15.

Retirement Benefit Plans

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans receive additional benefits under our defined contribution plans. Plan benefits are primarily based on years of credited service and the participant’s average eligible compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, we sponsor various foreign pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

We use a December 31 measurement date for our benefit plans.

Defined Benefit Plans

The components of net pension expense for our defined benefit retirement plans were as follows (in millions):


	U.S. and Puerto Rico									Foreign
For the Years Ended December 31,	2015			2014			2013			2015			2014			2013
Service cost	$	11.8		$	10.9		$	11.9		$	18.9		$	14.7		$	16.1
Interest cost		15.8			15.5			13.2			8.8			9.2			5.6
Expected return on plan assets		(31.8	)		(30.8	)		(28.7	)		(13.9	)		(11.0	)		(6.7	)
Amortization of prior service cost		(3.7	)		(2.6	)		(2.6	)		(1.9	)		(1.3	)		(1.3	)
Amortization of unrecognized actuarial loss		17.4			10.6			14.8			2.7			0.5			1.8

Net periodic benefit cost	$	9.5		$	3.6		$	8.6		$	14.6		$	12.1		$	15.5

The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans were as follows:


	U.S. and Puerto Rico						Foreign
For the Years Ended December 31,	2015		2014		2013		2015		2014		2013
Discount rate		4.56%		4.98%		4.32%		1.94%		2.46%		2.13%
Rate of compensation increase		3.29%		3.29%		3.29%		2.00%		1.48%		2.29%
Expected long-term rate of return on plan assets		7.75%		7.75%		7.75%		3.05%		2.88%		2.74%

The expected long-term rate of return on plan assets is based on the historical and estimated future rates of return on the different asset classes held in the plans. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. We believe that historical asset results approximate expected market returns applicable to the funding of a long-term benefit obligation.

Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments. Beginning in 2016, we will change the method used to estimate the service and interest costs for pension and postretirement benefits. The new method utilizes a full yield curve approach to estimate service and interest costs by applying specific spot rates along the yield curve used to determine the benefit obligation of relevant projected cash outflows. Historically, we utilized a single weighted-average discount rate applied to projected cash outflows. We made the change to provide a more precise measurement of service and interest costs by aligning the timing of the plan’s liability cash flows to the corresponding spot rate on the yield curve. The change does not impact the measurement of the plan’s obligations. We will account for this change as a change in accounting estimate.

Changes in projected benefit obligations and plan assets were (in millions):


	U.S. and Puerto Rico						Foreign
For the Years Ended December 31,	2015			2014			2015			2014
Projected benefit obligation – beginning of year	$	386.6		$	316.7		$	423.7		$	371.5
Obligation assumed from Biomet		–			–			159.4			–
Service cost		11.8			10.9			18.9			14.7
Interest cost		15.8			15.5			8.8			9.2
Plan amendments		(21.9	)		–			–			(7.0	)
Employee contributions		–			–			16.9			18.5
Benefits paid		(12.3	)		(10.0	)		(24.1	)		(22.6	)
Actuarial (gain) loss		(4.9	)		53.5			(18.9	)		77.9
Expenses paid		–			–			(0.3	)		(0.2	)
Settlement		–			–			(0.2	)		–
Translation (gain) loss		–			–			(15.6	)		(38.3	)

Projected benefit obligation – end of year	$	375.1		$	386.6		$	568.6		$	423.7

Plan assets at fair market value – beginning of year	$	402.2		$	398.6		$	385.4		$	372.3
Assets contributed by Biomet		–			–			129.4			–
Actual return on plan assets		(16.6	)		10.9			(4.0	)		38.0
Employer contributions		0.8			2.7			14.8			14.7
Employee contributions		–			–			16.9			18.5
Plan amendments		–			–			(0.2	)		–
Benefits paid		(12.3	)		(10.0	)		(24.1	)		(22.6	)
Expenses paid		–			–			(0.3	)		(0.2	)
Translation gain (loss)		–			–			(12.3	)		(35.3	)

Plan assets at fair market value – end of year	$	374.1		$	402.2		$	505.6		$	385.4

Funded status	$	(1.0	)	$	15.6		$	(63.0	)	$	(38.3	)

