Note 12: Postretirement Plans

Snap-on provides health care benefits for certain retired U.S. employees. Employees retiring prior to 1989 were eligible for retiree medical coverage upon reaching early retirement age, with no retiree contributions required. Benefits are paid based on deductibles and percentages of covered expenses and take into consideration payments made by Medicare and other insurance coverage.

Since 1989, U.S. retirees have been eligible for comprehensive major medical plans. Benefits are paid based on deductibles and percentages of covered expenses, and plan provisions allow for benefit and coverage changes. Most retirees are required to pay the entire cost of the coverage, but Snap-on may elect to subsidize the cost of coverage under certain circumstances.

Snap-on has a Voluntary Employees Beneficiary Association (“VEBA”) trust for the funding of existing postretirement health care benefits for certain non-salaried retirees in the United States; all other retiree health care plans are unfunded.

The status of Snap-on’s U.S. postretirement health care plans as of 2015 and 2014 year end is as follows:


(Amounts in millions)	2015		2014
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year	$	62.0	$	61.5
Service cost		0.1		0.1
Interest cost		2.2		2.5
Plan participant contributions		0.9		1.2
Benefits paid		(5.4)		(6.0)
Actuarial loss (gain)		(4.2)		2.7

Benefit obligation at end of year	$	55.6	$	62.0


Change in plan assets:
Fair value of plan assets at beginning of year	$	14.7	$	15.0
Plan participant contributions		0.9		1.2
Employer contributions		3.5		3.6
Actual return on VEBA plan assets		–		0.9
Benefits paid		(5.4)		(6.0)

Fair value of plan assets at end of year	$	13.7	$	14.7

Unfunded status at end of year	$	(41.9)	$	(47.3)

Amounts recognized in the Consolidated Balance Sheets as of 2015 and 2014 year end are as follows:


(Amounts in millions)	2015		2014
Accrued benefits	$	(4.0)	$	(4.8)
Retiree health care benefits		(37.9)		(42.5)

Net liability	$	(41.9)	$	(47.3)

Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2015 and 2014 year end are as follows:


(Amounts in millions)	2015		2014
Net gain, net of tax of $2.9 million and $1.5 million, respectively	$	4.5	$	2.4

The components of net periodic benefit cost and changes recognized in OCI are as follows:


(Amounts in millions)	2015		2014		2013
Net periodic benefit cost:
Service cost	$	0.1	$	0.1	$	0.1
Interest cost		2.2		2.5		2.2
Expected return on plan assets		(1.0)		(1.1)		(1.1)
Amortization of unrecognized loss		0.3		–		–

Net periodic benefit cost	$	1.6	$	1.5	$	1.2

Changes in benefit obligations recognized in OCI, net of tax:
Net loss (gain)	$	(2.1)	$	1.8	$	(3.4)

Snap-on expects to recognize $0.4 million of prior unrecognized gains, included in Accumulated OCI on the accompanying 2015 Consolidated Balance Sheet, in net periodic benefit cost during 2016.

The weighted-average discount rate used to determine Snap-on’s postretirement health care expense is as follows:


	2015		2014		2013
Discount rate		3.6%		4.2%		3.2%

The weighted-average discount rate used to determine Snap-on’s accumulated benefit obligation is as follows:


	2015		2014
Discount rate		4.1%		3.6%

The methodology for selecting the year-end 2015 and 2014 weighted-average discount rate for the company’s domestic postretirement plans was to match the plans’ yearly projected cash flows for benefits and, starting in 2015, service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. As a practical expedient, Snap-on uses the calendar year end as the measurement date for its plans.

For 2016, the actuarial calculations assume a pre-65 health care cost trend rate of 5.9% and a post-65 health care cost trend rate of 6.8%, both decreasing gradually to 4.5% in 2038 and thereafter. As of 2015 year end, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by approximately $0.8 million and the aggregate of the service cost and interest cost components by less than $0.1 million. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $0.7 million and the aggregate of the service cost and interest rate components by less than $0.1 million.

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


(Amounts in millions)	Amount
Year:
2016	$	5.1
2017		5.3
2018		5.5
2019		5.7
2020		5.8
2021 –2025		26.1

The objective of the VEBA trust is to achieve net of expense returns that meet or exceed the 6.8% long-term, rate-of-return-on-assets assumption used for reporting purposes. Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow.

The basis for determining the overall expected long-term, rate-of-return-on-assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums are then adjusted based on current relative valuation levels and macro-economic conditions.

Snap-on’s VEBA plan target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2015 and 2014 year end are as follows:


	Target		2015		2014
Asset category:
Debt securities and cash and cash equivalents		46%		44%		45%
Equity securities		29%		27%		29%
Hedge funds		25%		29%		26%

Total		100%		100%		100%

Fair value of plan assets (Amounts in millions)			$	13.7	$	14.7

The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (Level 1) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs. Fair value measurements primarily based on observable market information are given a Level 2 priority.

Debt securities are valued at quoted per share or unit market prices for which an official close or last trade pricing on an active exchange is available and are categorized as Level 1 in the fair value hierarchy. Equity securities are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, as reported by the fund managers. The share or unit price is quoted on a private market and is based on the value of the underlying investment, which is primarily based on observable inputs; such investments are categorized as Level 2 in the fair value hierarchy. Hedge funds, which have redemption restrictions, are stated at estimated fair value (based on the estimated fair market value of the underlying investments) as reported by the fund managers and are classified as Level 3 in the fair value hierarchy. The company regularly reviews fund performance directly with its investment advisor and the fund managers, and performs qualitative analysis to corroborate the reasonableness of the reported NAVs. For Level 3 funds for which the company did not receive a year-end NAV, the company recorded an estimate of the change in fair value for the latest period based on return estimates and other fund activity obtained from the fund managers.

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA assets as of 2015 year end:


(Amounts in millions)	Quoted Prices for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Asset category:		(Level 1)		(Level 2)		(Level 3)		Total
Cash and cash equivalents	$	0.1	$	–	$	–	$	0.1
Debt securities		6.0		–		–		6.0
Equity securities		–		3.7		–		3.7
Hedge funds		–		–		3.9		3.9

Total	$	6.1	$	3.7	$	3.9	$	13.7

There were no changes in the fair value of VEBA plan assets with Level 3 inputs during 2015; the hedge funds balance was $3.9 million as of both 2015 and 2014 year end.

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA assets as of 2014 year end:


(Amounts in millions)	Quoted Prices for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Asset category:		(Level 1)		(Level 2)		(Level 3)		Total
Cash and cash equivalents	$	0.1	$	–	$	–	$	0.1
Debt securities		6.5		–		–		6.5
Equity securities		–		4.2		–		4.2
Hedge funds		–		–		3.9		3.9

Total	$	6.6	$	4.2	$	3.9	$	14.7

The following is a summary of the 2014 changes in fair value of the VEBA plan assets with Level 3 inputs:


(Amounts in millions)	Hedge Funds
Balance as of 2013 year end	$	3.6
Unrealized gains attributable to assets held		0.3

Balance as of 2014 year end	$	3.9