Employee Benefits

The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below.

Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of various European subsidiaries retain benefits in local defined benefit plans, although those plans are closed to new participants and to future benefit accruals.

Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefit payments under the U.S. plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in other assets in the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2016 and 2015 amounted to $106.9 million and $106.1 million, respectively. Contributions of $8.5 million and $16.5 million were made to the “Rabbi” Trust in 2016 and 2015, respectively.

The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan, non-U.S. plans, and supplemental plan for 2016, 2015, and 2014. Prior service costs are being amortized on a straight-line basis over 11 years for the U.S. plan and 10 years for the supplemental plan.

TABLE 90: EMPLOYEE BENEFIT PLAN STATUS



	U.S. PLAN						NON-U.S. PLANS						SUPPLEMENTAL PLAN
($ In Millions)	2016			2015			2016			2015			2016			2015
Accumulated Benefit Obligation	$	953.2		$	903.4		$	158.3		$	156.5		$	108.9		$	102.1

Projected Benefit Obligation	1,062.7			1,006.5			155.9			156.5			121.1			113.9
Plan Assets at Fair Value	1,393.5			1,342.0			139.3			144.3			—			—

Funded Status at December 31	$	330.8		$	335.5		$	(16.6	)	$	(12.2	)	$	(121.1	)	$	(113.9	)
Weighted-Average Assumptions:
Discount Rates	4.46		%	4.71		%	2.39		%	3.39		%	4.46		%	4.71		%
Rate of Increase in Compensation Level	4.39			4.25			N/A			N/A			4.39			4.25
Expected Long-Term Rate of Return on Assets	6.75			7.00			3.22			3.73			N/A			N/A

TABLE 91: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME



	U.S. PLAN						NON-U.S. PLANS				SUPPLEMENTAL PLAN
(In Millions)	2016			2015			2016		2015		2016		2015
Net Actuarial Loss	$	378.1		$	381.0		$	55.8	$	51.6	$	67.4	$	66.1
Prior Service Cost	(2.3		)	(2.7		)	—		—		0.8		1.0

Gross Amount in Accumulated Other Comprehensive Income	375.8			378.3			55.8		51.6		68.2		67.1
Income Tax Effect	142.3			143.1			6.7		5.9		25.8		25.3

Net Amount in Accumulated Other Comprehensive Income	$	233.5		$	235.2		$	49.1	$	45.7	$	42.4	$	41.8

TABLE 92: NET PERIODIC PENSION EXPENSE



	U.S. PLAN									NON-U.S. PLANS									SUPPLEMENTAL PLAN
($ In Millions)	2016			2015			2014			2016			2015			2014			2016			2015			2014
Service Cost	$	37.4		$	37.8		$	32.7		$	—		$	—		$	—		$	3.5		$	3.6		$	3.1
Interest Cost	45.8			44.7			44.4			4.7			5.7			6.9			5.1			5.0			4.8
Expected Return on Plan Assets	(94.4		)	(96.5		)	(97.7		)	(4.6		)	(5.9		)	(7.0		)	N/A			N/A			N/A
Settlement Expense	—			—			—			3.7			—			—			—			—			—
Amortization:
Net Loss (Gain)	18.8			29.7			21.5			1.0			1.5			(1.6		)	5.8			7.3			5.8
Prior Service Cost	(0.4		)	(0.4		)	(0.4		)	—			—			—			0.2			0.2			0.5
Net Periodic Pension Expense (Benefit)	$	7.2		$	15.3		$	0.5		$	4.8		$	1.3		$	(1.7	)	$	14.6		$	16.1		$	14.2
Weighted-Average Assumptions:
Discount Rates	4.71		%	4.25		%	5.00		%	3.39		%	3.20		%	4.31		%	4.71		%	4.25		%	5.00		%
Rate of Increase in Compensation Level	4.25			4.25			4.25			N/A			N/A			N/A			4.25			4.25			4.25
Expected Long-Term Rate of Return on Assets	7.00			7.25			7.75			3.73			4.00			4.84			N/A			N/A			N/A

Pension expense for 2017 is expected to include approximately $25.9 million and $(0.3) million related to the amortization of net loss and prior service cost balances, respectively, from AOCI.

TABLE 93: CHANGE IN PROJECTED BENEFIT OBLIGATION



	U.S. PLAN						NON-U.S. PLANS						SUPPLEMENTAL PLAN
(In Millions)	2016			2015			2016			2015			2016			2015
Beginning Balance	$	1,006.5		$	1,091.5		$	156.5		$	184.6		$	113.9		$	123.0
Service Cost	37.4			37.8			—			—			3.5			3.6
Interest Cost	45.8			44.7			4.7			5.7			5.1			5.0
Actuarial (Gain) Loss	31.5			(93.7		)	26.0			(12.0		)	7.4			(8.1		)
Settlement	—			—			(7.3		)	—			—			—
Benefits Paid	(58.5		)	(73.8		)	(2.4		)	(9.4		)	(8.8		)	(9.6		)
Foreign Exchange Rate Changes	—			—			(21.6		)	(12.4		)	—			—

