PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

We have noncontributory union, non-union and combined retiree defined benefit pension plans covering eligible employees. The combined retiree defined benefit pension plan was created in 2016, to include all union and non-union retirees from the existing plans as of January 1, 2016. The plans provide defined benefits based on years of service and final average pay. We contributed $15.0 million in cash to the plans in 2018 ($1.7 million in 2017; $6.3 million in 2016). We contributed no shares of ALLETE common stock to the plans in 2018 (0.2 million shares, which had an aggregate value of $13.5 million in 2017; none in 2016). We also have a defined contribution RSOP covering substantially all employees. The 2018 plan year employer contributions, which are made through the employee stock ownership plan portion of the RSOP, totaled $11.4 million ($11.0 million for the 2017 plan year; $9.2 million for the 2016 plan year). (See Note 12. Common Stock and Earnings Per Share and Note 16. Employee Stock and Incentive Plans.)

The non-union defined benefit pension plan was frozen in 2018, and does not allow further crediting of service or earnings to the plan. Further, it is closed to new participants. The Minnesota Power union defined benefit pension plan is also closed to new participants.

We have postretirement health care and life insurance plans covering eligible employees. In 2010, the postretirement health care plan was closed to employees hired after January 31, 2011, and the eligibility requirements were amended. In 2014, the postretirement life plan was amended to close the plan to non-union employees retiring after December 31, 2015, and in 2018, the postretirement life plan was amended to limit the benefit level for union employees retiring after December 31, 2018. The postretirement health and life plans are contributory with participant contributions adjusted annually. Postretirement health and life benefits are funded through a combination of Voluntary Employee Benefit Association trusts (VEBAs), established under section 501(c)(9) of the Internal Revenue Code, and irrevocable grantor trusts. In 2018, no contributions were made to the VEBAs (none in 2017; none in 2016) and no contributions were made to the grantor trusts (none in 2017; none in 2016).

Management considers various factors when making funding decisions such as regulatory requirements, actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the pension plans. Contributions are based on estimates and assumptions which are subject to change. On January 15, 2019, we contributed $10.4 million in cash to the defined benefit pension plans. We do not expect to make any additional contributions to the defined benefit pension plans in 2019, and we do not expect to make any contributions to the defined benefit postretirement health and life plans in 2019.

Accounting for defined benefit pension and other postretirement benefit plans requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost.

The defined benefit pension and postretirement health and life benefit expense (credit) recognized annually by our regulated utilities are expected to be recovered (refunded) through rates filed with our regulatory jurisdictions. As a result, these amounts that are required to otherwise be recognized in accumulated other comprehensive income have been recognized as a long-term regulatory asset (regulatory liability) on the Consolidated Balance Sheet, in accordance with the accounting standards for the effect of certain types of regulation applicable to our Regulated Operations. The defined benefit pension and postretirement health and life benefit expense (credits) associated with our other operations are recognized in accumulated other comprehensive income.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)



Pension Obligation and Funded Status
As of December 31	2018			2017
Millions
Accumulated Benefit Obligation		$713.7			$745.4
Change in Benefit Obligation
Obligation, Beginning of Year		$793.2			$743.3
Service Cost	11.0			10.2
Interest Cost	29.6			32.5
Plan Amendments	(1.5		)	—
Plan Curtailments	(6.9		)	—
Actuarial (Gain) Loss	(53.0		)	44.8
Benefits Paid	(49.5		)	(51.0		)
Participant Contributions	24.1			13.4
Obligation, End of Year		$747.0			$793.2
Change in Plan Assets
Fair Value, Beginning of Year		$628.2			$557.5
Actual Return on Plan Assets	(21.2		)	91.6
Employer Contribution (a)	40.5			30.1
Benefits Paid	(49.5		)	(51.0		)
Fair Value, End of Year		$598.0			$628.2
Funded Status, End of Year	$(149.0)			$(165.0)

Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of:
Current Liabilities	$(1.6)			$(1.4)
Non-Current Liabilities	$(147.4)			$(163.6)


(a)	Includes Participant Contributions noted above.

The pension costs that are reported as a component within the Consolidated Balance Sheet, reflected in long-term regulatory assets or liabilities and accumulated other comprehensive income, consist of a net loss of $230.5 million and prior service cost of $1.4 million as of December 31, 2018 (net loss of $236.2 million as of December 31, 2017).



