Brunswick Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Postretirement Benefits

Postretirement Benefits

12 Months Ended

Dec. 31, 2016

Defined Benefit Pension Plans and Defined Benefit Postretirement Plans Disclosure [Abstract]

Overview. The Company has defined contribution plans, qualified and nonqualified defined benefit pension plans, and other postretirement benefit plans covering substantially all of its employees. The Company's contributions to its defined contribution plans include matching and annual discretionary contributions which are based on various percentages of compensation, and in some instances are based on the amount of the employees' contributions to the plans. The expense related to the defined contribution plans was $46.3 million, $46.3 million and $38.9 million in 2016, 2015 and 2014, respectively.

The Company's domestic pension and retiree health care and life insurance benefit plans, which are discussed below, provide benefits based on years of service and, for some plans, average compensation prior to retirement. Benefit accruals are frozen for all plan participants. The Company uses a December 31 measurement date for these plans. The Company's foreign postretirement benefit plans are not significant individually or in the aggregate.

Plan Developments. During 2016, total settlement payments of $125.2 million were made from the Brunswick Pension Plan For Hourly Bargaining Unit Employees (Hourly Bargaining Plan) and the Brunswick Pension Plan For Salaried Employees (Salaried Plan) to purchase group annuity contracts to cover future benefit payments. The annuity contract unconditionally and irrevocably guarantees the full payment of all future annuity payments to the affected participants. The insurance company assumed all risk associated with the assets and obligations that were transferred. The Company recognized a pretax settlement loss of $55.1 million in the fourth quarter of 2016 relating to this action.

The Company also took actions to terminate the Brunswick Pension Plan For Hourly Employees (Hourly Plan) and the Brunswick Pension Plan For Hourly Wage Employees (Muskegon Plan) at the Muskegon, Michigan Factory, effective as of December 31, 2016. All benefits are expected to be paid during 2017, either through a lump-sum payment or annuity offerings. As a result, the unfunded liabilities for both plans are currently recorded in Accrued expenses within the Company’s Consolidated Balance Sheets.

During 2015, total settlement payments of $191.8 million were made from the Brunswick Pension Plan For Selected Current And Former Employees and the Salaried Plan, consisting of lump-sum pension distributions of $61.7 million and the purchase of group annuity contracts totaling $130.1 million to cover future benefit payments. The annuity contract unconditionally and irrevocably guarantees the full payment of all future annuity payments to the affected participants. The insurance company assumed all risk associated with the assets and obligations that were transferred. The Company recognized a pretax settlement loss of $82.3 million in the fourth quarter of 2015 related to these actions.

During 2014, the Company offered a voluntary lump-sum pension payment opportunity to certain terminated vested Salaried Plan, Hourly Bargaining Plan and Muskegon Plan participants. Total lump-sum payments of $80.7 million, of which $71.9 million were considered settlement payments, for those participants electing to receive lump sums were made in 2014 using pension plan assets. The Company recognized pretax settlement losses of $27.9 million in the fourth quarter of 2014 for those plans where the settlement payment exceeded the sum of the plans' service and interest costs.

Costs. Pension and other postretirement benefit costs included the following components for 2016, 2015 and 2014:



	Pension Benefits									Other Postretirement Benefits
(in millions)	2016			2015			2014			2016			2015			2014
Interest cost	$	35.8		$	47.9		$	58.6		$	1.4		$	1.8		$	2.0
Expected return on plan assets	(38.5		)	(55.7		)	(58.8		)	—			—			—
Amortization of prior service credits	—			—			—			(0.7		)	(0.7		)	(0.9		)
Amortization of net actuarial losses	17.4			19.5			15.0			—			1.3			—
Settlement charges	55.1			82.3			27.9			—			—			—
Net pension and other benefit costs	$	69.8		$	94.0		$	42.7		$	0.7		$	2.4		$	1.1

Portions of Net pension and other benefit costs are recorded in Selling, general and administrative expenses as well as capitalized into inventory. Costs capitalized into inventory are eventually realized through Cost of sales in the Consolidated Statements of Operations.

