9. Pension Plan and Postretirement Benefits Other Than Pension

We provide a non‑contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”). Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final ten years of employment.

During the third quarter of 2016, the Company offered eligible terminated, vested pension plan participants an option to elect a one-time voluntary lump sum window distribution equal to the present value of the participant’s pension benefit, in settlement of all future pension benefits to which they would otherwise have been entitled. This offer was made in an effort to reduce pension obligations and ongoing annual pension expense. Payments were distributed to participants who accepted the lump sum offer in December 2016 from the assets of the Pension Plan. The Company recognized a non-cash settlement charge of $20.7 million in the fourth quarter of 2016. The charge was actuarially determined based on the acceleration of the recognition of the accumulated unrecognized actuarial loss associated with the Pension Plan.

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as W&R advisors, who are independent contractors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established. During the third quarter of 2016, the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. Qualified employees who retired on or before December 31, 2016 may continue to participate in retiree coverage under the plan. The plan amendment resulted in an $8.5 million curtailment gain, recorded as part of net other postretirement benefit costs.

A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31, 2016, 2015 and 2014 are as follows:


					Other
	Pension Benefits				Postretirement Benefits

	2016		2015	2014	2016	2015	2014
	(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year	$	210,783	208,085	172,105	8,421	9,902	8,172
Service cost		12,199	12,080	10,084	555	910	719
Interest cost		9,432	8,420	8,395	297	397	397
Benefits paid		(52,288)	(10,184)	(8,733)	(674)	(505)	(527)
Actuarial (gain) loss		795	(7,618)	26,410	1,790	(2,632)	760
Plan amendments		—	—	(176)	—	—	—
Retiree contributions		—	—	—	532	349	381
Curtailment gain		—	—	—	(8,475)	—	—
Net benefit obligation at end of year	$	180,921	210,783	208,085	2,446	8,421	9,902

The accumulated benefit obligation for the Pension Plan was $150.1 million and $177.1 million at December 31, 2016 and 2015, respectively.


					Other
	Pension Benefits				Postretirement Benefits
	2016		2015	2014	2016	2015	2014
	(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year	$	173,885	175,548	170,430	—	—	—
Actual return on plan assets		2,932	(11,479)	(6,149)	—	—	—
Employer contributions		20,000	20,000	20,000	142	156	146
Retiree contributions		—	—	—	532	349	381
Benefits paid		(52,288)	(10,184)	(8,733)	(674)	(505)	(527)
Fair value of plan assets at end of year	$	144,529	173,885	175,548	—	—	—
Funded status at end of year	$	(36,392)	(36,898)	(32,537)	(2,446)	(8,421)	(9,902)


								Other
	Pension Benefits							Postretirement Benefits
	2016			2015		2014		2016		2015		2014
	(in thousands, except percentage data)
Amounts recognized in the statement of financial position:
Current liabilities	$	—		—		—		(458)		(316)		(279)
Noncurrent liabilities		(36,392)		(36,898)		(32,537)		(1,988)		(8,105)		(9,623)
Net amount recognized at end of year	$	(36,392)		(36,898)		(32,537)		(2,446)		(8,421)		(9,902)
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income:
Transition obligation	$	(11)		(16)		(21)		—		—		—
Prior service credit (cost)		(346)		(720)		(1,179)		6		2		(17)
Accumulated gain (loss)		(73,775)		(88,882)		(75,681)		954		2,897		265
Accumulated other comprehensive income (loss)		(74,132)		(89,618)		(76,881)		960		2,899		248
Cumulative employer contributions in excess of (less than) net periodic benefit cost		37,740		52,720		44,344		(3,406)		(11,320)		(10,150)
Net amount recognized at end of year	$	(36,392)		(36,898)		(32,537)		(2,446)		(8,421)		(9,902)
Weighted average assumptions used to determine benefit obligation at December 31:
Discount rate		4.39	%	4.60	%	4.13	%	3.46	%	4.44	%	4.07	%
Rate of compensation increase		5.12	%	5.12	%	5.12	%	Not applicable

The discount rate assumption used to determine the pension and other postretirement benefits obligations was based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds and calculating the single rate that would produce the same present value of liabilities as the yield curve.

