Employee Benefits

The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below.

Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of certain European subsidiaries retain benefits in local defined benefit plans, although those plans are closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension plan, which is accounted for as a defined benefit plan under U.S. GAAP.

Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefit payments under the U.S. plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2018 and 2017 amounted to $129.9 million and $116.7 million, respectively. Contributions of $21.9 million and $11.5 million were made to the “Rabbi” Trust in 2018 and 2017, respectively.

The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan, non-U.S. plans, and supplemental plan for 2018, 2017, and 2016. Prior service costs are being amortized on a straight-line basis over 11 years for the U.S. plan and 9 years for the supplemental plan.

TABLE 94: EMPLOYEE BENEFIT PLAN STATUS



	U.S. PLAN						NON-U.S. PLANS						SUPPLEMENTAL PLAN
($ In Millions)	2018			2017			2018			2017			2018			2017
Accumulated Benefit Obligation	$	980.6		$	1,088.4		$	178.4		$	192.2		$	120.9		$	129.0

Projected Benefit Obligation	1,092.0			1,209.9			183.5			198.3			135.6			144.5
Plan Assets at Fair Value	1,380.1			1,506.4			166.7			178.7			—			—

Funded Status at December 31	$	288.1		$	296.5		$	(16.8	)	$	(19.6	)	$	(135.6	)	$	(144.5	)
Weighted-Average Assumptions:
Discount Rates	4.47		%	3.79		%	2.16		%	2.08		%	4.47		%	3.79		%
Rate of Increase in Compensation Level	4.39			4.39			1.75		%	1.75			4.39			4.39
Expected Long-Term Rate of Return on Assets	6.00			6.00			2.39			2.61			N/A			N/A

TABLE 95: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME



	U.S. PLAN						NON-U.S. PLANS				SUPPLEMENTAL PLAN
(In Millions)	2018			2017			2018		2017		2018		2017
Net Actuarial Loss	$	435.4		$	399.0		$	41.2	$	44.2	$	65.8	$	83.2
Prior Service Cost	(1.4		)	(1.8		)	3.6		2.5		0.4		0.6

Gross Amount in Accumulated Other Comprehensive Income	434.0			397.2			44.8		46.7		66.2		83.8
Income Tax Effect	108.5			151.6			6.0		5.3		16.4		31.9

Net Amount in Accumulated Other Comprehensive Income	$	325.5		$	245.6		$	38.8	$	41.4	$	49.8	$	51.9

TABLE 96: NET PERIODIC PENSION EXPENSE



	U.S. PLAN									NON-U.S. PLANS									SUPPLEMENTAL PLAN
($ In Millions)	2018			2017			2016			2018			2017			2016			2018			2017			2016
Service Cost	$	41.4		$	38.3		$	37.4		$	1.7		$	0.4		$	—		$	4.3		$	3.7		$	3.5
Interest Cost	44.3			45.9			45.8			4.0			4.0			4.7			5.3			5.2			5.1
Expected Return on Plan Assets	(88.2		)	(93.8		)	(94.4		)	(4.4		)	(4.5		)	(4.6		)	N/A			N/A			N/A
Settlement Expense	—			—			—			0.5			1.1			3.7			—			—			—
Amortization:
Net Loss	28.2			19.0			18.8			0.9			1.3			1.0			7.4			5.7			5.8
Prior Service Cost	(0.4		)	(0.4		)	(0.4		)	0.2			0.1			—			0.2			0.2			0.2
Net Periodic Pension Expense	$	25.3		$	9.0		$	7.2		$	2.9		$	2.4		$	4.8		$	17.2		$	14.8		$	14.6
Weighted-Average Assumptions:
Discount Rates	3.79		%	4.46		%	4.71		%	2.08		%	2.33		%	3.39		%	3.79		%	4.46		%	4.71		%
Rate of Increase in Compensation Level	4.39			4.39			4.25			1.75			1.75			N/A			4.39			4.39			4.25
Expected Long-Term Rate of Return on Assets	6.00			6.75			7.00			2.61			3.13			3.73			N/A			N/A			N/A

The components of net periodic pension expense are included in the line item “Employee Benefits” expense in the consolidated statements of income.