Pension expense in 2016 includes the impact of a change in methodology used to calculate the interest cost component of pension expense. In 2015 and prior years, the Company used a single-weighted average discount rate to calculate pension and postretirement interest costs. Beginning in 2016, the Company is utilizing a "spot rate approach" in the calculation of pension and postretirement interest costs to provide a more accurate measurement of interest costs. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of pension and postretirement interest costs. This calculation change is considered to be a change in accounting estimate and is being applied prospectively in 2016. The discount rates used to measure the 2016 interest costs are 3.58% and 3.30% for pensions and other postretirement benefits, respectively. The previous method would have used a discount rate for interest costs of 4.40% for pensions and 4.23% for other postretirement benefits, respectively. The decreased interest costs for the 12 months ended December 31, 2016, for pension and other postretirement benefits, was approximately $8.2 million and $0.4 million, respectively, compared with the previous method.

Additionally, pension expense in 2016 includes the impact of a decline in the assumed rate of return on plan assets to 5.25% in 2016 compared with 6.00% in 2015, primarily due to shifts in asset allocations toward fixed income investments. For the year ended December 31, 2016, pension expense increased by $5.6 million as a result of the lower assumed rate of return on plan assets.

Benefit Obligations and Funded Status. A reconciliation of the changes in the benefit obligations and fair value of assets over the two-year period ending December 31, 2016, and a statement of the funded status at December 31 for these years for the Company's pension and other postretirement benefit plans follow:



	Pension Benefits						Other Postretirement Benefits
(in millions)	2016			2015			2016			2015
Reconciliation of benefit obligation:
Benefit obligation at previous December 31	$	1,035.5		$	1,315.4		$	43.5		$	49.5
Interest cost	35.8			47.9			1.4			1.8
Participant contributions	—			—			0.5			0.7
Actuarial (gains) losses	49.0			(56.8		)	(0.9		)	(4.1		)
Benefit payments	(73.6		)	(79.2		)	(3.9		)	(4.4		)
Settlement payments	(125.2		)	(191.8		)	—			—
Benefit obligation at December 31	921.5			1,035.5			40.6			43.5

Reconciliation of fair value of plan assets:
Fair value of plan assets at previous December 31	736.4			965.9			—			—
Actual return on plan assets	75.7			(32.1		)	—			—
Employer contributions	74.6			73.6			3.4			3.7
Participant contributions	—			—			0.5			0.7
Benefit payments	(73.6		)	(79.2		)	(3.9		)	(4.4		)
Settlement payments	(125.2		)	(191.8		)	—			—
Fair value of plan assets at December 31	687.9			736.4			—			—

Funded status at December 31	$	(233.6	)	$	(299.1	)	$	(40.6	)	$	(43.5	)
Funded percentage ^(A)	75		%	71		%	NA			NA

(A) As all of the Company's plans are frozen, the projected benefit obligation and the accumulated benefit obligation are equal. As of December 31, 2016 and 2015, the projected and accumulated benefit obligations for all of the Company's pension plans were in excess of plan assets.

The funded status of these pension plans includes the projected and accumulated benefit obligations for the Company's nonqualified pension plan of $34.5 million and $36.7 million at December 31, 2016 and 2015, respectively. The Company's nonqualified pension plan and other postretirement benefit plans are not funded.

The amounts included in the Company's Consolidated Balance Sheets as of December 31, 2016 and 2015, were as follows:



	Pension Benefits				Other Postretirement Benefits
(in millions)	2016		2015		2016		2015
Accrued expenses	$	10.5	$	3.8	$	4.1	$	4.4
Postretirement benefit liabilities	223.1		295.3		36.5		39.1
Net amount recognized	$	233.6	$	299.1	$	40.6	$	43.5

Accumulated Other Comprehensive Loss. The following pretax activity related to pensions and other postretirement benefits was recorded in Accumulated other comprehensive loss as of December 31:



	Pension Benefits						Other Postretirement Benefits
(in millions)	2016			2015			2016			2015
Prior service credits
Beginning balance	$	—		$	—		$	(10.9	)	$	(11.6	)
Amount recognized as component of net benefit costs	—			—			0.7			0.7
Ending balance	—			—			(10.2		)	(10.9		)

