17. Employee Benefits

In accordance with the applicable accounting guidance for defined benefit and other postretirement plans, we measure plan assets and liabilities as of the end of the fiscal year.

Pension Plans

Effective December 31, 2009, we amended our cash balance pension plan and other defined benefit plans to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants’ existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions after freezing the plans. As part of the acquisition of First Niagara, Key also obtained two frozen defined benefit plans sponsored by First Niagara, both of which provide benefits based upon length of service and compensation levels. Effective September 30, 2016, the two First Niagara plans merged into another defined benefit plan maintained by Key to form the KeyCorp Consolidated Cash Balance Plan. Effective December 31, 2016, our original cash balance pension plan merged into the KeyCorp Consolidated Cash Balance Plan.

Pre-tax AOCI not yet recognized as net pension cost was $550 million at December 31, 2016, and $593 million at December 31, 2015, consisting entirely of net unrecognized losses. During 2017, we expect to recognize $17 million of net unrecognized losses in pre-tax AOCI as net pension cost.

During 2016, 2015, and 2014, lump sum payments made under certain pension plans triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement loss as reflected in the following table.

The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:



Year ended December 31, in millions	2016			2015			2014
Interest cost on PBO	$	44		$	41		$	46
Expected return on plan assets	(58		)	(56		)	(66		)
Amortization of losses	17			18			16
Settlement loss	18			23			23
Net pension cost	$	21		$	26		$	19

Other changes in plan assets and benefit obligations recognized in OCI:
Net (gain) loss	$	(9	)	$	47		$	97
Amortization of gains	(35		)	(41		)	(39		)
Total recognized in comprehensive income	$	(44	)	$	6		$	58

Total recognized in net pension cost and comprehensive income	$	(23	)	$	32		$	77

The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2016, and December 31, 2015.

The following table summarizes changes in the PBO related to our pension plans.



Year ended December 31, in millions	2016			2015
PBO at beginning of year	$	1,136		$	1,206
Interest cost	44			41
Actuarial losses (gains)	(25		)	(24		)
Benefit payments	(85		)	(87		)
Plan acquisitions	268			—
PBO at end of year	$	1,338		$	1,136

The following table summarizes changes in the FVA.



Year ended December 31, in millions	2016			2015
FVA at beginning of year	$	869		$	957
Actual return on plan assets	42			(15		)
Employer contributions	14			14
Benefit payments	(85		)	(87		)
Plan acquisitions	293			—
FVA at end of year	$	1,133		$	869

The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2016, and December 31, 2015.



December 31, in millions	2016			2015
Funded status ^(a)	$	(205	)	$	(267	)

Net prepaid pension cost recognized consists of:
Current liabilities	$	(16	)	$	(14	)
Noncurrent liabilities	(189		)	(253		)
Net prepaid pension cost recognized ^(b)	$	(205	)	$	(267	)


(a)	The shortage of the FVA under the PBO.


(b)	Represents the accrued benefit liability of the pension plans.

At December 31, 2016, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2017. We also do not expect to make any significant discretionary contributions during 2017.

At December 31, 2016, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2017 — $114 million; 2018— $108 million; 2019 — $114 million; 2020 — $95 million; 2021 — $91 million and $422 million in the aggregate from 2022 through 2026.

The ABO for all of our pension plans was $1.3 billion at December 31, 2016, and $1.1 billion at December 31, 2015. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:



December 31,
in millions	2016		2015
PBO	$	1,338	$	1,136
ABO	1,338		1,136
Fair value of plan assets	1,133		869

To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.



December 31,	2016		2015
Discount rate	3.75	%	3.75	%
Compensation increase rate	N/A		N/A

To determine net pension cost, we assumed the following weighted-average rates.



Year ended December 31,	2016		2015		2014
Discount rate	3.75	%	3.50	%	4.25	%
Compensation increase rate	N/A		N/A		N/A
Expected return on plan assets	6.00		6.25		7.25

We estimate that we will recognize $5 million in net pension benefit for 2017, compared to net pension cost of $21 million in 2016, and $26 million for 2015. A net pension benefit is expected in 2017 as compared to net pension cost in 2016 unless the 2017 lump sum payments made under our qualified cash balance pension plan are greater than the plan’s interest cost component of net pension cost for the year. If this situation occurs during 2017, in accordance with the applicable accounting guidance for defined benefit plans, we will recognize in earnings a portion of the aggregate gain or loss recorded in AOCI. Absent settlement losses, a net pension benefit is expected in 2017 as opposed to cost in 2016, primarily due to a reduction in the unfunded status of the plan as a result of plan mergers. Costs decreased from 2015 to 2016 due to a smaller settlement loss and increased discount rate. Costs increased from 2014 to 2015 due to a lower expected return on plan assets and a change to new mortality tables and mortality improvements that were finalized in October 2014.

