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 and its subsidiaries reimburse us for approximately 59% of the annual benefit expense of these plans, which represents pension benefits for employees performing administrative services and their allocated share of costs for employees in departments that support the administrative functions. For our funded pension plan, amounts are settled in cash for the portion of pension costs allocated to the Exchange and its subsidiaries. For our unfunded plans, we pay the obligations when due and amounts are settled in cash between entities when there is a payout.

Cost of pension plans

Pension plan cost includes the following components:



(in thousands)
	2018			2017			2016
Service cost for benefits earned	$	38,052		$	31,106		$	28,201
Interest cost on benefit obligation	35,382			34,275			33,125
Expected return on plan assets	(51,260		)	(41,267		)	(39,520		)
Prior service cost amortization	1,353			871			696
Net actuarial loss amortization	12,809			9,301			8,111
Settlement cost ⁽¹⁾	—			302			—
Pension plan cost ⁽²⁾	$	36,336		$	34,588		$	30,613


(1)	The final SERP benefit for two former executives was settled with lump sum payments in 2017.


(2)	Pension plan costs represent the total cost before reimbursements to Indemnity from the Exchange and its subsidiaries.

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:



	2018		2017		2016		2015
Employee pension plan:
Discount rate	4.47	%	3.73	%	4.24	%	4.57	%
Expected return on assets	6.75		6.75		7.00		7.00
Compensation increases ⁽¹⁾	3.32		3.32		3.32		3.32
SERP:
Discount rate – pre-retirement/post-retirement	4.47/3.97		3.73/3.23		4.24/3.74		4.57/4.07
Rate of compensation increase	5.00		5.00		5.00		5.00


(1)	The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 3.32% in 2018, 2017 and 2016 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 all periods presented was based upon a yield curve developed from corporate bond yield information.

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.

Funding policy/funded status

In 2018, we made accelerated pension contributions totaling $80 million. Following our 2018 contributions, we would not expect to make a subsequent contribution until the sum of the target normal costs for plan years beginning on and after December 31, 2017 exceeds $80 million, or earlier if a contribution is necessary to fund the plan to 100%. At that time, our funding policy will again generally be to contribute an amount equal or greater of the target normal cost for the plan year, or the amount necessary to fund the plan to 100%. Additional contributions may be necessary or desirable due to future plan changes, our particular business or investment strategy, or pending law changes. In 2017, in addition to our planned contribution of $19.0 million, we made additional unplanned contributions of $39.9 million. 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)
	2018			2017
Funded status at end of year	$	(118,596	)	$	(207,766	)

Pension liabilities – due within one year ⁽¹⁾	$	(1,730	)	$	(236	)
Pension liabilities – due after one year	(116,866		)	(207,530		)
Net amount recognized	$	(118,596	)	$	(207,766	)

(1) The current portion of pension liabilities is included in accounts payable and accrued 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)
	2018			2017
Projected benefit obligation, beginning of year	$	951,666		$	816,659
Service cost for benefits earned	38,052			31,106
Interest cost on benefit obligation	35,382			34,275
Plan amendments	3,007			5,050
Actuarial (gain) loss	(123,910		)	82,940
Benefits paid	(18,032		)	(16,184		)
Settlement cost	—			(2,180		)
Projected benefit obligation, end of year	$	886,165		$	951,666

Accumulated benefit obligation, end of year	$	727,340		$	767,527

Projected benefit obligations decreased $65.5 million at December 31, 2018 compared to December 31, 2017 due primarily to actuarial gains resulting from the increase in the discount rate used to measure the future benefit obligations. The discount rate increased to 4.47% in 2018 from 3.73% in 2017.

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



(in thousands)	Projected Benefit Obligation in Excess of Plan Assets
	2018		2017
Projected benefit obligation	$	886,165	$	951,666
Plan assets	767,569		743,900

At December 31, 2018 and 2017, both the defined benefit plan and the SERP had projected benefit obligations in excess of plan assets.

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



(in thousands)	Accumulated Benefit Obligation in Excess of Plan Assets
	2018		2017
Accumulated benefit obligation	$	18,908	$	767,527
Plan assets	—		743,900

At December 31, 2018, the SERP had an accumulated benefit obligation in excess of plan assets. At December 31, 2017, both the defined benefit plan and the SERP had accumulated benefit obligations in excess of plan assets.