Net actuarial losses
Beginning balance	457.8			528.6			1.9			7.3
Actuarial (gains) losses arising during the period	11.8			31.0			(0.9		)	(4.1		)
Amount recognized as component of net benefit costs	(72.5		)	(101.8		)	—			(1.3		)
Ending balance	397.1			457.8			1.0			1.9

Total	$	397.1		$	457.8		$	(9.2	)	$	(9.0	)

The estimated pretax net actuarial loss in Accumulated other comprehensive loss at December 31, 2016, expected to be recognized as a component of net periodic benefit cost in 2017 for the Company's pension plans, is $14.4 million. The estimated pretax prior service credit and net actuarial loss in Accumulated other comprehensive loss at December 31, 2016, expected to be recognized as components of net periodic benefit cost in 2017 for the Company's other postretirement benefit plans, are $0.7 million and $0.0 million, respectively.

Prior service costs and credits associated with other postretirement benefits are being amortized on a straight-line basis over the average future working lifetime to full eligibility for active hourly plan participants and over the average remaining life expectancy for those plans' participants who are fully eligible for benefits. Actuarial gains and losses in excess of 10 percent of the greater of the benefit obligation or the market value of assets are amortized over the remaining service period of active plan participants and over the average remaining life expectancy of inactive plan participants.

Other Postretirement Benefits. Once participants eligible for other postretirement benefits turn 65 years old, the health care benefits become a flat dollar amount based on age and years of service. The assumed health care cost trend rate for other postretirement benefits for pre-age 65 benefits as of December 31 was as follows:



	Pre-age 65 Benefits
	2016		2015
Health care cost trend rate for next year	5.7	%	5.8	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.5	%	4.5	%
Year rate reaches the ultimate trend rate	2037		2037

The health care cost trend rate assumption has an effect on the amounts reported. A one percent change in the assumed health care trend rate at December 31, 2016 would not have a material impact on the accumulated postretirement benefit obligation.

The Company monitors the cost of health care and life insurance benefit plans and reserves the right to make additional changes or terminate these benefits in the future.

Assumptions. In October 2014, the Society of Actuaries (SOA) issued updated mortality tables (RP-2014) and a mortality improvement scale (MP-2014), which reflect longer life expectancies than previously projected. Since then, the SOA has issued updated mortality improvement scales, (MP-2015 and MP-2016) which include actual mortality improvement data from the Social Security Administration for years 2011 through 2014. The actual mortality data showed higher rates of mortality than anticipated, and thus updated projections show a slight decrease in life expectancies compared to the original MP-2014 projection scale. This information was considered in developing the Company's updated mortality assumptions for pension and postretirement benefit obligations recorded at December 31, 2016. The updated mortality assumptions resulted in a decrease of approximately $10.5 million and $0.3 million in the Company's pension and postretirement benefit obligations, respectively, at December 31, 2016.

Weighted average assumptions used to determine pension and other postretirement benefit obligations at December 31 were as follows:



	Pension Benefits				Other Postretirement Benefits
	2016		2015		2016		2015
Discount rate	4.00	%	4.40	%	3.93	%	4.23	%

Weighted average assumptions used to determine net pension and other postretirement benefit costs for the years ended December 31 were as follows:



	2016	2015	2014
Discount rate for pension benefits	3.58%	3.95%	4.85%
Discount rate for other postretirement benefits	3.30%	3.75%	4.40%
Long-term rate of return on plan assets	5.25%	6.00%	6.25%

The Company utilizes a yield curve analysis to calculate the discount rates used to determine pension and other postretirement benefit obligations. The yield curve analysis matches the cash flows of the Company's benefit obligations. The yield curve consisted of spot interest rates at half year increments for each of the next 30 years and was developed based on pricing and yield information for high quality corporate bonds rated Aa by either Moody's or Standard & Poor's, private placement bonds that are traded in reliance with Rule 144A and are at least two years from date of issuance, bonds with make-whole provisions and bonds issued by foreign corporations that are denominated in U.S. dollars, excluding callable bonds and bonds less than a minimum size and other filtering criteria. Additionally, the Company's yield curve methodology includes bonds having a yield that is greater than the regression mean yield curve as the Company believes this methodology represents an appropriate estimate of the rates at which the Company could effectively settle its pension obligations.