Our Pension Plan asset allocation at December 31, 2016 and 2015 is as follows:


	Percentage of		Percentage of
	Plan Assets at		Plan Assets at
Plan assets by category	December 31, 2016		December 31, 2015
Cash	18	%	24	%
Equity securities:
Domestic	49	%	53	%
International	17	%	15	%
Fixed income securities	10	%	5	%
Gold bullion	6	%	3	%
Total	100	%	100	%

The primary investment objective is to maximize growth of the Pension Plan assets to meet the projected obligations to the beneficiaries over a long period of time and to do so in a manner that is consistent with the Company’s earnings strength and risk tolerance. Asset allocation is the most important decision in managing the assets and is reviewed regularly. The asset allocation policy considers the Company’s financial strength and long‑term asset class risk/return expectations since the obligations are long‑term in nature. As of December 31, 2016, our Pension Plan assets were invested in our Asset Strategy investment style and are managed by our in‑house investment professionals.

Asset Strategy invests in the domestic or foreign market that is believed to offer the greatest probability of return or, alternatively, that provides the highest degree of safety in uncertain times. This style may allocate its assets among stocks, bonds and short‑term investments and since the allocation is dynamically managed and able to take advantage of opportunities as they are presented by the market, there is not a predetermined asset allocation. Dependent on the outlook for the U.S. and global economies, our investment managers make top‑down allocations among stocks, bonds, cash, precious metals and currency markets around the globe. After determining allocations, we seek the best opportunities within each market. Derivative instruments play an important role in this style’s investment process to manage risk and maximize stability of the assets in the portfolio. At December 31, 2016, the Pension Plan had a significant weighting of plan assets invested in equity securities, a concentration not typical of a classic pension plan.

Risk management is primarily the responsibility of the investment portfolio manager, who incorporates it with day‑to‑day research and management. Although investment flexibility is essential to this style’s investment process, the Pension Plan does not invest in a number of asset classes that are commonly referred to as alternative investments; namely venture capital, direct real estate properties, timber, or oil, gas or other mineral explorations or development programs or leases. The Pension Plan also has a number of specific guidelines that serve to manage investment risk by placing limits on net securities exposure and concentration of assets within specific companies or industries.

We determine the fair value of our Pension Plan assets using broad levels of inputs as defined by related accounting standards and categorized as Level 1, Level 2 or Level 3, as described in Note 3. The following tables summarize our Pension Plan assets as of December 31, 2016 and 2015. There were no transfers between levels for the years ended December 31, 2016 or 2015.


2016	Level 1		Level 2	Level 3	Total
	(in thousands)
Equity securities:
Domestic	$	71,159	—	—		71,159
International		24,622	—	—		24,622
Equity derivatives		—	12	—		12
Fixed income securities:
Mortgage-backed securities		—	10	—		10
U.S.treasuries		—	4,801	—		4,801
Corporate bond		—	526	—		526
Foreign Bonds		—	8,897	—		8,897
Gold bullion		8,420	—	—		8,420
Total investment securities		104,201	14,246	—		118,447
Cash and other						26,082
Total					$	144,529


2015	Level 1		Level 2	Level 3	Total
	(in thousands)
Equity securities:
Domestic	$	92,037	—	—		92,037
International		25,822	—	—		25,822
Equity derivatives		—	280	—		280
Fixed income securities:
Mortgage-backed securities		—	11	—		11
U.S.treasuries		—	8,113	—		8,113
Gold bullion		5,226	—	—		5,226
Total investment securities		123,085	8,404	—		131,489
Cash and other						42,396
Total					$	173,885

The following table summarizes the activity of plan assets categorized as Level 3 for the years ended December 31, 2016 and 2015:


	2016		2015
	(in thousands)
Level 3 plan assets at beginning of year	$	—	3,402
Sales		—	(3,432)
Valuation change		—	30
Level 3 plan assets at end of year	$	—	—

The 7.50% expected long‑term rate of return on Pension Plan assets reflects management’s expectations of long‑term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy. The plan expects a relatively high return because of the types of investments the portfolio incorporates, the long-term success the portfolio managers have had with generating returns in excess of passive management in those types of investments, and the past history of returns. The ability to use a high concentration of equities, especially international equities, presents portfolio managers the opportunity to earn higher returns than other investment strategies that are restricted to owning lower returning asset classes.

