NOTE 16. PENSION BENEFITS

The Company sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 9,200 participants and beneficiaries, of which 1,800 are active employees. The Pension Plan is closed to new employees hired after January 1, 2006. The Pension Plan is generally non-contributory, but participation requires or required some employees to contribute 3% of pay, as defined, per year. Benefits for participants who are or were required to contribute to the Pension Plan are based on compensation during plan participation and the number of years of participation. Benefits for the vast majority of participants who are not required to contribute to the Pension Plan are based on years of service and final average pay, as defined. The Company funds the Pension Plan in accordance with the requirements of ERISA.

On May 12, 2016, the Company amended the Pension Plan to freeze benefit accruals, effective June 30, 2016, for substantially all of the participants under the plan. Accordingly, plan assets and liabilities were re-measured, resulting in balances in accumulated unrecognized pension loss and unamortized prior service credit prior to the freeze of $191.2 million and $0.3 million, respectively. In recognizing the curtailment, the Company recorded income of $0.3 million before income taxes in the second quarter of 2016 to immediately recognize the remaining unamortized prior service credit in the Pension Plan. The curtailment reduced the accumulated unrecognized pension loss by $23.3 million. The remaining accumulated unrecognized pension loss of $167.9 million as of the re-measurement date is being amortized over approximately 25 years, the remaining average estimated life expectancy of participants. Prior to the amendment, the accumulated unrecognized pension loss was being amortized over approximately 5 years, the remaining average service life of active participants.

NOTE 16. PENSION BENEFITS (Continued)

Changes in Fair Value of Plan Assets and Changes in Projected Benefit Obligation for the Pension Plan for the years ended December 31, 2016 and 2015 is presented below.



DOLLARS IN MILLIONS	2016			2015
Fair Value of Plan Assets at Beginning of Year	$	507.5		$	543.0
Actual Return on Plan Assets	29.9			(10.6		)
Employer Contributions	9.0			—
Benefits Paid	(25.5		)	(24.9		)
Fair Value of Plan Assets at End of Year	520.9			507.5
Projected Benefit Obligation at Beginning of Year	597.8			634.0
Service Cost	4.8			10.5
Interest Cost	20.1			25.7
Benefits Paid	(25.5		)	(24.9		)
Curtailment	(23.3		)	—
Actuarial Losses (Gains)	19.7			(47.5		)
Projected Benefit Obligation at End of Year	593.6			597.8
Funded Status—Plan Assets in Deficit of Projected Benefit Obligation	$	(72.7	)	$	(90.3	)
Unamortized Amount Reported in AOCI at End of Year:
Accumulated Actuarial Loss	$	(144.7	)	$	(152.2	)
Prior Service Credit	—			0.4
Unamortized Amount Reported in AOCI at End of Year	$	(144.7	)	$	(151.8	)
Accumulated Benefit Obligation at End of Year	$	593.5		$	573.9

The measurement dates of the assets and liabilities at end of year presented in the preceding table under the headings, “2016” and “2015” were December 31, 2016 and December 31, 2015, respectively.

The weighted-average discount rate and rate of increase in future compensation levels used to estimate the components of the Projected Benefit Obligation for the Pension Plan at December 31, 2016 and 2015 were:

Weighted-average asset allocations for the Pension Plan at December 31, 2016 and 2015 by asset category were:



ASSET CATEGORY	2016		2015
Cash and Short-term Investments	2	%	4	%
Corporate Bonds and Notes	31		28
Common and Preferred Stocks	48		43
Exchange Traded Funds	1		9
Other Assets	18		16
Total	100	%	100	%

The investment objective of the Pension Plan is to produce current income and long-term capital growth through a combination of equity and fixed income investments which, together with appropriate employer contributions and any required employee contributions, is adequate to provide for the payment of the benefit obligations of the Pension Plan. The assets of the Pension Plan may be invested in fixed income and equity investments or any other investment vehicle or financial instrument deemed appropriate. Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-cap, mid-cap and small-cap stocks, and may also include investments in investment companies, collective investment funds and Kemper common stock (subject to Section 407 and other requirements of ERISA). The Pension Plan has not invested in Kemper common stock.

