U.K. PENSION PLAN:

Through its Freightliner subsidiary, the Company has a defined benefit pension plan for Freightliner's eligible U.K. employees through a standalone shared cost arrangement within the Railways Pension Scheme (Pension Program). The Pension Program is managed and administered by a professional pension administration company and is overseen by trustees with professional advice from independent actuaries and other advisers. The Pension Program is a shared cost arrangement with required contributions shared between Freightliner and its employees with Freightliner contributing 60% and the remaining 40% contributed by active employees. The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to the Pension Program, subject to the assumptions that the Company selects.

The following table summarizes the funding obligations and assets of the Pension Program as of December 31, 2018 and 2017 (dollars in thousands):



	2018			2017
Projected benefit obligation (100%)	$	586,884		$	698,809
Fair value of plan assets (100%)	495,337			531,671
Funded status (100%)	(91,547		)	(167,138		)
Employees' share of deficit (40%)	(36,619		)	(66,855		)
Net pension liability recognized in the balance sheet (60%)	$	(54,928	)	$	(100,283	)

The following table presents the changes in the Company's portion of the benefit obligation and fair value of plan assets of the Pension Program for the years ended December 31, 2018 and 2017 and the funded status as of December 31, 2018 and 2017 (dollars in thousands):



	2018			2017
Change in benefit obligations:
Benefit obligation at beginning of period	$	419,286		$	364,202
Service cost	14,260			15,401
Interest cost	9,413			10,194
Benefits paid	(14,622		)	(13,580		)
Actuarial (gain)/loss	(52,141		)	6,697
Exchange rate changes	(24,066		)	36,372
Benefit obligation at end of year	$	352,130		$	419,286
Change in plan assets:
Fair value of plan assets at beginning of period	$	319,003		$	270,169
Actual return on plan assets	2,743			27,847
Benefits paid	(14,622		)	(13,580		)
Employer contributions	8,237			8,531
Exchange rate changes	(18,159		)	26,036
Fair value of plan assets at end of year	$	297,202		$	319,003
Funded status of the Pension Plan	$	(54,928	)	$	(100,283	)

The Pension Program's actuarial gain for the year ended December 31, 2018 was primarily due to an increase in the discount rate and a decrease in the salary increases rate reflected in the table of actuarial assumptions below, partially offset by updated participant census data. The Pension Program's actuarial loss for the year ended December 31, 2017 was primarily due to a decrease in the discount rate as reflected in the table of actuarial assumptions below.

The following table presents the amounts recognized for the Pension Program in the consolidated balance sheets as of December 31, 2018 and 2017 and in OCI for the years ended December 31, 2018 and 2017 (dollars in thousands):



	2018		2017
Amounts recognized in the consolidated balance sheet:
Accrued expenses	$	14,945	$	13,879
Other long-term liabilities	39,983		86,404
Total amount recognized in the consolidated balance sheet	$	54,928	$	100,283
Amount recognized in other comprehensive income/(loss):
Net actuarial income/(loss)	$	12,552	$	(24,409	)

The following table summarizes the components of the Pension Program related to the net benefit costs recognized in labor and benefits in the Company's consolidated statement of operations for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):



	2018			2017			2016
Operating expense:
Service cost^(a)	$	14,260		$	15,401		$	12,980
Nonoperating income, net:
Interest cost	9,413			10,194			12,074
Expected return on plan assets	(18,060		)	(17,046		)	(15,434		)
Total nonoperating income, net^(b)	$	(8,647	)	$	(6,852	)	$	(3,360	)
Net periodic benefit cost	$	5,613		$	8,549		$	9,620

(a) Included in labor and benefits within the Company's consolidated statement of operations.

(b) Included in other (loss)/income, net within the Company’s consolidated statement of operations.

The following table presents the actuarial assumptions used to compute the funded status of the Pension Program as of December 31, 2018, 2017 and 2016:



	2018		2017		2016
Discount rate	2.7	%	2.4	%	2.7	%
Price inflation (RPI measure)	3.3	%	3.3	%	3.3	%
Pension increases (CPI measure)	2.2	%	2.2	%	2.2	%
Salary increases	2.1	%	3.3	%	3.3	%

The following table presents the actuarial assumptions used for the calculation of net periodic expense associated with the Pension Program for the years ended December 31, 2018, 2017 and 2016:



	2018		2017		2016
Discount rate	2.4	%	2.7	%	3.8	%
Price inflation (RPI measure)	3.3	%	3.3	%	3.1	%
Pension increases (CPI measure)	2.2	%	2.2	%	2.0	%
Salary increases	3.3	%	3.3	%	3.7	%
Expected return on plan assets	6.0	%	6.1	%	6.1	%

The discount rates used by the actuaries are established by considering the yields on high-quality corporate bonds having a similar duration as the expected liabilities under the Pension Program. The following table presents the sensitivity to a change in the Company's U.K. pension liability resulting from a one percentage point change in the discount rate and retail price index (RPI) as of December 31, 2018 (dollars in thousands):



	Change in Pension Liability
Discount Rate +1% per annum	$	(61,744	)
Discount Rate -1% per annum	$	81,772
RPI inflation +1% per annum	$	61,234
RPI inflation -1% per annum	$	(47,456	)

