PENSION AND OTHER RETIREMENT BENEFITS

12 Months Ended

Dec. 31, 2017

NOTE 13 PENSION AND OTHER RETIREMENT BENEFITS

U.S. Plans

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.

Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008 and new hires in the U.S. instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s Retirement Plans and Other Retirement Plans continue to accrue benefits based on existing plan benefit formulas.

Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:

			Pension Plans				Other Retirement Plans
			2017		2016		2017		2016
Change in benefit obligation:
	Benefit obligation, beginning of the period		$	(489.5)	$	(459.2)	$	(29.5)	$	(27.0)
		Service cost		(18.4)		(20.1)		(2.5)		(2.2)
		Interest cost		(18.5)		(18.2)		(1.1)		(1.0)
		Plan participants’ contributions		-		-		(0.4)		(0.4)
		Benefits paid		15.0		9.9		1.4		0.9
		Actuarial gain (loss)		7.4		4.2		(0.1)		0.7
		Assumption changes		(14.1)		(6.1)		1.0		(0.5)
	Benefit obligation, end of the period		$	(518.1)	$	(489.5)	$	(31.2)	$	(29.5)
Change in plan assets:
	Fair value of plan assets, beginning of the period		$	297.1	$	260.9	$	-	$	-
		Actual return on plan assets		44.3		19.7		-		-
		Benefits paid		(15.0)		(9.9)		(1.4)		(0.9)
		Employer contributions		31.0		26.4		1.0		0.5
		Plan participants' contributions		-		-		0.4		0.4
	Fair value of plan assets, end of the period		$	357.4	$	297.1	$	-	$	-
Funded Status of the plans			$	(160.7)	$	(192.4)	$	(31.2)	$	(29.5)
Amounts recorded on the consolidated balance sheets:
	Pension and retirement benefits liability - current		$	(4.9)	$	(5.1)	$	(1.0)	$	(1.0)
	Pension and retirement benefits liability - non current			(155.8)		(187.3)		(30.2)		(28.5)
Net amount recognized			$	(160.7)	$	(192.4)	$	(31.2)	$	(29.5)
Accumulated benefit obligation, end of the period			$	(461.5)	$	(433.1)

The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:

	December 31,
	2017		2016
Aggregate projected benefit obligation	$	518.1	$	489.5
Aggregate accumulated benefit obligation	$	461.5	$	433.1
Aggregate fair value of plan assets	$	357.4	$	297.1

The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:

	Pension Plans				Other Retirement Plans
	2017		2016		2017		2016
Net actuarial losses	$	(104.0)	$	(133.9)	$	(3.0)	$	(4.0)
Net prior service costs		4.5		4.5		0.6		0.9
Total recognized in AOCI – pretax	$	(99.5)	$	(129.4)	$	(2.4)	$	(3.1)

The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:

	Pension Plans		Other Retirement Plans
Net actuarial losses	$	6.0	$	-
Net prior service costs		(0.3)		(0.3)
Total to be recognized as components of net periodic expense	$	5.7	$	(0.3)

Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:

	Pension Plans						Other Retirement Plans
	2017		2016		2015		2017		2016		2015
Components of net periodic expense
Service cost	$	18.4	$	20.1	$	21.6	$	2.5	$	2.2	$	2.2
Interest cost		18.5		18.2		16.9		1.1		1.0		1.0
Expected return on plan assets		(16.5)		(17.0)		(14.4)		-		-		-
Amortization of net actuarial loss from earlier periods		8.8		9.8		12.5		0.1		0.2		0.3
Amortization of net prior service costs from earlier periods		-		0.1		0.7		(0.3)		(0.3)		-
Net periodic expense	$	29.2	$	31.2	$	37.3	$	3.4	$	3.1	$	3.5

The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:

	Pension Plans						Other Retirement Plans
	2017		2016		2015		2017		2016		2015
Amortization of net actuarial losses	$	8.8	$	9.8	$	12.5	$	0.1	$	0.2	$	0.3
Amortization of prior service costs		-		0.1		0.7		(0.3)		(0.3)		-
Prior service costs		-		-		6.5		-		-		1.2
Net actuarial gain (loss) arising during the period		21.1		0.8		8.4		0.9		0.2		1.3
Total recognized in OCI – pre-tax	$	29.9	$	10.7	$	28.1	$	0.7	$	0.1	$	2.8

ADDITIONAL INFORMATION:

Assumptions – Retirement Plans

Weighted-average assumptions used to determine benefit obligations at December 31:

	Pension Plans		Other Retirement Plans
	2017	2016	2017	2016
Discount rate	3.46%	3.89%	3.45%	3.85%
Rate of compensation increase	3.71%	3.72%	-	-

Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:

	Pension Plans			Other Retirement Plans
	2017	2016	2015	2017	2016	2015
Discount rate	3.89%	4.04%	3.78%	3.85%	4.00%	3.65%
Expected return on plan assets	5.40%	6.10%	5.80%	-	-	-
Rate of compensation increase	3.72%	3.74%	3.76%	-	-	-

The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2017, the expected rate of return used in calculating the net periodic benefit costs was 5.40%. For 2018, the Company’s expected rate of return assumption is 4.50% to reflect the Company’s current view of long-term capital market outlook. In addition, the Company has updated its mortality assumption by adopting the newly released mortality improvement scale MP-2017 to accompany the RP-2014 mortality tables to reflect the latest information regarding future mortality expectations by the Society of Actuaries. Additionally, the assumed healthcare cost trend rate assumption is not material to the valuation of the other retirement plans.