We estimate that a 25 basis point increase or decrease in the expected return on plan assets would either decrease or increase, respectively, our net pension cost for 2017 by approximately $3 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2017 by approximately $1 million.

We determine the assumed discount rate based on the rate of return on a hypothetical portfolio of high quality corporate bonds with interest rates and maturities that provide the necessary cash flows to pay benefits when due.

We determine the expected return on plan assets using a calculated market-related value of plan assets that smoothes what might otherwise be significant year-to-year volatility in net pension cost. Changes in the value of plan assets are not recognized in the year they occur. Rather, they are combined with any other cumulative unrecognized asset- and obligation-related gains and losses and reflected evenly in the market-related value during the five years after they occur as long as the market-related value does not vary more than 10% from the plan’s FVA.

The expected return on plan assets is determined by considering a number of factors, the most significant of which are:


•	Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible, and other securities, and forecasted returns that are modeled under various economic scenarios.


•	Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 6% for 2016, 6.25% for 2015 and 7.25% for 2014. As part of an annual reassessment of current and expected future capital market returns, we deemed a rate of 6.00% to be appropriate in estimating 2017 pension cost.

The investment objectives of the pension fund are developed to reflect the characteristics of the plan, such as pension formulas, cash lump sum distribution features, and the liability profiles of the plan’s participants. An executive oversight committee reviews the plan’s investment performance at least quarterly, and compares performance against appropriate market indices. The pension fund’s investment objectives are to balance total return objectives with a continued management of plan liabilities, and to minimize the mismatch between assets and liabilities. These objectives are being implemented through liability driven investing and the adoption of a de-risking glide path. The following table shows the asset target allocations prescribed by the pension fund’s investment policies based on the plan’s funded status at December 31, 2016.



	Target Allocation
Asset Class	2016
Equity securities:
U.S.	20	%
International	16
Fixed income securities	40
Convertible securities	5
Real assets	13
Other assets	6
Total	100	%

Equity securities include common stocks of domestic and foreign companies, as well as foreign company stocks traded as American Depositary Shares on U.S. stock exchanges. Debt securities include investments in domestic- and foreign-issued corporate bonds, U.S. government and agency bonds, international government bonds, and mutual funds. Convertible securities include investments in convertible bonds. Real assets include an investment in a diversified real asset strategy separate account designed to provide exposure to the three core real assets: Treasury Inflation-Protected Securities, commodities, and real estate. Other assets include investments in a multi-strategy investment fund and a limited partnership.

Although the pension funds’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.

The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”

Equity securities. Equity securities traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 since quoted prices for identical securities in active markets are available.

Debt securities. Substantially all debt securities are investment grade and include domestic- and foreign-issued corporate bonds and U.S. government and agency bonds. These securities are valued using evaluated prices based on observable inputs, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves, and interest rate movements. Debt securities are classified as Level 2.

Mutual funds. Exchange-traded mutual funds listed or traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 because quoted prices for identical securities in active markets are available. All other investments in mutual funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.

Collective investment funds. Investments in collective investment funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these investments are classified as Level 2.

Insurance investment contracts and pooled separate accounts. Deposits under insurance investment contracts and pooled separate accounts with insurance companies do not have readily determinable fair values and are valued using a methodology that is consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.

Other assets. Other assets include an investment in a multi-strategy investment fund and an investment in a limited partnership. These investments do not have readily determinable fair values and are valued using a methodology consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.

The following tables show the fair values of our pension plan assets by asset class at December 31, 2016, and December 31, 2015.



