Annual report pursuant to Section 13 and 15(d)

Pension and Other Postretirement Benefit Programs

v3.7.0.1
Pension and Other Postretirement Benefit Programs
12 Months Ended
Dec. 31, 2016
Compensation and Retirement Disclosure [Abstract]  
Pension and Other Postretirement Benefit Programs
PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS
For periods prior to April 1, 2016, certain of our North American employees participated in defined-benefit pension and postretirement plans (the “Shared Plans”) sponsored by AWI. In addition, prior to April 1, 2016, certain of our U.S. employees participated in a postretirement medical benefit plan sponsored by us (the “AFI Postretirement Plan”). The related net benefit plan obligations of the Shared Plans were not included in our Consolidated Balance Sheets as we did not sponsor the Shared Plans and had no rights or obligations related to the Shared Plans’ assets or liabilities. Our Consolidated Statements of Operations and Comprehensive Income (Loss) include Shared Plan expenses for our active and retired employees as well as an allocation of Shared Plan expenses. The Shared Plan expenses presented in our Consolidated Financial Statements represent the allocation of plan costs to AFI and do not represent cash payments to AWI or to the Shared Plans.
Effective April 1, 2016, upon separation from AWI, AFI created defined-benefit pension and postretirement plans which provide North American employees and retirees who previously participated in the Shared Plans the same defined-benefit pension and postretirement benefits that had been previously been provided by AWI. As a result of the Separation, and based on an analysis provided by our actuaries, AFI assumed defined-benefit pension plan assets of $381.4 million, defined-benefit pension benefit obligations of $385.4 million, defined-benefit postretirement benefit obligations of $82.9 million and accumulated other comprehensive loss of $101.8 million. AFI also retained the AFI Postretirement Plan described above.

Benefits from defined-benefit pension plans are based primarily on an employee’s compensation and years of service. We fund our pension plans when appropriate. We fund postretirement benefits on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions. We also have defined-contribution pension plans for eligible employees.




























NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
Defined-Benefit Pension Plans

The following tables summarize the balance sheet impact of the pension benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions. The pension benefits disclosures include both the qualified, funded Retirement Income Plan (“RIP”) and the Retirement Benefit Equity Plan, which is a nonqualified, unfunded plan designed to provide pension benefits in excess of the limits defined under Sections 415 and 401(a)(17) of the Internal Revenue Code. The disclosures also include our two Canadian pension plans.
 
U.S.
 
Canadian
Defined-benefit pension plans
 
 
 
Change in benefit obligation:
 
 
 
Projected benefit obligations as of January 1, 2016
$

 
$

Liabilities assumed from separation
365.2

 
20.2

Service cost
4.3

 

Interest cost
11.7

 
0.5

Foreign currency translation adjustment

 
(0.8
)
Actuarial (gain)
(6.2
)
 
(0.5
)
Benefits paid
(10.6
)
 
(2.7
)
Projected benefit obligations as of December 31, 2016
364.4

 
16.7

 
 
 
 
Change in plan assets:
 
 
 
Fair value of plan assets as of January 1, 2016

 

Assets received from separation
362.2

 
19.2

Actual return on plan assets
11.6

 
0.8

Foreign currency translation adjustment

 
(0.8
)
Benefits paid
(10.6
)
 
(2.7
)
Fair value of plan assets as of December 31, 2016
363.2

 
16.5

Funded status of the plans
$
(1.2
)
 
$
(0.2
)


The accumulated benefit obligation for the U.S. and Canadian defined-benefit pension plans was $362.2 million and $16.7 million, respectively, at December 31, 2016.




NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
 
U.S.
 
Canadian
Defined-benefit pension plans
 
 
 
Weighted average assumptions used to determine benefit obligations as of December 31, 2016:
 
 
 
Discount rate
4.30
%
 
3.80
%
Rate of compensation increase
3.10
%
 

Weighted average assumptions used to determine net periodic benefit cost for 2016:
 
 
 
Discount rate
4.40
%
 
3.50
%
Expected return on plan assets
6.75
%
 
5.40
%
Rate of compensation increase
3.10
%
 


 
U.S.
 
