(10) EMPLOYEE BENEFIT PLANS

Sevcon has defined contribution plans covering the majority of its U.S. and U.K. employees in the controls business. There is also a small defined contribution plan covering senior managers in the capacitor business. The Company has frozen U.K. and U.S. defined benefit plans for which no future benefits are being earned by employees. The Company uses a September 30 measurement date for its defined benefit pension plans.

The Company’s French subsidiary, Sevcon S.A.S., has a liability to pay its employees a service and salary based award when they reach retirement age and leave the Company’s employment. This liability, which is unfunded, is recognized in accrued expenses and was $198,000 and $163,000 at September 30, 2016 and 2015, respectively. The obligation to pay this award is a French legal requirement and is only payable if the employee is employed by the Company when they retire; if they leave the Company prior to that time the award is no longer payable.

The Company’s Italian subsidiary, Bassi S.r.l., has a liability to pay its employees a severance indemnity, ‘Trattamento di fine Rapporto’ (“TFR”) when they leave the Company’s employment. TFR, which is mandatory for Italian companies, is deferred compensation and is based on the employees’ years of service and the compensation earned by the employee during the service period. The related liability is recognized in the consolidated balance sheet within “Other long-term liabilities”. This liability, which is unfunded, was $987,000 at September 30, 2016.

The following table sets forth the estimated funded status of these frozen defined benefit plans and the amounts recognized by Sevcon:

(in thousands of dollars)
	2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	31,090		$	30,646
Interest cost		1,141			1,236
Actuarial loss		8,267			1,540
Benefits paid		(2,404	)		(437	)
Foreign currency exchange rate changes		(4,304	)		(1,895	)
Benefit obligation at end of year		33,790			31,090
Change in plan assets:
Fair value of plan assets at beginning of year	$	20,127		$	21,117
Return on plan assets		6,660			22
Employer contributions		624			662
Benefits paid		(2,404	)		(437	)
Foreign currency exchange rate changes		(2,728	)		(1,237	)
Fair value of plan assets at end of year		22,279			20,127
Funded status		(11,511	)		(10,963	)
Liability for pension benefits recorded in the balance sheet	$	(11,511	)	$	(10,963	)

The funded status of the Company’s defined benefit pension plans decreased from a deficit of $10,963,000 at September 30, 2015 to a deficit of $11,511,000 at September 30, 2016. The increase in the deficit of $548,000 was due to several factors. There was a net actuarial loss in the Company’s U.K. defined benefit plan of $1.6 million due largely to the plan’s liabilities, being valued at a lower discount rate than the prior year caused by reduced yields on high quality corporate bonds; this increased the plan’s liabilities, although the increase was partially offset by higher than expected returns on the U.K. plan’s assets. The $1.6 million actuarial loss in the Company’s U.K. defined benefit plan was further offset by favorable foreign currency exchange gains of $1.4 million due to the stronger U.S. dollar compared to the British pound than in the prior year. In addition, lower discount rates used to value the Company’s U.S. plan resulted in an increase in the liability of $350,000.

Amounts recognized in the consolidated balance sheets consist of:

(in thousands of dollars)
	2016		2015
Non-current liabilities	$	11,511	$	10,963

Amounts recognized in other comprehensive loss consist of:

(in thousands of dollars)
	2016			2015
Actuarial loss, net of $354 tax benefit (2015:actuarial loss net of $644 tax benefit)	$	(1,420	)	$	(1,857	)

The Sevcon net periodic pension cost included the following components:

(in thousands of dollars)
	2016			2015
Components of net periodic benefit cost:
Interest cost	$	1,141		$	1,236
Expected return on plan assets		(1,104	)		(1,250	)
Settlement cost		529			-
Amortization of net actuarial loss		365			264
Net periodic benefit cost	$	931		$	250
Net cost of defined contribution plans	$	505		$	494

The weighted average assumptions used to determine plan obligations and net periodic benefit cost for the years ended September 30, 2016 and 2015 were as set out below:

	2016			2015
Plan obligations:
Discount rate		2.59	%		3.90	%
Net periodic benefit cost:
Discount rate		2.59	%		3.90	%
Expected long term return on plan assets		4.81	%		5.73	%

The assumptions regarding mortality tables and estimated retirement dates were as follows:

	2016	2015

Retirement age – U.K. Plan	65	65

Retirement age – U.S. Plan	65	65

Post-retirement mortality tables – U.K. Plan	105% of the S1PXA birth year tables with the latest CMI projections (CMI 2015) and a 1.0% p.a. long-term future improvement rate	105% of the S1PXA birth year tables with the latest CMI projections and a 1.0% p.a. long-term future improvement rate

Post-retirement mortality tables – U.S. Plan	RP-2014 White Collar Annuitant with MP-2015 Generational Projection (M/F)	RP-2014 White Collar Annuitant with MP-2014 Generational Projection (M/F)

Pre-retirement mortality tables – U.K. Plan	None	None

Pre-retirement mortality tables – U.S. Plan	RP-2014 White Collar Employee with MP-2015 Generational Projection (M/F)	RP-2014 White Collar Employee with MP-2014 Generational Projection (M/F)

The changes in these assumptions reflect actuarial advice and changing market conditions and experience. There is no compensation increase assumed in 2016 and in future years as both the U.K. and the U.S. defined benefit pension plans have been frozen and therefore there will be no future benefits earned by employees under these benefit arrangements.

