13. Pensions and Other Employee Benefit Plans

Pensions

We maintain a qualified defined benefit pension plan, to which members may contribute in order to receive enhanced pension benefits. Employees hired after June 30, 2006 do not participate in the defined benefit pension plan, but participate in our defined contribution savings plan with an additional Company contribution. Benefits are based primarily on members’ compensation and/or years of service. Our funding policy is to fund the qualified pension plan in accordance with the Internal Revenue Code and regulations thereon. Plan assets are generally invested in equity investments and fixed income investments. Pension plan assets are managed primarily by Russell Investment Corp. (“Russell”), which allocates the assets into funds as we direct.

Other Benefits

In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents through plans sponsored by Telesat. Participants are eligible for these benefits generally when they retire from active service and meet the eligibility requirements for our pension plan. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions. Effective January 1, 2015, retiree medical coverage for retirees age 65 or over and their dependents was discontinued. In January 2015, the Company made a discretionary one-time payment to retirees affected to assist them in purchasing alternate coverage. The effects on the consolidated financial statements of discontinuing this coverage and the one-time payment were not significant.

Sale of SS/L

As required by the Purchase Agreement, prior to the closing of the Sale on November 2, 2012, new stand-alone SS/L pension plans were established. Pension obligations related to SS/L current and former employees and plan assets determined through an initial allocation methodology were transferred from the Loral pension plans to the newly formed plans. With the closing of the Sale, the newly formed SS/L plans were transferred to SS/L. Subsequent to the closing of the Sale, our actuary performed a review to determine the amount of qualified plan assets that proportionately relate to the benefit liabilities of the SS/L pension participants in accordance with the asset priorities of Section 4044 of ERISA. This review resulted in a true-up of the initial asset transfer between plans. As a result, Loral contributed $10.7 million to its qualified pension plan, which transferred $11.9 million to SS/L’s plan. In return, MDA paid Loral $11.9 million, pursuant to the Purchase Agreement. The net effect of this true-up, which took place in April 2013, was a $1.2 million increase to Loral’s cash balance and a $1.2 million decrease to the assets of Loral’s qualified pension plan. This net change in plan assets is shown in the table below as “Transfer due to Sale” in 2013.

Termination of Supplemental Executive Retirement Plan (“SERP”)

In connection with the corporate office restructuring as a result of the Sale, on December 13, 2012, Loral’s Board of Directors approved termination of the SERP. The Company made lump sum payments of $17.7 million in December 2013 to the participants in the SERP in accordance with the requirements of Section 409A of the Internal Revenue Code and the regulations promulgated thereunder. The lump sum payouts were calculated based on plan provisions.

Funded Status

The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2014 and 2013, and a statement of the funded status as of December 31, 2014 and 2013, respectively. We use a December 31 measurement date for the pension plans and other post-retirement benefits (in thousands).


	Pension Benefits				Other Benefits
	Year Ended December 31,				Year Ended December 31,
	2014		2013		2014		2013
Reconciliation of benefit obligation:
Obligation at beginning of period	$	40,242	$	62,488	$	1,517	$	1,051
Service cost		188		311		1		2
Interest cost		1,882		1,843		71		65
Participant contributions		21		28		58		51
Plan amendment		—		—		—		230
Actuarial loss (gain)		7,554		(3,874)		145		249
Benefit payments		(1,715)		(1,868)		(169)		(147)
Curtailment and settlement		—		(18,686)		—		16
Obligation at December 31,		48,172		40,242		1,623		1,517
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of period		24,628		20,207		—		—
Actual return on plan assets		1,464		3,120		—		—
Employer contributions		4,078		3,955		111		96
Participant contributions		21		28		58		51
Benefit payments		(1,715)		(1,467)		(169)		(147)
Transfer due to Sale		—		(1,215)		—		—
Fair value of plan assets at December 31,		28,476		24,628		—		—
Funded status at end of period	$	(19,696)	$	(15,614)	$	(1,623)	$	(1,517)

The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $21.3 million at December 31, 2014 (the “unfunded benefit obligations”). The unfunded benefit obligations were measured using a discount rate of 4.00% and 4.75% at December 31, 2014 and 2013, respectively. Lowering the discount rate by 0.5% would have increased the unfunded benefit obligations by approximately $4.0 million and $3.1 million as of December 31, 2014 and 2013, respectively. Market conditions and interest rates will significantly affect future assets and liabilities of Loral’s pension plan and other post-retirement benefits.

The pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2014 and 2013 consist of (in thousands):


	Pension Benefits				Other Benefits
	December 31,				December 31,
	2014		2013		2014		2013
Actuarial loss	$	(17,200)	$	(9,636)	$	(550)	$	(444)
Amendments-prior service (cost) credit		—		—		(80)		(89)
	$	(17,200)	$	(9,636)	$	(630)	$	(533)

The amounts recognized in other comprehensive loss during the years ended December 31, 2014, 2013 and 2012 consist of (in thousands):


	Year Ended December 31,
	2014				2013				2012
	Pension Benefits		Other Benefits		Pension Benefits		Other Benefits		Pension Benefits		Other Benefits
Actuarial (loss) gain during the period	$	(7,972)	$	(145)	$	5,491	$	(249)	$	498	$	967
Prior service cost (credit) during the period		—		—		—		(230)		1,497		—
Amortization of actuarial loss (gain)		408		39		5,947		44		9,773		(279)
Amortization of prior service cost (credit)		—		9		—		9		(2,266)		(611)
Recognition due to curtailment		—		—		2,624		63		(1,497)		—
Amount reclassified to statement of operations upon disposition of SS/L		—		—		—		—		135,618		(12,241)
Total recognized in other comprehensive income (loss)	$	(7,564)	$	(97)	$	14,062	$	(363)	$	143,623	$	(12,164)

Amounts recognized in the balance sheet consist of (in thousands):


	Pension Benefits				Other Benefits
	December 31,				December 31,
	2014		2013		2014		2013
Current Liabilities	$	—	$	—	$	526	$	128
Long-Term Liabilities		19,696		15,614		1,097		1,389
	$	19,696	$	15,614	$	1,623	$	1,517

The estimated actuarial loss for pension benefits that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year is $0.8 million.

The accumulated pension benefit obligation was $46.9 million and $39.2 million at December 31, 2014 and 2013, respectively.

During 2014, we contributed $4.1 million to the qualified pension plan and contributed $0.1 million for other employee post-retirement benefits. During 2015, based on current estimates, our minimum required contributions to the qualified pension plan will be approximately $4.2 million. We expect to fund approximately $0.5 million for other employee post-retirement benefits during 2015.

The following table provides the components of net periodic cost included in income from continuing operations for the plans for the years ended December 31, 2014, 2013 and 2012 (in thousands):


	Pension Benefits						Other Benefits
		Year Ended December 31,						Year Ended December 31,
	2014		2013		2012		2014		2013		2012
Service cost	$	188	$	311	$	824	$	1	$	2	$	6
Interest cost		1,882		1,843		2,523		71		65		45
Expected return on plan assets		(1,882)		(1,503)		(1,435)		—		—		—
Recognition due to curtailment		—		1,671		(1,497)		—		78		—
Amortization of prior service cost (credit)		—		—		—		9		9		(24)
Amortization of net actuarial loss		408		5,947		748		39		44		12
Net periodic cost	$	596	$	8,269	$	1,163	$	120	$	198	$	39

Assumptions

Assumptions used to determine net periodic cost:


	For the Year Ended December 31,
	2014	2013	2012
Discount rate	4.75%	4.00%	4.75%
Expected return on plan assets	7.25%	7.25%	8.00%
Rate of compensation increase	4.25%	4.25%	4.25%

Assumptions used to determine the benefit obligation:


	December 31,
	2014	2013	2012
Discount rate	4.00%	4.75%	4.00%
Rate of compensation increase	4.25%	4.25%	4.25%

The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the projected benefit obligation for the plans, the asset mix of the plans and the fact that the plan assets are actively managed to mitigate risk. Our expected long-term rate of return on plan assets for 2015 is 7.25%.

As of December 31, 2014, the Company contributions remaining for other benefits are for fixed amounts. Therefore future health care cost trend rates will not affect Company costs and accumulated postretirement benefit obligation. Actuarial assumptions to determine the benefit obligation for other benefits as of December 31, 2013, used a health care cost trend rate of 8.5% decreasing gradually to 5% by 2021.

Plan Assets

The Company has established the pension plan as a retirement vehicle for participants and as a funding vehicle to secure promised benefits. The investment goal is to provide a total return that over time will earn a rate of return to satisfy the benefit obligations given investment risk levels, contribution amounts and expenses. The pension plan invests in compliance with the Employee Retirement Income Security Act 1974, as amended (“ERISA”), and any subsequent applicable regulations and laws.

The Company has adopted an investment policy for the management and oversight of the pension plan. It sets forth the objectives for the pension plans, the strategies to achieve these objectives, procedures for monitoring and control and the delegation of responsibilities for the oversight and management of pension plan assets.