December 31, 2016
in millions	Level 1		Level 2		Level 3	Total
ASSET CLASS
Cash and cash equivalents	$	14	—		—	$	14
Equity securities:
Common — U.S.	133		—		—	133
Common — International	15		—		—	15
Preferred — U.S.	2		—		—	2
Debt securities:
Corporate bonds — U.S.	—		$	90	—	90
Corporate bonds — International	—		26		—	26
Government and agency bonds — U.S.	—		101		—	101
Government bonds — International	—		1		—	1
State and municipal bonds	—		5		—	5
Mutual funds:
Equity — U.S.	118		—		—	118
Equity — International	35		—		—	35
Fixed income — U.S.	152		—		—	152
Fixed income — International	19		—		—	19
Real assets	9		—		—	9
Collective investment funds:
Equity — U.S.	—		15		—	15
Equity — International	—		97		—	97
Convertible securities	—		43		—	43
Fixed income securities	—		79		—	79
Short-term investments	—		18		—	18
Real assets	—		95		—	95
Insurance investment contracts and pooled separate accounts (measured at NAV) ^(a)	—		—		—	14
Other assets (measured at NAV) ^(a)	—		—		—	52
Total net assets at fair value	$	497	$	570	—	$	1,133


(a)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.



December 31, 2015
in millions	Level 1		Level 2		Level 3	Total
ASSET CLASS
Equity securities:
Common — U.S.	$	128	—		—	$	128
Common — International	20		—		—	20
Preferred — U.S.	2		—		—	2
Debt securities:
Corporate bonds — U.S.	—		$	97	—	97
Corporate bonds — International	—		26		—	26
Government and agency bonds — U.S.	—		95		—	95
Government bonds — International	—		1		—	1
State and municipal bonds	—		6		—	6
Mutual funds:
Equity — U.S.	16		—		—	16
Equity — International	24		—		—	24
Fixed Income — U.S.	5		—		—	5
Fixed Income — International	2		—		—	2
Collective investment funds:
Equity — U.S.	—		26		—	26
Equity — International	—		106		—	106
Convertible securities	—		41		—	41
Fixed income securities	—		86		—	86
Short-term investments	—		21		—	21
Real assets	—		101		—	101
Insurance investment contracts and pooled separate accounts (measured at NAV) ^(a)	—		—		—	14
Other assets (measured at NAV) ^(a)	—		—		—	52
Total net assets at fair value	$	197	$	606	—	$	869


(a)	Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.

Other Postretirement Benefit Plans

We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan. Effective November 29, 2016, an unfunded retiree welfare plan previously sponsored by First Niagara merged into our current retiree healthcare plan.

The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.



December 31,
in millions	2016			2015
Net unrecognized losses (gains)	$	(9	)	$	(5	)
Net unrecognized prior service credit	(2		)	(3		)
Total unrecognized AOCI	$	(11	)	$	(8	)

During 2017, we expect to recognize $1 million of pre-tax AOCI resulting from prior service credit as a reduction of net postretirement benefit cost.

The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:



December 31,
in millions	2016			2015			2014
Service cost of benefits earned	$	1		$	1		$	1
Interest cost on APBO	2			3			3
Expected return on plan assets	(2		)	(3		)	(3		)
Amortization of prior service credit	(1		)	(1		)	(1		)
Amortization of gains	—			—			(1		)
Net postretirement benefit	—			—			$	(1	)
Other changes in plan assets and benefit obligations recognized in OCI:
Net (gain) loss	$	(4	)	$	(6	)	$	13
Amortization of prior service credit	1			1			1
Amortization of losses	—			—			1
Total recognized in comprehensive income	$	(3	)	$	(5	)	$	15

Total recognized in net postretirement benefit cost and comprehensive income	$	(3	)	$	(5	)	$	14

The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2016, and December 31, 2015.

The following table summarizes changes in the APBO.



Year ended December 31,
in millions	2016			2015
APBO at beginning of year	$	67		$	79
Service cost	1			1
Interest cost	2			3
Plan participants’ contributions	2			2
Actuarial losses (gains)	(1		)	(12		)
Benefit payments	(6		)	(6		)
Plan acquisition	4			—
APBO at end of year	$	69		$	67

The following table summarizes changes in FVA.



Year ended December 31,
in millions	2016			2015
FVA at beginning of year	$	49		$	56
Employer contributions	—			—
Plan participants’ contributions	2			2
Benefit payments	(6		)	(6		)
Actual return on plan assets	5			(3		)
FVA at end of year	$	50		$	49

The following table summarizes the funded status of the postretirement plans, which corresponds to the amounts recognized in the balance sheets at December 31, 2016, and December 31, 2015.



