Note 15. Postretirement Benefits

Pension plans

Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan (“SERP”) for certain members of executive and senior management of the Erie Insurance Group. The pension plans provide benefits to covered individuals satisfying certain age and service requirements. The defined benefit pension plan and SERP each provide benefits through a final average earnings formula.

Although Indemnity is the sponsor of these postretirement plans and records the funded status of these plans, the Exchange and EFL reimburse Indemnity for approximately 56% of the annual benefit expense of these plans, which represents pension benefits for Indemnity employees performing claims and EFL functions. For our funded pension plan, amounts are settled in cash for the portion of pension costs allocated to the Exchange and EFL, respectively. For our unfunded plans, we pay the obligations when due and amounts are settled in cash between entities when there is a payout.

Prior to 2003, the employee pension plan purchased annuities from EFL for certain plan participants that were receiving benefit payments under the pension plan. These are nonparticipating annuity contracts under which EFL has unconditionally contracted to provide specified benefits to beneficiaries; however, the pension plan remains the primary obligor to the beneficiaries and a contingent liability, $26 million at December 31, 2013, exists in the event EFL does not honor the annuity contracts.

Cost of pension plans



(in millions)	Erie Insurance Group
	2013			2012			2011
Cost of pension plans:
Service cost for benefits earned	$	27		$	21		$	17
Interest cost on benefit obligation	26			24			23
Expected return on plan assets	(31		)	(27		)	(27		)
Prior service cost amortization	1			1			1
Net actuarial loss amortization	15			11			6
Pension plan cost ⁽¹⁾	$	38		$	30		$	20


(1)	Pension plan costs represent the total cost for the Erie Insurance Group before reimbursements to Indemnity from the Exchange and EFL.

Actuarial assumptions

The following table describes the assumptions at December 31 used to measure the year-end benefit obligations and the net periodic benefit costs for the subsequent year:



(in millions)	Erie Insurance Group
	2013		2012		2011		2010
Actuarial assumptions:
Employee pension plan:
Discount rate	5.11	%	4.19	%	4.99	%	5.69	%
Expected return on assets	7.50		7.50		8.00		8.00
Compensation increases ⁽¹⁾	4.15		4.15		4.15		4.15
SERP:
Discount rate – pre-retirement/post-retirement	5.11/4.61		4.19/3.69		4.99/4.49		5.69/5.19
Rate of compensation increase	6.00		6.00		6.00		6.00


(1)	The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 4.15% in 2013, 2012 and 2011 would produce similar results.

The two economic assumptions that have the most impact on the postretirement benefit expense are the discount rate and the long-term rate of return on plan assets. The discount rate assumption used to determine the benefit obligation for 2013 was based upon a yield curve developed from corporate bond yield information. The same methodology was employed to develop the discount rates used to determine the benefit obligation for 2012 and 2011, respectively.

The pension plan's expected long-term rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are paid. To determine the expected long-term rate of return assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the financial markets based upon key factors such as historical returns for the asset class' applicable indices, the correlations of the asset classes under various market conditions and consensus views on future real economic growth and inflation. The expected future return for each asset class is then combined by considering correlations between asset classes and the volatilities of each asset class to produce a reasonable range of asset return results within which our expected long-term rate of return assumption falls.

Funding policy/funded status

Our current policy is generally to contribute an amount equal to the greater of the IRS minimum required contribution or the target normal cost for the year plus interest to the date the contribution is made. A $15 million contribution will be made to the defined benefit pension plan in the first quarter of 2014. The following table sets forth the funded status of the pension plans and the amounts recognized in the Consolidated Statements of Financial Position as of December 31:



(in millions)	Erie Insurance Group
	2013			2012

Funded status at end of period	$	(95	)	$	(201	)

Pension liability recorded in the Consolidated Statement of Financial Position:
Pension liabilities – due within one year	$	(1	)	$	(2	)
Pension liabilities – due after one year	(94		)	(199		)
Net amount recognized	$	(95	)	$	(201	)

Benefit obligations

Benefit obligations are described in the following tables. Accumulated and projected benefit obligations (“ABO” and “PBO”) represent the obligations of a pension plan for past service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current compensation levels. PBO is ABO increased to reflect expected future compensation. The following tables set forth the change in our projected benefit obligation, the accumulated benefit obligation, and information for the defined benefit pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:



(in millions)	Erie Insurance Group
	2013			2012
Projected benefit obligation:
Balance, beginning of year	$	612		$	488
Service cost for benefits earned	27			21
Interest cost on benefit obligation	26			24
Plan amendments	1			0
Actuarial (gain) loss	(98		)	87
Benefits paid	(11		)	(8		)
Balance, end of year	$	557		$	612

Accumulated benefit obligation, December 31,	$	425		$	453



(in millions)	Erie Insurance Group
	2013		2012
Plans with assets less than ABO, December 31:
Plan assets	$	462	$	411
Accumulated benefit obligations	425		453
Projected benefit obligations	557		612

At December 31, 2013, the SERP had an accumulated benefit obligation in excess of plan assets. At December 31, 2012, both the defined benefit pension plan and the SERP had an accumulated benefit obligation in excess of plan assets.

Pension assets



(in millions)	Erie Insurance Group
	2013			2012
Fair value of plan assets:
Balance, beginning of year	$	411		$	348
Actual gain on plan assets	43			55
Employer contributions	19			16
Benefits paid	(11		)	(8		)
Balance, end of year	$	462		$	411

Shareholders’ equity



(in millions)	Erie Insurance Group
	2013		2012
Amounts included in shareholders’ equity (unamortized):
Net actuarial loss	$	95	$	220
Prior service cost	6		6
Net amount not yet recognized	$	101	$	226

The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into pension cost during 2014 are $6 million and $1 million, respectively.