The Company evaluates its assumption regarding the estimated long-term rate of return on plan assets based on historical experience, future expectations of investment returns, asset allocations, investment strategies and views of investment professionals. The Company's long-term rate of return on assets assumptions of 5.25 percent for 2016, 6.00 percent for 2015, and 6.25 percent for 2014, reflect expectations of projected weighted average market returns for the plans' assets. These changes in expected returns also reflected adjustments to the Company's targeted asset allocation.

Master Trust Investments. Assets of the Company's Master Pension Trust (Trust) are invested solely in the interest of the plan participants for the purpose of providing benefits to participants and their beneficiaries. Investment decisions within the Trust are made after giving appropriate consideration to the prevailing facts and circumstances that a prudent person acting in a like capacity would use in a similar situation, and follow the guidelines and objectives established within the investment policy statement for the Trust. In general, the Trust's investment strategy is to invest in a diversified portfolio of assets that will generate returns equal to or in excess of the change in liabilities resulting from interest costs and discount rate fluctuations. The excess returns generated from this strategy will contribute to improving the funded position of the plan. In order for returns to achieve this objective, the Trust will invest in fixed income investments and equities. These asset classes have historically been reasonably correlated to changes in plan liabilities resulting from changes in the discount rate. All investments are continually monitored and reviewed, with a focus on asset allocation, investment vehicles and performance of the individual investment managers, as well as overall Trust performance. Over time, the Company has shifted a greater percentage of the Trust's assets into long-term fixed-income securities, with an objective of achieving an improved matching of asset returns with changes in liabilities. The Company will consider future changes in asset allocation based on a number of factors including improvements in the plans' funded position, performance of equity investments and changes in the discount rate used to measure plan liabilities.

The Trust asset allocation at December 31, 2016 and 2015, and target allocation for 2017 are as follows:



	2016	2015	Target Allocation for 2017
Equity securities:
United States	19%	17%	17%
International	3%	3%	3%
Fixed-income securities	75%	77%	80%
Short-term investments	3%	3%	—
Total	100%	100%	100%

The fair values of the Trust's pension assets at December 31, 2016, by asset class were as follows:



	Fair Value Measurements at December 31, 2016 ^(A)
(in millions)				Quoted Prices in Active Markets for Identical Assets			Significant Observable Inputs
Investments at fair value	Total			(Level 1)			(Level 2)
Short-term investments	$	1.9		$	1.9		$	—
Fixed-income securities:
Government securities ^(C)	141.5			—			141.5
Corporate securities ^(D)	382.1			—			382.1
Other investments ^(F)	8.5			(0.4		)	8.9
Total investments at fair value	$	534.0		$	1.5		$	532.5
Investments at net asset value
Short-term investments	46.8
Equity securities ^(B)
United States	132.8
International	17.6
Fixed-income securities:
Commingled funds ^(E)	15.3
Total investments at net asset value	212.5
Other liabilities ^(G)	(58.6		)
Total pension plan net assets	$	687.9

(A)

See Note 7 – Fair Value Measurements for a description of levels within the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. A description of the valuation methodologies is provided following these tables. There were no transfers in and/or out of Level 1, Level 2 and Level 3 in 2016.


(B)	The equity assets are invested in two indexed funds based on the Russell 3000 Index (U.S.) and the MSCI EAFE Equity Index (International). The Trust did not directly own any of the Company's common stock as of December 31, 2016.


(C)	Government securities are comprised of U.S. Treasury bonds and other government securities.


(D)	Corporate securities consist primarily of a diversified portfolio of investment grade bonds issued by companies.


(E)	This class includes commingled funds that primarily invest in investment grade corporate securities and government-related securities. This class also includes investments in non-agency collateralized mortgage obligations and mortgage-backed securities, futures and options.


(F)	Other investments consist primarily of interest rate swaps used to manage the average duration of the fixed income portfolio and credit default swaps to manage credit risk exposure.


(G)	This class includes interest receivable and receivables/payables for securities sold/purchased.