TABLE 97: CHANGE IN PROJECTED BENEFIT OBLIGATION



	U.S. PLAN						NON-U.S. PLANS						SUPPLEMENTAL PLAN
(In Millions)	2018			2017			2018			2017			2018			2017
Beginning Balance	$	1,209.9		$	1,062.7		$	198.3		$	155.9		$	144.5		$	121.1
Service Cost	41.4			38.3			1.7			0.4			4.3			3.7
Interest Cost	44.3			45.9			4.0			4.0			5.3			5.2
Employee Contributions	—			—			0.4			0.1			—			—
Plan Amendment	—			—			1.3			2.5			—			—
Actuarial (Gain) Loss	(112.4		)	142.6			(9.3		)	0.4			(9.7		)	21.5
Settlement	—			—			(2.7		)	(6.8		)	—			—
Acquisitions/Divestitures	—			—			—			27.0			—			—
Benefits Paid	(91.2		)	(79.6		)	(1.1		)	(3.0		)	(8.8		)	(7.0		)
Foreign Exchange Rate Changes	—			—			(9.1		)	17.8			—			—

Ending Balance	$	1,092.0		$	1,209.9		$	183.5		$	198.3		$	135.6		$	144.5

Actuarial gains of $131.4 million in 2018 were primarily caused by increases in discount rates, while actuarial losses of $164.5 million in 2017 were mostly a result of decreases in discount rates and an update to the U.S. IRS lump sum mortality assumption to reflect longer life expectancies.

TABLE 98: ESTIMATED FUTURE BENEFIT PAYMENTS



(In Millions)	U.S. PLAN		NON-U.S. PLANS		SUPPLEMENTAL PLAN
2019	$	74.0	$	3.4	$	12.0
2020	76.8		3.8		11.5
2021	75.1		4.1		14.4
2022	73.4		3.9		16.2
2023	77.1		4.3		14.9
2024-2028	368.9		26.4		63.6

TABLE 99: CHANGE IN PLAN ASSETS



	U.S. PLAN						NON-U.S. PLANS
(In Millions)	2018			2017			2018			2017
Fair Value of Assets at Beginning of Period	$	1,506.4		$	1,393.5		$	178.7		$	139.3
Actual Return on Assets	(85.1		)	192.5			(2.3		)	12.4
Employer Contributions	50.0			—			2.6			3.0
Employee Contributions	—			—			0.4			0.1
Settlement	—			—			(2.7		)	(6.8		)
Acquisitions/Divestitures	—			—			—			18.5
Benefits Paid	(91.2		)	(79.6		)	(1.1		)	(3.0		)
Foreign Exchange Rate Changes	—			—			(8.9		)	15.2

Fair Value of Assets at End of Period	$	1,380.1		$	1,506.4		$	166.7		$	178.7

The minimum required and maximum remaining deductible contributions for the U.S. qualified plan in 2019 are estimated to be zero and $270.0 million, respectively.

During 2017, the investment strategy employed for Northern Trust's U.S. pension plan was changed to utilize a dynamic glide path based on a set of pre-approved asset allocations to return-seeking and liability-hedging assets that vary in accordance with the plan's projected benefit obligation funded ratio. In general, as the plan’s projected benefit obligation funded ratio increases beyond an established threshold, the plan’s allocation to liability-hedging assets will increase while the allocation to return-seeking assets will decrease. Conversely, a decrease in the plan’s projected benefit obligation funded ratio beyond an established threshold will result in a decrease in the plan’s allocation to liability-hedging assets and increase in the allocation to return-seeking assets. Liability-hedging assets include U.S. long credit bonds, U.S. long government bonds, and a custom completion strategy used to hedge more closely the liability duration of projected plan benefits with bond duration across all durations. Return-seeking assets include: U.S. equity, international developed equity, emerging markets equity, real estate, high yield bonds, global listed infrastructure, emerging market debt, private equity and hedge funds.

Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the plan’s investment objectives. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The intent of this strategy is to minimize plan expenses by outperforming growth in plan liabilities over the long run.