December 31,
in millions	2016			2015
Funded status ^(a)	$	(19	)	$	(18	)
Accrued postretirement benefit cost recognized ^(b)	(19		)	(18		)


(a)	The shortage of the FVA under the APBO.


(b)	Consists entirely of noncurrent liabilities.

There are no regulations that require contributions to the VEBA trust that funds our retiree healthcare plan, so there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trust, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2017, if any, will be minimal.

At December 31, 2016, we expect to pay the benefits from all funded and unfunded other postretirement plans as follows: 2017 — $5 million; 2018 — $5 million; 2019 — $5 million; 2020 — $5 million; 2021 — $5 million; and $23 million in the aggregate from 2022 through 2026.

To determine the APBO, we assumed discount rates of 3.75% at December 31, 2016, and 4% at December 31, 2015.

To determine net postretirement benefit cost, we assumed the following weighted-average rates.



Year ended December 31,	2016		2015		2014
Discount rate	4.00	%	3.75	%	4.50	%
Expected return on plan assets	4.50		4.50		5.25

The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.

Assumed healthcare cost trend rates do not have a material impact on net postretirement benefit cost or obligations since the postretirement plan has cost-sharing provisions and benefit limitations.

We estimate that we will recognize a credit of less than $1 million in net postretirement benefit cost for 2017, compared to a break-even position of no credit or expense for 2016 and an expense of less than of $1 million for 2015.

We estimate the expected returns on plan assets for the VEBA trust much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trust are to obtain a market rate of return, take into consideration the safety and/or risk of the investment, and to diversify the portfolio in order to satisfy the trust’s anticipated liquidity requirements. The following table shows the asset target allocations prescribed by the trust’s investment policy.



	Target Allocation
Asset Class	2016
Equity securities	80	%
Fixed income securities	10
Convertible securities	5
Cash equivalents	5
Total	100	%

Investments consist of mutual funds and common investment funds that invest in underlying assets in accordance with the target asset allocations shown above. Exchange-traded mutual funds are valued using quoted prices and, therefore, are classified as Level 1. Investments in common investment funds are valued at their closing net asset value. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.

The following tables show the fair values of our postretirement plan assets by asset class at December 31, 2016, and December 31, 2015.



December 31, 2016
in millions	Level 1		Level 2		Level 3	Total
ASSET CLASS
Mutual funds:
Equity — U.S.	$	23	—		—	$	23
Equity — International	5		—		—	5
Fixed income — U.S.	5		—		—	5
Common investment funds:
Equity — U.S.	—		$	10	—	10
Short-term investments	—		7		—	7
Total net assets at fair value	$	33	$	17	—	$	50



December 31, 2015
in millions	Level 1		Level 2		Level 3	Total
ASSET CLASS
Mutual funds:
Equity — U.S.	$	18	—		—	$	18
Equity — International	4		—		—	4
Fixed income — U.S.	4		—		—	4
Common investment funds:
Equity — U.S.	—		$	16	—	16
Equity — International	—		4		—	4
Convertible securities	—		2		—	2
Short-term investments	—		1		—	1
Total net assets at fair value	$	26	$	23	—	$	49

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage that is “actuarially equivalent” to the benefits under Medicare Part D. Based on our application of the relevant regulatory formula, we determined that the prescription drug coverage related to our retiree healthcare benefit plan is not actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2016, and December 31, 2015, we did not receive federal subsidies.

Employee 401(k) Savings Plan

A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1% to 100% of eligible compensation, with up to 6% being eligible for matching contributions. Commencing January 1, 2010, an automatic enrollment feature was added to the plan for all new employees. The initial default contribution percentage for employees is 2% and will increase by 1% at the beginning of each plan year until the default contribution is 10% for plan years on and after January 1, 2012. The plan also permits us to provide a discretionary annual profit sharing contribution to eligible employees who have at least one year of service. First Niagara employees who joined Key retained their years of services, and those employees that met eligibility requirements under Key’s savings plan have been included. We accrued a 2.5% contribution for 2016 and made contributions of 2% for each of 2015 and 2014 on eligible compensation for employees eligible on the last business day of the respective plan years. We also maintain a deferred savings plan that provides certain employees with benefits they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $94 million in 2016, $79 million in 2015, and $73 million in 2014.