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, 2014

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

Note 17 – Postretirement Benefits

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 a match and an annual discretionary contribution and 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 $38.9 million, $35.8 million and $34.5 million in 2014, 2013 and 2012, respectively. Company contributions to multiemployer plans were $0.1 million, $0.1 million and $0.1 million in 2014, 2013 and 2012, respectively. The multiemployer plans are not significant individually or in the aggregate.

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 2014, the Company offered a voluntary lump sum pension payment opportunity to certain terminated vested U.S. pension 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. Additionally, the Company initiated the process to offer lump sum payments to certain active pension plan participants, which is expected to be completed in November 2015. The Company expects to make approximately $70 million in payments from the plans in connection with this action and to incur an estimated settlement loss of $30 million to $35 million. However, since the final result of the offering is presently unknown, these amounts are subject to change.

Costs. Pension and other postretirement benefit costs included the following components for 2014, 2013 and 2012:



	Pension Benefits									Other Postretirement Benefits
(in millions)	2014			2013			2012			2014			2013			2012
Service cost	$	—		$	0.1		$	0.2		$	—		$	—		$	—
Interest cost	58.6			54.0			57.7			2.0			1.9			2.4
Expected return on plan assets	(58.8		)	(57.0		)	(55.2		)	—			—			—
Amortization of prior service credits	—			—			—			(0.9		)	(5.7		)	(6.3		)
Amortization of net actuarial losses	15.0			21.4			21.9			—			1.3			0.7
Curtailment loss	—			—			0.1			—			—			—
Settlement loss	27.9			—			—			—			—			—
Net pension and other benefit costs	$	42.7		$	18.5		$	24.7		$	1.1		$	(2.5	)	$	(3.2	)

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.

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, 2014, 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)	2014			2013			2014			2013
Reconciliation of benefit obligation:
Benefit obligation at previous December 31	$	1,249.3		$	1,388.0		$	47.7		$	58.0
Service cost	—			0.1			—			—
Interest cost	58.6			54.0			2.0			1.9
Participant contributions	—			—			0.9			1.1
Actuarial (gains) losses	165.9			(116.4		)	5.0			(5.2		)
Benefit payments	(86.5		)	(76.4		)	(6.1		)	(8.1		)
Settlement payments	(71.9		)	—			—			—
Benefit obligation at December 31	1,315.4			1,249.3			49.5			47.7

Reconciliation of fair value of plan assets:
Fair value of plan assets at previous December 31	956.0			898.6			—			—
Actual return on plan assets	94.5			80.0			—			—
Employer contributions	73.8			53.8			5.2			7.0
Participant contributions	—			—			0.9			1.1
Benefit payments	(86.5		)	(76.4		)	(6.1		)	(8.1		)
Settlement payments	(71.9		)	—			—			—
Fair value of plan assets at December 31	965.9			956.0			—			—

Funded status at December 31	$	(349.5	)	$	(293.3	)	$	(49.5	)	$	(47.7	)

The funded status of these pension plans includes the projected and accumulated benefit obligations for the Company's nonqualified pension plan of $39.7 million and $37.9 million at December 31, 2014 and 2013, 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, 2014 and 2013, were as follows:



	Pension Benefits				Other Postretirement Benefits
(in millions)	2014		2013		2014		2013
Accrued expenses	$	3.8	$	3.8	$	4.9	$	5.8
Postretirement benefit liabilities	345.7		289.5		44.6		41.9
Net amount recognized	$	349.5	$	293.3	$	49.5	$	47.7

As of December 31, 2014 and 2013, the projected and accumulated benefit obligations for all of the Company's pension plans were in excess of plan assets. The projected and accumulated benefit obligations and fair value of plan assets for the Company's qualified and nonqualified pension plans at December 31 were as follows:



(in millions)	2014			2013
Projected benefit obligation	$	1,315.4		$	1,249.3
Accumulated benefit obligation	$	1,315.4		$	1,249.3
Fair value of plan assets	$	965.9		$	956.0
Funded status	73		%	77		%

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



	Pension Benefits						Other Postretirement Benefits
(in millions)	2014			2013			2014			2013
Prior service credits
Beginning balance	$	—		$	—		$	(12.5	)	$	(18.2	)
Prior service credits arising during the period	—			—			—			—
Amount recognized as component of net benefit costs	—			—			0.9			5.7
Ending balance	—			—			(11.6		)	(12.5		)

Net actuarial losses
Beginning balance	441.3			602.1			2.3			8.8
Actuarial (gains) losses arising during the period	130.2			(139.4		)	5.0			(5.2		)
Amount recognized as component of net benefit costs	(42.9		)	(21.4		)	—			(1.3		)
Ending balance	528.6			441.3			7.3			2.3

Total	$	528.6		$	441.3		$	(4.3	)	$	(10.2	)

The estimated pretax net actuarial loss in Accumulated other comprehensive income (loss) at December 31, 2014, expected to be recognized as a component of net periodic benefit cost in 2015 for the Company's pension plans, is $20.0 million, which excludes an estimated amount to be recognized for settlement losses in 2015. The estimated pretax prior service credit and net actuarial loss in Accumulated other comprehensive income (loss) at December 31, 2014, expected to be recognized as components of net periodic benefit cost in 2015 for the Company's other postretirement benefit plans, are $0.7 million and $1.3 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
	2014		2013
Health care cost trend rate for next year	7.1	%	7.3	%
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	2028		2028

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, 2014, would have the following effects:



(in millions)	One Percent Increase		One Percent Decrease
Effect on total service and interest cost	$	—	$	—
Effect on accumulated postretirement benefit obligation	$	0.2	$	(0.2	)

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. The SOA RP-2014 and MP-2014 were considered in developing the Company's updated mortality assumptions for pension and postretirement benefit obligations recognized at December 31, 2014, and the amounts estimated for 2015 pension and postretirement benefit expense. The updated mortality assumptions resulted in an increase of approximately $59 million and $2 million in the Company's pension and postretirement benefit obligations, respectively, at December 31, 2014.

