Note 11: Pension Plans

Snap-on has several non-contributory defined benefit pension plans covering most U.S. employees and certain employees in foreign countries. Snap-on also has foreign contributory defined benefit pension plans covering certain foreign employees. Retirement benefits are generally provided based on employees’ years of service and average earnings or stated amounts for years of service. Normal retirement age is 65, with provisions for earlier retirement.

The status of Snap-on’s pension plans as of 2016 and 2015 year end is as follows:


(Amounts in millions)	2016		2015
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	1,279.4	$	1,325.9
Service cost		19.3		20.0
Interest cost		56.5		53.2
Plan participant contributions		1.0		1.1
Benefits paid		(63.2)		(62.4)
Actuarial loss (gain)		94.7		(40.8)
Foreign currency impact		(26.3)		(17.6)

Benefit obligation at end of year	$	1,361.4	$	1,279.4


Change in plan assets:
Fair value of plan assets at beginning of year	$	1,049.2	$	1,103.4
Actual return (loss) on plan assets		73.5		(17.8)
Plan participant contributions		1.0		1.1
Employer contributions		68.7		39.2
Benefits paid		(63.2)		(62.4)
Foreign currency impact		(18.4)		(14.3)

Fair value of plan assets at end of year	$	1,110.8	$	1,049.2

Unfunded status at end of year	$	(250.6)	$	(230.2)

Amounts recognized in the Consolidated Balance Sheets as of 2016 and 2015 year end are as follows:


(Amounts in millions)	2016		2015
Other assets	$	0.6	$	2.1
Accrued benefits		(4.7)		(4.5)
Pension liabilities		(246.5)		(227.8)

Net liability	$	(250.6)	$	(230.2)

Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2016 and 2015 year end are as follows:


(Amounts in millions)	2016		2015
Net loss, net of tax of $160.6 million and $141.4 million, respectively	$	(297.0)	$	(253.7)
Prior service credit, net of tax of $1.3 million and$1.7 million, respectively		2.2		2.8

	$	(294.8)	$	(250.9)

The accumulated benefit obligation for Snap-on’s pension plans as of 2016 and 2015 year end was $1,283.1 million and $1,231.2 million, respectively.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for Snap-on’s pension plans in which the accumulated benefit obligation exceeds the fair value of plan assets as of 2016 and 2015 year end are as follows:


(Amounts in millions)	2016		2015
Projected benefit obligation	$	1,312.1	$	1,128.4
Accumulated benefit obligation		1,238.7		1,097.6
Fair value of plan assets		1,061.0		906.5

The components of net periodic benefit cost and changes recognized in “Other comprehensive income (loss)” (“OCI”) are as follows:


(Amounts in millions)	2016		2015		2014
Net periodic benefit cost:
Service cost	$	19.3	$	20.0	$	18.0
Interest cost		56.5		53.2		57.3
Expected return on plan assets		(81.0)		(79.0)		(73.3)
Amortization of unrecognized loss		31.3		38.6		22.8
Amortization of prior service credit		(1.1)		(0.9)		(0.8)

Net periodic benefit cost	$	25.0	$	31.9	$	24.0


Changes in benefit obligations recognized in OCI, net of tax:
Net loss	$	43.3	$	6.3	$	72.0
Prior service cost		0.6		0.7		0.5

Total recognized in OCI	$	43.9	$	7.0	$	72.5

Amounts in Accumulated OCI that are expected to be amortized as net expense into net periodic benefit cost during 2017 are as follows:


(Amounts in millions)	Amount
Amortization of unrecognized loss	$	27.6
Amortization of prior service credit		(1.1)

Total to be recognized in net periodic benefit cost	$	26.5

The worldwide weighted-average assumptions used to determine Snap-on’s full-year pension costs are as follows:


	2016		2015		2014
Discount rate		4.5%		4.1%		5.1%
Expected return on plan assets		7.4%		7.4%		7.4%
Rate of compensation increase		3.6%		3.6%		3.6%

The worldwide weighted-average assumptions used to determine Snap-on’s projected benefit obligation as of 2016 and 2015 year end are as follows:


	2016		2015
Discount rate		4.2%		4.5%
Rate of compensation increase		3.4%		3.6%

The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2016 and 2015 year end was selected based on a cash flow matching methodology developed by the company’s outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans’ projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate.

