NOTE 12. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefit Plans

Pension and Other Postretirement Benefit Plans — North America

The Company has retirement obligations under OfficeMax’s U.S. pension plans. The Company sponsors these defined benefit pension plans covering certain terminated employees, vested employees, retirees and some active employees. In 2004 or earlier, OfficeMax’s pension plans were closed to new entrants and the benefits of eligible participants were frozen. Under the terms of these plans, the pension benefit for employees was based primarily on the employees’ years of service and benefit plan formulas that varied by plan. The Company’s general funding policy is to make contributions to the plans in amounts that are within the limits of deductibility under current tax regulations, and not less than the minimum contribution required by law.

Additionally, under previous OfficeMax arrangements, the Company has responsibility for sponsoring retiree medical benefit and life insurance plans including plans related to operations in the U.S. and Canada (referred to as “Other Benefits” in the tables below). The type of retiree benefits and the extent of coverage vary based on employee classification, date of retirement, location, and other factors. All of these postretirement medical plans are unfunded. The Company explicitly reserves the right to amend or terminate its retiree medical and life insurance plans at any time, subject only to constraints, if any, imposed by the terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.

Obligations and Funded Status

The following table provides a reconciliation of changes in the projected benefit obligation and the fair value of plans assets, as well as the funded status of the plans to amounts recognized on the Company’s Consolidated Balance Sheets. Pension plans with benefit obligations and accumulated benefit obligations exceed plan assets in all individual plans.


	Pension Benefits						Other Benefits
(In millions)	2016			2015			2016			2015
Changes in projected benefit obligation:
Obligation at beginning of period	$	1,094		$	1,218		$	13		$	17
Service cost		7			3			—			—
Interest cost		45			46			1			1
Actuarial (gain) loss		(8	)		(78	)		—			(2	)
Currency exchange rate change		—			—			—			(2	)
Benefits paid		(138	)		(95	)		(1	)		(1	)

Obligation at end of period	$	1,000		$	1,094		$	13		$	13

Change in plan assets:
Fair value of plan assets at beginning of period	$	922		$	1,039		$	—		$	—
Actual return (loss) on plan assets		84			(30	)		—			—
Employer contribution		2			8			1			1
Benefits paid		(138	)		(95	)		(1	)		(1	)

Fair value of plan assets at end of period		870			922			—			—

Net liability recognized at end of period	$	(130	)	$	(172	)	$	(13	)	$	(13	)

The following table shows the amounts recognized in the Consolidated Balance Sheets related to the Company’s North America defined benefit pension and other postretirement benefit plans as of year-ends:


	Pension Benefits						Other Benefits
(In millions)	2016			2015			2016			2015
Noncurrent assets	$	—		$	—		$	—		$	—
Current liabilities		(2	)		(3	)		(1	)		(1	)
Noncurrent liabilities		(128	)		(169	)		(12	)		(12	)

Net amount recognized	$	(130	)	$	(172	)	$	(13	)	$	(13	)

Components of Net Periodic Cost (Benefit)

The components of net periodic cost (benefit) are as follows:


	Pension Benefits									Other Benefits
(In millions)	2016			2015			2014			2016		2015		2014
Service cost	$	7		$	3		$	3		$	—	$	—	$	—
Interest cost		45			46			52			1		1		1
Expected return on plan assets		(55	)		(56	)		(62	)		—		—		—

Net periodic cost (benefit)	$	(3	)	$	(7	)	$	(7	)	$	1	$	1	$	1

Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income) are as follows:


	Pension Benefits								Other Benefits
(In millions)	2016			2015		2014			2016			2015			2014
Accumulated other comprehensive loss (income) at beginning of year	$	76		$	67	$	(26	)	$	(1	)	$	1		$	—
Net loss (gain)		(38	)		9		93			—			(2	)		1

Accumulated other comprehensive loss (income) at end of year	$	38		$	76	$	67		$	(1	)	$	(1	)	$	1

Less than $1 million of the accumulated other comprehensive loss is expected to be recognized as components of net periodic cost during 2017.

Accumulated other comprehensive loss (income) as of year-ends 2016 and 2015 consist of net losses (gains).

