7. EMPLOYEE BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFITS

Prior to Separation

Prior to the Separation Date, Conagra offered plans that were shared amongst its businesses, including Lamb Weston. The participation of Lamb Weston employees in Conagra’s plans until the Separation Date, is reflected in the financial statements as though Lamb Weston participated in a multiemployer plan with Conagra. Accordingly, a proportionate share of the service cost associated with these plans is reflected in the combined and consolidated financial statements. Additionally, the remaining cost elements (e.g., interest) are included in Conagra’s allocations of indirect costs (see Note 3, Related Party Transactions).

In Connection With and/or After Separation

In connection with the Separation, Conagra retained the pension liabilities related to Lamb Weston participants in the Conagra salaried employee pension plan and the vested benefits attributable to Lamb Weston hourly employee plan participants. On the Separation Date, Conagra transferred $7.4 million of qualified and nonqualified pension liabilities related to nonqualified benefits and Lamb Weston hourly participants’ unvested benefits. The liabilities were transferred to a new defined benefit pension plan for certain hourly employees that continue to accrue benefits and a new nonqualified defined benefit pension plan that provides unfunded supplemental retirement benefits to certain executives. The hourly plan is open to new participants. No assets were transferred to the plans.

Other Post-retirement Benefits

In connection with the Separation, Conagra transferred $3.2 million of liabilities for certain retiree health care and dental benefits granted to Lamb Weston employees. These employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. The plans are closed to new entrants.

Other Plans

Under the transition services agreement with Conagra, our employees continue to participate in Conagra’s defined contribution plan (“the Plan”) until we establish a separate plan sponsored by Lamb Weston. The Plan covers all of Lamb Weston’s eligible U.S. employees. The purpose of the Plan is to encourage employees to save for their future retirement needs. Lamb Weston generally matches 100% of the first 6% of the employee’s contribution election and also provides an additional 3% company contribution to eligible participants, regardless of employee participation level. The Plan’s matching contributions have a five-year graded vesting with 20% vesting each year through year five when employees will be 100% vested in all past and future company matching contributions. Since the Separation, we made $6.0 million of matching contributions to the Plan in fiscal 2017. Prior to Separation and during fiscal 2016 and 2015, matching contributions were paid to the Plan by Conagra.

We sponsor a deferred compensation savings plan, which is an unfunded nonqualified defined contribution plan. The plan permits eligible employees to continue to make deferrals and receive company matching contributions when their contributions to the defined contribution plan are stopped due to limitations under U.S. tax law. With the exception of a $0.7 million Rabbi Trust that was transferred to us from Conagra, participant deferrals and company matching contributions are not invested in separate trusts, but are paid directly from our general assets at the time benefits become due and payable. At May 28, 2017 and May 29, 2016, we had $8.8 million and $7.9 million, respectively, of liabilities attributable to participation in our deferred compensation plan recorded on our Consolidated Balance Sheets.

Obligations and Funded Status of Defined Benefit Pension and Other Post-retirement Benefits Plans

The funded status of our plans is based on company contributions, benefit payments, the plan asset investment return, the discount rate used to measure the liability, and expected participant longevity. The following table, which includes only company-sponsored defined benefit and other post-retirement benefit plans, reconciles the beginning and ending balances of the projected benefit obligation and the fair value of plan assets. We recognize the unfunded status of these plans on the Consolidated Balance Sheets, and we recognize changes in funded status in the year changes occur through the Consolidated Statements of Comprehensive Income (dollars in millions):


	For the Fiscal Years Ended
	May 28, 2017
	Pension Plan		Post-Retirement Plan
Change in Benefit Obligation
Benefit obligation at beginning of year	$	—	$	—
Net transfer from Conagra		7.4		3.2
Service cost		4.4		—
Interest cost		0.1		0.1
Participant contributions		—		—
Actuarial gain		(1.8)		(0.8)
Benefit obligation at fiscal year-end	$	10.1	$	2.5
Accumulated benefit obligation	$	10.1	$	2.5

Change in Plan Assets
Fair value of plan assets at beginning of year	$	—	$	—
Company contributions		4.5		—
Fair value of plan assets at end of year	$	4.5	$	—

Unfunded status	$	(5.6)	$	(2.5)

Amounts Recognized in Combined and Consolidated Balance Sheets
Other noncurrent liabilities	$	(5.6)	$	(2.5)
Amounts Recognized in Accumulated Other Comprehensive Loss (Pre-tax)
Actuarial net gain	$	1.0	$	0.8
Prior service benefit		—		(0.2)
Total	$	1.0	$	0.6

Components of Net Periodic Benefit Cost and Other Comprehensive (Income) Loss

For the period after the Separation Date, the components of net periodic benefit cost were as follows (dollars in millions):


	Pension Plan
Service cost	$	4.4
Interest cost		0.1
Expected return on plan assets		—
Net periodic benefit cost	$	4.5

Components of net periodic benefit cost for our post-retirement benefits were insignificant for the period after the Separation Date.

