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 2,530 million (3,623), which was SEK 638 million (136) 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 2022, Alecta reported a preliminary plan surplus of 172 percent (172).

The Group’s share of Alecta’s saving premiums is 0.2 percent, the total share of active members in Alecta is 1.0 percent. For 2023, the expected contribution to Alecta is SEK 29 million (36).

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 63 million (71). 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 third year. If the valuation indicates a requirement to increase the funding, Sandvik contributes with funding to the plan over a certain period of time. The plan is governed by trustees and investment decisions are made after consulting with Sandvik. Pension payments to retirees are made from the plan.

The benefit accruals for the majority of the defined-benefit plans were frozen in 2021. Defined-contribution plans replaced the defined-benefit plans.

US

US pension plans includes commitments for medical benefits. 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.

For the Sandvik pension plan a settlement with a one-time lump sum offering took place in December 2022. From the offering, 239 participants whose defined benefit obligations totalled SEK 497 million received a total of SEK 488 million in lump sum distributions, resulting in a settlement gain of SEK 9 million.

The benefit accruals for the majority of the defined-benefit plans were frozen in 2021. Defined-contribution plans replaced the defined-benefit plans.

Finland

In Finland, Sandvik sponsors a defined-benefit pension plan funded through 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. Sandvik has 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.

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Reconciliation of change in present value of defined benefit obligation for funded and unfunded plans
	2021	2022
Opening Balance, January 1	33,038	32,799
Service cost	611	361
Past service cost	–357	7
Gain/loss on settlements	–2	–10
Settlement	–	–501
Interest cost	539	655
Contributions by plan participants	29	31
Benefits paid	–1,137	–1,265
Remeasurements loss (gain) arising from:
– Financial assumptions	–1,785	–9,470
– Demographic assumptions	–27	–2
– Experience adjustments	16	504
Distribution of Alleima	–	–2,134
Acquisitions	85	154
Other	98	–2
Exchange differences	1,689	2,040
Closing balance, December 31	32,799	23,167

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Reconciliation of change in the fair value of plan assets
	2021	2022
Opening Balance, January 1	24,803	26,891
Interest income	418	578
Settlement payments from plan assets	–148	–501
Contributions by the employer	214	193
Benefits paid directly by employer	244	248
Contributions by plan participants	29	31
Benefits paid	–1,137	–1,265
Return on plan assets, excl interest income	1,555	–5,353
Effect of asset ceiling	–915	–698
Distribution of Alleima	–	–1,675
Acquisitions	40	148
Other	61	–30
Exchange differences	1,728	1,736
Closing balance, December 31	26,891	21,001

Actual return on plan assets	1,058	–4,484
Consolidation ration, funded plans, %	90	100
Consolidation ration, all plans, %	85	94
Estimated contributions, next year	396	396

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Information by country December 31, 2021

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

479

13,359

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

Over funded 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

Amount included in the income statement/ other comprehensive income

Total service cost

–225

–1

273

–120

–29

–76

–179

Net interest

–66

–9

–5

–1

–10

–12

–103

Remeasurements

1,447

548

–265

622

100

2,492

Total expense for defined benefits (pretax)

1,157

539

500

2,211

Cash flows

Contributions by the employer

–

–117

–

–29

–121

–214

Benefits paid

–85

–

–23

–

–57

–37

–202

Settlements paid

–

–138

–

–8

–145

Major assumptions for the valuation of the liability

Longevity, years %¹⁾

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.

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Information by country December 31, 2022

Other

Total

Amounts included in the balance sheet

Present value of funded and unfunded obligations

4,393

5,207

5,862

3,956

2,076

1,673

23,167

– of which for actives

1,935

–

1,363

1,145

764

1,160

6,367

– of which for deferred vested

1,361

2,102

652

777

308

5,267

– of which for retirees

1,096

3,105

3,847

2,035

1,004

445

11,532

Plan assets

2,531

5,320

6,395

4,624

1,562

1,267

21,699

Asset ceiling

–

–688

–

–10

–698

Total surplus (deficit)

–1,862

113

–155

668

–514

–416

–2,165

Pension plans recognized according to local rules

–

–218

Total net liability

–

2,383

Provision for pensions

–

3,458

Over funded pension plans recognized as asset, non-current receivable

–

1,074

Funding level, %

102

109

117

Net liability for medical plans

–

216

–

257

Average duration of the obligation, years

N/A

Amount included in the income statement/ other comprehensive income

Total service cost

–103

–

–132

–30

–66

–326

Net interest

–70

–

–23

–11

–63

Remeasurements

1,835

345

353

816

3,405

Total expense for defined benefits (pretax)

1,661

218

313

785

3,016

Cash flows

Contributions by the employer

–96

–

–23

–49

–21

–186

Benefits paid

–89

–

–29

–

–64

–36

–218

Settlements paid

–

–501

–

–500

Major assumptions for the valuation of the liability

Longevity, years %¹⁾

N/A

N/A

Inflation, %

2.00

3.10

2.50

2.00

2.25

N/A

2.40

Discount rate, % (weighted average)

3.95

4.95

5.20

4.24

4.10

N/A

4.58

Future salary increase, % (weighted average)

3.25

N/A

3.00

3.25

N/A

2.21

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 provision
	SE	UK	US	FI	DE	Total
Life expectancy, +1 year	171	163	155	142	51	682
Discount rate –50 bps	498	372	322	317	74	1,583
Inflation rate +50 bps	489	126	–	7	42	664
Equities –20%	128	73	129	289	74	693

Plan assets

The fair value of plan assets December 31, 2022, included loans of SEK 0 million (0) to Sandvik companies and the value of properties leased to Sandvik of SEK 204 million (204).

Class of assets, %

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	2021	2022
Interest bearing securities	69.1	69.3
Shares	21.1	19.7
Properties	1.9	2.3
Other	5.4	6.5
Cash and cash equivalents	2.5	2.2

Governance

The defined-benefit and defined contribution-plans are governed through Sandvik’s Pension Supervisory Board (PSB). The 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 the 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.