Benefit Plans

Pension and other postretirement plans

Defined benefit pension plans cover most full-time employees, certain part-time employees and employee-agents. Benefits under the pension plans are based upon the employee’s length of service, eligible annual compensation and, prior to January 1, 2014, either a cash balance or final average pay formula. A cash balance formula applies to all eligible employees hired after August 1, 2002. Eligible employees hired before August 1, 2002 chose between the cash balance formula and the final average pay formula. In July 2013, the Company amended its primary plans effective January 1, 2014 to introduce a new cash balance formula to replace the previous formulas (including the final average pay formula and the previous cash balance formula) under which eligible employees accrue benefits.

The Company also provides a medical coverage subsidy for eligible employees hired before January 1, 2003, including their eligible dependents, when they retire and certain life insurance benefits for eligible retirees (“postretirement benefits”). In July 2013, the Company amended the plan to eliminate the life insurance benefits effective January 1, 2014 for current eligible employees and effective January 1, 2016 for eligible retirees who retired after 1989. In 2016, the Company continues to pay life insurance premiums for certain retiree plaintiffs subject to a court order requiring it to do so until such time as their lawsuit seeking to keep their life insurance benefits intact is resolved. Qualified employees may become eligible for a medical subsidy if they retire in accordance with the terms of the applicable plans and are continuously insured under the Company’s group plans or other approved plans in accordance with the plan’s participation requirements. The Company shares the cost of retiree medical benefits with non Medicare-eligible retirees based on years of service, with the Company’s share being subject to a 5% limit on future annual medical cost inflation after retirement. For Medicare-eligible retirees, the Company provides a fixed Company contribution based on years of service and other factors, which is not subject to adjustments for inflation.

The Company has reserved the right to modify or terminate its benefit plans at any time and for any reason.

Obligations and funded status

The Company calculates benefit obligations based upon generally accepted actuarial methodologies using the projected benefit obligation (“PBO”) for pension plans and the accumulated postretirement benefit obligation (“APBO”) for other postretirement plans. The determination of pension costs and other postretirement obligations are determined using a December 31 measurement date. The benefit obligations represent the actuarial present value of all benefits attributed to employee service rendered as of the measurement date. The PBO is measured using the pension benefit formulas and assumptions as to future compensation levels. A plan’s funded status is calculated as the difference between the benefit obligation and the fair value of plan assets. The Company’s funding policy for the pension plans is to make annual contributions at a level that is in accordance with regulations under the Internal Revenue Code (“IRC”) and generally accepted actuarial principles. The Company’s postretirement benefit plans are not funded.

The components of the plans’ funded status that are reflected in the Consolidated Statements of Financial Position as of December 31 are as follows:



($ in millions)	Pension benefits						Postretirement benefits
	2015			2014			2015			2014
Fair value of plan assets	$	5,353		$	5,783		$	—		$	—
Less: Benefit obligation	6,130			6,493			405			575
Funded status	$	(777	)	$	(710	)	$	(405	)	$	(575	)

Items not yet recognized as a component of net periodic cost:
Net actuarial loss (gain)	$	2,710		$	2,707		$	(263	)	$	(111	)
Prior service credit	(365		)	(422		)	(61		)	(83		)
Unrecognized pension and other postretirement benefit cost, pre-tax	2,345			2,285			(324		)	(194		)
Deferred income tax	(821		)	(800		)	115			72
Unrecognized pension and other postretirement benefit cost	$	1,524		$	1,485		$	(209	)	$	(122	)

The $3 million increase in the pension net actuarial loss during 2015 is primarily related to lower than expected return on assets, substantially offset by an increase in the discount rate. The majority of the $2.71 billion net actuarial pension benefit losses not yet recognized in 2015 reflects decreases in the discount rate and the effect of unfavorable equity market conditions on the value of the pension plan assets in prior years. The $152 million increase in the OPEB net actuarial gain during 2015 primarily related to changes in the persistency and participation assumptions.

The primary qualified employee plan represents 79% of the pension benefits’ underfunded status as of December 31, 2015.

The change in 2015 in items not yet recognized as a component of net periodic cost, which is recorded in unrecognized pension and other postretirement benefit cost, is shown in the table below.



