Pension Plans and Postretirement Benefits

U.S. Pension Plans

Pursuant to the agreement to sell one of our former subsidiaries, WilTel Communications Group, LLC, the responsibility for WilTel’s defined benefit pension plan was retained by us. All benefits under this plan were frozen as of October 30, 2005. Prior to the acquisition of Jefferies, Jefferies sponsored a defined benefit pension plan covering certain employees; benefits under that plan were frozen as of December 31, 2005.

Late in 2015, we launched a limited time voluntary lump sum offer to approximately 4,000 of the deferred vested participants of the WilTel plan. Approximately 2,400 participants accepted the lump sum offer and benefit payments totaling $110.7 million were paid out of plan assets. We also recorded a $40.7 million settlement charge in 2015 related to the participant acceptances.

A summary of activity with respect to both plans is as follows (in thousands):



	2017			2016
Change in projected benefit obligation:
Projected benefit obligation, beginning of year	$	205,405		$	207,025
Interest cost	8,119			8,464
Actuarial (gains) losses	6,644			(544		)
Benefits paid	(8,911		)	(9,540		)
Projected benefit obligation, end of year	$	211,257		$	205,405

Change in plan assets:
Fair value of plan assets, beginning of year	$	127,514		$	117,719
Actual return on plan assets	22,192			2,947
Employer contributions	12,417			19,100
Benefits paid	(8,911		)	(9,540		)
Administrative expenses	(2,406		)	(2,712		)
Fair value of plan assets, end of year	$	150,806		$	127,514

Funded status at end of year	$	(60,451	)	$	(77,891	)

As of December 31, 2017 and 2016, $51.3 million and $58.9 million, respectively, of the net amount recognized in the Consolidated Statements of Financial Condition was reflected as a charge to Accumulated other comprehensive income (substantially all of which were cumulative losses) and $60.5 million and $77.9 million, respectively, was reflected as accrued pension cost.

The following table summarizes the components of net periodic pension cost and other amounts recognized in other comprehensive income (loss) excluding taxes (in thousands):



	2017			2016			2015
Components of net periodic pension cost:
Interest cost	$	8,119		$	8,464		$	12,958
Expected return on plan assets	(7,689		)	(7,589		)	(10,581		)
Settlement charge	—			—			40,973
Actuarial losses	2,207			1,908			6,963
Net periodic pension cost	$	2,637		$	2,783		$	50,313

Amounts recognized in other comprehensive income (loss):
Net (gain) loss arising during the period	$	(5,453	)	$	6,811		$	(24,186	)
Settlement charge	—			—			(40,973		)
Amortization of net loss	(2,207		)	(1,908		)	(6,963		)
Total recognized in other comprehensive income (loss)	$	(7,660	)	$	4,903		$	(72,122	)

Net amount recognized in net periodic benefit cost and other comprehensive income (loss)	$	(5,023	)	$	7,686		$	(21,809	)

The amounts in Accumulated other comprehensive income at the end of each year have not yet been recognized as components of net periodic pension cost in the Consolidated Statements of Operations. The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2018 is $2.5 million.

We expect to pay $8.9 million of employer contributions in 2018.

We use a December 31 measurement date for the WilTel plan and a November 30 date for the Jefferies plan. The assumptions used are as follows:



	2017		2016
WilTel Plan
Discount rate used to determine benefit obligation	3.51	%	3.85	%
Weighted-average assumptions used to determine net pension cost:
Discount rate	3.85	%	4.00	%
Expected long-term return on plan assets	7.00	%	7.00	%

Jefferies Plan
Discount rate used to determine benefit obligation	3.60	%	3.90	%
Weighted-average assumptions used to determine net pension cost:
Discount rate	3.90	%	4.10	%
Expected long-term return on plan assets	6.25	%	6.25	%

The following pension benefit payments are expected to be paid (in thousands):



2018	$	9,943
2019	9,915
2020	9,666
2021	9,577
2022	10,233
2023 – 2027	67,493

U.S. Plan Assets

The information below on the plan assets for the WilTel plan and the Jefferies plan is presented separately for the plans as the investments are managed independently. Cash equivalents are valued at cost, which approximates fair value and are categorized in Level 1 of the fair value hierarchy. The estimated fair values for securities measured using Level 1 inputs are determined using publicly quoted market prices in active markets for identical assets. Certain fixed income securities are measured using Level 2 inputs. Although these securities trade in brokered markets, the market for certain securities is sometimes inactive. Valuation inputs include benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. Neither plan had any assets classified within Level 3 of the fair value hierarchy.

