12. Pension and Other Postretirement Benefit Plans

Defined Benefit Pension Plans

The company has both tax-qualified and nonqualified, noncontributory defined benefit pension plans that together cover certain domestic and foreign employees. These plans provide benefits based upon a participant’s compensation and years of service. The nonqualified plans are made up of the following arrangements: a nonqualified supplemental deferred compensation arrangement and a nonqualified excess pension deferred compensation arrangement (together, “the nonqualified plans”). The nonqualified supplemental deferred compensation arrangement provides supplemental income to key executives of the company. The benefit is determined by the accumulation of an account balance that results from a percentage of pay credit and interest. No deferrals of pay are required from participants. The balance is paid to a participant after retirement over a 15-year period. The nonqualified excess pension deferred compensation arrangement provides benefits to key employees that cannot be provided by the qualified plan due to IRS limitations.

The change in benefit obligation, change in fair value of plan assets and funded status for the plans are as follows:


	2016			2015
(dollars in millions)
Benefit obligation - beginning	$	586.9		$	544.0
Service cost		29.2			30.1
Interest cost		19.0			20.2
Transfers–Medicon		(19.1	)		25.4
Curtailment		(5.9	)		—
Actuarial loss (gain)		24.3			6.1
Benefits paid		(31.8	)		(33.1	)
Currency/other		(13.3	)		(5.8	)

Benefit obligation - ending	$	589.3		$	586.9

Fair value of plan assets - beginning	$	462.6		$	455.6
Actual return on plan assets		35.6			(5.1	)
Company contributions		34.8			31.6
Transfers–Medicon		(19.0	)		17.9
Benefits paid		(31.8	)		(33.1	)
Currency/other		(12.5	)		(4.3	)

Fair value of plan assets - ending	$	469.7		$	462.6

Funded status of the plans, December 31	$	(119.6	)	$	(124.3	)

Foreign benefit plan assets at fair value included in the preceding table were $86.8 million and $107.8 million at December 31, 2016 and 2015, respectively. The foreign pension plan benefit obligations included in this table were $102.4 million and $123.1 million at December 31, 2016 and 2015, respectively. The benefit obligation for nonqualified plans also included in this table was $86.4 million and $78.9 million at December 31, 2016 and 2015, respectively. The nonqualified plans are generally not funded.

At December 31, 2016 and 2015, the accumulated benefit obligation for all pension plans was $537.6 million and $526.4 million, respectively. At December 31, 2016 and 2015, the accumulated benefit obligation for foreign pension plans was $87.6 million and $105.5 million, respectively. The accumulated benefit obligation for the nonqualified plans was $82.8 million and $75.1 million at December 31, 2016 and 2015, respectively.

For pension plans with benefit obligations in excess of plan assets at December 31, 2016 and 2015, the fair value of plan assets was $469.7 million and $444.7 million, respectively, and the benefit obligation was $589.3 million and $576.3 million, respectively. For pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2016 and 2015, the fair value of plan assets was $8.0 million and $7.1 million, respectively, and the accumulated benefit obligation was $94.6 million and $96.6 million, respectively.

Defined benefit plans are an exception to the recognition and fair value measurement principles in business combinations. Defined benefit plan obligations are recognized and measured in accordance with the accounting principles for benefit plans rather than at fair value. Accordingly, at the time of acquisition, the company remeasured the benefit plans sponsored by Medicon and recognized an asset or liability for the funded status of these plans. See Note 2 of the notes to consolidated financial statements.

In the fourth quarter of 2016, the Medicon defined benefit pension plans were frozen to further benefit accruals and closed to new participants. This action required a remeasurement of the plans’ assets and obligations, which resulted in a non-cash curtailment gain of $5.3 million. These plans were converted to a defined contribution plan.

Amounts recognized in accumulated other comprehensive loss at December 31 consisted of:


	2016			2015
(dollars in millions)
Net loss	$	169.2		$	163.7
Prior service credit		(1.9	)		(2.7	)

Before tax amount	$	167.3		$	161.0

After tax amount	$	108.7		$	103.8

The change in net loss in the above table included net losses of $16.7 million ($11.3 million after tax) and $41.3 million ($26.5 million after tax) during the years ended December 31, 2016 and 2015, respectively.