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



	Pension Benefits				Other Postretirement Benefits
	2014		2013		2014		2013
Discount rate	3.95	%	4.85	%	3.75	%	4.40	%
Rate of compensation increase^(A)	—		—		—		—

(A) Assumption used in determining pension benefit obligation only. The rate of compensation increase was reduced to 0.00% at December 31, 2008, as a result of the decision to freeze future benefit accruals for those plans where benefits are based on average compensation.

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



	2014	2013	2012
Discount rate for pension benefits	4.85%	4.00%	4.50%
Discount rate for other postretirement benefits	4.40%	3.60%	4.20%
Long-term rate of return on plan assets^(A)	6.25%	6.50%	7.00%
Rate of compensation increase^(A)	—	—	—

(A) Assumption used in determining pension benefit cost only.

The Company utilizes a yield curve analysis to determine the discount rates for 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 6.25 percent for 2014, 6.50 percent for 2013, and 7.00 percent for 2012, 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 discount rate used to measure plan liabilities. The excess returns generated from this strategy will contribute to improving the funded position of the plan. In order for returns to exceed the discount rate, the Trust will invest in equities and other asset classes which have had historically higher rates of returns than fixed income investments. These asset classes have also had lower correlations 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 will be shifting 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 these 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, 2014 and 2013, and target allocation for 2015 are as follows:



	2014	2013	Target Allocation for 2015
Equity securities:
United States	17%	25%	17%
International	3%	5%	3%
Fixed-income securities	66%	46%	80%
Short-term investments	14%	24%	—
Total	100%	100%	100%

The fair values of the Trust's pension assets at December 31, 2014, by asset class were as follows:



	Fair Value Measurements at December 31, 2014 ^(A)
(in millions)				Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs			Significant Unobservable Inputs
Asset Class	Total			(Level 1)		(Level 2)			(Level 3)
Short-term investments	$	151.3		$	6.3	$	145.0		$	—
Equity securities: ^(B)
United States	164.4			—		164.4			—
International	28.1			—		28.1			—
Fixed-income securities:
Government securities ^(C)	119.7			—		119.7			—
Corporate securities ^(D)	372.3			—		372.3			—
Commingled funds ^(E)	141.3			—		141.3			—
Other investments ^(F)	(6.2		)	—		(6.2		)	—
Total pension assets at fair value	970.9			$	6.3	$	964.6		$	—
Other liabilities ^(G)	(5.0		)
Total pension plan net assets	$	965.9

(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 2014.

(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, 2014.

(C) Government securities are comprised of U.S. Treasury bonds and other government securities and are considered Level 2 in 2014.

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

(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 obligation 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 fair values of the Trust's pension assets at December 31, 2013, by asset class were as follows:



	Fair Value Measurements at December 31, 2013 ^(A)
(in millions)				Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
Asset Class	Total			(Level 1)		(Level 2)		(Level 3)
Short-term investments	$	237.0		$	—	$	237.0	$	—
Equity securities: ^(B)
United States	243.8			—		243.8		—
International	46.8			—		46.8		—
Fixed-income securities:
Government securities ^(C)	70.2			27.8		42.4		—
Corporate securities ^(D)	157.0			—		157.0		—
Commingled funds ^(E)	208.0			—		208.0		—
Other investments ^(F)	9.0			—		9.0		—
Total pension assets at fair value	971.8			$	27.8	$	944.0	$	—
Other liabilities ^(G)	(15.8		)
Total pension plan net assets	$	956.0

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

(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 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.

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 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: Derivative instruments are valued using market indices.

There were no pension plan assets using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and December 31, 2013.

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 2015 ^(A)	$	73.8	$	4.9
Expected benefit payments (which reflect future service):
2015 ^(B)	$	81.5	$	4.9
2016	$	82.3	$	4.6
2017	$	82.6	$	4.4
2018	$	82.3	$	4.1
2019	$	82.0	$	3.8
2020-2024	$	394.1	$	15.2

(A) The Company currently 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 2015. Company contributions are subject to change based on market conditions or Company discretion.

(B) In addition to the 2015 expected pension benefit payments of $81.5 million, estimated lump sum pension settlement payments of $70 million are expected to be made in 2015.

The Company also provides postemployment benefits to qualified former or inactive employees. The pretax prior service credits in Accumulated other comprehensive income (loss) recognized in income was $1.3 million in both 2014 and 2013. The estimated pretax prior service credit in Accumulated other comprehensive income (loss) at December 31, 2014, expected to be recognized in income in 2015, is $0.6 million.

- Definition

The entire disclosure for pension and other postretirement benefits.

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