WilTel Plan Assets. At December 31, 2017 and 2016, the WilTel plan assets at fair value consisted of the following (in thousands):



			Fair Value Measurements Using
	Total		Level 1		Level 2
2017
Cash and cash equivalents	$	539	$	539	$	—
Growth Portfolio	65,625		—		65,625
Liability-Driven Investing Portfolio	31,693		—		31,693
Total	$	97,857	$	539	$	97,318

2016
Cash and cash equivalents	$	919	$	919	$	—
Growth Portfolio	51,852		—		51,852
Liability-Driven Investing Portfolio	24,751		—		24,751
Total	$	77,522	$	919	$	76,603

The current investment objectives are designed to close the funding gap while mitigating funded status volatility through a combination of liability hedging and investment returns. As plan funded status improves, the asset allocation will move along a predetermined, de-risking glide path that reallocates capital from growth assets to liability-hedging assets in order to reduce funded status volatility and lock in funded status gains. Plan assets are split into two separate portfolios, each with different asset mixes and objectives:


•	The Growth Portfolio consists of global equities and high yield investments.

•

The Liability-Driven Investing ("LDI") Portfolio consists of long duration credit bonds and a suite of long duration, Treasury-based instruments designed to provide capital-efficient interest rate exposure as well as target specific maturities. The objective of the LDI Portfolio is to seek to achieve performance similar to the WilTel plan's liability by seeking to match the interest rate sensitivity and credit sensitivity. The LDI Portfolio is managed to mitigate volatility in funded status deriving from changes in the discounted value of benefit obligations from market movements in the interest rate and credit components of the underlying discount curve.

To develop the assumption for the expected long-term rate of return on plan assets, we considered the following underlying assumptions: 2.25% current expected inflation, 1.0% to 1.5% real rate of return for long duration risk free investments and an additional 1.0% to 1.5% return premium for corporate credit risk. For U.S. and international equity, we assume an equity risk premium over cash equals to 4.0%. We then weighted these assumptions based on invested assets and assumed that investment expenses were offset by expected returns in excess of benchmarks, which resulted in the selection of the 7.0% expected long-term rate of return assumption for 2017.

Jefferies Plan Assets. At December 31, 2017 and 2016, the Jefferies plan assets at fair value consisted of the following (in thousands):



			Fair Value Measurements Using
	Total (1)		Level 1		Level 2
2017
Common collective trusts	$	52,949	$	—	$	52,949
Total	$	52,949	$	—	$	52,949

2016
Cash and cash equivalents	$	1,135	$	1,135	$	—
Listed equity securities (2)	32,342		32,342		—
Fixed income securities:
Corporate debt securities	4,906		—		4,906
Foreign corporate debt securities	1,835		—		1,835
U.S. government securities	5,370		5,370		—
Agency mortgage-backed securities	3,330		—		3,330
Commercial mortgage-backed securities	591		—		591
Asset-backed securities	483		—		483
Total	$	49,992	$	38,847	$	11,145

(1) There are no plan assets classified within Level 3 of the fair value hierarchy.

(2) Listed equity securities are diversified across a spectrum of primarily U.S. large-cap companies.

Investment Policies and Strategies - Assets in the plan are invested under guidelines adopted by Jefferies Administrative Committee of the U.S. Pension Plan. Because the U.S. Pension Plan exists to provide a vehicle for funding future benefit obligations, the investment objectives of the portfolio take into account the nature and timing of future plan liabilities. The policy recognizes that the portfolio’s long-term investment performance and its ability to meet the plan’s overall objectives are dependent on the strategic asset allocation, which includes adequate diversification among assets classes.