Ending Balance	$	1,062.7		$	1,006.5		$	155.9		$	156.5		$	121.1		$	113.9

TABLE 94: ESTIMATED FUTURE BENEFIT PAYMENTS



(In Millions)	U.S. PLAN		NON-U.S. PLANS		SUPPLEMENTAL PLAN
2017	$	69.0	$	2.1	$	9.0
2018	69.1		2.5		11.3
2019	69.8		2.2		12.6
2020	68.6		2.8		12.3
2021	69.0		3.0		11.9
2022-2026	344.4		19.3		56.2

TABLE 95: CHANGE IN PLAN ASSETS



	U.S. PLAN						NON-U.S. PLANS
(In Millions)	2016			2015			2016			2015
Fair Value of Assets at Beginning of Period	$	1,342.0		$	1,440.8		$	144.3		$	157.6
Actual Return on Assets	110.0			(25.0		)	21.9			1.3
Employer Contributions	—			—			4.3			4.6
Settlement	—			—			(7.3		)	—
Benefits Paid	(58.5		)	(73.8		)	(2.4		)	(9.4		)
Foreign Exchange Rate Changes	—			—			(21.5		)	(9.8		)

Fair Value of Assets at End of Period	$	1,393.5		$	1,342.0		$	139.3		$	144.3

The minimum required and maximum deductible contributions for the U.S. qualified plan in 2016 are estimated to be zero and $225.0 million, respectively.

A total return investment strategy approach is employed for Northern Trust’s U.S. pension plan whereby a mix of U.S. and non-U.S. equities, fixed income and alternative asset investments are used to maximize the long-term return of plan assets for a prudent level of risk. This is accomplished by diversifying the portfolio across various asset classes, with the goal of reducing volatility of return, and among various issuers of securities to reduce principal risk. Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the plan’s investment objectives. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The intent of this strategy is to minimize plan expenses by outperforming growth in plan liabilities over the long run.

The target allocation of plan assets since May 2014, by major asset category, is 20% U.S. equities, 15% non-U.S. equities, 45% long duration fixed income securities, and 20% alternative investments, split among private equity funds (5%), hedge funds (5%), real estate (5%) and global listed infrastructure (5%). Equity investments include common stocks that are listed on an exchange and investments in commingled funds that invest primarily in publicly traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and divided by investment style and market capitalization. Fixed income securities held include U.S. treasury securities and investments in commingled funds that invest in a diversified blend of longer duration fixed income securities. Alternative investments, including private equity, hedge funds, real estate, and global infrastructure, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the plan is prohibited. The plan’s private equity investments are limited to 20% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount. The plan holds two investments in a hedge fund of funds, which invests, either directly or indirectly, in a diversified portfolio of funds or other pooled investment vehicles.

Investment in real estate is designed to provide stable income returns and added diversification based upon the historical low correlation between real estate and equity or fixed income investments. The plan’s real estate assets consist of one collective index fund that invests in a diversified portfolio of global real estate investments, primarily equity securities.

Though not a primary strategy for meeting the plan’s objectives, derivatives may be used from time to time, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were no derivatives held by the plan at December 31, 2016 or 2015.

Investment risk is measured and monitored on an ongoing basis through quarterly liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Standards used to evaluate the plan’s investment manager performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and comparison against a relative benchmark. In addition, each manager of the investment funds held by the plan is ranked against a universe of peers and compared to a relative benchmark. Total plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon plan performance.

The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for the U.S. qualified plan assets measured at fair value.

Level 1 – Quoted, active market prices for identical assets or liabilities. The Plan’s Level 1 investments are comprised of a mutual fund and domestic common stocks. The Plan’s Level 1 investments that are exchange traded are valued at the closing price reported by the respective exchanges on the day of valuation.

Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. The Plan’s Level 2 assets are comprised of U.S. government obligations and collective trust funds. The investments in collective trust funds fair values are calculated on a scheduled basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number of fund shares currently issued and outstanding. Redemptions of the collective trust funds occur by contract at the respective fund’s redemption date NAV.

Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The Plan’s Level 3 assets are comprised of private equity and hedge funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value.

While Northern Trust believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material effect on the computation of the estimated fair values.

The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2016 and 2015.

TABLE 96: FAIR VALUE OF U.S. PENSION PLAN ASSETS



	December 31, 2016
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Domestic Common Stock	$	52.1	$	—	$	—	$	52.1
Foreign Common Stock	0.1		—		—		0.1
U.S. Government Obligations	—		134.6		—		134.6
Northern Trust Mutual Fund	70.7		—		—		70.7
Northern Trust Collective Trust Funds	—		1,029.9		—		1,029.9
Northern Trust Private Equity Funds	—		—		35.7		35.7
Northern Trust Hedge Funds	—		—		64.8		64.8
Cash and Other	5.6		—		—		5.6

Total Assets at Fair Value	128.5		1,164.5		100.5		1,393.5



	December 31, 2015
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		TOTAL
Domestic Common Stock	$	45.4	$	—	$	—	$	45.4
Foreign Common Stock	0.3		—		—		0.3
U.S. Government Obligations	—		135.7		—		135.7
Northern Trust Mutual Fund	64.3		—		—		64.3
Exchange Traded Fund	0.5		—		—		0.5
Northern Trust Collective Trust Funds	—		984.9		—		984.9
Northern Trust Private Equity Funds	—		—		47.5		47.5
Northern Trust Hedge Funds	—		—		63.4		63.4

Total Assets at Fair Value	110.5		1,120.6		110.9		1,342.0

The following table presents the changes in Level 3 assets for the years ended December 31, 2016 and 2015.