Amounts recognized in consolidated balance sheet:
Prepaid pension	$	14.6		$	29.4		$	16.5		$	12.4
Short-term accrued benefit liability		(1.0	)		(0.7	)		(0.6	)		(0.5	)
Long-term accrued benefit liability		(14.6	)		(13.1	)		(78.9	)		(50.2	)

Net amount recognized	$	(1.0	)	$	15.6		$	(63.0	)	$	(38.3	)

We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part of our net pension expense during 2016 (in millions):


	U.S. and Puerto Rico			Foreign
Unrecognized prior service cost	$	(5.9	)	$	(1.9	)
Unrecognized actuarial loss		17.1			2.9

	$	11.2		$	1.0

The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit retirement plans were as follows:


	U.S. and Puerto Rico									Foreign
For the Years Ended December 31,	2015			2014			2013			2015			2014			2013
Discount rate		4.36	%		4.10	%		4.98	%		1.86	%		1.38	%		2.45	%
Rate of compensation increase		3.29	%		3.29	%		3.29	%		2.02	%		1.43	%		1.52	%

Plans with projected benefit obligations in excess of plan assets were as follows (in millions):


	U.S. and Puerto Rico				Foreign
As of December 31,	2015		2014		2015		2014
Projected benefit obligation	$	53.8	$	54.6	$	393.4	$	365.2
Plan assets at fair market value		38.2		40.8		319.6		315.0

Total accumulated benefit obligations and plans with accumulated benefit obligations in excess of plan assets were as follows (in millions):


	U.S. and Puerto Rico				Foreign
As of December 31,	2015		2014		2015		2014
Total accumulated benefit obligations	$	354.6	$	337.5	$	556.8	$	413.1
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation		34.8		32.8		380.1		358.6
Plan assets at fair market value		20.6		22.0		314.9		315.0

The benefits expected to be paid out in each of the next five years and for the five years combined thereafter are as follows (in millions):


For the Years Ending December 31,	U.S. and Puerto Rico		Foreign
2016		14.3		22.4
2017		15.8		22.5
2018		17.3		23.0
2019		19.1		24.0
2020		20.6		23.9
2021-2025		118.4		125.2

The U.S. and Puerto Rico defined benefit retirement plans’ overall investment strategy is to maximize total returns by emphasizing long-term growth of capital while mitigating risk. We have established target ranges of assets held by the plans of 40 to 45 percent for equity securities, 30 to 35 percent for debt securities and 20 to 25 percent in non-traditional investments. The plans strive to have sufficiently diversified assets so that adverse or unexpected results from one asset class will not have an unduly detrimental impact on the entire portfolio. We regularly review the investments in the plans and we may rebalance them from time-to-time based upon the target asset allocation of the plans.

For the U.S. and Puerto Rico plans, we maintain an investment policy statement that guides the investment allocation in the plans. The investment policy statement describes the target asset allocation positions described above. Our benefits committee, along with our investment advisor, monitor compliance with and administer the investment policy statement and the plans’ assets and oversee the general

investment strategy and objectives of the plans. Our benefits committee generally meets quarterly to review performance and to ensure that the current investment allocation is within the parameters of the investment policy statement.

The investment strategies of foreign based plans vary according to the plan provisions and local laws. The majority of the assets in foreign based plans are located in Switzerland-based plans. These assets are held in trusts and are commingled with the assets of other Swiss companies with representatives of all the companies making the investment decisions. The overall strategy is to maximize total returns while avoiding risk. The trustees of the assets have established target ranges of assets held by the plans of 30 to 50 percent in debt securities, 20 to 37 percent in equity securities, 15 to 24 percent in real estate, 3 to 15 percent in cash funds and 0 to 12 percent in other funds.

The fair value of our U.S. and Puerto Rico pension plan assets by asset category was as follows (in millions):


	As of December 31, 2015
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	2.5	$	2.5	$	—	$	—
Equity securities:
U.S. large-cap		79.2		—		79.2		—
U.S. small-cap		25.6		—		25.6		—
International		93.2		—		93.2		—
Real estate		27.0		—		27.0		—
Commodity-linked mutual funds		16.4		—		16.4		—
Intermediate fixed income securities		130.2		—		130.2		—

