11. 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, fixed income and real asset 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. For the years ended December 31, 2018 and 2017 certain of these benefits were provided through plans sponsored or managed 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. Medical coverage for retired employees and dependents ends when the retiree reaches age 65.

Funded Status

The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2018 and 2017, and a statement of the funded status as of December 31, 2018 and 2017. We use a December 31 measurement date for the pension plan and other post-retirement benefits (in thousands).


	Pension Benefits				Other Benefits
	Year Ended December 31,				Year Ended December 31,
	2018		2017		2018		2017
Reconciliation of benefit obligation:
Obligation at beginning of period	$	53,976	$	49,463	$	519	$	544
Service cost		715		702		1		1
Interest cost		1,855		1,961		18		21
Participant contributions		27		27		15		17
Actuarial (gain) loss		(5,725)		3,599		(36)		(22)
Benefit payments		(1,828)		(1,776)		(38)		(42)
Obligation at December 31,		49,020		53,976		479		519
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of period		35,640		31,466		—		—
Actual return on plan assets		(1,925)		3,601		—		—
Employer contributions		2,349		2,322		23		25
Participant contributions		27		27		15		17
Benefit payments		(1,828)		(1,776)		(38)		(42)
Fair value of plan assets at December 31,		34,263		35,640		—		—
Funded status at end of period	$	(14,757)	$	(18,336)	$	(479)	$	(519)

The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $15.2 million at December 31, 2018 (the “unfunded benefit obligations”). The unfunded benefit obligations were measured using a discount rate of 4.25% and 3.50% at December 31, 2018 and 2017, respectively. For the year ended December 31, 2018, the actuarial gain component of the change in benefit obligation of $5.7 million for the pension plan comprises $5.1 million attributable to the change in the discount rate and $0.6 million attributable to other factors, and for the year ended December 31, 2017, the actuarial loss component of the change in benefit obligation of $3.6 million for the pension plan is attribuable to the change in the discount rate. Lowering the discount rate by 0.5% would have increased the unfunded benefit obligations by approximately $3.4 million and $3.8 million as of December 31, 2018 and 2017, 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, 2018 and 2017 consist of (in thousands):


	Pension Benefits				Other Benefits
	December 31,				December 31,
	2018		2017		2018		2017
Actuarial loss	$	(16,728)	$	(18,941)	$	(4)	$	(48)
Amendments-prior service cost		—		—		—		(22)
	$	(16,728)	$	(18,941)	$	(4)	$	(70)

The amounts recognized in other comprehensive income (loss) during the years ended December 31, 2018 and 2017 consist of (in thousands):


	Year Ended December 31,
	2018				2017
	Pension Benefits		Other Benefits		Pension Benefits		Other Benefits
Actuarial gain (loss) during the period	$	1,172	$	36	$	(2,123)	$	22
Amortization of actuarial loss		1,041		8		998		10
Amortization of prior service cost		—		22		—		25
Total recognized in other comprehensive income (loss)	$	2,213	$	66	$	(1,125)	$	57

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


	Pension Benefits				Other Benefits
	December 31,				December 31,
	2018		2017		2018		2017
Current Liabilities	$	—	$	—	$	69	$	69
Long-Term Liabilities		14,757		18,336		410		450
	$	14,757	$	18,336	$	479	$	519

The accumulated pension benefit obligation was $48.2 million and $53.0 million at December 31, 2018 and 2017, respectively.

During 2018, we contributed $2.3 million to the qualified pension plan and our contributions for the other employee post-retirement benefits were not significant. During 2019, based on current estimates, we expect our contributions to the qualified pension plan will be approximately $0.9 million. We expect that our funding of other employee post-retirement benefits during 2019 will not be significant.

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, 2018 and 2017 (in thousands):


	Pension Benefits				Other Benefits
	Year Ended December 31,				Year Ended December 31,
	2018		2017		2018		2017
Service cost (1)	$	715	$	702	$	1	$	1
Interest cost (2)		1,855		1,961		18		21
Expected return on plan assets (2)		(2,628)		(2,124)		—		—
Amortization of prior service cost (2)		—		—		22		25
Amortization of net actuarial loss (2)		1,041		998		8		10
Net periodic cost	$	983	$	1,537	$	49	$	57

⁽¹⁾

Included in general and administrative expenses.

⁽²⁾

Included in other expense.

Assumptions

Assumptions used to determine net periodic cost:


	Year Ended December 31,
	2018	2017
Discount rate	3.50%	4.00%
Expected return on plan assets	7.25%	6.75%
Rate of compensation increase	4.25%	4.25%

Assumptions used to determine the benefit obligation:


	December 31,
	2018	2017
Discount rate	4.25%	3.50%
Rate of compensation increase	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 2019 is 7.25%.