Amounts recognized in the consolidated balance sheets at December 31 consisted of:


	2016			2015
(dollars in millions)
Other assets	$	—		$	7.2
Accrued compensation and benefits		(4.6	)		(4.6	)
Other long-term liabilities		(115.0	)		(126.9	)

Net amount recognized	$	(119.6	)	$	(124.3	)

The estimated net actuarial loss for pension benefits that will be amortized from accumulated other comprehensive loss into net pension cost over the next fiscal year is expected to be $12.7 million.

The components of net periodic benefit cost for the following years ended December 31 are:


	2016			2015			2014
(dollars in millions)
Service cost, net of employee contributions	$	28.8		$	29.6		$	26.9
Interest cost		19.0			20.2			21.2
Expected return on plan assets		(32.1	)		(31.3	)		(27.9	)
Amortization of net loss		10.8			12.4			10.4
Amortization of prior service cost		(0.4	)		(0.4	)		(0.4	)
Curtailment		(5.3	)		—			—

Net periodic pension cost	$	20.8		$	30.5		$	30.2

The net pension cost attributable to foreign plans included in the above table were a credit of $0.5 million in 2016 and cost of $4.4 million and $4.2 million in 2015 and 2014, respectively.

The weighted average assumptions used in determining pension plan information for the following years ended December 31 are:


	2016			2015			2014
Net Cost
Discount rate – service cost		4.26	%		3.79	%		4.58	%
Discount rate – interest cost		3.47	%		3.79	%		4.58	%
Expected return on plan assets		6.72	%		7.17	%		7.26	%
Rate of compensation increase		3.57	%		3.42	%		3.49	%
Benefit Obligation
Discount rate		3.91	%		4.03	%		3.79	%
Rate of compensation increase		3.58	%		3.57	%		3.42	%

Prior to 2016, the company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curves used to measure the benefit obligation. In 2016, the company changed its method used to estimate the service and interest cost components of net periodic benefit cost for defined benefit plans. The company has elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The company has accounted for this change as a change in estimate and began to account for it prospectively in 2016. The reduction in service and interest cost for 2016 associated with this change in estimate was approximately $4.8 million.

The long-term rate of return for plan assets is derived from return assumptions determined for each of the significant asset classes. Under this approach, the historical real returns (net of inflation) on different asset classes are combined with long-term expectations for inflation to determine an expected return on assets within that class. These real rates of return for each asset class reflect the long-term historical relationships between equities and fixed income investments. Current market factors such as inflation and interest rates are evaluated before long-term assumptions are determined. The long-term portfolio return is established based on the combination of these asset class real returns and inflation with proper consideration of the effects of diversification and rebalancing.

Plan Assets—The company employs a total return investment approach whereby a mix of equities and fixed income investments are used to balance the need for long-term return of plan assets with a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk and are not impacted significantly by short-term fluctuations. Equity investments include a diversified mix of growth, value and small and large capitalization securities. Investment risks and returns are measured and monitored on an ongoing basis through quarterly investment portfolio reviews.

The weighted average target asset allocations for the plans at December 31, are as follows:


	Target Allocation
	2016			2015
Asset Categories
Equity securities		65	%		63	%
Fixed income securities		33	%		35	%
Cash equivalents		2	%		2	%

Total		100	%		100	%

Due to short-term fluctuations in asset performance, allocation percentages may temporarily deviate from these target allocation percentages before a rebalancing occurs. Cash equivalents are used to satisfy benefit disbursement requirements and will vary throughout the year.