($ in millions)	Pension benefits			Postretirement benefits
Items not yet recognized as a component of net periodic cost – December 31, 2014	$	2,285		$	(194	)
Net actuarial loss (gain) arising during the period	242			(158		)
Net actuarial (loss) gain amortized to net periodic benefit cost	(221		)	9
Prior service credit arising during the period	—			—
Prior service credit amortized to net periodic benefit cost	56			22
Translation adjustment and other	(17		)	(3		)
Items not yet recognized as a component of net periodic cost – December 31, 2015	$	2,345		$	(324	)

The net actuarial loss (gain) is recognized as a component of net periodic cost amortized over the average remaining service period of active employees expected to receive benefits. Estimates of the net actuarial loss (gain) and prior service credit expected to be recognized as a component of net periodic benefit cost during 2016 are shown in the table below.



($ in millions)	Pension benefits			Postretirement benefits
Net actuarial loss (gain)	$	174		$	(32	)
Prior service credit	(56		)	(21		)

The accumulated benefit obligation (“ABO”) for all defined benefit pension plans was $6.05 billion and $6.42 billion as of December 31, 2015 and 2014, respectively. The ABO is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered at the measurement date. However, it differs from the PBO due to the exclusion of an assumption as to future compensation levels.

The PBO, ABO and fair value of plan assets for the Company’s pension plans with an ABO in excess of plan assets were $5.81 billion, $5.74 billion and $5.02 billion, respectively, as of December 31, 2015 and $6.12 billion, $6.06 billion and $5.38 billion, respectively, as of December 31, 2014. Included in the accrued benefit cost of the pension benefits are certain unfunded non-qualified plans with accrued benefit costs of $143 million and $147 million for 2015 and 2014, respectively.

The changes in benefit obligations for all plans for the years ended December 31 are as follows:



($ in millions)	Pension benefits						Postretirement benefits
	2015			2014			2015			2014
Benefit obligation, beginning of year	$	6,493		$	5,297		$	575		$	482
Service cost	114			96			12			10
Interest cost	258			262			23			23
Participant contributions	—			1			19			19
Actuarial (gain) loss	(225		)	1,243			(158		)	103
Benefits paid ⁽¹⁾	(443		)	(368		)	(54		)	(57		)
Plan amendments	—			—			—			—
Translation adjustment and other	(67		)	(38		)	(12		)	(5		)
Curtailment gain	—			—			—			—
Benefit obligation, end of year	$	6,130		$	6,493		$	405		$	575

______________________________


⁽¹⁾	Benefits paid include lump sum distributions, a portion of which may trigger settlement accounting treatment.

Components of net periodic cost

The components of net periodic cost for all plans for the years ended December 31 are as follows:



	Pension benefits									Postretirement benefits
($ in millions)	2015			2014			2013			2015			2014			2013
Service cost	$	114		$	96		$	140		$	12		$	10		$	12
Interest cost	258			262			265			23			23			28
Expected return on plan assets	(424		)	(398		)	(394		)	—			—			—
Amortization of:
Prior service credit	(56		)	(58		)	(28		)	(22		)	(23		)	(23		)
Net actuarial loss (gain)	190			127			235			(9		)	(22		)	(16		)
Settlement loss	31			54			277			—			—			—
Curtailment gain	—			—			—			—			—			(181		)
Net periodic cost (credit)	$	113		$	83		$	495		$	4		$	(12	)	$	(180	)

Assumptions

Weighted average assumptions used to determine net pension cost and net postretirement benefit cost for the years ended December 31 are:



	Pension benefits						Postretirement benefits
($ in millions)	2015		2014		2013		2015		2014		2013
Discount rate	4.10	%	5.00	%	4.60	%	3.97	%	5.11	%	3.75	%
Rate of increase in compensation levels	3.5		3.5		3.5		n/a		n/a		n/a
Expected long-term rate of return on plan assets	7.33		7.36		7.75		n/a		n/a		n/a

Weighted average assumptions used to determine benefit obligations as of December 31 are listed in the following table.



	Pension benefits				Postretirement benefits
	2015		2014		2015		2014
Discount rate	4.83	%	4.10	%	4.56	%	4.15	%
Rate of increase in compensation levels	3.2		3.5		n/a		n/a

The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 6.3% for 2016, gradually declining to 4.5% in 2038 and remaining at that level thereafter.