The fair values of the Trust's pension assets at December 31, 2015, by asset class were as follows:



	Fair Value Measurements at December 31, 2015 ^(A)
(in millions)				Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs
Investments at fair value	Total			(Level 1)		(Level 2)
Short-term investments	$	0.5		$	0.5	$	—
Fixed-income securities:
Government securities ^(C)	124.8			—		124.8
Corporate securities ^(D)	415.8			—		415.8
Other investments ^(F)	(1.0		)	—		(1.0		)
Total investments at fair value	$	540.1		$	0.5	$	539.6
Investments at net asset value
Short-term investments	26.2
Equity securities ^(B)
United States	129.1
International	21.0
Fixed-income securities:
Commingled funds ^(E)	37.3
Total investments at net asset value	213.6
Other liabilities ^(G)	(17.3		)
Total pension plan net assets	$	736.4

(A)


(B)	The equity assets are invested in two indexed funds based on the Russell 3000 Index (U.S.) and the MSCI EAFE Equity Index (International). The Trust did not directly own any of the Company's common stock as of December 31, 2015.


(C)	Government securities are comprised of U.S. Treasury bonds and other government securities.


(D)	Corporate securities consist primarily of a diversified portfolio of investment grade bonds issued by companies.


(E)	This class includes commingled funds that primarily invest in investment grade corporate securities and government-related securities. This class also includes investments in non-agency collateralized mortgage obligations and mortgage-backed securities, futures and options.


(F)	Other investments consist primarily of interest rate swaps used to manage the average duration of the fixed income portfolio.


(G)	This class includes interest receivable and receivables/payables for securities sold/purchased.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. See Note 7 – Fair Value Measurements for further description of the procedures the Company performs with respect to its Level 2 measurements:

Equity securities: The indexed equity funds are valued at the net asset value (NAV) provided by the investment managers. The NAV is based on the quoted market value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding. The indexed equity funds are invested in portfolios of equity securities with the goal of matching returns to specific indices. Investments in United States equity securities are invested in an index fund that tracks the Russell 3000 index, which is an all cap market index. International equities are invested in an index fund that tracks the MSCI EAFE index, which is an index that tracks international equity markets of developed countries worldwide. Withdrawal from the United States equity fund is permitted with a one-day notice prior to the trade date with subsequent settlement three days after the trade date. Withdrawal from the international equity fund is permitted daily with a two-day notice prior to the trade date with subsequent settlement three days after the trade date.

Corporate debt securities: Corporate debt securities are valued based on prices provided by third-party pricing sources, which are based on estimated prices at which a dealer would pay for or sell a security.

Government debt securities: U.S. Treasury bonds are valued using quoted market prices in active markets. Other agency securities are valued based on prices provided by third-party pricing sources, which are based on estimated prices at which a dealer would pay for or sell a security.

Short-term investments, commingled funds: Short-term investments and commingled funds are valued at the NAV provided by the investment managers. The NAV is based on the quoted market value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding. Investments in fixed income commingled funds include long-duration corporate bonds and government-related securities with the goal of preserving capital and maximizing total return consistent with prudent investment management.

Other investments: Exchange-traded derivative instruments are valued using market indices. The fair value of derivatives that are not traded on an exchange are based on valuation models using observable market data as of the measurement date.

There were no pension plan assets using significant unobservable inputs (Level 3) for the years ended December 31, 2016 and December 31, 2015.

Expected Cash Flows. The expected cash flows for the Company's pension and other postretirement benefit plans follow:



(in millions)	Pension Benefits		Other Postretirement Benefits
Company contributions expected to be made in 2017 ^(A)	$	73.8	$	4.1
Expected benefit payments:
2017 ^(B)	158.7		4.1
2018	56.8		3.9
2019	56.9		3.7
2020	56.6		3.4
2021	56.0		3.1
2022-2026	270.0		13.2

(A) The Company anticipates contributing approximately $70.0 million to fund the qualified pension plans and approximately $3.8 million to cover benefit payments in the unfunded, nonqualified pension plan in 2017. Company contributions are subject to change based on market conditions or Company discretion.

(B) Expected benefit payments in 2017 include payments in connection with the Hourly Plan and Muskegon Plan terminations.