Annual report pursuant to Section 13 and 15(d)

Postretirement Benefits

v3.10.0.1
Postretirement Benefits
 12 Months Ended
Dec. 31, 2018
Defined Benefit Plan [Abstract]  
Postretirement Benefits
Postretirement Benefits

Overview. The Company has defined contribution plans and makes contributions including 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 $54.3 million in 2018, $52.1 million in 2017 and $46.3 million in 2016.

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.

The Company historically maintained four qualified defined benefit plans: the Brunswick Pension Plan for Salaried Employees (Salaried Plan), the Brunswick Pension Plan for Hourly Bargaining Unit Employees (Bargaining Plan), the Brunswick Pension Plan For Hourly Employees (Hourly Plan) and the Brunswick Pension Plan For Hourly Wage Employees (Muskegon Plan). During the third quarter of 2018, the Company initiated actions to terminate the two remaining plans, the Salaried Plan and the Bargaining Plan, effective October 31, 2018. All benefits are expected to be settled during 2019, either through a lump-sum payment to participants or the purchase of an annuity offering on behalf of the participants. As a result of the planned terminations, the over-funded positions for both plans are currently recorded within Prepaid expenses and other in the Consolidated Balance Sheets. The Company has previously completed actions to terminate the Hourly Plan and the Muskegon Plan, effective as of December 31, 2016, and all benefits were paid during 2017 as described below.

During 2017, total settlement payments of $132.7 million were made from the Bargaining Plan and Salaried Plan to purchase group annuity contracts on behalf of participants to cover future benefit payments. In addition, settlement payments totaling $101.7 million were made from the Hourly Plan and the Muskegon Plan in connection with plan terminations. The settlement payments included group annuity contracts to cover future benefit payments as well as lump-sum benefit payments to certain participants.

The annuity contracts provide for the full payment of all future annuity payments to the participants. The insurance company assumed all investment risk associated with the assets and obligations that were transferred. The Company recognized a pretax settlement loss of $96.6 million at December 31, 2017 related to these actions.

During 2016, total settlement payments of $125.2 million were made from the Bargaining Plan and the Salaried Plan to purchase group annuity contracts to cover future benefit payments. The annuity contract provides for 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.

Costs. Pension and other postretirement benefit costs included the following components for 2018, 2017 and 2016:
 
Pension Benefits
 
Other Postretirement Benefits
(in millions)
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Interest cost
$
22.6

 
$
28.4

 
$
35.8

 
$
1.1

 
$
1.2

 
$
1.4

Expected return on plan assets
(24.8
)
 
(33.5
)
 
(38.5
)
 
—

 
—

 
—

Amortization of prior service credits
—

 
—

 
—

 
(0.7
)
 
(0.7
)
 
(0.7
)
Amortization of net actuarial losses
9.9

 
14.4

 
17.4

 
—

 
—

 
—

Settlement charges
—

 
96.6

 
55.1

 
—

 
—

 
—

Net pension and other benefit costs
$
7.7

 
$
105.9

 
$
69.8

 
$
0.4

 
$
0.5

 
$
0.7


Net pension and other benefit costs are recorded in Other expense, net in the Consolidated Statements of Operations.

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, 2018, 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)
2018

2017

2018

2017
Reconciliation of benefit obligation:







Benefit obligation at previous December 31
$
716.9

 
$
921.5

 
$
38.7

 
$
40.6

Interest cost
22.6

 
28.4

 
1.1

 
1.2

Participant contributions
—

 
—

 
0.2

 
0.5

Actuarial (gains) losses
(42.9
)
 
58.0

 
(2.5
)
 
—

Benefit payments
(43.8
)
 
(56.6
)
 
(3.2
)
 
(3.6
)
Settlement payments
—

 
(234.4
)
 
—

 
—

Benefit obligation at December 31
652.8

 
716.9


34.3


38.7













Reconciliation of fair value of plan assets:











