For more information about Solvay Group risk management, please refer to the "Management of risks" section of the present document.

B.2. Description of obligations

The provisions have been set up primarily to cover post-employment benefits granted by most Group companies, in line either with local rules and customs or with established practices which generate constructive obligations.

The largest post-employment plans in 2017 are in the United Kingdom, France, the United States, Germany, and Belgium. These five countries represent 94% of the total defined benefit obligations.

United Kingdom

Solvay sponsors a few defined benefit plans in the United Kingdom; the largest one is the Rhodia Pension Fund. This is a final salary funded pension plan, with entitlement to accrue a percentage of salary per year of service. It was closed to new entrants in 2003 and replaced by a defined contribution plan.

Broadly, about 8% of the liabilities are attributable to current employees, 28% to former employees, and 64% to current pensioners.

The Fund functions and complies with UK legislation under a large regulatory framework. The Pensions Regulator has a risk-based approach to regulation and a code of practice which provides practical guidance to trustees and employers of defined benefit schemes on how to comply with the scheme funding requirements. In accordance with UK legislation, the Fund is subject to Scheme Specific Funding which requires that pension plans are funded prudently.

The Rhodia Pension Fund is governed by a Board of Trustees. They manage the Fund with prudent and fair judgment. The Trustees determine the liabilities used for Statutory Funding Objectives based on prudent actuarial and economic assumptions. Any shortfall or deficit once these liabilities have been deducted from the Fund’s assets must be reduced by additional contributions and in a time frame that fits with the employer’s ability to pay and the strength of covenant or contingent security being offered.

The Rhodia Pension Fund is subject to a triennial valuation cycle for funding purposes. This valuation is performed by the scheme actuary in line with UK regulations and is discussed between the Trustees and the sponsoring employer to agree the valuation assumptions and a funding plan. The last completed valuation was as at January 1, 2015 which established a fixed contribution rate of pensionable pay for active members plus a deficit recovery plan which aims to fund the scheme through technical provisions over a period of time. Future contributions were kept at the same level as those agreed at the previous valuation, which required the recovery plan to be extended for another year.

France

Solvay sponsors various defined benefit plans in France. The largest plans are the French compulsory retirement indemnity plan and two closed and one open top hat plans.

The main plan is for all former Rhodia current and retired employees who contributed to the plan prior to its closure in the 1970s. It offers a full benefit guarantee based on the end-of-career salary. This plan is unfunded and approximately 96% of the liabilities are attributable to current pensioners.

In accordance with French legislation, adequate guarantees have been provided.

United States

As of year end 2017 Solvay sponsors six different defined benefit pension plans in the United States (three qualified plans and three non-qualified plans).  A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under Section 401(a) of the Internal Revenue Code. At this moment all defined benefit plans are closed to new entrants; newly hired employees are eligible to participate in a defined contribution plan.  Note that all three of the qualified defined benefit pension plans are funded while the three non-qualified defined benefit pension plans are unfunded.  The qualified plans make up the vast majority of the pension liabilities as of December 31, 2017.

Solvay's plans are in compliance with local laws regarding audited financial statements, governmental filings, and Pension Benefit Guaranty Corporation insurance premiums where applicable.  The plans are reviewed and monitored locally by fiduciary committees for purposes of plan investments and administrative matters.

For the US qualified plans, Solvay’s contributions take into account minimum (tax-deductible) funding requirements and maximum tax deductible contributions, both regulated by the tax authorities.

Certain eligible participants may elect to receive their pension in a single lump sum payment instead of a monthly payment.

Broadly, about 27% of the liabilities are attributable to current employees, 9% to former employees for whom benefit payments have not yet commenced, and 64% to current pensioners.

In 2017, in the United States Solvay contributed to two multiemployer pension plans under collective bargaining agreements that cover certain of its union-represented employees. Each of the multiemployer plans is a defined benefit pension plan. None of the multiemployer plans provides an allocation of its assets, liabilities, or costs among contributing employers. None of the multiemployer plans provides sufficient information to permit Solvay, or other contributing employers, to account for the multiemployer plan as a defined benefit plan. Accordingly, the company accounts for its participation in each of the multiemployer plans as if they were a defined contribution plan. For multiemployer plans, during 2017 and 2016, the annual contributions paid are less than €1 million.

Germany

Solvay sponsors various defined benefit plans in Germany. The largest plans are a closed final-pay plan and an open cash balance plan. As is common in Germany, all plans are unfunded. Broadly, about 61% of the liabilities are attributable to current pensioners.

Belgium

Solvay sponsors two defined benefit plans in Belgium. These are funded pension plans. The plan for executives has been closed since the end of 2006, and the plan for the white and blue collars has been closed since 2004. The past service benefits provided under these plans continues to be adapted each year considering annual salary increase and inflation (“Dynamic management”). In accordance with market practice in Belgium, because of favorable retirement lump-sum taxation most benefits are paid as lump sum.

