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Postretirement Benefits

12 Months Ended

Dec. 31, 2019

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)
	2019			2018			2017
Service cost for benefits earned	$	33,854		$	38,052		$	31,106
Interest cost on benefit obligation	39,306			35,382			34,275
Expected return on plan assets	(47,484		)	(51,260		)	(41,267		)
Prior service cost amortization	1,394			1,353			871
Net actuarial loss amortization	5,113			12,809			9,301
Settlement cost ⁽¹⁾	—			—			302
Pension plan cost ⁽²⁾	$	32,183		$	36,336		$	34,588


(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:



	2019		2018		2017		2016
Employee pension plan:
Discount rate	3.59	%	4.47	%	3.73	%	4.24	%
Expected return on assets	6.00		6.75		6.75		7.00
Compensation increases ⁽¹⁾	3.21		3.32		3.32		3.32
SERP:
Discount rate – pre-retirement/post-retirement	3.59/3.09		4.47/3.97		3.73/3.23		4.24/3.74
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 3.21% in 2019 and 3.32% in 2018 and 2017 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 to the 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. 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)
	2019			2018
Funded status at end of year	$	(146,842	)	$	(118,596	)

Pension liabilities – due within one year ⁽¹⁾	$	(1,183	)	$	(1,730	)
Pension liabilities – due after one year	(145,659		)	(116,866		)
Net amount recognized	$	(146,842	)	$	(118,596	)

(1) The current portion of pension liabilities is included in accounts payable and accrued liabilities.

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)
	2019			2018
Projected benefit obligation, beginning of year	$	886,165		$	951,666
Service cost for benefits earned	33,854			38,052
Interest cost on benefit obligation	39,306			35,382
Plan amendments	452			3,007
Actuarial loss (gain)	138,144			(123,910		)
Benefits paid	(43,454		)	(18,032		)
Projected benefit obligation, end of year	$	1,054,467		$	886,165

Accumulated benefit obligation, end of year	$	858,209		$	727,340

Projected benefit obligations increased $168.3 million at December 31, 2019 compared to December 31, 2018 due primarily to actuarial losses resulting from the lower discount rate discount rate used to measure the future benefit obligations. The discount rate decreased to 3.59% in 2019 from 4.47% in 2018. The increase in benefits paid of $25.4 million in 2019 compared to 2018 was primarily due to a pension plan amendment offering a one-time lump sum payment to former vested employees.

Both the defined benefit plan and the SERP had projected benefit obligations in excess of plan assets at December 31:



(in thousands)	Projected Benefit Obligation in Excess of Plan Assets
	2019		2018
Projected benefit obligation	$	1,054,467	$	886,165
Plan assets	907,625		767,569

The SERP had accumulated benefit obligations in excess of plan assets at December 31:



(in thousands)	Accumulated Benefit Obligation in Excess of Plan Assets
	2019		2018
Accumulated benefit obligation	$	23,411	$	18,908
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)
	2019			2018
Fair value of plan assets, beginning of year	$	767,569		$	743,900
Actual gain (loss) on plan assets	182,002			(38,360		)
Employer contributions	1,508			80,061
Benefits paid	(43,454		)	(18,032		)
Fair value of plan assets, end of year	$	907,625		$	767,569

Accumulated other comprehensive loss

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



(in thousands)
	2019		2018
Net actuarial loss	$	142,678	$	144,165
Prior service cost	10,913		11,855
Net amount not yet recognized	$	153,591	$	156,020

Other comprehensive income

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



(in thousands)
	2019			2018
Net actuarial loss (gain) arising during the year	$	3,626		$	(34,290	)
Amortization of net actuarial loss	(5,113		)	(12,809		)
Amortization of prior service cost	(1,394		)	(1,353		)
Amendments ⁽¹⁾	452			3,007
Total recognized in other comprehensive income	$	(2,429	)	$	(45,445	)


(1)	In 2019, there was one new SERP participant. In 2018, there were five new SERP participants.

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:	2019			2018		2019		2018
Equity securities:
U.S. equity securities	27	%	⁽¹⁾	25	%	28	%	24	%
Non-U.S. equity securities	18		⁽²⁾	16		18		14
Total equity securities	45			41		46		38
Debt securities	54		⁽³⁾	58		53		61
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. The remaining 78% 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 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.


(3)	Debt securities – 33% are allocated to long U.S. Treasury Strips, 67% are allocated to U.S. corporate bonds with an emphasis on long duration bonds rated A or better.


(4)	Institutional money market fund.

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



	December 31, 2019
	Fair value measurements of plan assets using:
(in thousands)	Total		Level 1		Level 2		Level 3
Equity securities:
U.S. equity securities	$	248,585	$	0	$	248,585	$	0
Non-U.S. equity securities	165,752		0		165,752		0
Total equity securities	414,337		0		414,337		0
Debt securities	482,497		0		482,497		0
Other	10,791		10,791		0		0
Total	$	907,625	$	10,791	$	896,834	$	0




	December 31, 2018
	Fair value measurements of plan assets using:
(in thousands)	Total		Level 1		Level 2		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

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 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. Trustee and custodian valuation methodologies for Level 2 securities 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:



(in thousands)
Year ending December 31,		Expected future benefit payments
2020	$	23,788
2021		25,903
2022		29,031
2023		32,497
2024		35,722
2025 - 2029		229,518

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 $14.9 million in 2019, $13.9 million in 2018, and $12.8 million in 2017. 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 59% 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, 2019 and 2018.