Employee Retirement Benefits

We sponsor a qualified defined benefit pension plan that we closed entry into for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan as further explained below. For participants remaining in the pension plan, we continue to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our net periodic benefit cost is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. The qualified plan has been amended to allow for distribution of vested balances to terminated participants.

We sponsor a defined contribution plan (401(k) plan) with matching company contributions totaling $14 million,

$12 million and $11 million during the years 2016, 2015 and 2014, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. We also pay operating expenses for the 401(k) plan. Participants vest in the company match for the 401(k) plan after three years of eligible service.

We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $15 million at

year-end 2016 and $14 million at year-end 2015, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $24 million and $21 million at December 31, 2016 and 2015, respectively.

Defined Benefit Pension Plan Assumptions

We evaluate our pension plan assumptions annually and update them as necessary. This is a summary of the weighted-average assumptions used to determine our benefit obligations at December 31 for the plans:



	Qualified Pension Plan				SERP
	2016		2015		2016		2015
Discount rate	4.30	%	4.55	%	4.10	%	4.30	%
Rate of compensation increase	2.75-3.25		2.75-3.25		2.75-3.25		2.75-3.25

To determine the discount rate for each plan, a theoretical settlement portfolio of high-quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we decreased the rate from the prior year by 0.25 percentage points for the qualified pension plan and by 0.20 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption was updated in 2014 to the RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2014. During 2016 and 2015, the 2014 mortality assumption was updated to include the generational projection using Scale MP-2016 and Scale MP-2015, respectively. The updated mortality table did not have a significant impact on our consolidated financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.

This is a summary of the weighted-average assumptions used to determine our net periodic benefit cost for the plans:



	Qualified Pension Plan						SERP
	2016		2015		2014		2016		2015		2014
Discount rate	4.55	%	4.25	%	5.15	%	4.30	%	4.05	%	4.80	%
Expected return on plan assets	7.25		7.25		7.25		n/a		n/a		n/a
Rate of compensation increase	2.75-3.25		2.75-3.25		2.75-3.25		2.75-3.25		2.75-3.25		2.75-3.25

The discount rate was increased by 0.30 percentage points for the qualified pension plan and 0.25 percentage points for the SERP due to market interest rate conditions at the beginning of 2016. The discount rate assumptions for our benefit obligation generally track with high-quality rated corporate bond yields chosen in our theoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets, which is consistent with 2016 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these plan assets. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2016 was 16.6 percent and for 2015 was 0.6 percent. Our compensation increase assumptions in 2016 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.

Benefit obligation activity using an actuarial measurement date for our qualified pension plan and SERP at December 31 follows:



(Dollars in millions)	At December 31,
	2016			2015
Change in projected benefit obligation:
Benefit obligation, January 1	$	323		$	319
Service cost	11			12
Interest cost	14			14
Actuarial loss (gain)	13			(3		)
Benefits paid	(21		)	(19		)
Projected benefit obligation, December 31	$	340		$	323

Change in plan assets:
Fair value of plan assets, January 1	$	278		$	288
Actual return on plan assets	45			3
Employer contribution	13			6
Benefits paid	(21		)	(19		)
Fair value of plan assets, December 31	$	315		$	278

Funded status, December 31	$	(25	)	$	(45	)

Accumulated benefit obligation	$	309		$	293

Our unfunded status improved for 2016 primarily due to better-than-expected return on plan assets offset by an increase in actuarial losses resulting largely from decreases in discount rate and lump sum rates.

A reconciliation follows of the funded status for our qualified plan and SERP at the end of the measurement period to the amounts recognized in the consolidated balance sheets at December 31:



(Dollars in millions)	At December 31,
	2016			2015
Pension amounts recognized in the consolidated balance sheets:
Other liabilities	$	(25	)	$	(45	)
Total	$	(25	)	$	(45	)

Pension amounts recognized in accumulated other comprehensive income:
Net actuarial loss	$	26		$	41
Prior service cost	—			1
Total	$	26		$	42

Below are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:



(Dollars in millions)	Years ended December 31,
	2016			2015			2014
Net periodic benefit cost:
Service cost	$	11		$	12		$	10
Interest cost	14			14			15
Expected return on plan assets	(19		)	(18		)	(17		)
Amortization of actuarial loss and prior service cost	3			6			2
Other	—			1			3
Net periodic benefit cost	$	9		$	15		$	13



(Dollars in millions)	Years ended December 31,
	2016			2015			2014
Other changes in plan assets and benefit obligations recognized in
other comprehensive income:
Current year actuarial (gain) loss	$	(13	)	$	13		$	21
Amortization of actuarial loss	(2		)	(6		)	(5		)
Current year prior service cost	—			—			2
Amortization of prior service cost	(1		)	(1		)	—
Total recognized in other comprehensive (income) loss	$	(16	)	$	6		$	18

The total recognized in net periodic benefit cost and other comprehensive income (loss) was a net gain of

$7 million, net cost of $21 million, and a net cost of $31 million for the years ended December 31, 2016, 2015 and 2014, respectively. The 2016 change in the amount recognized in other comprehensive income from 2015 is largely due to better-than-expected investment return partially offset with decreases in discount and lump sum rates. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are

$2 million in actuarial loss and less than $1 million in prior service cost.

Defined Benefit Pension Plan Assets

The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our internal investment department; however, overall investment strategies are discussed with our employee benefits committee. Our investment strategy, currently driven by the low interest rate environment, is to weight our portfolio towards large-cap, high-quality, dividend-growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed-income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.

Excluding cash, during 2016 we held approximately 83 percent of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 10 percent in states, municipalities and taxable political subdivisions fixed-maturity investments and 7 percent in domestic corporate fixed-maturity investments. Our common equity portfolio consisted of 22 percent in the information technology sector, 20 percent in the financial sector, 14 percent in the healthcare sector, 10 percent in the consumer staples sector, 10 percent in the consumer discretionary sector and 10 percent in the industrial sector at year-end 2016. No additional sectors accounted for 10 percent or more of our common equity portfolio balance at year-end 2016.

Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2016 and 2015. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2016 and 2015. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2016 and 2015. Excluded from the table below is cash on hand of $11 million and $21 million at December 31, 2016 and 2015, respectively.



(Dollars in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At December 31, 2016			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	31	$	—	$	31
Corporate securities	—		20		—		20
Total fixed maturities, available for sale	—		51		—		51
Common equities, available for sale	253		—		—		253
Total	$	253	$	51	$	—	$	304

At December 31, 2015
Fixed maturities, available for sale:
States, municipalities and political subdivisions	$	—	$	32	$	—	$	32
Corporate securities	—		13		—		13
Total fixed maturities, available for sale	—		45		—		45
Common equities, available for sale	212		—		—		212
Total	$	212	$	45	$	—	$	257

Our pension plan assets included 232,113 and 267,113 shares of the company’s common stock at December 31, 2016 and 2015, which had a fair value of $18 million and $16 million at December 31, 2016 and 2015, respectively. The defined benefit pension plan did not purchase any shares of our common stock during 2016 and 2015. During 2016 and 2015, the pension plan sold 35,000 shares and 200,000 shares of the company’s common stock, respectively. The company paid less than $1 million in 2016 and $1 million in 2015 in cash dividends on our common stock to the pension plan.

We contributed $5 million to our qualified plan during the first quarter of 2017 and estimate $12 million of benefit payments from the SERP during 2017. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:



(Dollars in millions)	Years ended December 31,
	2017		2018		2019		2020		2021		2022 - 2026
Expected future benefit payments	$	34	$	23	$	24	$	26	$	28	$	148