Total	$	374.1	$	2.5	$	371.6	$	—


	As of December 31, 2014
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	1.4	$	1.4	$	—	$	—
Equity securities:
U.S. large-cap		83.7		—		83.7		—
U.S. small-cap		23.0		—		23.0		—
International		83.0		—		83.0		—
Real estate		49.1		—		49.1		—
Commodity-linked mutual funds		36.0		—		36.0		—
Intermediate fixed income securities		126.0		—		126.0		—

Total	$	402.2	$	1.4	$	400.8	$	—

The fair value of our foreign pension plan assets was as follows (in millions):


	As of December 31, 2015
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	34.0	$	34.0	$	—	$	—
Equity securities:
Energy		4.7		4.7		—		—
Materials		6.7		6.7		—		—
Industrials		8.2		8.2		—		—
Consumer discretionary		6.3		6.3		—		—
Consumer staples		8.5		8.5		—		—
Healthcare		8.6		8.6		—		—
Financials		17.4		17.4		—		—
Information technology		5.7		5.7		—		—
Telecommunication services		2.0		2.0		—		—
Utilities		3.3		3.3		—		—
Other		80.7		40.6		40.1		—
Fixed income securities:
Government bonds		104.0		—		104.0		—
Corporate bonds		74.5		—		74.5		—
Asset-backed securities		14.8		—		14.8		—
Other debt		11.3		—		11.3		—
Other types of investments:
Mortgage loans		9.8		—		9.8		—
Insurance contracts		5.8		—		5.8		—
Other investments		14.7		—		14.7		—
Real estate		84.6		—		10.7		73.9

Total	$	505.6	$	146.0	$	285.7	$	73.9


	As of December 31, 2014
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	31.0	$	31.0	$	—	$	—
Equity securities:
Energy		4.7		4.7		—		—
Materials		7.1		7.1		—		—
Industrials		7.5		7.5		—		—
Consumer discretionary		6.5		6.5		—		—
Consumer staples		7.5		7.5		—		—
Healthcare		6.8		6.8		—		—
Financials		16.3		16.3		—		—
Information technology		4.9		4.9		—		—
Telecommunication services		2.0		2.0		—		—
Utilities		3.4		3.4		—		—
Other		36.7		34.5		2.2		—
Fixed income securities:
Government bonds		72.5		—		72.5		—
Corporate bonds		58.9		—		58.9		—
Asset-backed securities		22.0		—		22.0		—
Other debt		1.7		—		1.7		—
Other types of investments:
Mortgage loans		9.2		—		9.2		—
Insurance contracts		6.1		—		6.1		—
Other investments		12.0		—		12.0		—
Real estate		68.6		—		—		68.6

Total	$	385.4	$	132.2	$	184.6	$	68.6

As of December 31, 2015 and 2014, our defined benefit pension plans’ assets did not hold any direct investment in Zimmer Biomet Holdings common stock.

Equity securities are valued using a market approach, based on quoted prices for the specific security from transactions in active exchange markets (Level 1), or in some cases where we are invested in mutual or collective funds, based upon the net asset value per unit of the fund which is determined from quoted market prices of the underlying securities in the fund’s portfolio (Level 2). Fixed income securities are valued using a market approach, based upon quoted prices for the specific security or from institutional bid evaluations. Some fixed income securities are in funds with a net asset value per unit which is determined using similar techniques for the underlying securities in the fund’s portfolio. Real estate is valued by discounting to present value the cash flows expected to be generated by the specific properties.

The following table provides a reconciliation of the beginning and ending balances of our foreign pension plan assets measured at fair value that used significant unobservable inputs (Level 3) (in millions):


	December 31, 2015
Beginning Balance	$	68.6
Gains on assets sold		0.2
Change in fair value of assets		2.2
Net purchases and sales		3.5
Translation loss		(0.6	)

Ending Balance	$	73.9

We expect that we will have no legally required minimum funding requirements in 2016 for the qualified U.S. and Puerto Rico defined benefit retirement plans, nor do we expect to voluntarily contribute to these plans during 2016. Contributions to foreign defined benefit plans are estimated to be $15.1 million in 2016. We do not expect the assets in any of our plans to be returned to us in the next year.

Defined Contribution Plans

We also sponsor defined contribution plans for substantially all of the U.S. and Puerto Rico employees and certain employees in other countries. The benefits offered under these plans are reflective of local customs and practices in the countries concerned. We expensed $40.2 million, $32.8 million and $29.6 million related to these plans for the years ended December 31, 2015, 2014 and 2013, respectively.