The target allocation of plan assets since May 2017 is 45% U.S. long credit bonds, 10% U.S. long government bonds, 10% custom completion, 8% U.S. equities, 5% international developed equity, 3% emerging markets equity, 3% real estate, 4% high yield bonds, 3% global listed infrastructure, 4% emerging market debt, 2% private equity, and 3% hedge funds.

Equity investments include common stocks that are listed on an exchange and investments in commingled funds that invest primarily in publicly traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and divided by investment style and market capitalization. Fixed income securities held include U.S. treasury securities and investments in commingled funds that invest in a diversified blend of longer duration fixed income securities; the custom completion strategy uses U.S. treasury securities and interest rate futures (or similar instruments) to align more closely with the target hedge ratio across maturities. Diversifying investments, including private equity, hedge funds, listed real estate, emerging market debt, high yield bonds, and global listed infrastructure, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the plan is prohibited. The plan’s private equity investments are limited to 2% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount. The plan holds two investments in hedge funds of funds, which invest, either directly or indirectly, in diversified portfolios of funds or other pooled investment vehicles.

Investment in listed real estate, high yield bonds, emerging market debt, and global listed infrastructure are designed to provide income and added diversification.

Though not a primary strategy for meeting the plan’s objectives, derivatives may be used from time to time, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were four derivatives held by the plan at December 31, 2018. There were four derivatives held by the plan at December 31, 2017.

Investment risk is measured and monitored on an ongoing basis through monthly liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Standards used to evaluate the plan’s investment manager performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and comparison against a relative benchmark. In addition, each manager of the investment funds held by the plan is ranked against a universe of peers and compared to a relative benchmark. Total plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon plan performance.

The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for the U.S. qualified plan assets measured at fair value.

Level 1 – Quoted, active market prices for identical assets or liabilities. The Plan’s Level 1 investments are comprised of a mutual fund and domestic common stocks. The Plan’s Level 1 investments that are exchange traded are valued at the closing price reported by the respective exchanges on the day of valuation.

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. The Plan’s Level 2 assets are comprised of U.S. government obligations and collective trust funds. The investments in collective trust funds fair values are calculated on a scheduled basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number of fund shares currently issued and outstanding. Redemptions of the collective trust funds occur by contract at the respective fund’s redemption date NAV.

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The Plan’s Level 3 assets are comprised of private equity and hedge funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value.

While Northern Trust believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material effect on the computation of the estimated fair values.

The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2018 and 2017.

TABLE 100: FAIR VALUE OF U.S. PENSION PLAN ASSETS



	December 31, 2018
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Domestic Common Stock	$	36.3	$	—	$	—	$	36.3
Foreign Common Stock	—		—		—		—
U.S. Government Obligations	—		1,010.2		—		1,010.2
Northern Trust Mutual Fund	39.9		—		—		39.9
Exchange Traded Fund	0.1		—		—		0.1
Northern Trust Collective Trust Funds	—		226.5		—		226.5
Northern Trust Private Equity Funds	—		—		25.5		25.5
Northern Trust Hedge Funds	—		—		29.2		29.2
Cash and Other	12.4		—		—		12.4

Total Assets at Fair Value	$	88.7	$	1,236.7	$	54.7	$	1,380.1



	December 31, 2017
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Domestic Common Stock	$	38.6	$	—	$	—	$	38.6
Foreign Common Stock	—		—		—		—
U.S. Government Obligations	—		1,072.0		—		1,072.0
Northern Trust Mutual Fund	44.5		—		—		44.5
Exchange Traded Fund	0.1		—		—		0.1
Northern Trust Collective Trust Funds	—		268.6		—		268.6
Northern Trust Private Equity Funds	—		—		29.3		29.3
Northern Trust Hedge Funds	—		—		44.6		44.6
Cash and Other	8.7		—		—		8.7

Total Assets at Fair Value	$	91.9	$	1,340.6	$	73.9	$	1,506.4

The following table presents the changes in Level 3 assets for the years ended December 31, 2018 and 2017.

