NOTE 6. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

Our retirement plans consist of defined benefit plans, postretirement healthcare plans and defined contribution savings plans. Plans cover certain employees both in and outside of the U.S.

Retirement Plans

We sponsor five defined benefit plans. Those plans include a master defined benefit retirement plan, a nonqualified supplemental executive defined benefit retirement plan and three defined benefit retirement plans covering employees in Germany and France. Benefits for such plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment. We contribute funds to trusts as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period of time. All of our plans have a September 30 measurement date.

Effect on Operations

The components of net periodic benefit cost for our defined benefit retirement plans were as follows:

	Years Ended September 30
	2016			2015			2014

Service cost	$	5.0		$	5.4		$	5.0
Interest cost		10.9			14.6			14.4
Expected return on plan assets		(13.0	)		(16.7	)		(16.7	)
Amortization of unrecognized prior service cost, net		0.3			0.6			0.6
Amortization of net loss		4.5			5.2			3.2
Net periodic benefit cost		7.7			9.1			6.5
Settlement charge		-			9.6			-
Special termination benefits		-			-			2.4
Net pension expense	$	7.7		$	18.7		$	8.9

Beginning in the first quarter of fiscal 2016, we elected to change the method we use to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension plans to a spot yield curve approach. Previously, we estimated the service and interest cost components of pension expense using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Under the new approach, we apply discounting using individual spot rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. These spot rates align to each of the projected benefit obligations and service cost cash flows. The service cost component relates to the active participants in the plan, so the relevant cash flows on which to apply the yield curve are considerably longer in duration on average than the total projected benefit obligation cash flows, which also include benefit payments to retirees. Interest cost is computed by multiplying each spot rate by the corresponding discounted projected benefit obligation cash flows. The spot yield curve approach reduces any actuarial gains and losses based upon interest rate expectations (e.g., built-in gains in interest cost in an upward sloping yield curve scenario), or gains and losses merely resulting from the timing and magnitude of cash outflows associated with our benefit obligations. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs offsets the actuarial gains and losses recorded in other comprehensive income.

We made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a better measurement of service and interest costs. This change is considered a change in estimate and is accounted for on a prospective basis starting in fiscal year 2016.

In April, 2015, we offered all terminated vested participants of our domestic master defined benefit retirement plan an option to receive a lump sum cash payout in lieu of their right to future periodic benefit payments under the plan upon their retirement. Lump sums of $42.3 million were paid to participants in September 2015, triggering a plan settlement charge of $9.6 million, which is recorded as a component of Special charges on the Statements of Consolidated Income.

During the second quarter of fiscal 2014, we initiated a domestic early retirement program, which offered certain special termination benefits relating to our pension and postretirement health care plans. This program and the related special termination benefits resulted in a non-cash charge of $3.2 million, of which $2.4 million related to our master defined benefit retirement plan and $0.8 million for our postretirement health care plan. The $0.8 million postretirement healthcare charge also reflects a $1.3 million reversal recorded as certain participants elected alternative coverage separate from the postretirement health care plan. The employee elections were not known until the third and fourth quarters of fiscal 2014. The reversal was recorded to the special charges caption and is offset by charges recorded to reflect our incremental cost associated with the alternative coverage. Refer to Note 8 of our Consolidated Financial Statements for more details.

Obligations and Funded Status

The change in benefit obligations, plan assets and funded status, along with amounts recognized in the Consolidated Balance Sheets for our defined benefit retirement plans were as follows:

	Years Ended September 30
	2016			2015

Change in benefit obligation:
Benefit obligation at beginning of year	$	315.5		$	343.8
Service cost		5.0			5.4
Interest cost		10.9			14.6
Actuarial loss		27.4			12.5
Benefits paid		(11.9	)		(54.0	)
Plan settlement		-			(4.4	)
Exchange rate loss (gain)		0.2			(2.4	)
Benefit obligation at end of year		347.1			315.5

Change in plan assets:
Fair value of plan assets at beginning of year		219.1			276.1
Actual return on plan assets		28.8			(3.9	)
Employer contributions		31.0			0.9
Benefits paid		(11.9	)		(54.0	)
Fair value of plan assets at end of year		267.0			219.1
Funded status and net amounts recognized	$	(80.1	)	$	(96.4	)

Amounts recorded in the Consolidated Balance Sheets:
Accrued pension benefits, current portion	$	(1.1	)	$	(1.0	)
Accrued pension benefits, long-term		(79.0	)		(95.4	)
Net amount recognized	$	(80.1	)	$	(96.4	)

In addition to the amounts above, net actuarial losses of $85.7 million and prior service costs of $0.8 million, less an applicable aggregate tax effect of $32.2 million are included as components of accumulated other comprehensive loss at September 30, 2016. In addition to the amounts above, net actuarial losses of $79.3 million and prior service costs of $1.0 million, less an applicable aggregate tax effect of $30.0 million are included as components of accumulated other comprehensive loss at September 30, 2015. The estimated net actuarial loss and prior service cost for our defined benefit retirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $6.1 million and $0.2 million, respectively.

