Benefit Plans

Pension and other post-retirement plans

We sponsor U.S. and non-U.S. defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees.

In November 2017, our Board of Directors authorized the termination of the Pentair Salaried Plan (the “Salaried Plan”), a U.S. qualified pension plan, effective December 31, 2017. The Salaried Plan participants will not be adversely affected by the plan termination. Those participants whose plan benefits were not in pay status as of July 1, 2018 were given the opportunity to elect a lump sum (or monthly annuity) payment during a special election window. Payments of $171.9 million were made to participants who elected to receive a lump sum during this window. For all participants whose Salaried Plan benefits were not paid in lump sum, the Company will purchase an annuity for them with an annuity provider within 120 days after all required government approvals for the Salaried Plan termination have been received. The termination is expected to be completed in 2019.

At December 31, 2018, the projected benefit obligation of the Salaried Plan was $175.9 million and the plan assets were $153.7 million. Due to the changing nature of these assumptions, it is at least reasonably possible that changes in these assumptions will occur in the near term and, due to the uncertainties inherent in setting assumptions, that the effect of such changes could be material to the financial statements.

As described in Note 1, during the first quarter of 2018, the Company adopted ASU 2017-07. As a result, service costs are classified as employee compensation costs within Cost of goods sold and Selling, general and administrative expense within the Consolidated Statements of Operations and Comprehensive Income. All other components of net periodic benefit expense are classified within Other (income) expense for the periods presented.

The information herein relates to defined-benefit pension and other post-retirement plans of our continuing operations only.

Obligations and funded status

The following tables present reconciliations of plan benefit obligations, fair value of plan assets and the funded status of pension plans and other post-retirement plans as of and for the years ended December 31, 2018 and 2017:



	Pension plans						Other post-retirement plans
In millions	2018			2017			2018			2017
Change in benefit obligations
Benefit obligation beginning of year	$	473.8		$	423.8		$	17.5		$	18.9
Service cost	4.1			11.7			—			—
Interest cost	11.5			16.4			0.6			0.7
Actuarial loss (gain)	(23.6		)	41.4			(1.4		)	(0.1		)
Foreign currency translation	(0.2		)	0.6			—			—
Benefits paid	(187.7		)	(20.1		)	(1.8		)	(2.0		)
Benefit obligation end of year	$	277.9		$	473.8		$	14.9		$	17.5
Change in plan assets
Fair value of plan assets beginning of year	$	382.8		$	352.3		$	—		$	—
Actual return on plan assets	(21.4		)	42.4			—			—
Company contributions	7.1			6.3			1.8			2.0
Foreign currency translation	(0.1		)	1.9			—			—
Benefits paid	(187.7		)	(20.1		)	(1.8		)	(2.0		)
Fair value of plan assets end of year	$	180.7		$	382.8		$	—		$	—
Funded status
Benefit obligations in excess of the fair value of plan assets	$	(97.2	)	$	(91.0	)	$	(14.9	)	$	(17.5	)

Amounts recorded in the Consolidated Balance Sheets were as follows:



	Pension plans						Other post-retirement plans
In millions	2018			2017			2018			2017
Current liabilities	$	(28.3	)	$	(6.1	)	$	(1.7	)	$	(1.9	)
Non-current liabilities	(68.9		)	(84.9		)	(13.2		)	(15.6		)
Benefit obligations in excess of the fair value of plan assets	$	(97.2	)	$	(91.0	)	$	(14.9	)	$	(17.5	)

The accumulated benefit obligation for all defined benefit plans was $275.0 million and $470.4 million at December 31, 2018 and 2017, respectively.

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets as of December 31 was as follows:



	Projected benefit obligation exceeds the fair value of plan assets				Accumulated benefit obligation exceeds the fair value of plan assets
In millions	2018		2017		2018		2017
Projected benefit obligation	$	277.9	$	473.8	$	270.6	$	464.9
Fair value of plan assets	180.7		382.8		173.7		374.5
Accumulated benefit obligation	N/A		N/A		268.3		462.3

Components of net periodic benefit expense for our pension plans for the years ended December 31 were as follows:



In millions	2018			2017			2016
Service cost	$	4.1		$	11.7		$	12.8
Interest cost	11.5			16.4			16.5
Expected return on plan assets	(7.6		)	(11.6		)	(11.5		)
Net actuarial loss (gain)	5.2			8.4			(11.5		)
Net periodic benefit expense	$	13.2		$	24.9		$	6.3

Components of net periodic benefit expense for our other post-retirement plans for the years ended December 31 2018, 2017 and 2016, were not material.

Assumptions

The following table provides the weighted-average assumptions used to determine benefit obligations and net periodic benefit cost as they pertain to our pension and other post-retirement plans.



	Pension plans						Other post-retirement plans
	2018		2017		2016		2018		2017		2016
Benefit obligation assumptions⁽¹⁾
Discount rate	3.73	%	4.00	%	3.92	%	3.95	%	3.40	%	3.80	%
Rate of compensation increase	3.77	%	3.96	%	3.95	%	NA		NA		NA
Net periodic benefit expense assumptions
Discount rate	4.00	%	3.94	%	4.12	%	3.40	%	3.80	%	3.95	%
Expected long-term return on plan assets	4.17	%	4.05	%	4.19	%	NA		NA		NA
Rate of compensation increase	3.96	%	3.96	%	3.93	%	NA		NA		NA


⁽¹⁾	The benefit obligation for the Salaried Plan as of December 31, 2018 and 2017 were determined using assumptions reflecting the termination of the plan. As a result, the weighted-average assumptions for the pension plans reflected in the table above do not include the Salaried Plan.

