NOTE F34 Provisions

The use (cash-out) of € 513 million includes € 503 million for continuing operations, of which € 337 million for employee benefits (including € 114 million for voluntary contributions), € 62 million for restructuring plans and € 81 million for environmental items. The reversal of unused amounts includes the reversal of provisions for indemnities for expected refusals to relocate following the decision to stop the planned transfers of the teams based in Paris to Lyon and Brussels (€ (48) million). The line “increase through discounting” includes € 87 million for increase at constant discount rate, and € 20 million related to change of discount rate. The line “Other” corresponds mainly to a reclassification of € 40 million in other non-current liabilities following the adoption of IFRIC 23 Uncertainty over Income Tax Treatments, and € 16 million in lease liabilities related to onerous contracts following the adoption of IFRS 16 Leases.

The deleveraging corresponds to the net difference between:

• cash out (use for € (513) million) on the one hand; and
• the sum of the net accruals for new liabilities (€ 154 million, being additions less reversals of unused amounts) and the increase through discounting (€ 87 million) at constant discount rate on the other hand.

The deleveraging of provisions amounts to € 272 million. This amount is higher than in previous years mainly due to a voluntary contribution in pensions plans of United Kingdom for € 114 million in addition to the mandatory pensions contributions. The effect of this voluntary contribution will be a partial de-risking of the pension plans and a reduction of recurring pension contributions in the mid-term.

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

F34.A. Provisions for employee benefits

Overview

Post-employment benefits

A. Defined contribution plans

For defined contribution plans, Solvay pays contributions to publicly or privately administered pension funds or insurance companies. For 2019, the expense amounts to € 62 million compared to € 58 million for 2018.

B. Defined benefit plans

Defined benefit plans can be either funded via outside pension funds or insurance companies (“funded plans”) or financed within the Group (“unfunded plans”). Unfunded plans have no plan assets dedicated to them.

The net liability results from the net of the provisions and the asset plan surplus.

The operating expense includes current service cost for € 44 million (€ 47 million in 2018).

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, even 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 respective schemes’ and Group’s long term objectives.

Changes in bond yields

A decrease in corporate bond yields will increase the carrying amount of the plans’ liabilities. For funded schemes this impact will be partially offset 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 part of the assets are either unaffected by or only loosely correlated with inflation, meaning that an increase in inflation will also increase the plans’ net liabilities.

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.

Regulatory risk

Especially with respect to funded 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 to cover post-employment benefits granted by most Group companies in line, either with local rules and /or with established practices which generate constructive obligations.

The largest post-employment plans in 2019 are in the United Kingdom, the United States, France, Germany and Belgium. These five countries represent 94% of the total defined benefit obligations.

It is worth highlighting that unfunded plans are mainly in Germany and France that account for 68% of 2019 net liability. See comments by countries below.

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, 27% to former employees and 65% 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 UK 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 determined in accordance with the employer’s ability to pay and the strength of covenant or contingent security being offered by the employer.

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, 2018 which established a fixed contribution rate of pensionable pay for active members plus a deficit recovery plan which aims to fund the scheme’s technical provisions over a period of time. Recovery contributions have been increased so that the plan is expected to be fully funded by the end of 2027 in accordance with local regulations. At the end of 2019 a voluntary contribution has been paid (€ 114 million), which corresponds to the expected annual contributions for the next four years.

The guarantee provided by Solvay (£ 550 million) is based on local regulations and exceeds the recognized liability (€ 216 million) – See note F39 Contingent liabilities and financial guarantees for more information.

France

Solvay sponsors different defined benefit plans in France. The largest plans are the French compulsory retirement indemnity plan and three closed top hat plans. Indeed, as required by the “Loi Pacte”, the open top hat plan (so called “ARS”) has been closed at the end of 2019 and replaced by a defined contribution plan.

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 broadly, about 99% of the liabilities are attributable to current pensioners.

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

United States

As of year-end 2019 Solvay sponsored five different defined benefit pension plans in the United States (two 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 where newly hired employees are eligible to participate in a defined contribution plan.  Note that both 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, 2019.

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 as well as 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 2019, 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 provide 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 2019 and 2018, 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 64% 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 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 hereafter. These are funded pension plans which are open since the beginning of 2007 for the one in favor of the executives and since beginning of 2005 for the one in favor of the White and Blue collars. Participants may choose to invest their contributions amongst four different investment funds (from “Prudent” to “Dynamic”). However, regardless of their choices, the Belgian law foresees that the employer must guarantee a return on employer contribution and on personal contribution, creating that way a potential liability for the Group. Since 2016 the return has been fixed at 1.75% for both types of contributions, at the minimum of the range provided by law since January 1, 2016 (1.75% to 3.75%). At the end of 2019 net liability recognized in the consolidated statement of financial position concerning these plans is not material.