Accumulated Benefit Obligation

The accumulated benefit obligation for all defined benefit pension plans was $326.3 million and $296.7 million at September 30, 2016 and 2015. Selected information for our plans, including plans with accumulated benefit obligations exceeding plan assets, was as follows:

	September 30
	2016						2015
	PBO		ABO		Plan Assets		PBO		ABO		Plan Assets

Master plan	$	319.6	$	300.7	$	266.8	$	292.5	$	275.3	$	218.9
International plans		22.2		20.3		0.2		17.9		16.3		0.2
Supplemental executive plan		5.3		5.3		-		5.1		5.1		-
	$	347.1	$	326.3	$	267.0	$	315.5	$	296.7	$	219.1

Actuarial Assumptions

The weighted average assumptions used in accounting for our domestic pension plans were as follows:

	2016	2015	2014
Weighted average assumptions to determine benefit
obligations at the measurement date:
Discount rate for obligation	3.7%	4.4%	4.5%
Rate of compensation increase	3.0%	3.0%	3.0%

Weighted average assumptions to determine benefit
cost for the year:
Discount rate for expense	4.4%	4.5%	5.0%
Expected rate of return on plan assets	5.8%	6.8%	7.0%
Rate of compensation increase	3.0%	3.0%	3.3%

The discount rates used in the valuation of our defined benefit pension plans are evaluated annually based on current market conditions. In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, and then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of our pension obligations. The overall expected long-term rate of return is based on historical and expected future returns, which are inflation adjusted and weighted for the expected return for each component of the investment portfolio, as well as taking into consideration economic and capital market conditions. The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments. The weighted average discount rate assumptions used for our international plans are lower than our domestic plan assumptions and do not significantly affect the consolidated net benefit obligation or net periodic benefit cost balances.

Plan Assets

The weighted average asset allocations of our master defined benefit retirement plan at September 30, 2016 and 2015, by asset category, along with target allocations, are as follows:

	2016	2015	2016	2015
	Target	Target	Actual	Actual
	Allocation	Allocation	Allocation	Allocation

Equity securities	39 - 49%	39 - 49%	43%	42%
Fixed income securities	51 - 61%	51 - 61%	57%	58%
Total			100%	100%

We have a Plan Committee that sets investment guidelines with the assistance of an external consultant. These guidelines are established based on market conditions, risk tolerance, funding requirements and expected benefit payments. The Plan Committee also oversees the investment allocation process and monitors asset performance. As pension liabilities are long-term in nature, we employ a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent level of risk. Target allocations are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.

The investment portfolio contains a diversified portfolio of primarily equities and fixed income securities. Securities are also diversified in terms of domestic and international securities, short- and long-term securities, growth and value styles, large cap and small cap stocks. The primary investment strategy is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded positions. This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.

Trust assets are invested subject to the following policy restrictions: short-term securities must be rated A2/P2 or higher; all fixed-income securities shall have a credit quality rating “BBB” or higher; investments in equities in any one company may not exceed 10 percent of the equity portfolio.

Fair Value Measurements of Plan Assets

The following table summarizes the valuation of our pension plan assets by pricing categories:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance at		Assets		Inputs		Inputs
	September 30, 2016		(Level 1)		(Level 2)		(Level 3)
Cash	$	3.7	$	3.7	$	-	$	-
Equities
U.S. companies		59.3		-		59.3		-
International companies		56.4		-		56.4		-
Fixed income securities		147.6		-		147.6		-
Total plan assets at fair value	$	267.0	$	3.7	$	263.3	$	-

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Balance at		Assets		Inputs		Inputs
	September 30, 2015		(Level 1)		(Level 2)		(Level 3)
Cash	$	3.5	$	3.5	$	-	$	-
Equities
U.S. companies		47.1		-		47.1		-
International companies		44.8		-		44.8		-
Fixed income securities		123.7		-		123.7		-
Total plan assets at fair value	$	219.1	$	3.5	$	215.6	$	-

The Level 2 investments are commingled funds and/or collective trusts valued using the net asset value (“NAV”) unit price provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund. For further descriptions of the asset Levels used in the above chart, refer to Note 1 of our Consolidated Financial Statements.