Assumptions

The assumptions used in accounting for the Company’s plans are estimates of factors including, among other things, the amount and timing of future benefit payments. The following table presents the key weighted average assumptions used in the measurement of the Company’s benefit obligations as of year-ends:


										Other Benefits
	Pension Benefits									United States									Canada
	2016			2015			2014			2016			2015			2014			2016			2015			2014
Discount rate		4.11	%		4.33	%		3.91	%		3.60	%		3.70	%		3.40	%		3.80	%		4.00	%		4.00%

The following table presents the weighted average assumptions used in the measurement of net periodic benefit:


										Other Benefits
	Pension Benefits									United States									Canada
	2016			2015			2014			2016			2015			2014			2016			2015			2014
Discount rate		4.33	%		3.91	%		4.84	%		3.70	%		3.40	%		4.00	%		4.00	%		4.00	%		4.80%
Expected long-term rate of return on plan assets		6.00	%		5.85	%		6.50	%		—	%		—	%		—	%		—	%		—	%		—%

For pension benefits, the selected discount rates (which is required to be the rates at which the projected benefit obligations could be effectively settled as of the measurement date) are based on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated AA- or better) with cash flows that generally match expected benefit payments in future years. In selecting bonds for this theoretical portfolio, the Company focuses on bonds that match cash flows to benefit payments and limit the concentration of bonds by issuer. To the extent scheduled bond proceeds exceed the estimated benefit payments in a given period; the yield calculation assumes those excess proceeds are reinvested at an assumed forward rate. The implied forward rate used in the bond model is based on the Citigroup Pension Discount Curve as of the last day of the year. The selected discount rate for other benefits is from a discount rate curve matched to the assumed payout of related obligations.

The expected long-term rates of return on plan assets assumptions are based on the weighted average of expected returns for the major asset classes in which the plans’ assets are held. Asset-class expected returns are based on long-term historical returns, inflation expectations, forecasted gross domestic product and earnings growth, as well as other economic factors. The weights assigned to each asset class are based on the Company’s investment strategy. The weighted average expected return on plan assets used in the calculation of net periodic pension cost for 2017 is 5.76%.

Obligation and costs related to the Canadian retiree health plan are impacted by changes in trend rates.

The following table presents the assumed healthcare cost trend rates used in measuring the Company’s postretirement benefit obligations at year-ends:


	2016			2015			2014
Weighted average assumptions as of year-end:
Healthcare cost trend rate assumed for next year		5.90	%		6.20	%		6.40%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.50	%		4.50	%		4.50%
Year that the rate reaches the ultimate trend rate		2022			2022			2022

A 1% change in the assumed healthcare cost trend rates would impact operating income by less than $1 million.

The Company reassessed the mortality assumptions to measure the North American pension and other postretirement benefit plan obligations at year end 2016, adopting the most applicable mortality tables and improvement factors released in 2016 by The Society of Actuaries’ Retirement Plan Experience Committee. As a result of this assumption change, pension and other postretirement benefit plan obligations decreased by $19 million and less than $1 million, respectively. As a result of the mortality assumption change in 2015, pension and other postretirement benefit plan obligations decreased by $25 million and less than $1 million, respectively.

Plan Assets

The allocation of pension plan assets by category at year-ends is as follows:


	2016			2015
Money market funds		3	%		2%
Equity securities		11			9
Fixed-income securities		50			57
Mutual funds		36			31
Other		—			1

		100	%		100%

The Employee Benefit Committee is responsible for establishing and overseeing the implementation of the investment policy for the Company’s pension plans. The investment policy is structured to optimize growth of the pension plan trust assets, while minimizing the risk of significant losses, in order to enable the plans to satisfy their benefit payment obligations over time. The Company uses benefit payments and Company contributions as its primary rebalancing mechanisms to maintain the asset class exposures within the guideline ranges established under the investment policy.

The current asset allocation guidelines set forth an U.S. equity range of 13% to 23%, an international equity range of 8% to 18%, a global equity range of 5% to 15% and a fixed-income range of 53% to 63%. Asset-class positions within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plans and market risks. Occasionally, the Company may utilize futures or other financial instruments to alter the pension trust’s exposure to various asset classes in a lower-cost manner than trading securities in the underlying portfolios.

