10. Pension Plan and Postretirement Benefits Other Than Pension

Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment. The Compensation Committee of the Company’s Board of Directors approved an amendment to freeze the Pension Plan effective September 30, 2017. After September 30, 2017, participants in the Pension Plan no longer accrue additional benefits for future service or compensation. Participants will retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. In accordance with applicable accounting standards, the Pension Plan’s assets and liabilities were remeasured as of July 31, 2017, the date participants were notified of the freeze. This resulted in a reduction of the accrued pension liability of approximately $30.0 million and a curtailment gain of $31.6 million.

During 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 2016 from the assets of the Pension Plan. The Company recognized a non-cash settlement charge of $20.7 million in 2016 related to this event.

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as Advisors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when such plan was established. During 2016, the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. The plan amendment resulted in an $8.5 million curtailment gain, recorded in 2016 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, 2018, 2017 and 2016 are as follows:


					Other
	Pension Benefits				Postretirement Benefits
	2018		2017	2016	2018	2017	2016
	(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year	$	184,245	180,921	210,783	2,195	2,446	8,421
Service cost		—	8,367	12,199	—	—	555
Interest cost		5,986	6,248	9,432	54	58	297
Benefits paid		(13,690)	(8,511)	(52,288)	(602)	(954)	(674)
Actuarial (gain) loss		(22,013)	28,841	(19,886)	(965)	139	1,790
Retiree contributions		—	—	—	366	506	532
Curtailment gain		—	(31,621)	—	—	—	(8,475)
Settlement loss		—	—	20,681	—	—	—
Net benefit obligation at end of year	$	154,528	184,245	180,921	1,048	2,195	2,446


					Other
	Pension Benefits				Postretirement Benefits
	2018		2017	2016	2018	2017	2016
	(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year	$	170,881	144,529	173,885	—	—	—
Actual return on plan assets		1,808	24,863	2,932	—	—	—
Employer contributions		4,000	10,000	20,000	236	448	142
Retiree contributions		—	—	—	366	506	532
Benefits paid		(13,690)	(8,511)	(52,288)	(602)	(954)	(674)
Fair value of plan assets at end of year	$	162,999	170,881	144,529	—	—	—
Funded status at end of year	$	8,471	(13,364)	(36,392)	(1,048)	(2,195)	(2,446)


								Other
	Pension Benefits							Postretirement Benefits
	2018			2017		2016		2018		2017		2016
	(in thousands, except percentage data)
Amounts recognized in the statement of financial position:
Noncurrent assets	$	8,471		—		—		—		—		—
Current liabilities		—		—		—		(250)		(422)		(458)
Noncurrent liabilities		—		(13,364)		(36,392)		(798)		(1,773)		(1,988)
Net amount recognized at end of year	$	8,471		(13,364)		(36,392)		(1,048)		(2,195)		(2,446)
Weighted average assumptions used to determine benefit obligation at December 31:
Discount rate		4.45	%	3.76	%	4.39	%	4.08	%	3.28	%	3.46	%
Rate of compensation increase		Not applicable				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, 2018 and 2017 is as follows:


	Percentage of		Percentage of
	Plan Assets at		Plan Assets at
Plan assets by category	December 31, 2018		December 31, 2017
Cash	2	%	40	%
Equity securities:
Domestic	—		29	%
International	—		18	%
Fixed income securities	98	%	8	%
Gold bullion	—		5	%
Total	100	%	100	%

Historically, the primary investment objective has been 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. Prior to the Pension Plan freeze in 2017, assets were invested in our Asset Strategy investment style, managed by our in‑house investment professionals. Subsequent to the freeze, the Company adjusted the Pension Plan’s asset allocation to decrease the exposure to equity securities. In 2018, the Company implemented a new pension de-risking strategy designed to more closely match assets to the pension obligations by shifting exposure from return-seeking assets to liability-hedging assets.

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 4. The following tables summarize our Pension Plan assets as of December 31, 2018 and 2017. As of December 31, 2018 and 2017 a portion of the international equity securities were valued utilizing Level 2 inputs, in accordance with company policy based on market movement greater than or equal to 0.50% on the final trading day of the year.