NOTE 16. PENSION BENEFITS (Continued)

The trust investment committee for the Pension Plan, along with its third party fiduciary advisor, periodically reviews the performance of the Pension Plan’s investments and asset allocation. Several external investment managers, one of which is Fayez Sarofim & Co. (see Note 24, “Related Parties,” to the Consolidated Financial Statements), manage the equity investments of the trust for the Pension Plan. Each manager is allowed to exercise investment discretion, subject to limitations, if any, established by the trust investment committee for the Pension Plan. All other investment decisions are made by the Company, subject to general guidelines as set by the trust investment committee for the Pension Plan.

The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Company’s expectations of future returns, with consideration to historical returns, for the Pension Plan’s investments, based on target allocations of the Pension Plan’s investments.

Fair value measurements for the Pension Plan’s assets at December 31, 2016 are summarized below.



DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measured at Net Asset Value		Fair Value
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	21.2	$	8.6	$	—	$	—	$	29.8
States and Political Subdivisions	—		3.1		—		—		3.1
Corporate Bonds and Notes	—		126.4		—		—		126.4
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate	—		6.2		—		—		6.2
Common Stocks:
Manufacturing	77.5		16.0		—		—		93.5
Other Industries	88.1		—		—		—		88.1
Other Equity Interests:
Collective Investment Funds	—		—		—		60.7		60.7
Exchange Traded Funds	6.0		—		—		—		6.0
Limited Liability Companies and Limited Partnerships	—		—		—		93.5		93.5
Short-term Investments	11.8		—		—		—		11.8
Receivables and Other	1.4		—		0.4		—		1.8
Total	$	206.0	$	160.3	$	0.4	$	154.2	$	520.9

NOTE 16. PENSION BENEFITS (Continued)

Fair value measurements for the Pension Plan’s assets at December 31, 2015 are summarized below.



DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measured at Net Asset Value		Fair Value
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	19.2	$	—	$	—	—		$	19.2
States and Political Subdivisions	—		3.2		—		—		3.2
Corporate Bonds and Notes	—		122.2		—		—		122.2
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate	—		6.1		—		—		6.1
Common Stocks:
Manufacturing	77.9		16.2		—		—		94.1
Other Industries	82.5		1.8		—		—		84.3
Other Equity Interests:
Collective Investment Funds	—		—		—		31.1		31.1
Exchange Traded Funds	47.2		—		—		—		47.2
Limited Liability Companies and Limited Partnerships	—		—		—		78.2		78.2
Short-term Investments	20.4		—		—		—		20.4
Receivables and Other	1.1		—		0.4		—		1.5
Total	$	248.3	$	149.5	$	0.4	$	109.3	$	507.5

Additional information pertaining to the changes in the fair value of the Pension Plan’s assets classified as Level 3 in the two preceding tables for the years ended December 31, 2016 and 2015 is presented below.



DOLLARS IN MILLIONS	2016		2015
Balance at Beginning of Year	$	0.4	$	0.4
Return on Plan Assets Held	—		—
Purchases, Sales and Settlements, Net	—		—
Transfers out of Level 3	—		—
Balance at End of Year	$	0.4	$	0.4

The components of Comprehensive Pension Expense (Income) for the Pension Plan for the years ended December 31, 2016, 2015 and 2014 were:



DOLLARS IN MILLIONS	2016			2015			2014
Service Cost Earned During the Year	$	4.8		$	10.5		$	8.7
Interest Cost on Projected Benefit Obligation	20.1			25.7			24.8
Expected Return on Plan Assets	(32.7		)	(35.0		)	(34.9		)
Amortization of Actuarial Loss	6.6			24.4			9.7
Curtailment Gain	(0.3		)	—			—
Pension Expense (Income) Recognized in Consolidated Statements of Income	(1.5		)	25.6			8.3
Unrecognized Pension Loss (Gain) Arising During the Year	(0.7		)	(1.9		)	102.0
Prior Service Credit Arising During the Year	—			—			(0.6		)
Amortization of Accumulated Unrecognized Pension Loss	(6.3		)	(24.4		)	(9.7		)
Comprehensive Pension Expense (Income)	$	(8.5	)	$	(0.7	)	$	100.0