For the period after the Separation Date, the components of other comprehensive income (loss) were as follows (dollars in millions):


	For the Fiscal Years Ended
	May 28, 2017
	Pension Plan		Post-Retirement Plan
Actuarial net gain	$	1.0	$	0.8
Amortization of prior service benefit		—		(0.2)
Total recognized in other comprehensive income (loss)	$	1.0	$	0.6

Assumptions

The actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined benefit and post-retirement plans are as follows:


	For the Fiscal Years Ended
	May 28, 2017
	Pension Plan		Post-Retirement Plan
Weighted-Average Assumptions Used to Determine Benefit Obligations at May 28, 2017:
Discount rate		4.33%		3.50%
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost at May 28, 2017:
Discount rate		3.81%		3.18%
Long-term rate of return on plan assets		7.50%		N/A

Discount Rate Assumption. The discount rate reflects the current rate at which the pension obligations could be settled on the measurement date: May 28, 2017. The discount rate assumption used to calculate the present value of pension and post-retirement benefit obligations reflects the rates available on high-quality bonds on May 28, 2017. The bonds included in the models reflect anticipated investments that would be made to match the expected monthly benefit payments over time. The plans’ projected cash flows were duration-matched to these models to develop an appropriate discount rate. The discount rate we will use in fiscal 2018 to calculate the net periodic pension benefit and post-retirement benefit cost is 4.33% and 3.50%, respectively.

Asset Return Assumption. The Employee Benefit Investments Council is in the process of establishing our investment strategy and related asset allocation policies. The expected return on plan assets reflects the expected long-term rates of return based on investments Conagra has historically held in the plan and the investment returns we expect once our investment policy is finalized. We will adjust the expected long-term rate of return when there are changes in expected returns on the plan investments. The weighted-average expected return on plan assets we will use in our calculation of fiscal 2018 net periodic pension benefit cost is 7.50%.

Health Care Cost Trend Rate Assumptions. We review external data and historical trends for health care costs to determine our healthcare cost trend rate assumptions. We assumed health care cost trend rates for our post-retirement benefit plan as follows:


	2017
Health care cost trend rate (Pre65/Post65)		9.0/6.5%
Ultimate health care cost trend rate		4.5%
Year that the rate reaches the ultimate trend rate		2024

A one-percentage point increase in the assumed health care cost trend rate would have an insignificant effect on the 2017 postretirement benefit obligation.

Investment Policies and Strategies and Fair Value Measurements of Plan Assets

In May 2017, we contributed $4.5 million to our pension plan. Our Employee Benefits Investments Council is responsible for establishing and overseeing our investment policy. At May 28, 2017, the fair value of our pension plan assets, which consist entirely of cash and cash equivalents (Level 1), was $4.5 million.

Funding and Cash Flows

We make pension plan contributions that are sufficient to fund our actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (“ERISA”). From time to time, we may make discretionary contributions based on the funded status of the plans, tax deductibility, income from operations, and other factors. In fiscal 2017, we made $4.5 million of contributions to our qualified plan, which exceeded our 2017 minimum contribution requirements.

The following are estimated benefit payments to be paid to current plan participants by year (dollars in millions). Qualified pension benefit payments are paid from plan assets, while nonqualified pension benefit payments are paid by the Company.


	Pension Plan		Post-Retirement Plan
2018	$	0.1	$	0.0
2019		0.1		0.1
2020		0.2		0.1
2021		0.4		0.2
2022		0.6		0.2
Succeeding 5 years		7.1		1.1

We have $1.6 million of required minimum qualified pension contributions in fiscal 2018.

Pension Cost Financial Statement Presentation

Allocated pension costs (benefits) incurred by Conagra prior to November 9, 2016 and pension costs recognized after the Separation Date are included in the Combined and Consolidated Statements of Earnings as follows (dollars in millions):


	For the Fiscal Years Ended May
	2017		2016		2015
Cost of sales (a)	$	9.6	$	12.0	$	11.3
Selling, general and administrative expenses (a)		(5.5)		53.9		(5.4)
Total	$	4.1	$	65.9	$	5.9

(a)

Pension service costs are allocated to operations as reflected in cost of sales above. Expected returns on pension assets and interest costs are reflected in “Selling, general and administrative expenses” in the Combined and Consolidated Statements of Earnings. Fiscal 2016 includes $59.5 million of charges reflecting Lamb Weston’s portion of the actuarial losses in excess of 10% of Conagra’s pension liability for Conagra sponsored plans.