2018	Level 1		Level 2	Level 3	Total
	(in thousands)
Cash equivalents	$	—	465	—		465
Equity securities:
International		—	4	—		4
Fixed income securities:
U.S. Treasuries		—	46,415	—		46,415
Corporate bond		—	91,521	—		91,521
Foreign bonds		—	21,870	—		21,870
Total investment securities		—	160,275	—		160,275
Cash						2,724
Total					$	162,999


2017	Level 1		Level 2	Level 3	Total
	(in thousands)
Cash equivalents	$	—	66,779	—		66,779
Equity securities:
Domestic		49,540	—	—		49,540
International		4,889	26,542	—		31,431
Fixed income securities:
U.S. Treasuries		—	6,455	—		6,455
Corporate bond		—	587	—		587
Foreign Bonds		—	6,591	—		6,591
Gold bullion		8,369	—	—		8,369
Total investment securities		62,798	106,954	—		169,752
Cash						1,129
Total					$	170,881

The 6.00% expected long‑term rate of return utilized after the Pension Plan freeze in 2017 reflected 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 was based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy. In 2018, we adjusted the expected long-term rate of return to 5.00% to reflect a further decrease to the Plan’s equity securities’ holdings based on expected investment mix at the beginning of the year. During the year, we accelerated the de-risking strategy and as such, expect to further reduce the long-term rate of return in the future.

The components of net periodic pension and other postretirement costs consisted of the following for the years ended December 31, 2018, 2017 and 2016:


					Other
	Pension Benefits				Postretirement Benefits
	2018		2017	2016	2018	2017	2016
	(in thousands)
Components of net periodic benefit cost:
Service cost	$	—	8,367	12,199	—	—	555
Interest cost		5,986	6,248	9,432	54	58	297
Expected return on plan assets		(8,320)	(10,113)	(13,927)	—	—	—
Actuarial (gain) loss		(15,501)	14,091	(8,891)	—	—	—
Actuarial gain amortization		—	—	—	(120)	(180)	(153)
Prior service cost amortization		—	—	—	(2)	(4)	4
Curtailment gain		—	(31,621)	—	—	—	(8,475)
Settlement loss		—	—	20,681	—	—	—
Total	$	(17,835)	(13,028)	19,494	(68)	(126)	(7,772)

The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows:


							Other
	Pension Benefits						Postretirement Benefits
	2018		2017		2016		2018		2017		2016
Discount rate	3.76	%	4.39% / 3.96	1%	4.60	%	3.28	%	3.46	%	4.44	%
Expected return on plan assets	5.00	%	7.00% / 6.00	1%	7.50	%	Not applicable
Rate of compensation increase	Not applicable		5.12	%	5.12	%	Not applicable

________________________

(1)

Due to the Pension Plan freeze and associated remeasurement as of July 31, 2017, the discount rate changed from 4.39% to 3.96% and the expected return on assets changed from 7.00% to 6.00%.

Under current plan provisions, we expect the following benefit payments to be paid:


			Other
	Pension		Postretirement
	Benefits		Benefits
	(in thousands)
2019	$	7,984	250
2020		8,068	179
2021		9,371	131
2022		8,843	116
2023		9,031	79
2024 through 2028		46,521	233
	$	89,818	988

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 2018, 2017 and 2016 were voluntary.

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 2019 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $366 thousand, $506 thousand and $532 thousand for the years ended December 31, 2018, 2017 and 2016, respectively.

For measurement purposes, the initial health care cost trend rate was 8.05% (prior to age 65) and 9.30% (subsequent to age 65) for 2018, 7.02% (prior to age 65) and 8.47% (subsequent to age 65) for 2017 and 6.82% for 2016. The health care cost trend rate reflects anticipated increases in health care costs. The initial growth rates for 2018 are assumed to gradually decline over the next 8 years to a rate of 4.5%.

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”).

The SERP allowed for discretionary contributions, though none were awarded to participants in 2017 or 2016. 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 were payable in installments or in a lump sum. 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, 2018, the pension asset and postretirement liability recorded in the consolidated balance sheet was comprised of a pension asset of $8.5 million and a liability for postretirement benefits in the amount of $0.8 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the consolidated balance sheet. At December 31, 2017, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $13.4 million and a liability for postretirement benefits in the amount of $1.8 million. The accrued liability for the current portion of postretirement liability of $0.4 million is included in other current liabilities on the consolidated balance sheet.