Plan Assets

Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring plan asset performance, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company’s Asset Management Committee is responsible for overseeing the investment activities of the plan, which includes selecting acceptable asset classes, defining allowable ranges of holdings by asset class and by individual investment managers, defining acceptable securities within each asset class, and establishing investment performance expectations. Ongoing monitoring of the plan includes reviews of investment performance and managers on a regular basis, annual liability measurements, and periodic asset/liability studies.

In 2014, the Company implemented a revised investment policy, which uses risk-controlled investment strategies by increasing the plan’s asset allocation to fixed income securities and specifying ranges of acceptable target allocation by asset class based on different levels of the plan’s accounting funded status. In addition, the investment policy also requires the investment-grade fixed income assets be rebalanced between shorter and longer duration bonds as the interest rate environment changes. This revised investment policy is designed to help protect the plan’s funded status and to limit volatility of the Company’s contributions. Based on the revised policy, the Company’s current target asset allocation is approximately 53% (range of 48% to 58%) in equity securities, 40% (range of 35% to 45%) in fixed income securities and 7% (range of 4% to 10%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. The plan also invests in other fixed income investments such as debts rated below investment grade, emerging market debt, and convertible securities. The plan’s other investment, which is made through a private real estate debt fund, is expected to provide additional diversification benefits and absolute return enhancement to the plan assets.

Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2017 and 2016 are as follows:

		Fair Value Measurement as of December 31, 2017
Asset Category		Balance		Level 1		Level 2			Measured using NAV practical expedient ^(a)	% of total assets
Cash and cash equivalent		$	16.5	$	-	$	16.5	$	-	4%
Common/collective trust funds - equity securities
	U.S. large-cap		140.3		-		140.3		-	39%
	U.S. small and mid-cap		23.3		-		23.3		-	7%
	Emerging markets		28.1		-		28.1		-	8%
Total equity investments			191.7		-		191.7		-	54%
Emerging markets bond fund			12.1		12.1		-		-	3%
Common/collective trust funds - fixed income securities
	Intermediate-term investment grade U.S. government/ corporate bonds		83.7		-		83.7		-	23%
	U.S. Treasury Inflation-Protected Securities (TIPs)		13.4		-		13.4		-	4%
Private investment fund - convertible securities			9.9		-		-		9.9	3%
Private investment fund - high yield securities			9.7		-		-		9.7	3%
Total fixed-income investments			128.8		12.1		97.1		19.6	36%
Other investment - private real estate debt fund			20.4		-		-		20.4	6%
Total Assets		$	357.4	$	12.1	$	305.3	$	40.0	100%

		Fair Value Measurement as of December 31, 2016
Asset Category		Balance		Level 1		Level 2			Measured using NAV practical expedient ^(a)	% of total assets
Cash and cash equivalent		$	1.2	$	-	$	1.2	$	-	-
Common/collective trust funds - equity securities
	U.S. large-cap		130.1		-		130.1		-	44%
	U.S. small and mid-cap		19.7		-		19.7		-	7%
	Emerging markets		20.8		-		20.8		-	7%
Total equity investments			170.6		-		170.6		-	58%
Emerging markets bond fund			11.4		11.4		-		-	4%
Common/collective trust funds - fixed income securities
	Intermediate-term investment grade U.S. government/ corporate bonds		74.3		-		74.3		-	25%
	U.S. Treasury Inflation-Protected Securities (TIPs)		13.1		-		13.1		-	4%
Private investment fund - convertible securities			9.1		-		-		9.1	3%
Private investment fund - high yield securities			9.0		-		-		9.0	3%
Total fixed-income investments			116.9		11.4		87.4		18.1	39%
Other investment - private real estate fund			8.4		-		-		8.4	3%
Total Assets		$	297.1	$	11.4	$	259.2	$	26.5	100%
(a) Investments are measured using the net asset value per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit a reconciliation of the fair value hierarchy to the value of the total plan assets.

Cash and cash equivalents are primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are considered to have a readily determinable fair value. Investments for which fair value is estimated by using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy.

Except for the Company’s U.S. funded pension plan, all of Moody’s Retirement Plans are unfunded and therefore have no plan assets.

Cash Flows The Company contributed $25.9 million and $22.4 million to its U.S. funded pension plan during the years ended December 31, 2017 and 2016, respectively. The Company made payments of $5.1 million and $4.0 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2017 and 2016, respectively. The Company made payments of $1.0 million and $0.5 million to its Other Retirement Plans during the years ended December 31, 2017 and 2016, respectively. The Company is currently evaluating whether to make a contribution to its funded pension plan in 2018, and anticipates making payments of $4.9 million related to its unfunded U.S. pension plans and $1.0 million related to its Other Retirement Plans during the year ended December 31, 2018.

Estimated Future Benefits Payable

Estimated future benefits payments for the Retirement Plans are as follows as of year ended December 31, 2017:

Year Ending December 31,	Pension Plans		Other Retirement Plans
Year Ending December 31,	Pension Plans		Other Retirement Plans
2018	$	12.2	$	1.0
2019		13.0		1.1
2020		41.4		1.2
2021		17.8		1.3
2022		19.5		1.4
2023 – 2027	$	135.7	$	10.2

Defined Contribution Plans

Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions, equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $43.3 million, $28.3 million and $21.1 million in 2017, 2016, and 2015, respectively. The full year 2017 expense includes an accrued profit sharing contribution.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.7 million during each of the years ended December 31, 2017, 2016 and 2015, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 457,000 and 471,000 shares of Moody’s common stock at December 31, 2017 and 2016, respectively.

International Plans

Certain of the Company’s international operations provide pension benefits to their employees. The non-U.S. defined benefit pension plans are immaterial. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2017, 2016 and 2015 were $23.9 million, $24.5 million and $26.7 million, respectively.