Employee Benefit Plans

Defined Benefit Pension Plans

As a result of the Company's acquisition of ND as described in Note 3—Acquisitions, the Company maintains defined benefit pension plans for certain employees in the United Kingdom. These plans consist of the Christian Salvesen Pension Scheme (“CSPS”) and TDG Pension Scheme (“TDGPS” and together with the CSPS, the “UK Plans”). As a result of the Company’s acquisition of ND, the Company also maintains defined benefit pension plans for certain of its foreign subsidiaries. These international defined benefit pension plans are excluded from the disclosures below due to their immateriality.

As a result of the Company’s acquisition of Con-way as described in Note 3—Acquisitions, the Company maintains defined benefit pension plans for certain employees in the United States. These pension plans include qualified plans that are eligible for certain beneficial treatment under the Internal Revenue Code of 1986, as amended (“IRC”), as well as non-qualified plans that do not meet the IRC criteria. The Company’s qualified defined benefit pension plans consist of a primary qualified defined benefit pension plan and another qualified defined benefit pension plan (the “U.S. Qualified Plans”). The Company’s non-qualified defined benefit pension plans (collectively, the “U.S. Non-Qualified Pension Plans” and together with the U.S. Qualified Plans, the “U.S. Plans”) consist mostly of a primary non-qualified supplemental defined benefit pension plan and provides additional benefits for certain employees who are affected by IRC limitations on compensation eligible for benefits available under the qualified plans. As a result of the Company’s acquisition of Con-way, the Company maintains defined benefit pension plans sponsored by certain of Con-way’s foreign subsidiaries. These international defined benefit pension plans are excluded from the disclosures below due to their immateriality. Both the U.S. and UK Plans do not allow for new plan participants or additional benefit accruals.

Defined benefit pension plan obligations are measured based on the present value of projected future benefit payments for all participants for services rendered to date. The projected benefit obligation is a measure of benefits attributed to service to date assuming that the plan continues in effect and that estimated future events (including turnover and mortality) occur. The net periodic benefit costs are determined using assumptions regarding the projected benefit obligation and the fair value of plan assets as of the ND and Con-way acquisition dates. Net periodic benefit costs are recorded in sales, general and administrative expense. The funded status of the defined benefit pension plans, which represents the difference between the projected benefit obligation and the fair value of plan assets, is calculated on a plan-by-plan basis. The Company did not have defined benefit pension plans prior to June 2015.

Funded Status of Defined Benefit Pension Plans

The following tables provide a reconciliation of the changes in the plans’ projected benefit obligations as of December 31, 2015:



(Dollars in millions)	U.S. Qualified Plans			U.S Non-Qualified Plans			UK Plans
Projected benefit obligation at December 31, 2014	$	—		$	—		$	—
From acquisitions	1,685.8			74.1			1,393.4
Interest cost	12.7			0.5			28.6
Actuarial gain	(23.0		)	(0.7		)	(65.3		)
Foreign currency exchange rate changes	—			—			(37.5		)
Benefits paid	(9.7		)	(0.9		)	(31.5		)
Projected benefit obligation at December 31, 2015	$	1,665.8		$	73.0		$	1,287.7

The following tables provide a reconciliation of the changes in the plans' fair value of plan assets as of December 31, 2015:



(Dollars in millions)	U.S. Qualified Plans			U.S Non-Qualified Plans			UK Plans
Fair value of plan assets at December 31, 2014	$	—		$	—		$	—
From acquisitions	1,659.4			—			1,290.5
Actual return (loss) on plan assets	(29.8		)	—			(30.3		)
Employer contributions	—			0.9			10.3
Benefits paid	(9.7		)	(0.9		)	(31.5		)
Foreign currency exchange rate changes	—			—			(35.2		)
Fair value of plan assets at December 31, 2015	$	1,619.9		$	—		$	1,203.8

The following table provides the funded status of the plans as of December 31, 2015:



(Dollars in millions)	U.S. Qualified Plans			U.S Non-Qualified Plans			UK Plans
Funded Status:
Fair value of plan assets	$	1,619.9		$	—		$	1,203.8
Projected benefit obligation	1,665.8			73.0			1,287.7
Funded status at December 31, 2015	$	(45.9	)	$	(73.0	)	$	(83.9	)
Funded Status Recognized in Balance Sheet:
Long-term assets	$	17.3		$	—		$	—
Current liabilities	—			(5.2		)	—
Long-term liabilities	(63.2		)	(67.8		)	(83.9		)
Total liability at December 31, 2015	$	(45.9	)	$	(73.0	)	$	(83.9	)
Plans with projected and accumulated benefit obligation in excess of plan assets:
Projected and accumulated benefit obligation	$	1,645.7		$	73.0		$	1,287.7
Fair value of plan assets	1,582.5			—			1,203.8
Weighted-average assumptions as of December 31:
Discount rate	4.65		%	4.65		%	3.75		%