Fair value of plan assets at previous December 31
546.1

 
687.9

 
—

 
—

Actual return on plan assets
(24.1
)
 
75.5

 
—

 
—

Employer contributions
163.8

 
73.7

 
3.0

 
3.1

Participant contributions
—

 
—

 
0.2

 
0.5

Benefit payments
(43.8
)
 
(56.6
)
 
(3.2
)
 
(3.6
)
Settlement payments
—

 
(234.4
)
 
—

 
—

Fair value of plan assets at December 31
642.0


546.1


—


—













Funded status at December 31
$
(10.8
)

$
(170.8
)

$
(34.3
)

$
(38.7
)
Funded percentage (A)
98
%

76
%

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, 2018 and 2017, the plan assets for the Company's Salaried and Bargaining plans were in excess of the projected and accumulated benefit obligations.

The funded status of these pension plans includes the projected and accumulated benefit obligations for the Company's nonqualified pension plan of $29.2 million and $33.2 million at December 31, 2018 and 2017, 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, 2018 and 2017, were as follows:
 
Pension Benefits
 
Other Postretirement Benefits
(in millions)
2018
 
2017
 
2018
 
2017
Prepaid expenses and other
$
14.8

 
$
—

 
$
—

 
$
—

Accounts and notes receivable
3.6

 
3.5

 
—

 
—

Assets recognized
$
18.4

 
$
3.5

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Accrued expenses
$
3.7

 
$
3.8

 
$
3.6

 
$
3.7

Postretirement benefit liabilities
25.5

 
170.5

 
30.7

 
35.0

Liabilities recognized
$
29.2

 
$
174.3

 
$
34.3

 
$
38.7



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)
2018
 
2017
 
2018
 
2017
Prior service credits
 
 
 
 
 
 
 
Beginning balance
$
—

 
$
—

 
$
(9.5
)
 
$
(10.2
)
Amount recognized as component of net benefit costs
—

 
—

 
0.7

 
0.7

Ending balance
—

 
—

 
(8.8
)
 
(9.5
)
 
 
 
 
 
 
 
 
Net actuarial losses
 
 
 
 
 
 
 
Beginning balance
302.1

 
397.1

 
1.0

 
1.0

Actuarial (gains) losses arising during the period
6.1

 
16.0

 
(2.5
)
 
—

Amount recognized as component of net benefit costs
(9.9
)
 
(111.0
)
 
—

 
—

Ending balance
298.3

 
302.1

 
(1.5
)
 
1.0

 
 
 
 
 
 
 
 
Total
$
298.3

 
$
302.1

 
$
(10.3
)
 
$
(8.5
)


The estimated pretax net actuarial loss in Accumulated other comprehensive loss at December 31, 2018, expected to be recognized as a component of net periodic benefit cost in 2019 for the Company's pension plans, is $5.1 million. The estimated pretax prior service credit and net actuarial loss in Accumulated other comprehensive loss at December 31, 2018, expected to be recognized as components of net periodic benefit cost in 2019 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
 
2018
 
2017
Health care cost trend rate for next year
5.5
%
 
5.6
%
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



A one percent change in the assumed health care trend rate at December 31, 2018 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. Weighted average assumptions used to determine pension and other postretirement benefit obligations at December 31 were as follows:
 
Pension Benefits
 
Other Postretirement Benefits
 
2018
 
2017
 
2018
 
2017
Discount rate
4.13
%
 
3.63
%
 
4.20
%
 
3.51
%


Weighted average assumptions used to determine net pension and other postretirement benefit costs for the years ended December 31 were as follows:
 
2018
 
2017
 
2016
Discount rate for pension benefits (A) (B)
3.27%
 
3.40%
 
3.58%
Discount rate for other postretirement benefits (A) (B)
3.08%
 
3.17%
 
3.30%
Long-term rate of return on plan assets (C)
4.25%
 
4.75%
 
5.25%


(A) 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. For the Company's Salaried and Bargaining plans which were terminated during 2018, the discount rate was a blend of the December 31, 2018 yield curve rate associated with those participants electing annuity contracts to cover future benefit payments, and a lump-sum segment rate for those participants electing lump-sum benefit payments.
(B) The Company uses 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.
(C) 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.