Other comprehensive income



(in millions)	Erie Insurance Group
	2013				2012
Amounts recognized in other comprehensive income for pension plans:
Amortization of net actuarial loss	$	(15	)		$	(11	)
Amortization of prior service cost	(1		)		(1		)
Net actuarial (gain) loss arising during the year	(110		)		59
Amendments	1			⁽¹⁾	0			⁽²⁾
Total recognized in other comprehensive income	$	(125	)		$	47


(1)	The charges recognized as amendments were the result of factoring in the prior service cost for four new plan participants in 2013.


(2)	The charges recognized as amendments were the result of factoring in the prior service cost for one new plan participant in 2012.

Asset allocation

The employee pension plan utilizes a return seeking and a liability asset matching allocation strategy. It is based upon the understanding that 1) equity investments are expected to outperform debt investments over the long-term, 2) the potential volatility of short-term returns from equities is acceptable in exchange for the larger expected long-term returns, and 3) a portfolio structured across investment styles and markets (both domestic and foreign) reduces volatility. As a result, the employee pension plan’s investment portfolio utilizes a broadly diversified asset allocation across domestic and foreign equity and debt markets. The investment portfolio is composed of commingled pools that are dedicated exclusively to the management of employee benefit plan assets.

The target and actual asset allocation for the portfolio is as follows for the years ended December 31:



	Erie Insurance Group
	Target asset allocation			Target asset allocation		Actual asset allocation		Actual asset allocation
Asset allocation:	2013			2012		2013		2012
Equity securities:
U.S. equity securities	35	%	⁽¹⁾	40	%	36	%	41	%
Non-U.S. equity securities	20		⁽²⁾	20		20		21
Total equity securities	55			60		56		62
Debt securities	44		⁽³⁾	39		43		37
Other	1		⁽⁴⁾	1		1		1
Total	100	%		100	%	100	%	100	%


(1)	U.S. equity securities – 22% seek to achieve excess returns relative to the Russell 2000 Index, while 30% seek to achieve excess returns relative to the S&P 500. The remaining 48% of the allocation to U.S. equity securities are comprised of equity index funds that track the S&P 500.


(2)	Non-U.S. equity securities – 11% are allocated to international small cap investments, while another 11% are allocated to international emerging market investments. The remaining 78% of the Non-U.S. equity securities are allocated to investments seeking to achieve excess returns relative to an international market index.


(3)	Debt securities – 44% are allocated to long U.S. Treasury Strips, 44% are allocated to U.S. corporate bonds with an emphasis on long duration bonds rated A or better, while the remaining 12% are allocated to floating rate high income leverage loans.


(4)	Institutional money market fund.

The following tables represent the fair value measurements for the pension plan assets by major category and level of input:



	Erie Insurance Group
	At December 31, 2013
	Fair value measurements of plan assets using:
(in millions)	Total		Quoted prices in active markets for identical assets Level 1		Significant observable inputs Level 2		Significant unobservable inputs Level 3
Equity securities:
U.S. equity securities	$	165	$	0	$	165	$	0
Non-U.S. equity securities	94		0		94		0
Total equity securities	259		0		259		0
Debt securities	199		0		199		0
Other	4		4		0		0
Total	$	462	$	4	$	458	$	0



	Erie Insurance Group
	At December 31, 2012
	Fair value measurements of plan assets using:
(in millions)	Total		Quoted prices in active markets for identical assets Level 1		Significant observable inputs Level 2		Significant unobservable inputs Level 3
Equity securities:
U.S. equity securities	$	168	$	0	$	168	$	0
Non-U.S. equity securities	87		0		87		0
Total equity securities	255		0		255		0
Debt securities	153		0		153		0
Other	3		3		0		0
Total	$	411	$	3	$	408	$	0

Estimates of fair values of the pension plan assets are obtained primarily from our trustee and custodian of our pension plan. Our Level 1 category includes a money market fund that is a mutual fund for which the fair value is determined using an exchange traded price provided by the trustee and custodian. Our Level 2 category includes commingled pools. Estimates of fair values for securities held by our commingled pools are obtained primarily from the trustee and custodian. The methodologies used by the trustee and custodian that support a financial instrument Level 2 classification include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuers spreads, two-sided markets, benchmark securities, bids, offers, and reference data.

Estimated future benefit payments

The following table sets forth amounts of benefits expected to be paid over the next 10 years from our pension and other postretirement plans as of December 31:



(in millions)	Erie Insurance Group
Year ending December 31,	Expected future cash flows
2014	$	12
2015	13
2016	15
2017	17
2018	20
2019 - 2023	139

Retiree health benefit plan

The retiree health benefit plan was terminated in 2006. We continue to provide retiree health benefits only to employees who met certain age and service requirements on or before July 1, 2010. The accumulated benefit obligation and net periodic benefit cost of this plan were not material to our consolidated financial statements.

Employee savings plan

All full-time and regular part-time employees are eligible to participate in a traditional qualified 401(k) or a Roth 401(k) savings plan. We match 100% of the participant contributions up to 3% of compensation and 50% of participant contributions over 3% and up to 5% of compensation. Matching contributions paid to the plan were $10 million in 2013, $10 million in 2012, and $9 million in 2011. Employees are permitted to invest the employer-matching contributions in our Class A common stock. Employees, other than executive and senior officers, may sell the shares at any time without restriction; sales by executive and senior officers are subject to restrictions imposed by our insider trading policies and the federal securities laws. The plan acquires shares in the open market necessary to meet the obligations of the plan. Plan participants held 0.2 million shares of our Class A common stock at December 31, 2013 and 2012.