Annual report pursuant to Section 13 and 15(d)

Pension and Other Postretirement Benefit Programs

v3.8.0.1
Pension and Other Postretirement Benefit Programs
12 Months Ended
Dec. 31, 2017
Retirement Benefits [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. 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. In addition to the Shared Plans', 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”).
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. Our U.S. defined-benefit pension plans were amended to freeze accruals for remaining salaried non-production employees, effective December 31, 2017.

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.

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. Pension Plans
 
Canadian Pension Plans
 
2017
 
2016
 
2017
 
2016
Change in benefit obligation:
 
 
 
 
 
 
 
Projected benefit obligations as of January 1,
$
364.4

 
$

 
$
16.7

 
$

Liabilities assumed from Separation

 
365.2

 

 
20.2

Service cost
5.4

 
4.3

 

 

Interest cost
15.4

 
11.7

 
0.6

 
0.5

Foreign currency translation adjustment

 

 
1.2

 
(0.8
)
Actuarial loss (gain)
28.4

 
(6.2
)
 
1.1

 
(0.5
)
Benefits paid
(17.8
)
 
(10.6
)
 
(1.8
)
 
(2.7
)
Projected benefit obligations as of December 31,
395.8

 
364.4

 
17.8

 
16.7

 
 
 
 
 
 
 
 
Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets as of January 1,
363.2

 

 
16.5

 

Assets received from Separation

 
362.2

 

 
19.2

Actual return on plan assets
45.3

 
11.6

 
1.2

 
0.8

Employer contribution
0.1

 

 

 

Foreign currency translation adjustment

 

 
1.2

 
(0.8
)
Benefits paid
(17.8
)
 
(10.6
)
 
(1.8
)
 
(2.7
)
Fair value of plan assets as of December 31,
390.8

 
363.2

 
17.1

 
16.5

Funded status of the plans
$
(5.0
)
 
$
(1.2
)
 
$
(0.7
)
 
$
(0.2
)
 
 
 
 
 
 
 
 
Accumulated benefit obligation as of December 31,
$
394.5

 
$
362.2

 
$
17.8

 
$
16.7


The table below presents the weighted-average assumptions used in computing the benefit obligations and net periodic benefit cost for the defined-benefit pension plans:
 
U.S. Pension Plans
 
Canadian Pension Plans
 
2017
 
2016
 
2017
 
2016
Weighted average assumptions used to determine benefit obligations as of December 31,
 
 
 
 
 
 
 
Discount rate
3.75
%
 
4.30
%
 
3.30
%
 
3.80
%
Rate of compensation increase
3.25
%
 
3.10
%
 
n/a

 
n/a

Weighted average assumptions used to determine net periodic benefit cost for the period:
 
 
 
 
 
 
 
Discount rate
4.30
%
 
4.40
%
 
3.80
%
 
3.50
%
Expected return on plan assets
6.10
%
 
6.75
%
 
5.40
%
 
5.40
%
Rate of compensation increase
3.10
%
 
3.10
%
 
n/a

 
n/a



Basis of Rate-of-Return Assumption

Long-term asset class return assumptions are determined based on the expected performance of the asset classes over 20 years. For the U.S. plans, these forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 6.10% and 6.75% for the years ended December 31, 2017 and 2016, respectively. For our Canadian plans, these forecasted gross returns were reduced by estimated management fees and expenses, yielding a long-term return forecast of 5.40% for the years ended December 31, 2017 and 2016.

Defined-benefit pension plans with benefit obligations in excess of plan assets were as follows:
 
U.S. Pension Plans
 
Canadian Pension Plans
 
2017
 
2016
 
2017
 
2016
Projected benefit obligation, December 31
$
395.8

 
$
1.4

 
$
17.3

 
$
16.1

Accumulated benefit obligation, December 31
394.5

 
1.3

 
17.3

 
16.1

Fair value of plan assets, December 31
390.8

 

 
16.5

 
15.9



The components of net periodic pension cost for the U.S. defined-benefit pension plans were as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Service cost of benefits earned during the period
$
5.4

 
$
4.3

 
$

Interest cost on projected benefit obligation
15.4

 
11.7

 

Expected return on plan assets
(22.7
)
 
(17.4
)
 

Amortization of prior service cost
0.4

 
0.3

 

Recognized net actuarial loss
10.5

 
7.7

 

Allocated benefit cost from Shared Plans

 
2.2

 
14.8

Net periodic pension cost
$
9.0

 
$
8.8

 
$
14.8

The components of net periodic pension (credit) cost for the Canadian defined-benefit pension plans were as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Interest cost on projected benefit obligation
$
0.6

 
$
0.5

 
$

Expected return on plan assets
(0.9
)
 
(0.8
)
 

Amortization of net actuarial loss
0.2

 
0.2

 

Allocated benefit cost from Shared Plans

 
0.1

 
0.3

Net periodic pension (credit) cost
$
(0.1
)
 
$

 
$
0.3



Excluded from net periodic pension (credit) 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 tables below show the asset allocation targets and the December 31, 2017 and 2016 positions for each asset class:
 
Target Weight at
 
Position at December 31,
 
December 31, 2017
 
2017
 
2016
U.S. Asset Class
 
 
 
 
 
Fixed income securities
60
%
 
56
%
 
60
%
Equities
40
%
 
44
%
 
40
%


 
Target Weight at
 
Position at December 31,
 
December 31, 2017
 
2017
 
2016
Canadian Asset Class
 
 
 
 
 
Fixed income securities
50
%
 
49
%
 
49
%
Equities
48
%
 
49
%
 
48
%
Other
2
%
 
2
%
 
3
%


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.