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 Trust asset allocation at December 31, 2018 and 2017, and target allocation for 2019 are as follows:
 
2018
 
2017
 
Target
Allocation for 2019
Equity securities:
 
 
 
 
 
United States
—%
 
4%
 
—%
International
—%
 
1%
 
—%
Fixed-income securities
84%
 
89%
 
85%
Short-term investments
16%
 
6%
 
15%
Total
100%
 
100%
 
100%


The fair values of the Trust's pension assets at December 31, 2018, by asset class were as follows:
 
Fair Value Measurements at December 31, 2018 (A)
(in millions)
Quoted Prices in Active Markets for Identical Assets
 
Significant Observable Inputs
 
 
Investments at fair value
(Level 1)
 
(Level 2)
 
Total
Cash and cash equivalents
$
6.1

 
$
—

 
$
6.1

Fixed-income securities:
 
 
 
 
 
Government securities (C)
—

 
126.2

 
126.2

Corporate securities (D)
—

 
356.2

 
356.2

Other investments (F) 
—

 
7.2

 
7.2

Total investments at fair value
$
6.1

 
$
489.6

 
$
495.7

Investments at net asset value
 
 
 
 
 
Short-term investments
 
 
 
 
102.3

Equity securities: (B)
 
 
 
 
 
United States
 
 
 
 
2.0

Fixed-income securities:
 
 
 
 
 
Commingled funds (E)
 
 
 
 
63.3

Total investments at net asset value
 
 
 
 
167.6

Other liabilities (G)
 
 
 
 
(21.3
)
Total pension plan net assets
 
 
 
 
$
642.0


(A)
See Note 8 – 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 and Level 2 in 2018.
(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, 2018.
(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, 2017, by asset class were as follows:
 
Fair Value Measurements at December 31, 2017 (A)
(in millions)
Quoted Prices in Active Markets for Identical Assets
 
Significant Observable Inputs
 
 
Investments at fair value
(Level 1)
 
(Level 2)
 
Total
Short-term investments
$
15.2

 
$
—

 
$
15.2

Fixed-income securities:
 
 
 
 
 
Government securities (C)
—

 
114.1

 
114.1

Corporate securities (D)
—

 
324.0

 
324.0

Other investments (F)
—

 
9.2

 
9.2

Total investments at fair value
$
15.2

 
$
447.3

 
$
462.5

Investments at net asset value
 
 
 
 
 
Short-term investments
 
 
 
 
25.0

Equity securities: (B)
 
 
 
 
 
United States
 
 
 
 
23.9

International
 
 
 
 
5.6

Fixed-income securities:
 
 
 
 
 
Commingled funds (E)
 
 
 
 
65.2

Total investments at net asset value
 
 
 
 
119.7

Other liabilities (G)
 
 
 
 
(36.1
)
Total pension plan net assets
 
 
 
 
$
546.1


(A)
See Note 8 – 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 and Level 2 in 2017.
(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, 2017.
(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 following is a description of the valuation methodologies used for assets and liabilities measured at fair value. See Note 8 – 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, asset-backed securities and other short-term, fixed-income 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 measured using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and December 31, 2017.

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 2019
$
3.7

 
$
3.6

Expected benefit payments:
 
 
 
2019 (A)
639.3

 
3.6

2020
3.5

 
3.4

2021
3.1

 
3.2

2022
2.9

 
2.9

2023
2.8

 
2.8

2024-2028
10.7

 
12.1


(A) Expected benefit payments in 2019 include payments in connection with the Salaried Plan and Bargaining Plan terminations.