NOTE 16. PENSION BENEFITS (Continued)

The actuarial loss included in AOCI at December 31, 2016 is being amortized over approximately 24 years, the remaining average estimated life expectancy of participants. The Company estimates that Pension Expense for the Pension Plan for the year ended December 31, 2017 will include expense of $2.5 million resulting from the amortization of the related accumulated actuarial loss included in AOCI at December 31, 2016.

Effective January 1, 2016, the Company changed its method for estimating the interest and service cost components of expense recognized for its pension and other postretirement employee benefit plans. As a result, the Company elected to use a full yield curve approach to estimate these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. See Note 2, “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements for further discussion of the change. The weighted-average discount rate, service cost discount rate, interest cost discount rate, rate of increase in future compensation levels and expected long-term rate of return on plan assets used to develop the components of Pension Expense for the Pension Plan for the periods presented below were:



					Years Ended December 31,
	5/13/16 to 12/31/16		1/1/16 to 5/12/16		2015		2014
Weighted-average Discount Rate	3.94	%	4.47	%	4.10	%	4.90	%
Service Cost Discount Rate	4.22		4.78		—		—
Interest Cost Discount Rate	3.18		3.69		—		—
Rate of Increase in Future Compensation Levels	3.15		3.15		3.31		3.05
Expected Long Term Rate of Return on Plan Assets	6.25		6.25		6.75		7.00

On August 12, 2016, the Company made a voluntary cash contribution of $9.0 million to the Pension Plan. The Company did not contribute to the Pension Plan in 2015 or 2014. The Company does not expect that it will be required to contribute to the Pension Plan in 2017, but could make a voluntary contribution pursuant to the maximum funding limits under ERISA.

The following benefit payments (net of participant contributions), which consider expected future service of certain participants that remain eligible for a benefit accrual, as appropriate, are expected to be paid from the Pension Plan:



DOLLARS IN MILLIONS	Years Ending December 31,
DOLLARS IN MILLIONS	2017		2018		2019		2020		2021		2022-2026
Estimated Pension Benefit Payments	$	27.6	$	28.8	$	29.9	$	30.9	$	31.9	$	170.0

The Company also sponsors a non-qualified supplemental defined benefit pension plan (the “Supplemental Plan”). As a result of the amendment to the Pension Plan, benefit accruals for all participants in the Supplemental Plan were also frozen effective June 30, 2016. Accordingly, plan liabilities for the Supplemental Plan were also re-measured in the second quarter of 2016, resulting in balances in accumulated unrecognized pension loss and unamortized prior service costs prior to the freeze of $1.6 million and $1.3 million, respectively. The Company recorded expense of $1.3 million in the second quarter of 2016 to immediately recognize the remaining net unamortized prior service costs in the Supplemental Plan. The curtailment reduced the Projected Benefit Obligation by $5.2 million at the re-measurement date. Accordingly, a curtailment gain of $3.6 million before tax was recorded to recognize the reduction in the Projected Benefit Obligation that exceeded the accumulated unrecognized pension loss prior to the freeze.

The unfunded liability related to the Supplemental Plan was $25.4 million and $30.4 million at December 31, 2016 and 2015, respectively. Pension income for the Supplemental Plan was $1.0 million for the year ended December 31, 2016, compared to pension expense of $2.1 million and $1.8 million for the years ended December 31, 2015, and 2014, respectively. An actuarial gain of $4.8 million before taxes, an actuarial gain of $1.5 million before taxes and an actuarial loss of $7.0 million before taxes are included in Other Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014, respectively.

The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $8.4 million, $7.8 million and $7.3 million in 2016, 2015 and 2014, respectively.

Discount Rate

Rate of Increase in Future Compensation Levels