The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term strategic outlook of the investment markets. The investment markets outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes multiple investment managers to maximize the plan’s return while minimizing risk.

The assumed rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income and alternative investments. In determining the expected return on plan assets, the Company considers long-term rates of return on the asset classes (historically and forecasted) in which the Company expects the pension funds to be invested.

At September 30, 2016, the assets of the U.S. plan were invested 82% in mutual funds, 12% in exchanged traded funds and 6% in cash and cash equivalents. The U.S. plan had a deficit of $933,000, or 21% of the total U.S. benefit obligation, as of September 30, 2016. The Company has committed to future annual contributions to the defined benefit plan to pay down this deficit within the next five years. The Company established a 401(k) defined contribution plan for current and future U.S. employees effective October 1, 2010.

At September 30, 2016, the assets of the U.K. plan were invested 70% in equity-like securities, represented by the Adept Strategy 9 Fund in the table below, 28% in liability matching assets represented by the Schroder Matching Plus Fund in the table below and 2% in cash and cash equivalents. The U.K. plan was frozen effective September 30, 2012 and in consequence there will be no future accrual earned by U.K. employees under this defined benefit arrangement. The U.K. plan had a deficit of $10,578,000, or 36% of the total U.K. benefit obligation, as of September 30, 2016. The Company has committed to future annual contributions of $780,000 to the defined benefit plan to pay down this deficit within the next fourteen years. The Company has established a defined contribution pension plan for current and future U.K. employees effective October 1, 2012.

The overall expected long-term rate of return on plan assets has been based on the expected returns on equities, bonds and real estate based broadly on the current and proposed future asset allocation.

The tables below present information about our plan assets measured and recorded at fair value as of September 30, 2016 and September 30, 2015, and indicates the fair value hierarchy of the inputs utilized by the Company to determine the fair values (see Fair value measurements in Note 1).

(in thousands of dollars)
2016	Level 1* (Quoted prices in active markets)		Level 2** (Significant observable inputs)		Level 3*** (Unobservable inputs)
Adept Strategy 9 Fund (a sub-fund of Adept Investment Management plc)		-		13,268		-
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)		-		5,335		-
U.S. Mutual Funds and Fixed Income Funds		2,837		-		-
U.S. Equity Funds		400		-		-
Other Types of Investments
Cash		439		-		-
Total		3,676		18,603		-

(in thousands of dollars)
2015	Level 1* (Quoted prices in active markets)		Level 2** (Significant observable inputs)		Level 3*** (Unobservable inputs)
Adept Strategy 9 Fund ( a sub-fund of Adept Investment Management plc)		-		13,044		-
Schroder Matching Plus Nominal and Index Linked Liability Driven Investment Swap Funds (funds managed by Schroder Investment Management Limited)		-		3,845		-
U.S. Mutual Funds and Fixed Income Funds		2,557		-		-
U.S. Equity Funds		350		-		-
Other Types of Investments
Cash		331		-		-
Total		3,238		16,889		-

*	Level 1 investments represent mutual funds for which a quoted market price is available on an active market. These investments primarily hold stocks or bonds, or a combination of stocks and bonds.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The Company’s pension plan financial assets held in the Adept Strategy 9 Fund and the Schroder investments are Level 2 assets. The Company uses the Net Asset Value to determine the fair value of underlying investments which (a) do not have readily determinable fair value; and (b) prepare their financial statements consistent with the measurement principles of an investment company. The Funds are not exchange traded. The Funds are not subject to any redemption notice periods or restrictions and can be redeemed on a daily basis. No gates or holdbacks or dealing suspensions are being applied to the Funds. The Funds are of perpetual duration.

***	The Company currently does not have any Level 3 pension plan financial assets.

The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid:

(in thousands of dollars)
2017	$	470
2018		488
2019		494
2020		502
2021		499
2022 – 2026		2,722

In 2017, it is estimated that the Company will make contributions to the U.K. and U.S. defined benefit pension plans of $883,000. It is also estimated that the Company will recognize $369,000 as a component of the net periodic benefit cost in respect of the amortization of actuarial losses from accumulated other comprehensive loss in 2017. Actual payment obligations with respect to the pension plan liability are due over an extended period of time and will depend on changes in the assumptions described above.