Employee and Agent Benefits

12 Months Ended

Dec. 31, 2022

Employee and Agent Benefits

Employee and Agent Benefits

13. Employee and Agent Benefits

PFG provides a U.S. qualified defined benefit pension plan, covering U.S. employees that meet certain eligibility requirements and certain agents contracted on or before December 31, 2018. A final average pay benefit formula has been in place for plan participants employed prior to January 1, 2002. For agents, this formula ended on December 31, 2018, and for employees the formula ended on December 31, 2022. The final average pay benefit is based on the years of service and generally the employee’s or agent’s average annual compensation during the last five years prior to the earliest of termination, retirement or the formula end date. A cash balance benefit was added on January 1, 2002. A participant’s cash balance account is credited with an amount based on the participant’s salary, age and service. These credits accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance benefit applies. For pre-2002 participants, the pension benefit earned prior to the final average pay formula end date is the greater of the final average pay benefit or the cash balance benefit earned before the end date. They will also earn a new cash balance benefit for service after the formula end date. We reflect pension expense through our expense allocation agreement with PFG.

In addition, PFG sponsors non-qualified defined benefit plans subject to Section 409A of the Internal Revenue Code. This plan is for certain highly compensated employees and agents to replace the benefit that cannot be provided by the qualified defined benefit pension plan due to IRS limits. These nonqualified plans generally parallel the qualified plan but offer different payment options. No agent will become a new participant in the nonqualified plan after December 31, 2018.

We provide certain health care, life insurance and long-term care benefits for retired employees, their beneficiaries and covered dependents (“other postretirement benefits”). While virtually all U.S. employees continue to have access to the postretirement health care and life insurance benefits, only those U.S. employees that were hired prior to January 1, 2002, and retired prior to January 1, 2011, (post-65 medical) or January 1, 2020, (life insurance and pre-65 medical) were eligible to receive subsidized benefits. All others pay the full cost of coverage. The long-term care plan was subsidized only for those who retired prior to January 1, 2000, and is no longer accessible. The subsidy level for all benefits varies by plan, age, service and retirement date. Our policy is to fund the cost of providing retiree benefits in the years the employees are providing service, taking into account the funded status of the trust. PFG is the sponsor of the post-65 retiree medical plan for both employees and individual field agents.

Obligations and Funded Status

The combined funded status, reconciled to amounts recognized in the consolidated statements of financial position relating to the other postretirement employee benefits plans, was as follows:

	December 31,
	2022		2021
	(in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	(79.2)	$	(92.5)
Interest cost		(1.9)		(1.8)
Actuarial gain		17.0		6.4
Participant contributions		(6.4)		(6.1)
Benefits paid		11.9		11.9
Plan transfer due to change in sponsorship		—		2.9
Benefit obligation at end of year	$	(58.6)	$	(79.2)
Change in plan assets
Fair value of plan assets at beginning of year	$	89.5	$	751.1
Actual return on plan assets		(15.0)		(0.8)
Employer contribution		1.4		1.5
Participant contributions		6.4		6.1
Benefits paid		(11.9)		(11.9)
Assets re-designated for non-retiree benefits		—		(656.5)
Fair value of plan assets at end of year	$	70.4	$	89.5
Amount recognized in statement of financial position
Other assets	$	11.8	$	10.3
Total	$	11.8	$	10.3
Amount recognized in accumulated other comprehensive income
Total net actuarial gain	$	(18.1)	$	(20.7)
Pre-tax accumulated other comprehensive income	$	(18.1)	$	(20.7)

Other Postretirement Plan Changes and Plan Gains/Losses

For the year ended December 31, 2022, the other postretirement benefit plans had an actuarial gain primarily due to an increase in the discount rates and actual medical claims costs being lower than previously expected. For the year ended December 31, 2021, the other postretirement benefit plans had an actuarial gain primarily due to an increase in the discount rate and actual, along with projected, medical claim costs being lower than previously expected.

Effective January 1, 2021, the Long-Term Care Assistance Plan merged with the Principal Welfare Plan for Medicare Eligible Retirees and PFG became the plan sponsor. The result of the plan merger was a liability of $2.9 million moving to PFG. In addition, the net unrecognized actuarial loss of $2.0 million and the prior period service cost of $0.7 million from the long-term care plan moved to PFG with the plan merger.

Effective January 1, 2021, $656.5 million of assets in excess of the expected liability to cover the postretirement medical benefits for retirees were re-designated for non-retiree benefits. The elections were made pursuant to plan provisions, which provide for assets in excess of 125% of expected liabilities to fund other benefits covered under the plans. The re-designated assets, net of associated tax receivable impacts related to a tax adjustment to accumulated other comprehensive income, are not included as part of the asset balances presented in the footnote as they no longer qualify as plan assets in accordance with U.S. GAAP. The re-designated assets are included in equity securities and other investments on our consolidated statements of financial position beginning January 1, 2021.

We did not have any other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets.

Components of Other Postretirement Benefits Net Periodic Benefit Cost

	For the year ended December 31,
	2022		2021		2020
	(in millions)
Interest cost	$	1.9	$	1.8	$	2.4
Expected return on plan assets		(3.7)		(3.5)		(34.8)
Amortization of prior service cost		—		—		0.1
Recognized net actuarial (gain) loss		(0.9)		(0.4)		0.2
Net periodic benefit income	$	(2.7)	$	(2.1)	$	(32.1)

The components of net periodic benefit cost including the service cost component are included in operating expenses on the consolidated statements of operations.

For the other postretirement benefit plans, actuarial gains and losses were amortized with use of the corridors allowed.