Solvay’s plans are administered through the Solvay Pension Fund that operates in compliance with local laws regarding minimum funding, investments principles, audited financial statements, governmental filings, and governance principles. The Pension Fund is 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-employment medical plans, which represent 6% of the total defined benefit obligation.

B.3 Financial impacts

Changes in net liability

Net expense

The service costs and administrative expenses of these benefit plans are recognized within cost of sales, administrative costs, research & development costs or operating gains and losses and results from legacy remediation, and the net interest is recognized as a finance expense.

In 2019 the Group’s current service costs amount to € 44 million, of which € 29 million related to funded plans and € 15 million related to unfunded plans.

In 2018 the Group’s current service costs amounted to € 47 million, of which € 31 million related to funded plans and € 16 million related to unfunded plans. Past service costs include mainly favorable impacts reflecting the amendment of post-retirement healthcare and death benefit plan in the United States (€ 24 million), a curtailment effect (€ 15 million) mainly in France and in Belgium, compensated by an unfavorable impact of the UK guarantee minimum pension for € 16 million.

Net liability

Changes in defined benefit obligations

Changes in the fair value of plan assets

In 2019 the total return on plan assets, i.e. including interest income, amounts to € 414 million against € (101) million in 2018.

In 2019, the Group’s cash contributions amount to € 308 million, of which € 107 million of mandatory contributions to funds, € 114 million of voluntary cash contributions, and € 87 million of direct benefits payments. The voluntary cash contributions were made to improve the funding levels of the Rhodia Pension Fund in the United Kingdom.

The Group’s cash contributions for 2018 amounted to € 196 million, of which € 95 million of mandatory contributions to funds and € 101 million of direct benefits payments.

Except for any significant change in the regulatory environment (see “regulatory risk” above), the Group’s mandatory cash contributions in 2020 are expected to decrease to approximate € 129 million, and the voluntary cash contributions are expected to approximate € 435 million (€ 380 million in France and € 55 million in the United States). The decrease of the mandatory contributions expected in 2020 is due to the action plans undertaken by the Group on the management of pension funding.

Categories of plan assets

Actuarial assumptions used in determining the liability

Some of the retirement plans that Solvay has in place provide annuity payments that are adjusted on a regular basis to mitigate the effects for cost of living increases.

The salary growth assumption is used to determine what will be the salary at the end of the career of the individuals, as the defined benefit plans take into account the last salary of the individuals. This assumption includes impacts of both inflation and merit increases.

The pension growth assumption defines the expected future adjustments for these annuity payments. The plan defines how these annuity payments will be adjusted, and might be linked to inflation. Pension growth assumptions mainly apply for the defined benefit retirement plans in the United Kingdom, France and Germany.

Inflation assumption is presented separately as salary growth and pension growth assumptions encompass more variables than inflation.

Actuarial assumptions used in determining the annual cost

F34.B. Provisions other than for employee benefits

Restructuring provisions

These provisions amount to € 99 million, compared with € 185 million at the end of 2018.

The provisions at the end of 2019 mainly relate to the Group’s simplification and transformation program (€ 85 million).

Environmental provisions

These provisions amount to € 703 million at the end of 2019, compared with € 691 million at the end of 2018, 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 € 149 million;
• the dismantling of the last mercury electrolysis activities, that was completed in 2019. The remaining provisions related to those activities will be used for the management of contamination of soils and groundwater, 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;
• 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 periodically adjusted to reflect the passage of time.

The breakdown of the environmental provisions for the main Countries/Regions is reported here below:

Provisions for litigation

Provisions for litigation refer to indirect tax and legal exposures. They amount to € 80 million at the end of 2019 compared with € 121 million at the end of 2018. The balance at the end of 2019 relates to indirect tax risks (€ 13 million) and legal claims (€ 67 million).

In the framework of adopting IFRIC 23 Uncertainty over Income Tax Treatments, an amount of € 40 million has been reclassified from provisions to other non-current liabilities.

Other provisions

Other provisions relate to the shutdown or disposal of activities and amount to € 135 million, compared with € 168 million at the end of 2018.