Canadian
Defined-benefit pension plans with benefit obligations in excess of assets
 
 
 
Projected benefit obligation, December 31, 2016
$
1.4

 
$
16.1

Accumulated benefit obligation, December 31, 2016
1.3

 
16.1

Fair value of plan assets, December 31, 2016

 
15.9



The components of the pension cost are as follows:
 
Year Ended December 31,
 
2016
 
2015
 
2014
U.S. defined-benefit pension plans
 
 
 
 
 
Service cost of benefits earned during the period
$
4.3

 
$

 
$

Interest cost on projected benefit obligation
11.7

 

 

Expected return on plan assets
(17.4
)
 

 

Amortization of prior service cost
0.3

 

 

Recognized net actuarial loss
7.7

 

 

Allocated benefit cost from Shared Plans
2.2

 
14.8

 
2.6

Net periodic pension cost
$
8.8

 
$
14.8

 
$
2.6







NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Canadian defined-benefit pension plans
 
 
 
 
 
Interest cost on projected benefit obligation
$
0.5

 
$

 
$

Expected return on plan assets
(0.8
)
 

 

Amortization of net actuarial loss
0.2

 

 

Allocated benefit cost from Shared Plans
0.1

 
0.3

 

Net periodic pension cost
$

 
$
0.3

 
$


Excluded from net periodic pension costs in the Canadian defined-benefit pension table above were $0.3 million of settlement charges recorded in 2016.

Investment Policies

Our primary investment objective is to maintain the funded status of the plans such that the likelihood that we will be required to make significant contributions to the plan is limited. This objective is expected to be achieved by:

Investing a substantial portion of the plan assets in high quality corporate and treasury bonds whose duration is at least equal to that of the plan’s liabilities such that there is a relatively high correlation between the movements of the plan’s liability and asset values.
Investing in publicly traded equities in order to increase the ratio of plan assets to liabilities over time.
Limiting investment return volatility by diversifying among additional asset classes with differing expected rates of return and return correlations.

Each asset class used has a defined asset allocation target and allowable range. The table below shows the asset allocation target and the December 31, 2016 position for each asset class:
 
Target Weight at
 
Position at
 
December 31, 2016
 
December 31, 2016
U.S. Asset Class
 
 
 
Fixed income securities
60
%
 
60
%
Equities
40
%
 
40
%


 
Target Weight at
 
Position at
 
December 31, 2016
 
December 31, 2016
Canadian Asset Class
 
 
 
Fixed income securities
50
%
 
49
%
Equities
48
%
 
48
%
Other
2
%
 
3
%






NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
Pension plan assets are required to be reported and disclosed at fair value in the financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
 
Value at December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. Plans
 
 
 
 
 
 
 
Fixed income securities
$

 
$
219.1

 
$

 
$
219.1

Equities

 
144.1

 

 
144.1

Net assets measured at fair value
$

 
$
363.2

 
$

 
$
363.2



 
Value at December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Canadian Plans
 
 
 
 
 
 
 
Fixed income securities
$

 
$
8.1

 
$

 
$
8.1

Equities

 
7.9

 

 
7.9

Other
0.5

 

 

 
0.5

Net assets measured at fair value
$
0.5

 
$
16.0

 
$

 
$
16.5



Following is a description of the valuation methodologies used for assets.

Fixed income securities — Consists of registered investment funds and common and collective trust funds investing in fixed income securities tailored to institutional investors. The fair values of the investments in this class are based on the underlying securities in each fund’s portfolio which is the amount the fund would receive for the security upon a current sale.

Equities — Consists of investments in funds investing in equities tailored to institutional investors. The fair value of each fund is based on the underlying securities in each fund’s portfolio which is the amount the fund would receive for the security upon a current sale.

NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
Other — Consists of cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity of these instruments.

Basis of Rate-of-Return Assumption

Long-term asset class return assumptions are determined based on the expected performance of the asset classes over 10 to 30 years. Incremental components were added for the expected return from active management and asset class rebalancing based on historical information. These forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 6.75% for our U.S. plans and 5.40% for our Canadian plans for the year ended December 31, 2016.

