Note 8. 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. 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 we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange reimburses us for approximately 59% of the annual benefit expense of these plans, which represents pension benefits for our employees performing claims and life insurance functions and their share of service department costs. For our funded pension plan, amounts are settled in cash for the portion of pension costs allocated to the Exchange. 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 Erie Family Life Insurance Company ("EFL"), a wholly owned subsidiary of the Exchange, 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. A contingent liability of $21.0 million at December 31, 2016, exists in the event EFL does not honor the annuity contracts.

Cost of pension plans

Pension plan cost includes the following components:



(in thousands)
	2016			2015			2014
Service cost for benefits earned	$	28,201		$	30,433		$	22,510
Interest cost on benefit obligation	33,125			30,755			28,112
Expected return on plan assets	(39,520		)	(35,921		)	(31,419		)
Prior service cost amortization	696			670			712
Net actuarial loss amortization	8,111			14,031			6,344
Pension plan cost ⁽¹⁾	$	30,613		$	39,968		$	26,259


(1)	Pension plan costs represent the total cost 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 obligations and the net periodic benefit costs for the subsequent year:



	2016		2015		2014		2013
Employee pension plan:
Discount rate	4.24	%	4.57	%	4.17	%	5.11	%
Expected return on assets ⁽¹⁾	7.00		7.00		7.00		7.50
Compensation increases ⁽²⁾	3.32		3.32		3.32		4.15
SERP:
Discount rate – pre-retirement/post-retirement	4.24/3.74		4.57/4.07		4.17/3.67		5.11/4.61
Rate of compensation increase	5.00		5.00		5.00		6.00


(1)	The expected return on assets used to measure the net periodic benefit cost for 2017 is 6.75%.


(2)	The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 3.32% in 2016, 2015 and 2014 would produce similar results.

The economic assumptions that have the most impact on the postretirement benefits 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 2016 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 2015 and 2014.

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 to be 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.

Projected benefit obligations increased $92.1 million at December 31, 2016 compared to December 31, 2015. In addition to the normal increases in benefit accruals, the lower discount rate, partially offset by mortality tables being updated with two additional years of mortality data, contributed to this increase.

Funding policy/funded status

Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is made. Employer contributions of

$19.0 million were made to the defined benefit pension plan in January 2017. The following table sets forth the funded status of the pension plans and the amounts recognized in the Statements of Financial Position at December 31:



(in thousands)
	2016			2015
Funded status at end of year	$	(224,115	)	$	(173,089	)

Pension liabilities – due within one year ⁽¹⁾	$	(2,288	)	$	(389	)
Pension liabilities – due after one year	(221,827		)	(172,700		)
Net amount recognized	$	(224,115	)	$	(173,089	)

(1) The current portion of pension liabilities is included in accrued expenses and other current liabilities in the Statements of Financial Position.

Benefit obligations

Benefit obligations are described in the following tables. Accumulated and projected benefit obligations represent the obligations of a pension plan for past service as of the measurement date. The accumulated benefit obligation is the present value of pension benefits earned as of the measurement date based on employee service and compensation prior to that date. It differs from the projected benefit obligation in that the accumulated benefit obligation includes no assumptions to reflect expected future compensation. The following table sets forth a reconciliation of beginning and ending balances of the projected benefit obligation, as well as the accumulated benefit obligation at December 31:



(in thousands)
	2016			2015
Projected benefit obligation, beginning of year	$	724,580		$	736,705
Service cost for benefits earned	28,201			30,433
Interest cost on benefit obligation	33,125			30,755
Plan amendments	2,114			0
Actuarial loss (gain)	43,032			(60,774		)
Benefits paid	(14,393		)	(12,539		)
Projected benefit obligation, end of year	$	816,659		$	724,580

Accumulated benefit obligation, end of year	$	657,969		$	583,432

The following table describes plans with assets less than accumulated benefit obligation at December 31:



(in thousands)
	2016		2015
Projected benefit obligation	$	816,659	$	724,580
Accumulated benefit obligation	657,969		583,432
Plan assets	592,544		551,491

Both the defined benefit pension plan and the SERP had accumulated benefit obligations in excess of plan assets at December 31, 2016 and 2015.

Pension assets

The following table sets forth a reconciliation of beginning and ending balances of the fair value of plan assets at December 31:



(in thousands)
	2016			2015
Fair value of plan assets, beginning of year	$	551,491		$	547,788
Actual gain (loss) on plan assets	38,028			(1,042		)
Employer contributions	17,418			17,284
Benefits paid	(14,393		)	(12,539		)
Fair value of plan assets, end of year	$	592,544		$	551,491

Accumulated other comprehensive income

Net actuarial loss and prior service cost included in accumulated other comprehensive income that were not yet recognized as components of net benefit costs were as follows:



(in thousands)
	2016		2015
Net actuarial loss	$	185,278	$	148,865
Prior service cost	6,023		4,605
Net amount not yet recognized	$	191,301	$	153,470

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 2017 is $9.3 million and $0.8 million, respectively.

Other comprehensive income

Amounts recognized in other comprehensive income for pension plans:



(in thousands)
	2016			2015
Net actuarial loss (gain) arising during the year	$	44,524		$	(23,810	)
Amortization of net actuarial loss	(8,111		)	(14,031		)
Amortization of prior service cost	(696		)	(670		)
Amendments ⁽¹⁾	2,114			0
Total recognized in other comprehensive income	$	37,831		$	(38,511	)


(1)	Effective September 12, 2016, a plan amendment was adopted to allow part time employees to participate in the pension plan, which added prior service cost of $1.7 million. Additionally, there was one new SERP participant in 2016, which contributed $0.4 million.

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 allocations for the portfolio are as follows for the years ended December 31:




	Target asset allocation			Target asset allocation		Actual asset allocation		Actual asset allocation
Asset allocation:	2016			2015		2016		2015
Equity securities:
U.S. equity securities	35	%	⁽¹⁾	35	%	38	%	36	%
Non-U.S. equity securities	20		⁽²⁾	20		18		20
Total equity securities	55			55		56		56
Debt securities	44		⁽³⁾	44		43		43
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:




	At December 31, 2016
	Fair value measurements of plan assets using:
(in thousands)	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	$	225,446	$	0	$	225,446	$	0
Non-U.S. equity securities	107,953		0		107,953		0
Total equity securities	333,399		0		333,399		0
Debt securities	253,197		0		253,197		0
Other	5,948		5,948		0		0
Total	$	592,544	$	5,948	$	586,596	$	0




	At December 31, 2015
	Fair value measurements of plan assets using:
(in thousands)	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	$	201,021	$	0	$	201,021	$	0
Non-U.S. equity securities	107,945		0		107,945		0
Total equity securities	308,966		0		308,966		0
Debt securities	236,619		0		236,619		0
Other	5,906		5,906		0		0
Total	$	551,491	$	5,906	$	545,585	$	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 plans as of December 31:



(in thousands)
Year ending December 31,		Expected future benefit payments
2017	$	18,943
2018		18,672
2019		20,778
2020		23,369
2021		26,246
2022 - 2026		181,837

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 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 $12.1 million in 2016, $11.6 million in 2015, and $10.7 million in 2014. 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, provided they are in compliance with applicable insider trading laws; sales by executive and senior officers are subject to additional pre-clearance restrictions imposed by our insider trading policies. 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, 2016 and 2015.