The following table summarizes fair value measurements of plan assets at December 31:


	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Total^(B)
	2016		2015		2016		2015		2016		2015
(dollars in millions)
Cash equivalents	$	3.4	$	7.1	$	—	$	—	$	3.4	$	7.1
Equity securities:
U.S. large-cap		125.7		117.3		—		—		125.7		117.3
U.S. small-cap		40.6		37.2		—		—		40.6		37.2
Foreign		118.0		117.3		—		—		118.0		117.3
Fixed income securities:
Diversified bond funds^(A)		131.6		121.1		—		2.1		131.6		123.2
Foreign government bonds		11.5		17.5		—		3.9		11.5		21.4
Foreign corporate notes and bonds		11.3		12.7		—		—		11.3		12.7
Private alternative investment		—		—		19.6		19.3		19.6		19.3
Guaranteed insurance contracts		—		—		8.0		7.1		8.0		7.1

Total plan assets	$	442.1	$	430.2	$	27.6	$	32.4	$	469.7	$	462.6

^(A)	Diversified bond funds consists of U.S. Treasury bonds, mortgage backed securities, and corporate bonds.

^(B)	There were no plan assets categorized as Level 3 at December 31, 2016 or 2015.

As discussed in Note 1 of the notes to consolidated financial statements, the company adopted a new accounting standard update that clarifies that an equity security has a readily determinable fair value if it meets certain conditions. As a result, certain plan assets previously reported as Level 2 were reclassified to Level 1 in the fair value hierarchy for which fair value is readily determinable. These assets include commingled funds invested in cash equivalents, equities and fixed income securities and are valued at net asset value (“NAV”) as determined by the fund administrators.

Plan assets categorized as Level 2 primarily consist of private alternative investments, guaranteed insurance contracts and fixed income securities. These assets are valued using other inputs, such as NAV provided by the fund administrators or by dealer quotes for similarly-rated instruments that are observable or that can be corroborated by observable market data for substantially the remaining term of the plan instruments. There were no redemption restrictions on these investments other than for the private alternative investment, which requires a 60 day notice period for quarterly redemptions and a 90 day notice period for monthly redemptions, or unfunded commitments related to assets valued at NAV at December 31, 2016.

Funding Policy and Expected Contributions—The company’s objective in funding its domestic tax-qualified plan is to accumulate funds sufficient to provide for all benefits and to satisfy the minimum contribution requirements of ERISA. Outside the United States, the company’s objective is to fund the international retirement costs over time within the limits of minimum requirements and allowable tax deductions. The company’s annual funding decisions also consider the relationship between the returns on each asset compared to the plan’s corresponding expense and consider the relationship between each tax-qualified plan’s benefit obligation and its corresponding funded status. The company expects to make discretionary contributions of up to $30 million to its qualified plans in 2017.

The total expected benefit payments are as follows:


(dollars in millions)
2017	$	33.9
2018		32.4
2019		34.1
2020		36.1
2021		35.5
2022 through 2026		206.6

Defined Contribution Retirement Plans

All domestic employees of the company not covered by a collective bargaining agreement who have been scheduled for 1,000 hours of service are eligible to participate in the company’s defined contribution plan. The amounts charged to income for this plan were $16.0 million, $15.9 million and $14.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. Outside the United States, the company maintains defined contribution plans along with small pension arrangements that are typically funded with insurance products. These arrangements had a total expense of $5.3 million for the year ended December 31, 2016 and $5.1 million for each of the years ended December 31, 2015 and 2014. In addition, the company maintains a long-term deferred compensation arrangement for directors that allows for the deferral of the annual retainer and meeting fees at the director’s election and provides certain other long-term compensation benefits. The company annually accrues for long-term compensation, which is paid out upon the director’s retirement from the board. These arrangements had a total expense of $6.9 million, $5.5 million and $6.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, and a benefit obligation of $36.1 million and $35.4 million at December 31, 2016 and 2015, respectively.

Other Postretirement Benefit Plan

The company does not provide subsidized postretirement healthcare benefits and life insurance coverage except for a limited number of former employees. As this plan is unfunded, contributions are made as benefits are incurred. The benefit obligation for this plan was $6.2 million and $7.0 million at December 31, 2016 and 2015, respectively. Amounts recognized in accumulated other comprehensive loss were $1.5 million ($0.9 million after tax) for the year ended December 31, 2016 and $2.0 million ($1.3 million after tax) for the year ended December 31, 2015. The net periodic benefit cost was $0.3 million, $0.4 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.