Reconciliation of Net Pension Amounts Recognized in Consolidated Balance Sheet
As of December 31	2018	2017
Millions
Net Loss	$(230.5)	$(236.2)
Prior Service Cost	1.4	—
Accumulated Contributions in Excess of Net Periodic Benefit Cost (Prepaid Pension Asset)	80.1	71.2
Total Net Pension Amounts Recognized in Consolidated Balance Sheet	$(149.0)	$(165.0)

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)



Components of Net Periodic Pension Cost
Year Ended December 31	2018			2017			2016
Millions
Service Cost		$11.0			$10.2			$8.1
Non-Service Cost Components (a)
Interest Cost	29.6			32.5			33.2
Expected Return on Plan Assets	(44.4		)	(42.4		)	(43.6		)
Amortization of Loss	11.4			9.9			9.5
Amortization of Prior Service Cost	(0.1		)	—			—
Net Pension Cost		$7.5			$10.2			$7.2


(a)	These components of net periodic pension cost are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.



Other Changes in Pension Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities
Year Ended December 31	2018		2017
Millions
Net (Gain) Loss	$5.8		$(4.3)
Amortization of Prior Service Cost	0.1		—
Prior Service Cost Arising During the Period	(1.6	)	—
Amortization of Loss	(11.4	)	(9.9	)
Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities	$(7.1)		$(14.2)



Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets
As of December 31	2018		2017
Millions
Projected Benefit Obligation		$747.0		$793.2
Accumulated Benefit Obligation		$713.7		$745.4
Fair Value of Plan Assets		$598.0		$628.2

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)



Postretirement Health and Life Obligation and Funded Status
As of December 31	2018			2017
Millions
Change in Benefit Obligation
Obligation, Beginning of Year		$190.1			$173.4
Service Cost	4.7			4.4
Interest Cost	7.1			7.7
Actuarial (Gain) Loss	(15.8		)	15.5
Benefits Paid	(11.6		)	(12.2		)
Participant Contributions	3.6			3.1
Plan Amendments	(2.1		)	(1.8		)
Obligation, End of Year		$176.0			$190.1
Change in Plan Assets
Fair Value, Beginning of Year		$171.0			$154.3
Actual Return on Plan Assets	(9.6		)	24.5
Employer Contribution	1.0			1.3
Participant Contributions	3.6			3.1
Benefits Paid	(11.7		)	(12.2		)
Fair Value, End of Year		$154.3			$171.0
Funded Status, End of Year	$(21.7)			$(19.1)

Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet Consist of:
Non-Current Assets	$0.4			$3.0
Current Liabilities	$(1.0)			$(1.1)
Non-Current Liabilities	$(21.1)			$(21.0)

According to the accounting standards for retirement benefits, only assets in the VEBAs are treated as plan assets in the preceding table for the purpose of determining funded status. In addition to the postretirement health and life assets reported in the previous table, we had $18.3 million in irrevocable grantor trusts included in Other Investments on the Consolidated Balance Sheet as of December 31, 2018 ($19.2 million as of December 31, 2017).

The postretirement health and life costs that are reported as a component within the Consolidated Balance Sheet, reflected in regulatory long-term assets or liabilities and accumulated other comprehensive income, consist of the following:



Unrecognized Postretirement Health and Life Costs
As of December 31	2018		2017
Millions
Net Loss	$25.0		$21.1
Prior Service Credit	(4.6	)	(4.6	)
Total Unrecognized Postretirement Health and Life Cost	$20.4		$16.5



Reconciliation of Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet
As of December 31	2018		2017
Millions
Net Loss (a)	$(25.0)		$(21.1)
Prior Service Credit	4.6		4.6
Accumulated Net Periodic Benefit Cost in Excess of Contributions (a)	(1.3	)	(2.6	)
Total Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet	$(21.7)		$(19.1)


(a)	Excludes gains, losses and contributions associated with irrevocable grantor trusts.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)



Components of Net Periodic Postretirement Health and Life Cost
Year Ended December 31	2018			2017			2016
Millions
Service Cost		$4.7			$4.4			$3.9
Non-Service Cost Components (a)
Interest Cost	7.1			7.7			7.4
Expected Return on Plan Assets	(10.9		)	(10.5		)	(11.2		)
Amortization of Loss	0.8			0.3			0.2
Amortization of Prior Service Credit	(2.1		)	(2.0		)	(2.9		)
Net Postretirement Health and Life Credit	$(0.4)			$(0.1)			$(2.6)


(a)	These components of net periodic postretirement health and life cost are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.