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one percentage-point increase in assumed health care cost trend rates would increase the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $3 million and $20 million, respectively. A one percentage-point decrease in assumed health care cost trend rates would decrease the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $2 million and $17 million, respectively.

Pension plan assets

The change in pension plan assets for the years ended December 31 is as follows:



($ in millions)	2015			2014
Fair value of plan assets, beginning of year	$	5,783		$	5,602
Actual return on plan assets	(43		)	540
Employer contribution	125			49
Benefits paid	(443		)	(368		)
Translation adjustment and other	(69		)	(40		)
Fair value of plan assets, end of year	$	5,353		$	5,783

In general, the Company’s pension plan assets are managed in accordance with investment policies approved by pension investment committees. The purpose of the policies is to ensure the plans’ long-term ability to meet benefit obligations by prudently investing plan assets and Company contributions, while taking into consideration regulatory and legal requirements and current market conditions. The investment policies are reviewed periodically and specify target plan asset allocation by asset category. In addition, the policies specify various asset allocation and other risk limits. The target asset allocation takes the plans’ funding status into consideration, among other factors, including anticipated demographic changes or liquidity requirements that may affect the funding status such as the potential impact of lump sum settlements as well as existing or expected market conditions. In general, the allocation has a lower overall investment risk when a plan is in a stronger funded status position since there is less economic incentive to take risk to increase the expected returns on the plan assets. As a result, the primary employee plan has a greater allocation to equity securities than the employee-agent plan. The primary qualified employee plan comprises 80% of total plan assets and 86% of equity securities. The pension plans’ asset exposure within each asset category is tracked against widely accepted established benchmarks for each asset class with limits on variation from the benchmark established in the investment policy. Pension plan assets are regularly monitored for compliance with these limits and other risk limits specified in the investment policies.

The pension plans’ weighted average target asset allocation and the actual percentage of plan assets, by asset category as of December 31, 2015 are as follows:



	Target asset allocation ⁽¹⁾	Actual percentage of plan assets
Asset category	2015	2015		2014
Equity securities ⁽²⁾	53 - 63%	60	%	41	%
Fixed income securities	28 - 37%	30		50
Limited partnership interests	0 - 12%	7		7
Short-term investments and other	—	3		2
Total without securities lending ⁽³⁾		100	%	100	%

______________________________


⁽¹⁾	The target asset allocation considers risk based exposure while the actual percentage of plan assets utilizes a financial reporting view excluding exposure provided through derivatives.

⁽²⁾

The actual percentage of plan assets for equity securities include private equity investments that are subject to the limited partnership interests target allocation of 2% and 1% in 2015 and 2014, respectively, fixed income mutual funds that are subject to the fixed income securities target allocation of 3% for both 2015 and 2014 as well as 9% of equity exposure created through a derivative which is not included in the actual allocations in 2014.


⁽³⁾	Securities lending collateral reinvestment of $152 million and $217 million is excluded from the table above in 2015 and 2014, respectively.

The target asset allocation for an asset category may be achieved either through direct investment holdings, through replication using derivative instruments (e.g., futures or swaps) or net of hedges using derivative instruments to reduce exposure to an asset category. The net notional amount of derivatives used for replication and hedges is limited to 105% or 115% of total plan assets depending on the plan. Market performance of the different asset categories may, from time to time, cause deviation from the target asset allocation. The asset allocation mix is reviewed on a periodic basis and rebalanced to bring the allocation within the target ranges.

Outside the target asset allocation, the pension plans participate in a securities lending program to enhance returns. As of December 31, 2015, U.S. government fixed income securities and U.S. equity securities are lent out and cash collateral is invested 5% in fixed income securities and 95% in short-term investments.

The following table presents the fair values of pension plan assets as of December 31, 2015.



($ in millions)
	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Balance as of December 31, 2015
Equity securities	$	136		$	2,945		$	100		$	3,181
Fixed income securities:
U.S. government and agencies	72			334			—			406
Municipal	—			—			7			7
Corporate	—			1,205			10			1,215
Short-term investments	112			184			—			296
Limited partnership interests:
Real estate funds ⁽¹⁾	—			—			104			104
Private equity funds ⁽²⁾	—			—			237			237
Hedge funds	—			—			33			33
Cash and cash equivalents	22			—			—			22
Total plan assets at fair value	$	342		$	4,668		$	491		5,501
% of total plan assets at fair value	6.2		%	84.9		%	8.9		%	100.0		%

Securities lending obligation ⁽³⁾										(167		)
Other net plan assets ⁽⁴⁾										19
Total reported plan assets										$	5,353

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⁽¹⁾	Real estate funds held by the pension plans are primarily invested in U.S. commercial real estate.