The following tables set forth by level within the fair value hierarchy a summary of the U.S. and Canadian defined-benefit pension plan assets, net of payables for administrative expenses, measured at fair value on a recurring basis:
 
Value at December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. Plans
 
 
 
 
 
 
 
Fixed income securities
$

 
$
219.2

 
$

 
$
219.2

Equities

 
172.1

 

 
172.1

Other
(0.5
)
 

 

 
(0.5
)
Net assets measured at fair value
$
(0.5
)
 
$
391.3

 
$

 
$
390.8



 
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, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Canadian Plans
 
 
 
 
 
 
 
Fixed income securities
$

 
$
8.4

 
$

 
$
8.4

Equities

 
8.3

 

 
8.3

Other
0.4

 

 

 
0.4

Net assets measured at fair value
$
0.4

 
$
16.7

 
$

 
$
17.1



 
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, common and collective trust funds, and segregated 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.

Other — Consists of cash and cash equivalents and other payables and receivables (net). The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity of these instruments. The carrying amounts of payables and receivables approximate fair value due to the short-term nature of these instruments.


Defined-Benefit Postretirement Benefit Plans

The following tables summarize the balance sheet impact of the postretirement benefit plans, as well as the related benefit obligations, assets, funded status and rate assumptions.
 
2017
 
2016
Change in benefit obligation:
 
 
 
Projected benefit obligations as January 1,
$
83.6

 
$
3.5

Liabilities assumed from Separation

 
82.9

Service cost
0.4

 
0.1

Interest cost
3.3

 
2.7

Plan participants' contributions
1.7

 
1.6

Actuarial loss
0.2

 
1.1

Benefits paid
(9.8
)
 
(8.3
)
Projected benefit obligation as of December 31,
79.4

 
83.6

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

 

Employer contribution
8.1

 
6.7

Plan participants' contribution
1.7

 
1.6

Benefits paid
(9.8
)
 
(8.3
)
Fair value of plan assets as of December 31,

 

Funded status of the plans
$
(79.4
)
 
$
(83.6
)


The table below presents the weighted-average assumptions used in computing the benefit obligations and net periodic benefit cost for the U.S. defined-benefit postretirement benefit plans:
 
2017
 
2016
Weighted average discount rate used to determine benefit obligations as of December 31,
3.60
%
 
4.05
%
Weighted average discount rate used to determine net periodic benefit cost
4.05
%
 
4.25
%


The components of net periodic postretirement benefit cost (credit) were as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Service cost of benefits earned during the period
$
0.4

 
$
0.1

 
$

Interest cost on accumulated postretirement benefit obligations
3.3

 
2.7

 
0.1

Amortization of prior service (credit)

 
(0.2
)
 

Amortization of net actuarial (gain)
(2.3
)
 
(3.2
)
 

Allocated benefit (credit) cost from Shared Plans

 
(0.3
)
 
0.7

Net periodic postretirement benefit cost (credit)
$
1.4

 
$
(0.9
)
 
$
0.8



For measurement purposes, an average rate of annual increase in the per capita cost of covered health care benefits of 7.9% for pre-65 retirees and 5.7% to 10.7% for post-65 retirees (depending on plan type) was assumed for 2018, decreasing ratably to an ultimate rate of 4.5% by 2026. 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 on the defined-benefit postretirement benefit plans for 2018:
 
One percentage point
 
Increase
 
Decrease
(Decrease) increase on total service and interest cost components
$

 
$

(Decrease) increase on postretirement benefit obligation
(1.8
)
 
1.6


Financial Statement Impacts
Amounts recognized in assets and (liabilities) on the consolidated balance sheets at year end consist of:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
2017
 
2016
 
2017
 
2016
Prepaid pension costs
$

 
$
0.1

 
$

 
$
0.1

Pension benefit liabilities
(5.0
)
 
(1.3
)
 
(0.7
)
 
(0.3
)
Net amount recognized
$
(5.0
)
 
$
(1.2
)
 
$
(0.7
)
 
$
(0.2
)

 
Postretirement Benefits
 
2017
 
2016
Accounts payable and accrued expenses
$
(6.7
)
 
$
(8.1
)
Postretirement benefit liabilities
(72.7
)
 
(75.5
)
Net amount recognized
$
(79.4
)
 
$
(83.6
)


Pre-tax amounts recognized in AOCI at year end for our pension and postretirement benefit plans consist of:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
2017
 
2016
 
2017
 
2016
Net actuarial (loss)
$
(127.4
)
 
$
(132.2
)
 
$
(3.8
)
 
$
(2.9
)
Prior service (cost)

 
(0.5
)
 

 

Accumulated other comprehensive (loss)
$
(127.4
)
 
$
(132.7
)
 
$
(3.8
)
 
$
(2.9
)

 
Postretirement Benefits
 
2017
 
2016
Net actuarial gain
$
34.8

 
$
37.0



We expect to amortize $10.6 million and $0.3 million of previously unrecognized net actuarial losses into U.S. and Canadian plan pension cost, respectively, in 2018. We expect to amortize $2.4 million of previously unrecognized net actuarial gains into postretirement benefit cost in 2018.

We expect to contribute $0.1 million each to our U.S. and Canadian defined-benefit pension plans and $6.7 million to our U.S. postretirement benefit plans in 2018.

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. and Canadian plans:
 
U.S. Pension Benefits
 
Canadian Pension Benefits
 
Postretirement Benefits
2018
$
15.8

 
$
1.5

 
$
6.7

2019
16.7

 
1.4

 
6.5

2020
17.7

 
1.4

 
6.4

2021
18.8

 
1.3

 
6.3

2022
19.9

 
1.3

 
6.1

2023-2027
113.0

 
6.2

 
25.4



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

Costs for defined-contribution pension plans were $8.0 million in 2017 and $7.3 million in 2016.