Generally, quoted market prices are used to value pension plan assets. Equities, some fixed-income securities, publicly traded investment funds, and U.S. government obligations are valued by reference to published market prices. Investments in certain restricted stocks are valued at the quoted market price of the issuer’s unrestricted common stock less an appropriate discount. If a quoted market price for unrestricted common stock of the issuer is not available, restricted common stocks are valued at a multiple of current earnings less an appropriate discount. The multiple chosen is consistent with multiples of similar companies based on current market prices.

The following table presents the pension plan assets by level within the fair value hierarchy at year-ends.


(In millions)			Fair Value Measurements 2016
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	25	$	—	$	25	$	—
Equity securities
U.S. large-cap		29		29		—		—
U.S. small and mid-cap		4		4		—		—
International		60		60		—		—

Total equity securities		93		93		—		—

Fixed-income securities
Corporate bonds		407		—		407		—
Government securities		14		—		14		—
Other fixed-income		16		—		16		—

Total fixed-income securities		437		—		437		—

Other
Mutual funds		312		—		312		—
Other, including plan receivables and payables		3		3		—		—

Total other		315		3		312		—

	$	870	$	96	$	774	$	—


			Fair Value Measurements 2015
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	19	$	—	$	19	$	—
Equity securities
U.S. large-cap		25		25		—		—
U.S. small and mid-cap		4		4		—		—
International		58		58		—		—

Total equity securities		87		87		—		—

Fixed-income securities
Corporate bonds		485		—		485		—
Government securities		10		—		10		—
Other fixed-income		24		—		24		—

Total fixed-income securities		519		—		519		—

Other
Equity mutual funds		290		—		290		—
Other, including plan receivables and payables		7		7		—		—

Total other		297		7		290		—

	$	922	$	94	$	828	$	—

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

Cash Flows

Pension plan contributions include required statutory minimum amounts and, in some years, additional discretionary amounts. In 2016, the Company contributed $3 million to these pension plans. Pension contributions for the full year of 2017 are estimated to be $3 million. The Company may elect at any time to make additional voluntary contributions.

Qualified pension benefit payments are paid from the assets held in the plan trust, while nonqualified pension and other benefit payments are paid by the Company. Anticipated benefit payments by year are as follows:


(in millions)	Pension Benefits		Other Benefits
2017	$	87	$	1
2018		85		1
2019		82		1
2020		80		1
2021		77		1
Next five years		346		4

Pension Plan — UK

The Company has a frozen defined benefit pension plan covering a limited number of employees in the United Kingdom. As part of the disposition of the OD European Business in 2016, the Company retained responsibility for this plan. The European entity contributed GBP 20 million to the plan prior to the transfer.

Obligations and Funded Status

The following table provides a reconciliation of changes in the projected benefit obligation, the fair value of plan assets and the funded status of the plan to amounts recognized on the Company’s Consolidated Balance Sheets.


(In millions)	2016			2015
Changes in projected benefit obligation:
Obligation at beginning of period	$	210		$	239
Service cost		—			—
Interest cost		7			9
Benefits paid		(6	)		(7	)
Actuarial (gain) loss		59			(20	)
Currency translation		(40	)		(11	)

Obligation at end of period		230			210

Changes in plan assets:
Fair value of plan assets at beginning of period		240			257
Actual return on plan assets		62			2
Company contributions		29			—
Benefits paid		(6	)		(7	)
Currency translation		(47	)		(12	)

Fair value of plan assets at end of period		278			240

Net asset recognized at end of period	$	48		$	30

In the Consolidated Balance Sheets, the net funded amounts are classified as a non-current asset in the caption Other assets.

Components of Net Periodic Benefit

The components of net periodic benefit are presented below:


(In millions)	2016			2015			2014
Service cost	$	—		$	—		$	—
Interest cost		7			9			10
Expected return on plan assets		(10	)		(14	)		(14	)

Net periodic pension benefit	$	(3	)	$	(5	)	$	(4	)

Included in Accumulated other comprehensive income were deferred losses of $1 million in 2016 and deferred gains of $7 million in 2015. The deferred loss is not expected to be amortized into income during 2017.