The Company’s Board of Directors has delegated primary fiduciary responsibility for pension assets to an investment committee. In carrying out its responsibilities, the investment committee establishes investment policy, makes asset allocation decisions, determines asset class strategies and retains investment managers to implement asset allocation and asset class strategy decisions. It is responsible for the investment policy and may amend such policy from time to time.

Pension plan assets are invested in various asset classes in what we believe is a prudent manner for the exclusive purpose of providing benefits to participants. U.S. equities are held for their long-term expected return premium over fixed income investments and inflation. Non-U.S. equities are held for their expected return premium (along with U.S. equities), as well as diversification relative to U.S. equities and other asset classes. Fixed income investments are held for diversification relative to equities. Alternative investments are held for both diversification and higher returns than those typically available in traditional asset classes. Asset allocation policy is reviewed regularly.

Asset allocation policy is the principal method for achieving the pension plan’s investment objectives stated above. Asset allocation policy is reviewed regularly by the investment committee. The pension plans’ actual and targeted asset allocations are as follows:


	December 31,
	Actual Allocation		Target Allocation
	2014	2013	Target	Target Range
Equities	58%	58%	60%	50-70%
Fixed Income	42%	42%	40%	30-50%
	100%	100%	100%	100%

The target and target range levels can be further defined as follows:


	Target Allocation
	Target	Target Range
U.S. Large Cap Equities	25%	15-40%
U.S. Small Cap Equities	5%	0-10%
Global Equities	10%	5-20%
Non-U.S. Equities	10%	5-20%
Alternative Equity Investments	10%	0-20%
Total Equities	60%	50-70%

Fixed Income	30%	20-40%
Alternative Fixed Income Investments	10%	0-20%
Total Fixed Income	40%	30-50%

Total Target Allocation	100%	100%

The pension plan’s assets are actively managed using a multi-asset, multi-style, multi-manager investment approach. Portfolio risk is controlled through this diversification process and monitoring of money managers. Consideration of such factors as differing rates of return, volatility and correlation are utilized in the asset and manager selection process. Diversification reduces the impact of losses in single investments. Performance results and fund accounting are provided to the Company by Russell on a monthly basis. Periodic reviews of the portfolio are performed by the investment committee with Russell. These reviews typically consist of a market and economic review, a performance review, an allocation review and a strategy review. Performance is judged by investment type against market indexes. Allocation adjustments or fund changes may occur after these reviews. Performance is reported to the Company’s Board of Directors at quarterly board meetings.

Fair Value Measurements

The values of the fund trusts are calculated using systems and procedures widely used across the investment industry. Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, discounted cash flow methodology, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers.

The table below provides the fair values of the Company’s pension plan assets at December 31, 2014 and 2013, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category. The Company’s pension plan assets are mainly held in commingled employee benefit fund trusts.


	Fair Value Measurements
			Quoted Prices
			In Active Markets	Significant	Significant
			For Identical	Observable	Unobservable
			Assets	Inputs	Inputs
Asset Category	Total	Percentage	Level 1	Level 2	Level 3
	(In thousands)
At December 31, 2014:
Equity securities:
U.S. large-cap(1)	$ 7,031	25%		$ 7,031
U.S. small-cap(2)	2,004	7%		2,004
Global (3)	2,288	8%		2,288
Non-U.S.(4)	3,494	12%		3,494
Alternative investments:
Equity long/short fund(5)	801	3%			$ 801
Real Estate Securities(6)	598	2%		598
Private equity fund(7)	249	1%			249
	16,465	58%	—	15,415	1,050
Fixed income securities:
Commingled funds(8)	10,273	36%		10,273
Alternative investments:
Distressed opportunity limited partnership(9)	368	1%			368
Multi-strategy limited partnerships(10)	1,370	5%			1,370
	12,011	42%	—	10,273	1,738

	$ 28,476	100%	—	$ 25,688	$ 2,788
At December 31, 2013:
Equity securities:
U.S. large-cap(1)	$ 5,965	24%		$ 5,965
U.S. small-cap(2)	1,688	7%		1,688
Global (3)	1,956	8%		1,956
Non-U.S.(4)	3,103	13%		3,103
Alternative investments:
Equity long/short fund(5)	842	3%			$ 842
Real Estate Securities(6)	482	2%		482
Private equity fund(7)	287	1%			287
	14,323	58%	—	13,194	1,129

Fixed income securities:
Commingled funds(8)	8,650	35%		8,650
Alternative investments:
Distressed opportunity limited partnership(9)	364	2%			364
Multi-strategy limited partnerships(10)	1,291	5%			1,291
	10,305	42%	—	8,650	1,655

	$ 24,628	100%	—	$ 21,844	$ 2,784

(1) Investments in common stocks that rank among the largest 1,000 companies in the U.S. stock market.