The weighted-average discount rate for Snap-on’s domestic pension plans of 4.5% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s domestic discount rate assumption by 50 basis points (100 basis points (“bps”) equals 1.0 percent) would have increased Snap-on’s 2016 domestic pension expense and projected benefit obligation by approximately $6.7 million and $65.3 million, respectively. As of 2016 year end, Snap-on’s domestic projected benefit obligation comprised approximately 83% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 2.9% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s foreign discount rate assumption by 50 bps would have increased Snap-on’s 2016 foreign pension expense and projected benefit obligation by approximately $1.7 million and $23.4 million, respectively.

Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants.

As a practical expedient, Snap-on uses the calendar year end as the measurement date for its plans. Snap-on funds its pension plans as required by governmental regulation and may consider discretionary contributions as conditions warrant. Snap-on intends to make contributions of $7.1 million to its foreign pension plans and $2.3 million to its domestic pension plans in 2017, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2017.

The following benefit payments, which reflect expected future service, are expected to be paid as follows:


(Amounts in millions)	Amount
Year:
2017	$	68.8
2018		70.6
2019		73.2
2020		76.0
2021		78.8
2022-2026		438.2

Snap-on’s domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. The long-term investment performance objective for Snap-on’s domestic plans’ assets is to achieve net of expense returns that meet or exceed the 7.5% domestic long-term return on plan assets assumption used for reporting purposes. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans’ assets. As of 2016 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.

The basis for determining the overall expected long-term return on plan assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, which are calculated using the geometric mean, are then adjusted based on current relative valuation levels, macro-economic conditions, and the expected alpha related to active investment management. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses.

For risk and correlation assumptions, the actual experience for each asset class is reviewed for the longest time period available. Expected relationships for a 10 to 20 year time horizon are determined based upon historical results, with adjustments made for material changes.

Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow. Asset/liability studies are conducted periodically to determine if any revisions to the strategic asset allocation policy are necessary.

Snap-on’s domestic pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2016 and 2015 year end are as follows:


	Target		2016		2015
Asset category:
Equity securities		50%		51%		49%
Debt securities and cash and cash equivalents		35%		39%		39%
Real estate and other real assets		5%		1%		2%
Hedge funds		10%		9%		10%

Total		100%		100%		100%


Fair value of plan assets (Amounts in millions)			$	957.1	$	892.3

The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority.

Certain equity and debt securities are valued at quoted per share or unit market prices for which an official close or last trade pricing on an active exchange is available and are categorized as Level 1 in the fair value hierarchy. If quoted market prices are not readily available for specific securities, values are estimated using quoted prices of securities with similar characteristics and are categorized as Level 2 in the fair value hierarchy. Insurance contracts are valued at the present value of the estimated future cash flows promised under the terms of the insurance contracts and are categorized as Level 2 in the fair value hierarchy.

Commingled equity securities and commingled multi-strategy funds are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, as reported by the fund managers. The share or unit price is quoted on a private market and is based on the value of the underlying investments, which are primarily based on observable inputs; such investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

Private equity partnership funds, hedge funds, and real estate and other real assets are valued at the NAV as reported by the fund managers. Private equity partnership funds, certain hedge funds, and certain real estate and other real assets are valued based on the proportionate interest or share of net assets held by the pension plan, which is based on the estimated fair market value of the underlying investments. Certain other hedge funds and real estate and other real assets are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, based on the estimated value of the underlying investments as reported by the fund managers. These investments are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy.