As of December 31, 2018 and 2017, the Company contributions remaining for other benefits were primarily for fixed amounts. Therefore, future health care cost trend rates will not affect Company costs and accumulated postretirement benefit obligation.

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 plan, 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. Real assets are held for diversification relative to equities and fixed income. Alternative investments are held for both diversification and higher returns than those typically available in traditional asset classes.

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 plan’s actual and targeted asset allocations, are as follows:


	December 31, 2018	Target Allocation
	Actual Allocation	Target	Target Range
Liquid return-seeking investments	59%	56.5%	45-65%
Alternative investments	9%	14.5%	0-20%
Fixed income investments	32%	29.0%	20-40%
	100%	100%	100%

The target allocation within the liquid return-seeking portfolio is 75% global equities, 15% marketable real assets and 10% fixed income. Allocations may vary by up to 3% from these targets.

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, by asset category, at December 31, 2018 and 2017. The Company’s pension plan assets are mainly held in commingled employee benefit fund trusts.


	Fair Value Measurements
								Assets
								Measured
Asset Category	Total		Percentage	Level 1	Level 2	Level 3		at NAV(1)
		(In thousands)
At December 31, 2018
Liquid return-seeking:
Multi-asset fund(2)	$	20,251	59%					$	20,251
Fixed income securities:
Commingled funds(3)		10,869	32%						10,869
Alternative investments:
Equity long/short fund(4)		1,002	3%			$	1,002
Private equity fund(5)		76	0%				76
Distressed opportunity limited partnership(6)		463	1%				463
Multi-strategy limited partnership(7)		1,602	5%				1,602
		3,143	9%	—	—		3,143		—
	$	34,263	100%	—	—	$	3,143	$	31,120

At December 31, 2017
Liquid return-seeking:
Multi-asset fund(2)	$	21,447	60%					$	21,447
Fixed income securities:
Commingled funds(3)		10,967	31%						10,967
Alternative investments:
Equity long/short fund(4)		1,067	3%			$	1,067
Private equity fund(5)		83	0%				83
Distressed opportunity limited partnership(6)		504	2%				504
Multi-strategy limited partnership(7)		1,572	4%				1,572
		3,226	9%	—	—		3,226		—
	$	35,640	100%	—	—	$	3,226	$	32,414

⁽¹⁾

Assets measured using the net asset value (“NAV”) practical expedient have not been classified in the fair value hierarchy. The NAV practical expedient is based on the fair value of the underlying assets of the common/collective trust (“CCT”) minus its liabilities, and then divided by the number of units outstanding. The NAV practical expedient of a CCT is calculated based on a compilation of primarily observable market information.

⁽²⁾

A single fund that invests in global equities, marketable real assets and fixed income securities. The fund has no limitation on redemptions.

⁽³⁾

Investments in bonds representing many sectors of the broad bond market with both short-term and intermediate-term maturities. The fund has no limitation on redemptions.

⁽⁴⁾

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

⁽⁵⁾

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. The fund terminates on June 26, 2019, subject to extension for up to three one-year periods. Earlier redemptions are not permitted.

⁽⁶⁾

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 with notice of 90 days and is reported on a one month lag.

⁽⁷⁾

Investments in a partnership that has a multi-strategy investment program and does not rely on a single investment model. This partnership has quarterly redemption rights with notice of 65 days and is reported on a one month lag.

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, 2018 and 2017 is presented below:


		Fair Value Measurements Using Significant
		Unobservable Inputs (Level 3)
	Private Equity Fund		Equity Long/Short Fund		Distressed Opportunity Ltd. Partnership		Multi Strategy Fund		Total
		(In thousands)
Balance, January 1, 2017	$	129	$	835	$	448	$	1,523	$	2,935
Unrealized gain		7		232		56		49		344
Sales		(53)		—		—		—		(53)
Balance, December 31, 2017		83		1,067		504		1,572		3,226
Unrealized gain (loss)		10		(65)		(41)		30		(66)
Sales		(17)		—		—		—		(17)
Balance, December 31, 2018	$	76	$	1,002	$	463	$	1,602	$	3,143

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.

The Multi-Strategy Fund invests in various underlying securities. The fund’s net asset value is calculated by the fund manager and is not publicly available. The fund manager accumulates all the underlying security values and uses them in determining the fund’s net asset value.

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
2019	$	1,992	$	71
2020		2,134		63
2021		2,258		56
2022		2,374		49
2023		2,532		43
2024 to 2028		14,540		138

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 each of the years ended December 31, 2018 and 2017, Company contributions were $0.1 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.