Discount rates

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of bonds rated AA or higher available in the marketplace, adjusted to eliminate the effects of call provisions. There are no known or anticipated changes in our discount rate assumptions that will impact our pension expense in 2019.

Expected rates of return

The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader long-term market indices. Pension plan assets yielded returns of (5.60)%, 12.00% and 7.40% in 2018, 2017 and 2016, respectively. As a result of our de-risking strategy to reduce U.S. pension plan liability, we anticipate the expected rate of return on our funded pension plans will continue to be consistent with the discount rate utilized. Any difference in the expected rate and actual returns will be included with the actuarial gain or loss recorded in the fourth quarter when our plans are remeasured.

Healthcare cost trend rates

The assumed healthcare cost trend rates for other post-retirement plans as of December 31 were as follows:



	2018		2017
Healthcare cost trend rate assumed for following year	6.2	%	6.6	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.4	%	4.4	%
Year the cost trend rate reaches the ultimate trend rate	2038		2038

The assumed healthcare cost trend rates can have a significant effect on the amounts reported for healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rates would have the following effects as of and for the year ended December 31, 2018:



	One Percentage Point
In millions	Increase		Decrease
Increase (decrease) in annual service and interest cost	$	—	$	—
Increase (decrease) in other post-retirement benefit obligations	0.6		(0.5		)

Pension plans assets

Objective

The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested.

Asset allocation

Our actual overall asset allocation for our pension plans as compared to our investment policy goals as of December 31 was as follows:



	Actual				Target
	2018		2017		2018		2017
Fixed income	87	%	98	%	95	%	97	%
Alternative	5	%	2	%	5	%	3	%
Cash	8	%	—	%	—	%	—	%

Fair value measurement

The fair values of our pension plan assets and their respective levels in the fair value hierarchy as of December 31, 2018 and December 31, 2017 were as follows:



	December 31, 2018
In millions	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	—	$	12.0	$	—	$	12.0
Fixed income:
Corporate and non U.S. government	—		102.3		—		102.3
U.S. treasuries	—		18.7		—		18.7
Other	—		16.5		—		16.5
Other investments	—		—		9.3		9.3
Total investments at fair value	$	—	$	149.5	$	9.3	$	158.8
Investments measured at NAV							21.9
Total							$	180.7



	December 31, 2017
In millions	Level 1		Level 2		Level 3		Total
Fixed income:
Corporate and non U.S. government	$	—	$	262.8	$	—	$	262.8
U.S. treasuries	—		43.2		—		43.2
Mortgage-backed securities	—		3.3		—		3.3
Other	—		37.0		—		37.0
Other investments	—		—		9.4		9.4
Total investments at fair value	$	—	$	346.3	$	9.4	$	355.7
Investments measured at NAV							27.1
Total							$	382.8

Valuation methodologies used for investments measured at fair value were as follows:


•	Cash and cash equivalents: Cash consists of cash held in bank accounts and is considered a Level 1 investment. Cash equivalents consist of investments in commingled funds valued based on observable market data. Such investments were classified as Level 2.

•

Fixed income: Investments in corporate bonds, government securities, mortgages and asset backed securities were valued based upon quoted market prices for similar securities and other observable market data. Investments in commingled funds were generally valued at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments were classified as Level 2.

•

Other investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that were valued at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service were classified as Level 2. Investments in commingled funds that were valued based on unobservable inputs due to liquidation restrictions were classified as Level 3.

Activity for our Level 3 pension plan assets held during the years ended December 31, 2018 and 2017 was not material.

Cash flows

Contributions

Pension contributions from continuing operations totaled $7.1 million and $6.3 million in 2018 and 2017, respectively. We anticipate our 2019 pension contributions to be approximately $29.9 million, which includes the planned termination of the Salaried Plan. The changing nature of the termination assumptions used to value the Salaried Plan may cause 2019 pension contributions to be higher or lower than expected. The 2019 expected contributions will equal or exceed our minimum funding requirements.

Estimated future benefit payments

The following benefit payments, which reflect expected future service or payout from termination, as appropriate, are expected to be paid by the plans for the years ended December 31 as follows:



In millions	Pension Plans		Other post- retirement plans
2019	$	183.0	$	1.7
2020	7.2		1.6
2021	7.2		1.6
2022	7.3		1.5
2023	6.8		1.4
Thereafter	36.2		5.4

Savings plan

We have a 401(k) plan (the “401(k) plan”) with an employee share ownership (“ESOP”) bonus component, which covers certain union and all non-union U.S. employees who met certain age requirements. Under the 401(k) plan, eligible U.S. employees could voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who met certain eligibility and service requirements.

As of January 1, 2018, the 401(k) company match contribution was changed to a dollar-for-dollar (100%) matching contribution on up to 5% of employee eligible earnings, contributed as before-tax contributions. This change replaced the ESOP component discussed below and offers the same 5% total company match.

During 2017 and 2016, the 401(k) matching contribution was 100% of eligible employee contributions for the first 1% of eligible compensation and 50% of the next 5% of eligible compensation.

During 2018, 2017 and 2016, in addition to the matching contribution, all employees who met certain service requirements received a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.

Our combined expense for the 401(k) plan and the ESOP was $23.4 million, $27.9 million and $27.1 million in 2018, 2017 and 2016, respectively.

Other retirement compensation

Total other accrued retirement compensation, primarily related to deferred compensation and supplemental retirement plans, was $28.2 million and $29.6 million as of December 31, 2018 and 2017, respectively, and is included in Pension and other post-retirement compensation and benefits and Other non-current liabilities in the Consolidated Balance Sheets.