In May 2017, Jefferies entered into an agreement with an external investment manager to invest and manage the plan’s assets under a strategy using a combination of two portfolios. The investment manager allocates the plan’s assets between a growth portfolio and a liability-driven portfolio according to certain target allocations and tolerance bands that are agreed to by Jefferies Administrative Committee of the U.S. Pension Plan. Such target allocations will take into consideration the plan’s funded ratio. The manager will also monitor the strategy and, as the plan’s funded ratio changes over time, will rebalance the strategy, if necessary, to be within the agreed tolerance bands and target allocations. The portfolios are comprised of certain common collective investment trusts that are established and maintained by the investment manager.

German Pension Plan

In connection with the acquisition of Jefferies Bache from Prudential in 2011, Jefferies acquired a defined benefit pension plan located in Germany for the benefit of eligible employees of Jefferies Bache in that territory. The German pension plan has no plan assets and is therefore unfunded; however, Jefferies has purchased insurance contracts from multi-national insurers held in the name of Jefferies Bache Limited to provide for the plan’s future obligations. The investment in these insurance contracts is included in Financial instruments owned - Trading assets in the Consolidated Statements of Financial Condition and has a fair value of $16.0 million and $15.2 million at December 31, 2017 and 2016, respectively. All costs relating to the plan (including insurance premiums and other costs as computed by the insurers) are paid by Jefferies. In connection with the acquisition, Prudential agreed that any insurance premiums and funding obligations related to pre-acquisition date service will be reimbursed to Jefferies by Prudential.

On December 28, 2017, a Liquidation Insurance Contract was entered into between Jefferies Bache Limited and Generali Lebensversicherung AG ("Generali") to transfer the defined benefit pension obligations and insurance contracts to Generali, for approximately €6.5 million, which was paid in January 2018 and which will release Jefferies from any and all obligations under the German Pension Plan. Subject to certain precedent conditions being fulfilled, this transaction is expected to be completed in the first quarter of 2018. In addition, on December 28, 2017, Jefferies entered into an agreement with Prudential under which it received $3.25 million as consideration for the release of Prudential by Jefferies from their indemnity relating to the German Pension Plan defined benefit pension obligations.

The provisions and assumptions used in the German pension plan are based on local conditions in Germany. Jefferies did not contribute to the plan during the year ended December 31, 2017.

The following tables summarize the changes in the projected benefit obligation and the components of net periodic pension cost for the years ended December 31, 2017, 2016 and 2015 (in thousands):



	2017			2016
Change in projected benefit obligation:
Projected benefit obligation, beginning of year	$	24,166		$	23,545
Interest cost	426			529
Actuarial (gains) losses	(91		)	1,157
Benefits paid	(1,233		)	(1,104		)
Currency adjustment	2,976			39
Projected benefit obligation, end of year	$	26,244		$	24,166



	2017		2016		2015
Components of net periodic pension cost:
Interest cost	$	426	$	529	$	523
Net amortization	353		326		325
Net periodic pension cost	$	779	$	855	$	848

The amounts in Accumulated other comprehensive income at December 31, 2017 and 2016 are charges of $5.3 million and $5.7 million, respectively. The following are assumptions used to determine the actuarial present value of the projected benefit obligation and net periodic pension benefit cost for the years ended December 31, 2017 and 2016:



	2017		2016
Projected benefit obligation
Discount rate	1.80	%	1.70	%
Rate of compensation increase (1)	N/A		N/A

Net periodic pension benefit cost
Discount rate	1.70	%	2.20	%
Rate of compensation increase (1)	N/A		N/A

(1) There were no active participants in the plan at December 31, 2017 and 2016.

The following pension benefit payments are expected to be paid (in thousands):



2018	$	1,303
2019	1,275
2020	1,329
2021	1,339
2022	1,320
2023 – 2027	6,571

Other

We have defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee’s salary. Amounts charged to expense related to such plans were $8.9 million, $9.6 million and $9.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.