Cash Flows

Our U.S. qualified defined benefit plan is funded in excess of 84 percent, as measured under the requirements of the Pension Protection Act of 2006, and therefore we expect that the plan will not be subject to the “at risk” funding requirements of this legislation.

During 2016 and 2015, we contributed cash of $31.0 million and $0.9 million to our defined benefit retirement plans. We will not be required to contribute to our master defined benefit retirement plan in fiscal year 2017 due to the current funding level; however, minimal contributions will be required for our unfunded plans.

Estimated Future Benefit Payments

The benefit payments, which are expected to be funded through plan assets and company contributions and reflect expected future service, are expected to be paid as follows:

	Pension Benefits
2017	$	13.3
2018	$	13.4
2019	$	14.0
2020	$	14.6
2021	$	15.4
2022-2026	$	88.6

Defined Contribution Savings Plans

We have defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on eligibility and employee contributions. Expense under these plans was $26.8 million, $17.4 million and $15.0 million in fiscal years 2016, 2015 and 2014, respectively.

Postretirement Health Care Plans

In addition to defined benefit retirement plans, we also offer two domestic postretirement health care plans, one of which was assumed in the acquisition of Welch Allyn, that provide health care benefits to qualified retirees and their dependents. The plans are closed to new participants and include retiree cost sharing provisions and generally extends retiree coverage for medical and prescription benefits beyond the COBRA continuation period to the date of Medicare eligibility. We use a measurement date of September 30 for these plans.

The expense related to postretirement health care plans, including the Welch Allyn plan on a post-acquisition basis, has not been significant during 2016, 2015 or 2014. The change in the accumulated postretirement benefit obligation was as follows:

	Years Ended September 30
	2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	25.1		$	11.2
Service cost		0.3			0.4
Interest cost		0.8			0.4
Acquired obligation		-			14.1
Actuarial gain		(3.7	)		(0.9	)
Benefits paid		(1.5	)		(0.2	)
Retiree contributions		0.6			0.1
Benefit obligation at end of year	$	21.6		$	25.1

Amounts recorded in the Consolidated Balance Sheets:
Accrued benefits obligation, current portion	$	1.6		$	1.8
Accrued benefits obligation, long-term		20.0			23.3
Net amount recognized	$	21.6		$	25.1

We contributed approximately $1.5 million to the plans in fiscal 2016, compared with less than $0.2 million to the plans in fiscal 2015, including the post-acquisition period for the Welch Allyn plan.

In addition to the amounts above, net actuarial gains of $5.9 million and prior service credits of $0.5 million, less an applicable aggregate tax effect of $2.4 million are included as components of accumulated other comprehensive loss at September 30, 2016. Net actuarial gains of $2.4 million and prior service credits of $1.4 million, less an applicable aggregate tax effect of $1.5 million are included as components of accumulated other comprehensive loss at September 30, 2015.

The estimated net actuarial gain and prior service benefit for our postretirement health care plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are ($0.4) million and ($0.4) million.

The discount rate used to determine the net periodic benefit cost for the postretirement health care plans during the fiscal year ended September 30, 2016, 2015 and 2014 was 3.5, 3.7 and 4.1 percent, respectively. The discount rate used to determine the benefit obligation as of September 30, 2016 ranged from 2.9 to 3.0 percent. For fiscal years ended 2015 and 2014 the discount rate was 3.5 and 3.7 percent. As of September 30, 2016, the health care cost trend rates for the plans were generally assumed to be in the ranges of 5.25 to 9.0 percent, trending down to a rate between 4.5 and 5.0 percent over the long-term.

A one-percentage-point increase/decrease in the assumed health care cost trend rates as of September 30, 2016 would cause an increase/decrease in service and interest costs of less than $0.1 million, along with an increase in the benefit obligation of $1.4 million and a decrease of $1.3 million.

We fund the postretirement health care plans as benefits are paid, and current plan benefits are expected to require net company contributions of approximately $1.7 million in fiscal 2017 and approximately $2.0 million per year thereafter.