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)
	2018			2017
Fair value of plan assets, beginning of year	$	743,900		$	592,544
Actual (loss) gain on plan assets	(38,360		)	108,618
Employer contributions	80,061			61,102
Benefits paid	(18,032		)	(16,184		)
Settlements ⁽¹⁾	—			(2,180		)
Fair value of plan assets, end of year	$	767,569		$	743,900


(1)	The final SERP benefit for two former executives was settled with lump sum payments in 2017.

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)
	2018		2017
Net actuarial loss	$	144,165	$	191,264
Prior service cost	11,855		10,201
Net amount not yet recognized	$	156,020	$	201,465

Other comprehensive income

Amounts recognized in other comprehensive income for pension plans were as follows:



(in thousands)
	2018			2017
Net actuarial (gain) loss arising during the year	$	(34,290	)	$	15,588
Amortization of net actuarial loss	(12,809		)	(9,301		)
Amortization of prior service cost	(1,353		)	(871		)
Amendments ⁽¹⁾	3,007			5,050
Impact due to settlement ⁽²⁾	—			(302		)
Total recognized in other comprehensive income	$	(45,445	)	$	10,164


(1)	In 2018, there were five new SERP participants. In 2017, amendments include an enactment to the surviving spouse's death benefits, which increased the pension plan obligation by $3.6 million and the SERP obligation by $0.3 million, additionally there were two new SERP participants in 2017, which contributed $1.2 million.


(2)	The final SERP benefit for two former executives was settled with lump sum payments in 2017.

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 ⁽¹⁾			Target asset allocation		Actual asset allocation		Actual asset allocation
Asset allocation:	2018			2017		2018		2017
Equity securities:
U.S. equity securities	25	%	⁽²⁾	35	%	24	%	39	%
Non-U.S. equity securities	16		⁽³⁾	20		14		19
Total equity securities	41			55		38		58
Debt securities	58		⁽⁴⁾	44		61		41
Other	1		⁽⁵⁾	1		1		1
Total	100	%		100	%	100	%	100	%


(1)	Changes to the target asset allocation in 2018 were made to reduce investment risk by shifting portfolio assets from equity securities to debt securities.


(2)	U.S. equity securities – 21% seek to achieve excess returns relative to the Russell 2000 Index. The remaining 79% of the allocation to U.S. equity securities are comprised of equity index funds that track the S&P 500.


(3)	Non-U.S. equity securities – 11% are allocated to international small cap investments, while another 20% are allocated to international emerging market investments. The remaining 69% of the Non-U.S. equity securities are allocated to investments seeking to achieve excess returns relative to an international market index.


(4)	Debt securities – 32% are allocated to long U.S. Treasury Strips, 62% are allocated to U.S. corporate bonds with an emphasis on long duration bonds rated A or better, while the remaining 6% are allocated to floating rate high income leverage loans.


(5)	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, 2018
	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	$	182,495	$	0	$	182,495	$	0
Non-U.S. equity securities	110,942		0		110,942		0
Total equity securities	293,437		0		293,437		0
Debt securities	464,613		0		464,613		0
Other	9,519		9,519		0		0
Total	$	767,569	$	9,519	$	758,050	$	0




	At December 31, 2017
	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	$	288,861	$	0	$	288,861	$	0
Non-U.S. equity securities	145,238		0		145,238		0
Total equity securities	434,099		0		434,099		0
Debt securities	303,331		0		303,331		0
Other	6,470		6,470		0		0
Total	$	743,900	$	6,470	$	737,430	$	0

Estimates of fair values of the pension plan assets are obtained primarily from the 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
2019	$	22,039
2020		23,244
2021		25,946
2022		29,319
2023		32,631
2024 - 2028		213,490

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 $13.9 million in 2018, $12.8 million in 2017, and $12.1 million in 2016. In 2018, we made an additional discretionary employer contribution of $5.4 million, as a way of sharing the tax savings realized from the lower corporate income tax rate that became effective January 1, 2018 with our employees. The Exchange and its subsidiaries reimbursed us for approximately 61% of the matching and discretionary contributions. 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, 2018 and 2017.