TABLE 101: CHANGE IN LEVEL 3 ASSETS



	PRIVATE EQUITY FUNDS						HEDGE FUNDS
(In Millions)	2018			2017			2018			2017
Fair Value at January 1	$	29.3		$	35.7		$	44.6		$	64.8
Actual Return on Plan Assets	(1.5		)	(5.4		)	(2.7		)	(3.1		)
Realized Gain	—			—			2.4			5.0
Purchases	0.3			0.8			—			—
Sales	(2.6		)	(1.8		)	(15.1		)	(22.1		)

Fair Value at December 31	$	25.5		$	29.3		$	29.2		$	44.6

Note: The return on plan assets represents the change in the unrealized gain (loss) on assets still held at December 31.

A building block approach is employed for Northern Trust’s U.S. pension plan in determining the long-term rate of return for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are studied using the widely accepted capital market principle that assets with higher volatility generate a greater return over the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate. Based on this approach and the plan’s target asset allocation, the expected long-term rate of return on assets as of the plan’s December 31, 2018, measurement date was set at 6.00%.

Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time.

The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, the net periodic postretirement benefit cost of the plan for 2018 and 2017, and the change in the accumulated postretirement benefit obligation during 2018 and 2017.

TABLE 102: POSTRETIREMENT HEALTH CARE PLAN STATUS



	DECEMBER 31,
(In Millions)	2018		2017
Accumulated Postretirement Benefit Obligation at Measurement Date:
Retirees and Dependents	$	23.5	$	27.7
Actives Eligible for Benefits	4.6		6.7

Net Postretirement Benefit Obligation	$	28.1	$	34.4

TABLE 103: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME



	DECEMBER 31,
(In Millions)	2018			2017
Net Actuarial Loss / (Gain)	$	(6.5	)	$	3.9
Prior Service Cost	—			—

Gross Amount in Accumulated Other Comprehensive Income	(6.5		)	3.9
Income Tax Effect	(2.2		)	1.5

Net Amount in Accumulated Other Comprehensive Income	$	(4.3	)	$	2.4

TABLE 104: NET PERIODIC POSTRETIREMENT (BENEFIT) EXPENSE



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018		2017		2016
Service Cost	$	—	$	0.1	$	0.1
Interest Cost	1.3		1.4		1.5
Expected Return on Plan Assets	—		—		—
Amortization
Net Gain	—		—		—
Prior Service Benefit	—		—		—

Net Periodic Postretirement Expense	$	1.3	$	1.5	$	1.6

TABLE 105: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2018			2017
Beginning Balance	$	34.4		$	34.1
Service Cost	—			0.1
Interest Cost	1.3			1.4
Actuarial Loss / (Gain)	(6.7		)	(0.2		)
Net Claims Paid	(6.3		)	(1.0		)
Medicare Subsidy	5.4			—

Ending Balance	$	28.1		$	34.4

Northern Trust uses the aggregate RP-2014 mortality table with adjustment from 2014 to 2006. Northern Trust’s pension obligations reflect proposed future improvement under scale MP-2018, released by the Society of Actuaries in October 2018. This assumption was updated at December 31, 2018 from improvement scale MP-2017.

TABLE 106: ESTIMATED FUTURE BENEFIT PAYMENTS



(In Millions)	TOTAL POSTRETIREMENT MEDICAL BENEFITS
2019	$	2.5
2020	2.5
2021	2.4
2022	2.3
2023	2.2
2024-2028	10.1

The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 4.47% at December 31, 2018, and 3.79% at December 31, 2017. For measurement purposes, a 6.5% annual increase in the cost of pre-age 65 medical benefits and post-age 65 medical benefits were assumed for 2018. For drug claims, an 8.50% annual increase in cost was assumed for 2018. These rates are both assumed to gradually decrease until they reach 4.5% in 2026 and 2027, respectively. The health care cost trend rate assumption has an effect on the amounts reported.

Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering substantially all employees. The Corporation’s contribution to the U.S. plan and to certain European-based plans includes a matching component. The expense associated with defined contribution plans is charged to employee benefits and totaled $54.4 million in 2018, $53.4 million in 2017, and $50.0 million in 2016.