TABLE 97: CHANGE IN LEVEL 3 ASSETS



	PRIVATE EQUITY FUNDS						HEDGE FUNDS
(In Millions)	2016			2015			2016			2015
Fair Value at January 1	$	47.5		$	49.0		$	63.4		$	68.6
Actual Return on Plan Assets	(5.6		)	6.6			1.5			(0.2		)
Realized Gain	—			—			—			2.6
Purchases	2.0			2.4			—			10.0
Sales	(8.2		)	(10.5		)	(0.1		)	(17.6		)

Fair Value at December 31	$	35.7		$	47.5		$	64.8		$	63.4

Note: The return on plan assets represents the change in the unrealized gain (loss) on assets still held at December 31.

A building block approach is employed for Northern Trust’s U.S. pension plan in determining the long-term rate of return for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are studied using the widely accepted capital market principle that assets with higher volatility generate a greater return over the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate. Based on this approach and the plan’s target asset allocation, the expected long-term rate of return on assets as of the plan’s December 31, 2016, measurement date was set at 6.75%.

Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time.

The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, the net periodic postretirement benefit cost of the plan for 2016 and 2015, and the change in the accumulated postretirement benefit obligation during 2016 and 2015.

TABLE 98: POSTRETIREMENT HEALTH CARE PLAN STATUS



	DECEMBER 31,
(In Millions)	2016		2015
Accumulated Postretirement Benefit Obligation at Measurement Date:
Retirees and Dependents	$	26.4	$	24.9
Actives Eligible for Benefits	7.7		7.3

Net Postretirement Benefit Obligation	$	34.1	$	32.2

TABLE 99: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME



	DECEMBER 31,
(In Millions)	2016		2015
Net Actuarial Loss / (Gain)	$	0.3	$	(2.6	)
Prior Service Cost	—		—

Gross Amount in Accumulated Other Comprehensive Income	0.3		(2.6		)
Income Tax Effect	0.1		(1.0		)

Net Amount in Accumulated Other Comprehensive Income	$	0.2	$	(1.6	)

TABLE 100: NET PERIODIC POSTRETIREMENT (BENEFIT) EXPENSE



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2016		2015		2014
Service Cost	$	0.1	$	0.1	$	0.1
Interest Cost	1.5		1.4		1.5
Expected Return on Plan Assets	—		—		—
Amortization
Net Gain	—		—		(0.6		)
Prior Service Benefit	—		—		—

Net Periodic Postretirement Expense	$	1.6	$	1.5	$	1.0

TABLE 101: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION



	FOR THE YEAR ENDED DECEMBER 31,
(In Millions)	2016			2015
Beginning Balance	$	32.2		$	33.4
Service Cost	0.1			0.1
Interest Cost	1.5			1.4
Actuarial Loss / (Gain)	2.7			(0.2		)
Net Claims Paid	(2.4		)	(2.5		)
Medicare Subsidy	—			—

Ending Balance	$	34.1		$	32.2

Northern Trust uses the aggregate RP-2014 mortality table with adjustment from 2014 to 2006. Northern Trust reflects proposed future improvement under scale MP-2016, released by the Society of Actuaries in October 2016. This assumption was updated at December 31, 2016 from improvement scale MP-2015.

TABLE 102: ESTIMATED FUTURE BENEFIT PAYMENTS



(In Millions)	TOTAL POSTRETIREMENT MEDICAL BENEFITS
2017	$	2.6
2018	2.7
2019	2.7
2020	2.7
2021	2.6
2022-2026	11.8

Net periodic postretirement (benefit) expense for 2017 is not expected to include any amortization from AOCI of the net actuarial gain. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 4.46% at December 31, 2016, and 4.71% at December 31, 2015. For measurement purposes, a 7.0% annual increase in the cost of pre-age 65 medical and drug benefits and a 7.0% annual increase in the cost of post-age 65 medical and drug benefits were assumed for 2016. These rates are both assumed to gradually decrease until they reach 5.0% in 2026. The health care cost trend rate assumption has an effect on the amounts reported. For example, increasing or decreasing the assumed health care trend rate by one percentage point in each year would have the following effect.

TABLE 103: HEALTH CARE COST TREND RATE ASSUMPTION



(In Millions)	1–PERCENTAGE POINT INCREASE		1–PERCENTAGE POINT DECREASE
Effect on Postretirement Benefit Obligation	$	0.8	$	(0.7	)
Effect on Total Service and Interest Cost Components	—		—

Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering substantially all employees. The Corporation’s contribution to the U.S. plan and to certain European-based plans includes a matching component. The expense associated with defined contribution plans is charged to employee benefits and totaled $50.0 million in 2016, and $46.8 million in each of 2015 and 2014.