The following table provides amounts included in accumulated other comprehensive loss that have not yet been recognized in net periodic benefit expense as of December 31, 2015:



(Dollars in millions)	U.S. Qualified Plans			U.S Non-Qualified Plans		UK Plans
Actuarial gain (loss)	$	(22.2	)	$	0.7	$	0.5

The following table sets forth the amount of net periodic benefit cost and amounts recognized in other comprehensive income or loss for the year ended December 31, 2015:



(Dollars in millions)	U.S. Qualified Plans			U.S Non-Qualified Plans			UK Plans
Net periodic benefit expense (income):
Interest cost	$	12.7		$	0.5		$	28.6
Expected return on plan assets	(15.4		)	—			(34.6		)
Net periodic benefit expense (income)	$	(2.7	)	$	0.5		$	(6.0	)
Amounts recognized in other comprehensive income or loss:
Actuarial loss (gain)	22.2			(0.7		)	(0.5		)
Loss (gain) recognized in other comprehensive income or loss	$	22.2		$	(0.7	)	$	(0.5	)

No amounts in accumulated other comprehensive loss are expected to be recognized as components of net periodic benefit expense (income) for the year ended December 31, 2016.

The following table outlines the weighted-average assumptions used to determine the net periodic benefit cost at December 31, 2015:



	U.S. Qualified Plans		UK Plans
Discount rate	4.55	%	3.75	%
Expected long-term rate of return on plan assets	5.57	%	5.40	%

No rate of compensation increase was assumed as the plans are frozen to additional participant benefit accruals. As of December 31, 2015, the impact of a 25 basis point decrease in the discount rate would increase the projected benefit obligation by approximately $60.0 million, $1.9 million and $51.0 million for the U.S. Qualified Plans, U.S. Non-Qualified Plans and UK Plans, respectively.

Expected benefit payments for the defined benefit pension plans are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates.



(Dollars in millions)	U.S. Qualified Plans		U.S Non-Qualified Plans		UK Plans
Year ending December 31:
2016	$	66.0	$	5.2	$	51.9
2017	70.1		5.2		53.4
2018	74.3		5.2		54.9
2019	78.9		5.2		59.3
2020	83.8		5.2		60.8
2021-2025	479.5		25.2		347.1

Plan Assets

U.S. Qualified Plans

The U.S. Qualified Plans’ assets are segregated from those of the Company and are managed pursuant to a long-term allocation strategy that seeks to mitigate the funded status volatility by increasing exposure to fixed income investments over time. This strategy was developed by analyzing a variety of diversified asset-class combinations in conjunction with the projected liabilities.

The current investment strategy is to achieve a mix of approximately 76% in fixed income securities and 24% of investments in equity securities. The target allocations for fixed income securities includes 7% in global opportunistic fixed income. The target allocations for equity securities include 12% in U.S. large companies, 2% in U.S. small companies, and 10% in international companies. Investments in equity securities are allocated between growth- and value-style investment strategies and are diversified across industries and investment managers. Investments in fixed income securities consist primarily of high-quality U.S. and global corporate or government debt instruments in a variety of industries. Investments in equity and fixed income securities consist of individual securities held in managed separate accounts as well as commingled investment funds.

The investment strategy does not include a meaningful long-term investment allocation to cash and cash equivalents; however, the cash allocation may rise periodically in response to timing considerations regarding contributions, investments, and the payment of benefits and eligible plan expenses. Additionally, the level of cash and cash equivalents may reflect the un-invested balance of each manager's allocated portfolio balance. This "un-invested cash" is typically held in a short-term fund that invests in money-market instruments, including commercial paper and other liquid short-term interest-bearing instruments.

The investment policy does not allow investment managers to use market-timing strategies or financial derivative instruments for speculative purposes. However, financial derivative instruments are used to manage risk and achieve stated investment objectives regarding duration, yield curve, credit and equity exposures. Generally, the investment managers are prohibited from short selling, trading on margin, and trading commodities, warrants or other options, except when acquired as a result of the purchase of another security, or in the case of options, when sold as part of a covered position. The Company’s investment policies also restrict the investment managers from accumulating concentrations by issuer, country or industry segment.

The assumption of 5.65% for the overall expected long-term rate of return in 2016 was developed using asset allocation, return, risk (defined as standard deviation), and correlation expectations. The return expectations are created using long-term historical returns and current market expectations for inflation, interest rates and economic growth.

UK Plans

The UK Plans’ assets are segregated from those of the Company and invested by trustees, which include Company representatives, with the goal of meeting the respective plans' projected future pension liabilities. The trustees' investment objectives are to meet the performance target set in the deficit recovery plans of the schemes in a risk-controlled framework. The actual asset allocations of the plans are in line with the target asset allocations. The target asset allocation of the CSPS consists of 25% matching assets (UK gilts and cash) and 75% growth assets (consisting of government and credit - commingled funds, illiquid credit, hedge funds, dynamic asset allocation, and risk parity). The CSPS target asset allocation also includes 40% notional exposure for synthetic equity exposure. The target asset allocation of the TDGPS consists of 30% matching assets (UK gilts and cash) and 70% growth assets (consisting of government and credit - commingled funds, illiquid credit, hedge funds, real estate alternatives, dynamic asset allocation, and risk parity). The target asset allocations of both plans include acceptable ranges for each asset class, which are typically +/- 10% from the target.