The company regularly reviews fund performance directly with its investment advisor and the fund managers, and performs qualitative analysis to corroborate the reasonableness of the reported NAVs. For funds for which the company did not receive a year-end NAV, the company recorded an estimate of the change in fair value for the latest period based on return estimates and other fund activity obtained from the fund managers.

The columns labeled “Investments Measured at NAV” in the following tables reflect certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit a reconciliation of the fair value hierarchy to the pension plan assets.

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2016 year end:


(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Investments Measured at NAV		Total
Asset category:
Cash and cash equivalents	$	20.4	$	–	$	–	$	20.4
Equity securities:
Domestic		66.0		–		–		66.0
Foreign		74.7		–		–		74.7
Commingled funds – domestic		–		–		191.3		191.3
Commingled funds – foreign		–		–		117.7		117.7
Private equity partnerships		–		–		34.2		34.2
Debt securities:
Government		139.2		0.9		–		140.1
Corporate bonds		–		214.6		–		214.6
Real estate and other real assets		–		–		10.4		10.4
Hedge funds		–		–		87.7		87.7

Total	$	300.3	$	215.5	$	441.3	$	957.1

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2015 year end:


(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Investments Measured at NAV		Total
Asset category:
Cash and cash equivalents	$	21.3	$	–	$	–	$	21.3
Equity securities:
Domestic		53.9		–		–		53.9
Foreign		61.7		–		–		61.7
Commingled funds – domestic		–		–		169.3		169.3
Commingled funds – foreign		–		–		110.0		110.0
Private equity partnerships		–		–		43.7		43.7
Debt securities:
Government		133.0		–		–		133.0
Corporate bonds		–		195.8		–		195.8
Real estate and other real assets		–		–		17.4		17.4
Hedge funds		–		–		86.2		86.2

Total	$	269.9	$	195.8	$	426.6	$	892.3

Snap-on’s primary investment objective for its foreign pension plans’ assets is to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s risk tolerance. The foreign asset allocation policies consider the company’s financial strength and long-term asset class risk/return expectations, since the obligations are long term in nature. The company believes the foreign pension plans’ assets, which are managed locally by professional investment firms, are well diversified.

The expected long-term rates of return on foreign plans’ assets, which ranged from 1.8% to 6.3% as of 2016 year end, reflect management’s expectations of long-term average rates of return on funds invested to provide benefits included in the plans’ projected benefit obligation. The expected returns are based on outlooks for inflation, fixed income returns and equity returns, asset allocations and investment strategies. Differences between actual and expected returns on foreign pension plans’ assets are recorded as an actuarial gain or loss and amortized accordingly.

Snap-on’s foreign pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2016 and 2015 year end are as follows:


	Target		2016		2015
Asset category:
Equity securities*		39%		41%		40%
Debt securities* and cash and cash equivalents		36%		36%		36%
Insurance contracts and hedge funds		25%		23%		24%

Total		100%		100%		100%

Fair value of plan assets (Amounts in millions)			$	153.7	$	156.9

*	Includes commingled funds – multi-strategy

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2016 year end:


(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Investments Measured at NAV		Total
Asset category:
Cash and cash equivalents	$	0.7	$	–	$	–	$	0.7
Commingled funds – multi-strategy		–		–		117.4		117.4
Insurance contracts		–		21.3		–		21.3
Hedge fund		–		–		14.3		14.3

Total	$	0.7	$	21.3	$	131.7	$	153.7

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2015 year end:


(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Investments Measured at NAV		Total
Asset category:
Cash and cash equivalents	$	0.2	$	–	$	–	$	0.2
Commingled funds – multi-strategy		–		–		119.0		119.0
Insurance contracts		–		19.8		–		19.8
Hedge fund		–		–		17.9		17.9

Total	$	0.2	$	19.8	$	136.9	$	156.9

Snap-on has several 401(k) plans covering certain U.S. employees. Snap-on’s employer match to the 401(k) plans is made with cash contributions. For 2016, 2015 and 2014, Snap-on recognized $8.2 million, $7.0 million and $6.5 million, respectively, of expense related to its 401(k) plans.