Defined-Benefit Postretirement Benefit Plans
 
2016
 
2015
U.S. defined-benefit retiree health and life insurance plans
 
 
 
Change in benefit obligation:
 
 
 
Projected benefit obligations as January 1,
$
3.5

 
$
3.1

Liabilities assumed from separation
82.9

 

Service cost
0.1

 

Interest cost
2.7

 
0.1

Plan participants' contributions
1.6

 

Actuarial loss
1.1

 
0.3

Benefits paid, gross
(8.3
)
 

Projected benefit obligation as of December 31,
83.6

 
3.5

 
 
 
 
Change in plan assets:
 
 
 
Fair value of plan assets as January 1,

 

Employer contribution
6.7

 

Plan participants' contribution
1.6

 

Benefits paid
(8.3
)
 

Fair value of plan assets as of December 31,

 

Funded status of the plans
$
(83.6
)
 
$
(3.5
)


 
2016
 
2015
U.S. defined-benefit retiree health and life insurance plans
 
 
 
Weighted average discount rate used to determine benefit obligations as of December 31,
4.05
%
 
4.25
%
Weighted average discount rate used to determine net periodic benefit cost
4.25
%
 
3.90
%





NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
The components of postretirement benefits costs are as follows:
 
Year Ended December 31,
 
2016
 
2015
 
2014
U.S. defined-benefit retiree health and life insurance plans
 
 
 
 
 
Service cost of benefits earned during the period
$
0.1

 
$

 
$

Interest cost on accumulated postretirement benefit obligations
2.7

 
0.1

 
0.1

Amortization of prior service (credit)
(0.2
)
 

 

Amortization of net actuarial (gain)
(3.2
)
 

 

Allocated benefit cost (credit) from Shared Plans
(0.3
)
 
0.7

 
4.2

Net periodic postretirement benefit cost
$
(0.9
)
 
$
0.8

 
$
4.3



For measurement purposes, an average rate of annual increase in the per capita cost of covered health care benefits of 7.2% for pre-65 retirees and 8.0% to 9.3% for post-65 retirees (depending on plan type) was assumed for 2017, decreasing ratably to an ultimate rate of 4.5% by 2025. Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 2017:
 
One percentage point
 
Increase
 
Decrease
U.S. defined-benefit retiree health and life insurance plans
 
 
 
Effect on total service and interest cost components
$

 
$

Effect on postretirement benefit obligation
(2.1
)
 
1.7



Amounts recognized in assets and (liabilities) on the consolidated balance sheets at year end consist of:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
2016
 
2016
Prepaid pension costs
$
0.1

 
$
0.1

Pension benefit liabilities
(1.3
)
 
(0.3
)
Net amount recognized
$
(1.2
)
 
$
(0.2
)

 
Retiree Health and Life Insurance Benefits
 
2016
 
2015
Accounts payable and accrued expenses
$
(8.1
)
 
$
(0.2
)
Postretirement benefit liabilities
(75.5
)
 
(3.3
)
Net amount recognized
$
(83.6
)
 
$
(3.5
)







NOTE 15. PENSION AND OTHER POSTRETIREMENT BENEFIT PROGRAMS (continued)
Pre-tax amounts recognized in accumulated other comprehensive (loss) income at year end consist of:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
2016
 
2016
Net actuarial (loss)
$
(132.2
)
 
$
(2.9
)
Prior service (cost)
(0.5
)
 

Accumulated other comprehensive (loss)
$
(132.7
)
 
$
(2.9
)

 
Retiree Health and Life Insurance Benefits
 
2016
 
2015
Net actuarial gain (loss)
$
37.0

 
$
(0.6
)


We expect to amortize $9.2 million and $0.1 million of previously unrecognized prior service cost and net actuarial losses into U.S. and Canadian plan pension cost, respectively, in 2017. We expect to amortize $2.6 million of previously unrecognized net actuarial gains into postretirement benefit cost in 2017.

We expect to contribute $0.1 million each to our U.S. and Canadian defined-benefit pension plans and $8.2 million to our U.S. postretirement benefit plans in 2017.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next ten years for our U.S. plans:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
Retiree Health and Life Insurance Benefits, Gross
 
Retiree Health Medicare Subsidy Receipts
2017
$
15.2

 
$
1.5

 
$
8.3

 
$
(0.1
)
2018
16.2

 
1.4

 
7.9

 
(0.1
)
2019
17.3

 
1.3

 
7.5

 
(0.1
)
2020
18.5

 
1.3

 
7.0

 
(0.1
)
2021
19.5

 
1.3

 
6.6

 
(0.1
)
2022-2026
110.3

 
5.8

 
27.9

 
(0.5
)


These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

Costs for other worldwide defined-contribution benefit plans were $7.3 million in 2016.