The risk parity and dynamic asset allocation categories include investments in multi-asset funds. These funds are designed to provide a diversified exposure to markets with less volatility than equities. Collateral assets consist of UK gilts and cash, which are used to back derivative positions used to hedge the sensitivity of the liability to changes in interest rates and inflation, such that approximately 85% of the actuarial liability sensitivities were hedged as of December 31, 2015. The derivative positions are also used to gain a synthetic exposure to equity markets. Investments in illiquid credit fixed income securities, real estate and hedge funds are less liquid and typically are categorized as Level 3 in the fair value hierarchy, given the inherent restrictions on redemptions that may impact the Company's ability to sell the investment at its net asset value in the near term.

The expected return over 2016 is 5.4%. The approach to determine the expected long-term rate of return on plan assets is consistent with the one used for the U.S. Plans.

The following table sets forth the fair values of investments held in the pension plans by major asset category as of December 31, 2015, as well as the percentage that each asset category comprises of total plan assets:



(Dollars in millions)
Asset Category (U.S. Qualified Plans)	Level 1		Level 2			Level 3		Total			Percentage of Plan Assets
Cash and Cash Equivalents
Short-term investment fund	$	—	$	34.3		$	—	$	34.3		2.1	%
Equity
U.S. large companies
S&P 500 futures	0.7		—			—		0.7			—	%
Growth	91.4		—			—		91.4			5.6	%
Value	88.2		—			—		88.2			5.4	%
U.S. Small Companies
Value	27.1		—			—		27.1			1.7	%
International
Growth	66.1		—			—		66.1			4.1	%
Value fund	—		65.9			—		65.9			4.1	%
Fixed Income Securities
Global long-term debt instruments	158.1		1,088.1			—		1,246.2			76.9	%
Total U.S. Plan Assets	$	431.6	$	1,188.3		$	—	$	1,619.9		100.0	%

Asset Category (UK Plans)
Cash and Cash Equivalents	$	32.8	$	—		$	—	$	32.8		2.7	%
Fixed Income Securities
Government	260.3		—			—		260.3			21.6	%
Government and credit - commingled funds	—		210.8			—		210.8			17.5	%
Illiquid credit [a]	—		—			55.2		55.2			4.6	%
Derivatives
Equity	20.8		—			—		20.8			1.7	%
Interest rate	—		13.1			—		13.1			1.1	%
Currencies	—		(1.6		)	—		(1.6		)	(0.1	)%
Hedge Funds [b]	—		—			40.6		40.6			3.4	%
Diversified Multi-Asset Funds
Risk parity	—		235.2			—		235.2			19.5	%
Dynamic asset allocation	49.6		287.0			—		336.6			28.0	%
Total UK Plan Assets	$	363.5	$	744.5		$	95.8	$	1,203.8		100.0	%

[a] This fund is not publicly traded and does not have a readily determinable fair value. Accordingly, the fund is valued at its net asset value per share. The underlying investments in the fund consist primarily of commercial mortgage-backed securities and real estate loans.

[b] The fair value of the fund is based on the fair value of the underlying assets, substantially all of which is invested in the York Credit Opportunities Master Fund, L.P., an exempted limited partnership formed under the laws of the Cayman Islands. The fund offers very limited liquidity with redemption only allowed on anniversary of investment with 60 days’ prior notice.

The following table is a roll-forward of Level 3 instruments measured at fair value on a recurring basis from December 31, 2014 to December 31, 2015:



(Dollars in millions)	Illiquid Credit			Hedge Funds			Real Estate			Total
Balance at December 31, 2014	$	—		$	—		$	—		$	—
From ND acquisition	56.5			46.3			1.9			104.7
Actual return on assets:
Assets held at end of period	0.3			(4.3		)	—			(4.0		)
Assets sold during the period	—			—			(0.2		)	(0.2		)
Sales	—			—			(1.7		)	(1.7		)
Foreign currency exchange rate changes	(1.6		)	(1.4		)	—			(3.0		)
Balance at December 31, 2015	$	55.2		$	40.6		$	—		$	95.8

There was no XPO common stock held in plan assets as of December 31, 2015. The U.S. Non-Qualified Pension Plans are unfunded.

Funding

The Company’s funding practice is to evaluate its tax and cash position, as well as the funded status of its plans, in determining its planned contributions. The Company estimates that it will contribute $5.2 million to its U.S. Plans and $16.3 million to its UK Plans in 2016; however, this could change based on variations in interest rates, asset returns and other factors.