Furthermore, Solvay sponsors two open defined contribution plans, classified as defined benefit plans for accounting purposes due to the minimum guarantees explained below. These are funded pension plans: the plan for executives opened at the beginning of 2007 and the plan for white and blue collars opened at the beginning of 2005. There are four different investment funds – ranging from “Prudent” to “Dynamic” – in which participants may choose to invest their contributions. However, regardless of their choices, Belgian law stipulates that the employer must guarantee a return on employer contribution and on personal contribution, thereby creating a potential liability for the Company. Since January 1, 2016 the return is set on an annual basis with a minimum of 1.75% and a maximum of 3.75%. Since 2016 the return has been fixed at 1.75% for both types of contributions. For these plans Solvay has €123 million of plan assets at December 31, 2017, and paid €9 million of contributions during 2017. At the end of 2017 net liability recognized in the consolidated statement of financial position concerning these plans is not material.

Solvay’s plans are administered through two Solvay Pension Funds that operate in compliance with local laws regarding minimum funding, investments principles, audited financial statements, governmental filings, and governance principles. Pension Funds are managed through a General Assembly and a Board of Directors delegating day-to-day activities to an operational committee.

Solvay sponsors a few other smaller pension plans. All these plans are insured.

Other plans

The majority of the obligations relate to pension plans. In some countries (mainly the United States), there are also post-retirement medical plans, which represent 5% of the total defined benefit obligation.

B.3. Financial impacts

Changes in net liability

The decrease of the net liability of €314 million between 2016 and 2017 is mainly explained by the net effect of:

• a cash-out of €(203) million,
• a net expense in the consolidated income statement for €93 million,
• Remeasurements of €(93) million due to:
  • the return on plan assets (excluding interests recognized in the consolidated income statement) for €(206) million,
  • reduction in discount rates (€169 million) in the United States, the United Kingdom, and Brazil,
  • decrease in inflation rate (€(51) million) for the United Kingdom,
• the transfer of Polyamides to assets held for sale for €(43) million, and
• the currency translation differences for €(72) million.

Net expense

Net liability

Changes in defined benefit obligations

Changes in the fair value of plan assets

Categories of plan assets

With respect to the invested assets, it should be noted that these assets do not contain any direct investment in Solvay Group shares or in property or other assets occupied or used by Solvay. This does not exclude Solvay shares being included in mutual investment fund type investments.

Changes in assets ceiling

In some countries such as United Kingdom and United States, the mortality assumptions reflect actual scheme experience and/or Solvay’s expectations in terms of future mortality improvements.

The actuarial assumptions used in determining the benefit obligation at December 31 are based on the following employee benefit liability durations:

F31.B. Provisions other than for employee benefits

Restructuring provisions

These provisions amount to €62 million, as against €99 million at the end of 2016.

The main provisions at the end of 2017 relate to:

• The shutdown of business activities (€28 million) and the reorganization of Corporate Functions (€26 million), both following the Group portfolio review, and
• Cytec integration (€8 million).

Environmental provisions

These provisions amount to €702 million at the end of 2017, as against €737 million at the end of 2016, and pertain to:

• mines and drilling operations to the extent that legislation and/or operating permits in relation to quarries, mines, and drilling operations contain requirements to pay compensation to third parties. Most of these provisions, based on local expert advice, can be expected to be used over a 1-20 year horizon and amount to €139 million,
• the dismantling of the last mercury electrolysis activities, which should be completed by the end of 2019. The remaining provisions related to those activities will be used for contamination of soil and for groundwater management, mostly over the next 20 years,
• lime dikes (settling ponds related mainly to soda ash plant) , dump at sites and third party dump sites (linked to several industrial activities). These provisions have a horizon of 1 to 20 years, and
• various types of pollution (organic, inorganic) coming from miscellaneous chemical productions; these provisions mainly cover discontinued activities or closed plants. Most of these provisions have a horizon of 1 to 20 years.

The estimated amounts are discounted based on the probable date of settlement, and are adjusted periodically to reflect the passage of time.

Provisions for litigation

Provisions for litigation refer to tax and legal exposures. They amount to €129 million at the end of 2017 as against €167 million at the end of 2016. The balance at the end of 2017 relates to tax risks (€58 million) and legal claims (€72 million).

Other provisions

Other provisions relate to the shutdown or disposal of activities and amount to €180 million, as against €148 million at the end of 2016. The increase is mainly related to provision for post-closing warranties related to the disposal of the Pharma business. Other movements (€(20) million) relate to M&A post-closing adjustments.