Other Changes in Postretirement Benefit Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities
Year Ended December 31	2018			2017
Millions
Net Loss		$4.7			$1.6
Prior Service Credit Arising During the Period	(2.1		)	(1.8		)
Amortization of Prior Service Credit	2.1			2.0
Amortization of Loss	(0.8		)	(0.3		)
Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities	$3.9			$1.5



Estimated Future Benefit Payments	Pension		Postretirement Health and Life
Millions
2019		$47.9		$9.7
2020		$47.4		$9.7
2021		$47.3		$9.8
2022		$47.1		$9.8
2023		$47.0		$9.7
Years 2024 – 2028		$231.1		$51.1

The pension and postretirement health and life costs recorded in regulatory long-term assets or liabilities and accumulated other comprehensive income expected to be recognized as a component of net pension and postretirement benefit costs for the year ending December 31, 2019, are as follows:



	Pension		Postretirement Health and Life
Millions
Net Loss	$7.3		$0.4
Prior Service Credit	(0.2	)	(1.7	)
Total Pension and Postretirement Health and Life Cost (Credit)	$7.1		$(1.3)

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)



Assumptions Used to Determine Benefit Obligation
As of December 31	2018	2017
Discount Rate
Pension	4.39 - 4.53%	3.81 - 3.96%
Postretirement Health and Life	4.47%	3.86%
Rate of Compensation Increase	3.70 - 4.10%	3.70 - 4.10%
Health Care Trend Rates
Trend Rate	5.00 - 6.46%	5.00 - 6.73%
Ultimate Trend Rate	4.50%	4.50%
Year Ultimate Trend Rate Effective	2038	2038



Assumptions Used to Determine Net Periodic Benefit Costs
Year Ended December 31	2018	2017	2016
Discount Rate	3.81 - 3.96%	4.53 - 4.57%	4.72 - 4.73%
Expected Long-Term Return on Plan Assets
Pension	7.50%	7.50%	8.00%
Postretirement Health and Life	6.00 - 7.50%	6.00 - 7.50%	6.40 - 8.00%
Rate of Compensation Increase	3.70 - 4.10%	3.70 - 4.30%	3.70 - 4.30%

In establishing the expected long-term rate of return on plan assets, we determine the long-term historical performance of each asset class, adjust these for current economic conditions, and utilizing the target allocation of our plan assets, forecast the expected long-term rate of return.

The discount rate is computed using a bond matching study which utilizes a portfolio of high quality bonds that produce cash flows similar to the projected costs of our pension and other postretirement plans.

The Company utilizes actuarial assumptions about mortality to calculate the pension and postretirement health and life benefit obligations. The mortality assumptions used to calculate our pension and other postretirement benefit obligations as of December 31, 2018, considered a modified RP-2014 mortality table and mortality projection scale.



Sensitivity of a One Percent Change in Health Care Trend Rates
	One Percent Increase		One Percent Decrease
Millions
Effect on Total of Postretirement Health and Life Service and Interest Cost		$2.0	$(1.6)
Effect on Postretirement Health and Life Obligation		$20.7	$(17.2)



Actual Plan Asset Allocations	Pension				Postretirement Health and Life (a)
	2018		2017		2018		2017
Equity Securities	32	%	53	%	62	%	64	%
Fixed Income Securities	60	%	38	%	34	%	31	%
Private Equity	5	%	5	%	4	%	5	%
Real Estate	3	%	4	%	—		—
	100	%	100	%	100	%	100	%


(a)	Includes VEBAs and irrevocable grantor trusts.

There were no shares of ALLETE common stock included in pension plan equity securities as of December 31, 2018 (no shares as of December 31, 2017).

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)

The defined benefit pension plans have adopted a dynamic asset allocation strategy (glide path) that increases the invested allocation to fixed income assets as the funding level of the plan increases to better match the sensitivity of the plan’s assets and liabilities to changes in interest rates. This is expected to reduce the volatility of reported pension plan expenses. The postretirement health and life plans’ assets are diversified to achieve strong returns within managed risk. Equity securities are diversified among domestic companies with large, mid and small market capitalizations, as well as investments in international companies. The majority of debt securities are made up of investment grade bonds.

Following are the current targeted allocations as of December 31, 2018:



Plan Asset Target Allocations	Pension		Postretirement Health and Life (a)
Equity Securities	32	%	60	%
Fixed Income Securities	56	%	37	%
Private Equity	6	%	3	%
Real Estate	6	%	—
	100	%	100	%


(a)	Includes VEBAs and irrevocable grantor trusts.

Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). (See Note 9. Fair Value)

Pension Fair Value



	Fair Value as of December 31, 2018
Recurring Fair Value Measures	Level 1		Level 2		Level 3		Total
Millions
Assets:
Equity Securities:
U.S. Large-cap (a)	—			$59.1	—			$59.1
U.S. Mid-cap Growth (a)	—		28.1		—		28.1
U.S. Small-cap (a)	—		27.2		—		27.2
International	—		75.8		—		75.8
Fixed Income Securities	—		352.9		—		352.9
Cash and Cash Equivalents		$6.3	—		—		6.3
Private Equity Funds	—		—			$27.8	27.8
Real Estate	—		—		20.8		20.8
Total Fair Value of Assets		$6.3		$543.1		$48.6		$598.0


(a)	The underlying investments consist of actively-managed funds managed to achieve the returns of certain U.S. equity securities large‑cap, mid-cap and small-cap indexes.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)

Fair Value (Continued)



Recurring Fair Value Measures
Activity in Level 3	Private Equity Funds			Real Estate
Millions
Balance as of December 31, 2017		$33.2			$25.5
Actual Return on Plan Assets	2.8			0.7
Purchases, Sales, and Settlements – Net	(8.2		)	(5.4		)
Balance as of December 31, 2018		$27.8			$20.8



	Fair Value as of December 31, 2017
Recurring Fair Value Measures	Level 1		Level 2		Level 3		Total
Millions
Assets:
Equity Securities:
U.S. Large-cap (a)	—			$108.6	—			$108.6
U.S. Mid-cap Growth (a)	—		51.9		—		51.9
U.S. Small-cap (a)	—		51.5		—		51.5
International	—		122.3		—		122.3
Fixed Income Securities	—		222.8		—		222.8
Cash and Cash Equivalents		$12.4	—		—		12.4
Private Equity Funds	—		—			$33.2	33.2
Real Estate	—		—		25.5		25.5
Total Fair Value of Assets		$12.4		$557.1		$58.7		$628.2


(a)	The underlying investments consist of actively-managed funds managed to achieve the returns of certain U.S. equity securities large‑cap, mid-cap and small-cap indexes.



Recurring Fair Value Measures
Activity in Level 3	Private Equity Funds			Real Estate
Millions
Balance as of December 31, 2016		$40.6			$25.6
Actual Return on Plan Assets	7.1			1.7
Purchases, Sales, and Settlements – Net	(14.5		)	(1.8		)
Balance as of December 31, 2017		$33.2			$25.5

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)

Fair Value (Continued)

Postretirement Health and Life Fair Value



	Fair Value as of December 31, 2018
Recurring Fair Value Measures	Level 1		Level 2		Level 3		Total
Millions
Assets:
Equity Securities: (a)
U.S. Large-cap		$29.1	—		—			$29.1
U.S. Mid-cap Growth	21.2		—		—		21.2
U.S. Small-cap	12.9		—		—		12.9
International	30.4		—		—		30.4
Fixed Income Securities:
Mutual Funds	49.6		—		—		49.6
Debt Securities	—			$4.0	—		4.0
Cash and Cash Equivalents	0.6		—		—		0.6
Private Equity Funds	—		—			$6.5	6.5
Total Fair Value of Assets		$143.8		$4.0		$6.5		$154.3


(a)	The underlying investments consist of mutual funds (Level 1).



Recurring Fair Value Measures
Activity in Level 3	Private Equity Funds
Millions
Balance as of December 31, 2017		$8.2
Actual Return on Plan Assets	0.9
Purchases, Sales, and Settlements – Net	(2.6		)
Balance as of December 31, 2018		$6.5



	Fair Value as of December 31, 2017
Recurring Fair Value Measures	Level 1		Level 2		Level 3		Total
Millions
Assets:
Equity Securities: (a)
U.S. Large-cap		$32.1	—		—			$32.1
U.S. Mid-cap Growth	24.3		—		—		24.3
U.S. Small-cap	15.5		—		—		15.5
International	35.8		—		—		35.8
Fixed Income Securities:
Mutual Funds	49.8		—		—		49.8
Debt Securities	—			$4.5	—		4.5
Cash and Cash Equivalents	0.8		—		—		0.8
Private Equity Funds	—		—			$8.2	8.2
Total Fair Value of Assets		$158.3		$4.5		$8.2		$171.0


(a)	The underlying investments consist of mutual funds (Level 1).

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)

Fair Value (Continued)



Recurring Fair Value Measures
Activity in Level 3	Private Equity Funds
Millions
Balance as of December 31, 2016		$9.5
Actual Return on Plan Assets	2.6
Purchases, Sales, and Settlements – Net	(3.9		)
Balance as of December 31, 2017		$8.2

Accounting and disclosure requirements for the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) provide guidance for employers that sponsor postretirement health care plans that provide prescription drug benefits. We provide a fully insured postretirement health benefit, including a prescription drug benefit, which qualifies us for a federal subsidy under the Act. The federal subsidy is reflected in the premiums charged to us by the insurance company.