⁽²⁾	Private equity investments held by the pension plans are primarily comprised of buyout and growth funds in North America and other developed markets.

⁽³⁾

The securities lending obligation represents the plan’s obligation to return securities lending collateral received under a securities lending program. The terms of the program allow both the plan and the counterparty the right and ability to redeem/return the securities loaned on short notice. Due to its relatively short-term nature, the outstanding balance of the obligation approximates fair value.


⁽⁴⁾	Other net plan assets represent interest and dividends receivable and net receivables related to settlements of investment transactions, such as purchases and sales.

The following table presents the fair values of pension plan assets as of December 31, 2014.



($ in millions)
	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Balance as of December 31, 2014
Equity securities	$	161		$	2,109		$	75		$	2,345
Fixed income securities:
U.S. government and agencies	870			44			—			914
Foreign government	—			28			—			28
Municipal	—			—			14			14
Corporate	—			1,822			12			1,834
RMBS	—			115			—			115
Short-term investments	55			254			—			309
Limited partnership interests:
Real estate funds	—			—			154			154
Private equity funds	—			—			218			218
Hedge funds	—			—			32			32
Cash and cash equivalents	34			—			—			34
Free-standing derivatives:
Assets	(1		)	—			—			(1		)
Liabilities	(3		)	—			—			(3		)
Total plan assets at fair value	$	1,116		$	4,372		$	505		5,993
% of total plan assets at fair value	18.6		%	73.0		%	8.4		%	100.0		%

Securities lending obligation										(234		)
Other net plan assets										24
Total reported plan assets										$	5,783

The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 6.

The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2015.



($ in millions)			Actual return on plan assets:
	Balance as of December 31, 2014		Relating to assets sold during the period		Relating to assets still held at the reporting date			Purchases, sales and settlements, net			Net transfers in and/or (out) of Level 3			Balance as of December 31, 2015
Equity securities	$	75	$	1	$	(5	)	$	29		$	—		$	100
Fixed income securities:
Municipal	14		—		—			(7		)	—			7
Corporate	12		—		—			—			(2		)	10
Limited partnership interests:
Real estate funds	154		—		(12		)	(38		)	—			104
Private equity funds	218		—		(8		)	27			—			237
Hedge funds	32		—		1			—			—			33
Total Level 3 plan assets	$	505	$	1	$	(24	)	$	11		$	(2	)	$	491

The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2014.



($ in millions)			Actual return on plan assets:
	Balance as of December 31, 2013		Relating to assets sold during the period			Relating to assets still held at the reporting date		Purchases, sales and settlements, net			Net transfers in and/or (out) of Level 3		Balance as of December 31, 2014
Equity securities	$	237	$	2		$	2	$	(166	)	$	—	$	75
Fixed income securities:
Municipal	18		—			—		(4		)	—		14
Corporate	18		—			—		(6		)	—		12
Limited partnership interests:
Real estate funds	197		(3		)	6		(46		)	—		154
Private equity funds	211		(4		)	4		7			—		218
Hedge funds	9		—			—		23			—		32
Total Level 3 plan assets	$	690	$	(5	)	$	12	$	(192	)	$	—	$	505

The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2013.



($ in millions)			Actual return on plan assets:
	Balance as of December 31, 2012		Relating to assets sold during the period		Relating to assets still held at the reporting date			Purchases, sales and settlements, net			Net transfers in and/or (out) of Level 3		Balance as of December 31, 2013
Equity securities	$	314	$	3	$	18		$	(98	)	$	—	$	237
Fixed income securities:
Municipal	129		7		1			(119		)	—		18
Corporate	10		5		—			3			—		18
Limited partnership interests:
Real estate funds	214		—		11			(28		)	—		197
Private equity funds	199		—		(2		)	14			—		211
Hedge funds	80		—		—			(71		)	—		9
Total Level 3 plan assets	$	946	$	15	$	28		$	(299	)	$	—	$	690