Assumptions

Assumptions used in calculating the funded status and net periodic benefit included:


	2016			2015			2014
Expected long-term rate of return on plan assets		4.07	%		4.78	%		5.55%
Discount rate		2.70	%		3.90	%		3.80%
Inflation		3.20	%		3.00	%		3.10%

The long-term rate of return on assets assumption has been derived based on long-term UK government fixed income yields, having regard to the proportion of assets in each asset class. The funds invested in equities have been assumed to return 4.0% above the return on UK government securities of appropriate duration. A return equal to a 15 year AA bond index is assumed for funds invested in corporate bonds. Allowance is made for expenses of 0.5% of assets.

Plan Assets

The allocation of Plan assets is as follows:


	2016			2015
Cash		9	%		—%
Equity securities		21	%		50%
Fixed-income securities		70	%		50%

Total		100	%		100%

A committee, comprised of representatives of the Company and of this plan, is responsible for establishing and overseeing the implementation of the investment policy for this plan. The plan’s investment policy and strategy are to ensure assets are available to meet the obligations to the beneficiaries and to adjust plan contributions accordingly. The plan trustees are also committed to reducing the level of risk in the plan over the long term, while retaining a return above that of the growth of liabilities. The investment strategy is based on plan funding levels, which determine the asset target allocation into matching or growth investments. Matching investments are intended to provide a return similar to the increase in the plan liabilities. Growth investments are assets intended to provide a return in excess of the increase in liabilities. At December 31, 2016, the asset target allocation was in accordance with the investment strategy. Asset-class allocations within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plan and market risks.

The following table presents the pension plan assets by level within the fair value hierarchy.


(In millions)			Fair Value Measurements 2016
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	25	$	25	$	—	$	—
Equity securities
Developed market equity funds		19		19		—		—
Emerging market equity funds		7		7		—		—
Mutual funds real estate		7		—		—		7
Mutual funds		27		—		27		—

Total equity securities		60		26		27		7

Fixed-income securities
UK debt funds		62		—		62		—
Liability term matching debt funds		109		—		109		—
Emerging market debt fund		2		—		2		—
High yield debt		20		—		20		—

Total fixed-income securities		193		—		193		—

Total	$	278	$	51	$	220	$	7


(In millions)			Fair Value Measurements 2015
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	—	$	—	$	—	$	—
Equity securities
Developed market equity funds		70		70		—		—
Emerging market equity funds		15		15		—		—
Mutual funds real estate		8		—		—		8
Mutual funds		27		—		27		—

Total equity securities		120		85		27		8

Fixed-income securities
UK debt funds		25		—		25		—
Liability term matching debt funds		71		—		71		—
Emerging market debt fund		8		—		8		—
High yield debt		16		—		16		—

Total fixed-income securities		120		—		120		—

Total	$	240	$	85	$	147	$	8

The following is a reconciliation of the change in fair value of the pension plan assets calculated based on Level 3 inputs; during 2016, there was no change in the fair value of the pension plan assets or transfers of assets valued based on Level 3 inputs.


(In millions)	Total
Balance at December 26, 2015	$	8
Currency translation		(1	)

Balance at December 31, 2016	$	7

Cash Flows

Anticipated benefit payments for the European pension plan, at 2016 year-end exchange rates, are as follows:


(In millions)	Benefit Payments
2017	$	6
2018		6
2019		6
2020		7
2021		7
Next five years		36

Retirement Savings Plans

The Company also sponsors defined contribution plans for most of its employees. Eligible Company employees may participate in the Office Depot, Inc. Retirement Savings Plans (a plan for U.S. employees and a plan for Puerto Rico employees). All of the Company’s defined contribution plans (the “401(k) Plans”) allow eligible employees to contribute a percentage of their salary, commissions and bonuses in accordance with plan limitations and provisions of Section 401(k) of the Internal Revenue Code and the Company makes partial matching contributions to each plan subject to the limits of the respective 401(k) Plans. Matching contributions are invested in the same manner as the participants’ pre-tax contributions. The 401(k) Plans also allow for a discretionary matching contribution in addition to the normal match contributions if approved by the Board of Directors.

Office Depot and OfficeMax previously sponsored non-qualified deferred compensation plans that allowed certain employees, who were limited in the amount they could contribute to their respective 401(k) plans, to defer a portion of their earnings and receive a Company matching amount. Both plans are closed to new contributions.

During 2016, 2015 and 2014, $20 million, $20 million and $14 million, respectively, were recorded as compensation expense for the Company’s contributions to these plans.