For the other postretirement benefit plans, amounts recognized in pre-tax accumulated other comprehensive (income) loss were as follows:

	For the year ended December 31,
	2022		2021
	(in millions)
Other changes recognized in accumulated other comprehensive (income) loss
Net actuarial (gain) loss	$	1.7	$	(4.1)
Prior service benefit		—		(0.7)
Amortization of net gain		0.9		0.4
Total recognized in pre-tax accumulated other comprehensive (income) loss	$	2.6	$	(4.4)
Total recognized in net periodic benefit cost and pre-tax accumulated other comprehensive income	$	(0.1)	$	(6.5)

Net actuarial (gain) loss and net prior service cost benefit have been recognized in AOCI.

Assumptions

Weighted-average assumptions used for other postretirement benefit plans to determine benefit obligations as disclosed under the Obligations and Funded Status section

	December 31,
	2022		2021
Discount rate	5.05	%	2.55	%
Rate of compensation increase	N/A		N/A

Weighted average assumptions used for other postretirement benefit plans to determine net periodic benefit cost

	For the year ended December 31,
	2022		2021		2020
Discount rate (1)	2.55	%	2.15	%	2.95	%
Expected long-term return on plan assets	4.25	%	4.25	%	4.95	%
Rate of compensation increase	N/A		N/A		N/A	%

(1) During the second quarter 2020, subsidy increases provided under the long-term care plan were capped at 5% per calendar year. This change was remeasured as of March 31, 2020. A discount rate of 2.95% was used until the remeasurement date at which time a discount rate of 2.90% was used.

For other postretirement benefits, the discount rate is determined by projecting future benefit payments inherent in the accumulated postretirement benefit obligation, and discounting those cash flows using a spot yield curve for high quality corporate bonds. The plans’ expected benefit payments are discounted to determine a present value using the yield curve and the discount rate is the level rate that produces the same present value. The 4.25% expected long-term return on plan assets for 2022 was based on the weighted average expected long-term asset returns for the medical, life and long-term care plans. The expected long-term rates for the home office medical/life and agent medical/life plans were 4.25% and 4.25%, respectively.

Assumed Health Care Cost Trend Rates Used to Determine Net Periodic Benefit Cost

	December 31,
	2022		2021
Health care cost trend rate assumed for next year under age 65	7.00	%	7.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.50	%	4.50	%
Year that the rate reaches the ultimate trend rate (under age 65)	2031		2030

Other Postretirement Benefit Plan Assets

Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels.

● Level 1 — Fair values are based on unadjusted quoted prices in active markets for identical assets.

● Level 2 — Fair values are based on inputs other than quoted prices within Level 1 that are observable for the asset, either directly or indirectly.

● Level 3 — Fair values are based on significant unobservable inputs for the asset.

Our other postretirement benefit plan assets consist of cash, investments in fixed income security portfolios and investments in equity security portfolios. Because of the nature of cash, its carrying amount approximates fair value. The fair value of fixed income investment funds, U.S. equity portfolios and international equity portfolios is based on quoted prices in active markets for identical assets.

The fair value of the other postretirement benefit plans’ assets by asset category as of the most recent measurement date was as follows:

	December 31, 2022
	Assets		Fair value hierarchy level
	measured at
	fair value		Level 1		Level 2		Level 3
	(in millions)
Asset category
Cash and cash equivalents	$	0.5	$	0.5	$	—	$	—
Fixed income security portfolios (1)		34.7		34.7		—		—
U.S. equity portfolios (2)		25.6		25.6		—		—
International equity portfolios (3)		9.6		9.6		—		—
Total	$	70.4	$	70.4	$	—	$	—

	December 31, 2021
	Assets		Fair value hierarchy level
	measured at
	fair value		Level 1		Level 2		Level 3
	(in millions)
Asset category
Cash and cash equivalents	$	0.5	$	0.5	$	—	$	—
Fixed income security portfolios (1)		41.8		41.8		—		—
U.S. equity portfolios (2)		32.9		32.9		—		—
International equity portfolios (3)		14.3		14.3		—		—
Total	$	89.5	$	89.5	$	—	$	—

(1) The portfolios invest in various fixed income securities, primarily of U.S. origin. These include, but are not limited to, corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities, U.S. Treasury securities, agency securities, asset-backed securities and collateralized mortgage obligations.

(2) The portfolios invest primarily in publicly traded equity securities of large U.S. companies.

(3) The portfolios invest primarily in publicly traded equity securities of non-U.S. companies.

We have established an investment policy that provides the investment objectives and guidelines for the other postretirement benefit plans. Our investment strategy is to achieve the following:

● Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored.

● Ensure sufficient liquidity to meet the emerging benefit liabilities for the plans.

● Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the other postretirement benefit plans consistent with market and economic risk.

In administering the other postretirement benefit plans’ asset allocation strategies, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the

historical performance of capital markets adjusted for the perception of future short-and long-term capital market performance and the perception of future economic conditions.

According to our investment policy, the target asset allocation for the other postretirement benefit plans is:

Asset category	Target allocation
Fixed income security portfolios	50	%
U.S. equity portfolios	35	%
International equity portfolios	15	%

Estimated Future Benefit Payments

The estimated future benefit payments, which reflect expected future service are:

	Other postretirement
	benefits (gross benefit
	payments, including
	prescription drug benefits)
	(in millions)
Year ending December 31:
2023	$	11.6
2024		10.7
2025		9.7
2026		8.6
2027		7.6
2028-2032		30.1

The above table reflects the total estimated future benefits to be paid from the plan, including both our share of the benefit cost and the participants’ share of the cost, which is funded by their contributions to the plan. The assumptions used in calculating the estimated future benefit payments are the same as those used to measure the benefit obligation for the year ended December 31, 2022.