The expected long-term rate of return on plan assets reflects the average rate of earnings expected on plan assets. The Company’s assumption for the expected long-term rate of return on plan assets is reviewed annually giving consideration to appropriate financial data including, but not limited to, the plan asset allocation, forward-looking expected returns for the period over which benefits will be paid, historical returns on plan assets and other relevant market data. Given the long-term forward looking nature of this assumption, the actual returns in any one year do not immediately result in a change. In giving consideration to the targeted plan asset allocation, the Company evaluated returns using the same sources it has used historically which include: historical average asset class returns from an independent nationally recognized vendor of this type of data blended together using the asset allocation policy weights for the Company’s pension plans; asset class return forecasts from a large global independent asset management firm that specializes in providing multi-asset class investment fund products which were blended together using the asset allocation policy weights; and expected portfolio returns from a proprietary simulation methodology of a widely recognized external investment consulting firm that performs asset allocation and actuarial services for corporate pension plan sponsors. This same methodology has been applied on a consistent basis each year. All of these were consistent with the Company’s weighted average long-term rate of return on plan assets assumption of 7.33% used for 2015 and 7.30% that will be used for 2016. The assumption for the primary qualified employee plan is 7.75% and the employee-agent plan is 5.75% for both years. The employee-agent plan assumption is lower than the primary qualified employee plan assumption due to a lower investment allocation to equity securities and a higher allocation to fixed income securities. As of the 2015 measurement date, the arithmetic average of the annual actual return on plan assets for the most recent 10 and 5 years was 6.9% and 7.7%, respectively.

Cash flows

There was no required cash contribution necessary to satisfy the minimum funding requirement under the IRC for the tax qualified pension plans as of December 31, 2015. The Company currently plans to contribute $129 million to its pension plans in 2016.

The Company contributed $35 million and $38 million to the postretirement benefit plans in 2015 and 2014, respectively. Contributions by participants were $19 million and $19 million in 2015 and 2014, respectively.

Estimated future benefit payments

Estimated future benefit payments expected to be paid in the next 10 years, based on the assumptions used to measure the Company’s benefit obligation as of December 31, 2015, are presented in the table below.



($ in millions)	Pension benefits		Postretirement benefits
2016	$	341	$	26
2017	372		26
2018	388		26
2019	436		28
2020	472		29
2021-2025	2,569		155
Total benefit payments	$	4,578	$	290

Allstate 401(k) Savings Plan

Employees of the Company, with the exception of those employed by the Company’s international, Esurance and Answer Financial subsidiaries, are eligible to become members of the Allstate 401(k) Savings Plan (“Allstate Plan”). The Company’s contributions are based on the Company’s matching obligation and certain performance measures. The Company is responsible for funding its anticipated contribution to the Allstate Plan, and may, at the discretion of management, use the ESOP to pre-fund certain portions. In connection with the Allstate Plan, the Company has a note from the ESOP with a principal balance of $11 million as of December 31, 2015. The ESOP note has a fixed interest rate of 7.9% and matures in 2019. The Company records dividends on the ESOP shares in retained income and all the shares held by the ESOP are included in basic and diluted weighted average common shares outstanding.

The Company’s contribution to the Allstate Plan was $79 million, $75 million and $54 million in 2015, 2014 and 2013, respectively. These amounts were reduced by the ESOP benefit computed for the years ended December 31 as follows:



($ in millions)	2015			2014			2013
Interest expense recognized by ESOP	$	1		$	1		$	2
Less: dividends accrued on ESOP shares	(3		)	(4		)	(3		)
Cost of shares allocated	10			8			7
Compensation expense	8			5			6
Reduction of defined contribution due to ESOP	73			71			46
ESOP benefit	$	(65	)	$	(66	)	$	(40	)

The Company made $2 million, $3 million and $2 million in contributions to the ESOP in 2015, 2014 and 2013, respectively. As of December 31, 2015, total committed to be released, allocated and unallocated ESOP shares were 1 million, 36 million and 2 million, respectively.

Allstate’s Canadian, Esurance and Answer Financial subsidiaries sponsor defined contribution plans for their eligible employees. Expense for these plans was $10 million, $11 million and $11 million in 2015, 2014 and 2013, respectively.