The assets of the Pension Program are held in a separate trustee administered fund operated by Railways Pension Trustee Company Limited. The trustee is responsible for ensuring that investment strategies are in compliance with the Pension Program. The assets are invested through a number of pooled investment funds, each with a different risk and return profile. Only railways pension programs may invest in these pooled funds. Each railways pension program holds units in some or all of the pooled funds. The use of these pools enables each railways pension program to hold a broader range of investments more efficiently than may have been possible through direct ownership. The Pension Program's asset allocation policy states the assets should be allocated as follows, +/- 5%:



	Percentage
Asset category:
Return-seeking assets	81	%
Defensive/other assets	19	%
Total	100	%

The expected return on assets represents the weighted average of long-term expected yields of the pooled investment funds. The expected returns on these pooled funds are not readily determinable from quoted market prices. However, the funds are actively managed by the trustee to achieve benchmark returns. Accordingly, the expected return for each pooled investment fund for purposes of the actuarial calculations was estimated using the respective pooled fund's benchmark return relative to the RPI.

The following table provides the Pension Program's allocation of assets among the pooled investment funds and the expected return on assets for each pooled fund, net of expenses, as well as the weighted average expected return on assets used in the actuarial calculations as of December 31, 2018, 2017 and 2016:



	2018
	Weighted Average Expected Yields		Weighted Average Asset Allocation		Weighted Average Expected Return on Plan Assets
Growth, private equity and infrastructure pooled funds	7.1	%	78	%	5.5	%
Defensive and government bond pooled fund plus cash	1.5	%	22	%	0.3	%
Expected return on plan assets					5.8	%



	2017
	Weighted Average Expected Yields		Weighted Average Asset Allocation		Weighted Average Expected Return on Plan Assets
Growth, private equity and infrastructure pooled funds	7.1	%	81	%	5.7	%
Defensive and government bond pooled fund plus cash	1.4	%	19	%	0.3	%
Expected return on plan assets					6.0	%



	2016
	Weighted Average Expected Yields		Weighted Average Asset Allocation		Weighted Average Expected Return on Plan Assets
Growth, private equity and infrastructure pooled funds	7.1	%	82	%	5.8	%
Defensive and government bond pooled fund plus cash	1.5	%	18	%	0.3	%
Expected return on plan assets					6.1	%

The fair value of all of the Pension Program's assets are measured using the net asset value per share method. The following table presents the fair value of the Pension Program's assets as of December 31, 2018 and 2017 (dollars in thousands):



	2018		2017
Growth pooled fund^(a)	$	189,540	$	221,762
Private equity pooled fund^(b)	31,715		30,494
Government bond pooled fund^(c)	23,340		47,679
Infrastructure pooled fund^(d)	4,329		6,455
Long-term income pooled fund^(e)	18,076		8,485
Illiquid growth pooled fund^(f)	6,114		—
Short duration index linked pooled fund^(g)	23,102		4,128
Other, net^(h)	986		—
Fair value of plan assets	$	297,202	$	319,003

(a) The growth pooled fund is comprised of global equities, government bonds, property, emerging market bonds and hedge funds.

(b) The private equity pooled fund is comprised of a series of sub funds, each representing a different vintage of private equity investment.

(c) The government bond pooled fund is U.K. only government bond fund with an average portfolio duration of approximately five years.

(d) The infrastructure pooled fund is comprised of investments in facilities, structures and services required to facilitate the orderly operation of the economy.

(e) The long-term income pooled fund is comprised of investments offering inflation linkage, distributable income and are British pound denominated.

(f) The illiquid growth pooled fund is comprised of investments in a wide range of illiquid return seeking assets across different private markets and economies in order to produce an investment return in excess of U.K. inflation over a rolling five to ten year period.

(g) The short duration index linked pooled fund is comprised of investments in government bonds with average portfolio duration of approximately five years.

(h) Other, net represents cash, current assets and current liabilities, net.

The Company expects to contribute £7.0 million (or $8.9 million at the exchange rate on December 31, 2018) to the Pension Program for the year ending December 31, 2019. The Pension Program's assets may undergo significant changes over time as a result of market conditions, and its assets and liabilities are formally valued on an independent actuarial basis every three years to assess the adequacy of funding levels. A key element of the valuation process is an assessment of the creditworthiness of the participating employer. In March 2018, the Company completed its triennial valuation based on the program's funding position as of December 31, 2016, which did not have and is not expected to have a material impact on its consolidated financial statements. In the event that the Pension Program's projected assets and liabilities reveal additional funding requirements, the shared cost arrangement generally means that the Company will be required to pay 60% of any additional contributions, with active members contributing the remaining 40%, in each case over an agreed recovery period. If the Pension Program was to be terminated and wound up, any deficit would fall entirely on the Company and would not be shared with active members. Currently, the Company has no intention of terminating the Pension Program.

The following benefit payments are expected to be paid between 2019 and 2027 (dollars in thousands):



	Amount
2019	$	14,945
2020	$	13,997
2021	$	15,609
2022	$	15,953
2023	$	16,303
2024 - 2027	$	86,075