(2) Investments in common stocks that rank among the small capitalization stocks in the U.S. stock market.

(3)Investments in common stocks across the world without being limited by national borders or to specific regions.

(4) Investments in common stocks of companies from developed and emerging countries outside the United States.

(5) Investments primarily in long and short positions in equity securities of U.S. and non-U.S. companies. The fund has semi-annual tender offer redemption periods on June 30 and December 31 and is reported on a one month lag.

(6) As of December 31, 2014, the pension plan was invested in real estate through a fund of funds which invests in global public real estate securities (REITs).

(7) Fund invests in portfolios of secondary interest in established venture capital, buyout, mezzanine and special situation funds on a global basis. Fund is valued on a quarterly lag with adjustment for subsequent cash activity.

(8)Investments in bonds representing many sectors of the broad bond market with both short-term and intermediate-term maturities.

(9) Investments mainly in discounted debt securities, bank loans, trade claims and other debt and equity securities of financially troubled companies. This partnership has semi-annual withdrawal rights on June 30 and December 31. This fund is reported on a one month lag.

⁽¹⁰⁾

Investments mainly in partnerships that have multi-strategy investment programs and do not rely on a single investment model. One partnership has quarterly liquidation rights with notice of 65 days while the second partnership has monthly liquidation rights with notice of 33 days. Both funds are reported on a one month lag.

The significant amount of Level 2 investments in the table results from including in this category investments in commingled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis. These commingled funds are valued at their net asset values (NAVs) that are calculated by the investment manager or sponsor. Equity investments in both U.S and non-U.S. stocks as well as public real estate investment trusts are primarily valued using a market approach based on the quoted market prices of identical securities. Fixed income investments are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.

Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the years ended December 31, 2014 and 2013 is presented below:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Private Equity Fund	Equity Long/Short Fund	Distressed Opportunity Ltd. Partnership	Other Limited Partnership	Multi Strategy Funds	Total
	(In thousands)
Balance at January 1, 2013	$ 283	$ 682	$ 299	$ 33	$ 1,191	$ 2,488
Unrealized gain (loss)	62	160	65	(10)	100	377
Purchases	9	—	—	—	—	9
Sales	(67)	—	—	(23)	—	(90)
Balance at December 31, 2013	287	842	364	—	1,291	2,784
Unrealized gain (loss)	12	(41)	4	—	79	54
Realized gain	—	—	—	16	—	16
Sales	(50)	—	—	(16)	—	(66)
Balance at December 31, 2014	$ 249	$ 801	$ 368	—	$ 1,370	$ 2,788

Both the Equity Long/Short Fund and the Distressed Opportunity Limited Partnership are valued at each month-end based upon quoted market prices by the investment managers. They are included in Level 3 due to their restrictions on redemption to semi-annual periods on June 30 and December 31.

The Multi-Strategy Funds invest in various underlying securities. Each fund’s net asset value is calculated by the fund manager and is not publicly available. The fund managers accumulate all the underlying security values and use them in determining the funds’ net asset values.

The private equity fund and limited partnership valuations are primarily based on cost/price of recent investments, earnings/performance multiples, net assets, discounted cash flows, comparable transactions and industry benchmarks.

The annual audited financial statements of all funds are reviewed by the Company.

Benefit Payments

The following benefit payments, which reflect future services, as appropriate, are expected to be paid (in thousands):



	Pension Benefits		Other Benefits
2015	$	1,698	$	535
2016		1,714		158
2017		1,710		96
2018		1,901		93
2019		1,896		129
2020 to 2024		11,702		467

Employee Savings (401k) Plan

We have an employee savings (401k) plan, to which the Company provides contributions which match up to 6% of a participant’s base salary at a rate of 66⅔%. The Company also makes retirement contributions to the savings (401k) plan, which provide added retirement benefits to employees hired on or after July 1, 2006, as they are not eligible to participate in our defined benefit pension plan. Retirement contributions are provided regardless of an employee’s contribution to the savings (401k) plan. Matching contributions and retirement contributions are collectively known as Company contributions. Company contributions are made in cash and placed in each participant’s age appropriate “life cycle” fund. For the year ended December 31, 2014, Company contributions were $0.1 million and for each of the years ended December 31, 2013 and 2012, Company contributions were $0.2 million. Participants of the savings (401k) plan are able to redirect Company contributions to any available fund within the plan. Participants are also able to direct their contributions to any available fund.