The components of net periodic pension and other postretirement costs consisted of the following for the years ended December 31, 2016, 2015 and 2014:


					Other
	Pension Benefits				Postretirement Benefits
	2016		2015	2014	2016	2015	2014
	(in thousands)
Components of net periodic benefit cost:
Service cost	$	12,199	12,080	10,084	555	910	719
Interest cost		9,432	8,420	8,395	297	397	397
Expected return on plan assets		(13,927)	(14,510)	(14,016)	—	—	—
Actuarial (gain) loss amortization		6,215	5,171	1,496	(153)	—	(17)
Prior service cost amortization		374	459	468	4	19	55
Transition obligation amortization		5	5	5	—	—	—
Settlement loss		20,681	—	—	—	—	—
Curtailment gain		—	—	—	(8,475)	—	—
Total (1)	$	34,979	11,625	6,432	(7,772)	1,326	1,154

(1)

For the year ended December 31, 2016, $19.6 million of net periodic pension and other postretirement benefit costs were included in compensation and related costs and $7.6 million included in underwriting and distribution expense.

The estimated net actuarial loss, prior service cost and net transition obligation for the Pension Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2017 are $5.3 million, $123 thousand and $5 thousand, respectively. The estimated net actuarial gain and prior service credit for the postretirement medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2017 are $180 thousand and $4 thousand, respectively.

The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 are as follows:


							Other
	Pension Benefits						Postretirement Benefits
	2016		2015		2014		2016		2015		2014
Discount rate	4.60	%	4.13	%	4.97	%	4.44	%	4.07	%	4.94	%
Expected return on plan assets	7.50	%	7.75	%	7.75	%	Not applicable
Rate of compensation increase	5.12	%	5.12	%	5.12	%	Not applicable

We expect the following benefit payments to be paid, which reflect future service as appropriate:


			Other
	Pension		Postretirement
	Benefits		Benefits
	(in thousands)
2017	$	5,492	458
2018		7,066	416
2019		7,496	404
2020		8,240	319
2021		10,613	237
2022 through 2026		63,588	559
	$	102,495	2,393

Our policy with respect to funding the Pension Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes. All contributions made to the Pension Plan for 2016, 2015 and 2014 were voluntary. A contribution of $10 million was made to the Pension Plan in February 2017 and no further contributions are planned for 2017.

All Company contributions to other postretirement medical benefits are voluntary, as the postretirement medical plan is not funded and is not subject to any minimum regulatory funding requirements. The contributions for each year represent claims paid for medical expenses, and we anticipate making the 2017 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $532 thousand, $349 thousand and $381 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.

For measurement purposes, the initial health care cost trend rate was 6.82% for 2016, 7.55% for 2015 and 8.04% for 2014. The health care cost trend rate reflects anticipated increases in health care costs. The initial assumed growth rate of 6.82% for 2016 is assumed to gradually decline over the next 9 years to a rate of 4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2016 accumulated postretirement benefit obligation by approximately $108 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $133 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2016 accumulated postretirement benefit obligation by approximately $97 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $112 thousand.

We also sponsored the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and restated (the “SERP”), a non-qualified deferred compensation plan covering eligible employees. The SERP was adopted to supplement the annual pension benefit for certain senior executive officers that the Pension Plan was prevented from providing because of compensation and benefit limits in the Internal Revenue Code (the “IRC”).

Each calendar year, the Compensation Committee of the Board of Directors (the “Compensation Committee”) credited participants’ SERP accounts with (i) an amount equal to 4% of the participant’s base salary, less the amount of the maximum employer matching contribution available under our 401(k) plan, and (ii) a non formula award, if any, as determined by the Compensation Committee in its discretion. There were no discretionary awards made to participants during 2016, 2015 or 2014. Additionally, each calendar year, participants’ accounts were credited (or charged) with an amount equal to the performance of certain hypothetical investment vehicles since the last preceding year. Upon a participant’s separation, or at such other time based on a pre-existing election by a participant, benefits accumulated under the SERP are payable in installments or in a lump sum. As of December 31, 2016 and 2015, the aggregate liability to participants was $3.8 million. Following a lump sum payment of $3.8 million in February 2017 to the sole remaining participant in the SERP, the Board of Directors terminated the SERP.

At December 31, 2016, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $36.4 million and a liability for postretirement benefits in the amount of $2.0 million. The accrued liability for SERP benefits of $3.8 million and the current portion of postretirement liability of $0.4 million is included in other current liabilities on the consolidated balance sheet. At December 31, 2015, the accrued pension and postretirement liability recorded on the consolidated balance sheet was comprised of accrued pension costs of $36.9 million, a liability for postretirement benefits in the amount of $8.1 million and an accrued liability for SERP benefits of $3.8 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the consolidated balance sheet.