| Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations | 7. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations
Defined Benefit Retirement Plan
The Company has a funded noncontributory qualified defined benefit retirement plan (the “Single‑Employer Plan”) that, prior to June 1, 2008, covered substantially all full‑time employees following a vesting period of five years of service (the “Pension Participants”) and provided defined benefits based on years of service and final average salary. The Predecessor froze the accruing of future benefits for the majority of the Pension Participants (the “Frozen Pension Participants”) effective June 1, 2008. As of December 30, 2018, there were approximately 469 hourly paid employees in the Company’s distribution and transportation operations accruing future benefits under the plan and who remain eligible for pension benefits under the prior terms (the “Active Pension Participants”). No new employees are eligible for participation in the Single Employer Plan after June 1, 2008, with the exception of eligible new hires in the Company’s distribution and transportation operations. After June 1, 2008 Frozen Pension Participants continued to accrue service for vesting purposes only and future payments from the Single‑Employer Plan will be in accordance with the Single‑Employer Plan’s retirement payment provisions. The Company funds the Single‑Employer Plan with annual contributions as required by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Company uses a measurement date of December 31 for the Single‑Employer Plan. In 2018, the Society of Actuaries released updated mortality scales. In consideration of these scales, the Company modified the mortality assumptions used in determining its defined benefit retirement plan obligation as of December 31, 2018. The impact of these new mortality assumptions has resulted in a slight decrease to the Company’s defined benefit retirement plan obligation and a decrease in future related expense.
As of December 30, 2018, the funded status of the accumulated benefit obligation was 70.2%. The Company expects to fund a minimum required contribution of approximately $3.4 million during fiscal year 2019.
The following tables set forth the changes in benefit obligation and plan assets of this plan for the periods below (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Change in Benefit Obligation
Benefit obligation, beginning of period
$
(251,988)
$
(221,858)
Service cost
(1,904)
(1,731)
Interest cost
(9,356)
(9,578)
Actuarial loss (gain)
27,438
(23,401)
Prior service cost
—
(116)
Benefits paid
6,077
4,696
Benefit obligation, end of period
$
(229,733)
$
(251,988)
Fiscal Year
Fiscal Year
2018
2017
Change in Plan Assets
Fair value of plan assets, beginning of period
$
171,334
$
144,493
Actual return of plan assets, net of expenses
(17,004)
19,837
Employer contribution
8,823
11,700
Benefits paid
(6,077)
(4,696)
Fair value of plan assets, end of period
157,076
171,334
Funded status
(72,657)
(80,654)
Net amount recognized
$
(72,657)
$
(80,654)
Amounts before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
December 30,
December 31,
2018
2017
Postretirement and postemployment benefits
$
(72,657)
$
(80,654)
Net amount recognized
$
(72,657)
$
(80,654)
Amounts before income tax effect recognized in accumulated other comprehensive loss consist of the following (in thousands):
December 30,
December 31,
2018
2017
Net prior service cost
$
(113)
$
(116)
Net actuarial loss
(31,416)
(30,761)
Accumulated other comprehensive loss
$
(31,529)
$
(30,877)
During 2019, no accumulated other comprehensive loss is expected to be recognized as a component of net periodic benefit cost.
The following table shows the projected benefit obligation, the accumulated benefit obligation and the plan assets, in dollar amounts and as a percentage of the projected benefit obligation and the accumulated benefit obligation, respectively, as of each fiscal year‑end (dollar amounts in thousands):
December 30,
December 31,
2018
2017
Projected benefit obligation
$
229,733
$
251,988
Accumulated benefit obligation
223,805
244,560
Fair value of plan assets
157,076
171,334
Fair value of plan assets as a percentage of the projected benefit obligation
68.4
%
68.0
%
Fair value of plan assets as a percentage of the accumulated benefit obligation
70.2
%
70.1
%
The components included in the net periodic benefit cost and the increase in minimum liability included in other comprehensive loss for the periods indicated are as follows (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Service cost component
$
1,904
$
1,731
Interest cost component
9,356
9,578
Expected return on plan assets
(11,215)
(9,928)
Prior service cost amortization
3
—
Net loss amortization
126
—
Net periodic benefit cost
$
174
$
1,381
As a result of the Predecessor freezing plan benefits for the majority of the Pension Participants effective June 1, 2008, the amortization of the unrecognized net actuarial loss (in excess of 10% of the greater of the projected benefit obligation or the fair value of plan assets) has been amortized on a straight‑line basis over the expected average future lifetime of inactive participants expected to benefit under the plan.
The weighted‑average assumptions used to determine benefit obligations for this plan at fiscal year‑end were as follows:
December 30,
December 31,
2018
2017
Discount rate
4.40
%
3.75
%
Rate of compensation increase
3.25
3.25
The Company determines the discount rate assumption based on the internal rate of return for a portfolio of high quality bonds, with a minimum rating of Moody’s AA Corporate and with maturities that are consistent with the projected future cash flow obligations.
The weighted‑average assumptions used to determine net periodic benefit cost for each of the periods indicated were as follows:
Fiscal Year
Fiscal Year
2018
2017
Discount rate
3.75
%
4.30
%
Expected long-term return on plan assets
6.50
6.75
Rate of compensation increase
3.25
3.00
The Company determines the expected long-term rate of return on plan assets based upon recommendations from its pension plan's investment advisors and using an allocation approach that considers diversification and rebalancing for a portfolio of assets invested over a long-term time horizon. The approach relies on the historical returns of the plan’s portfolio and relationships between equities and fixed income investments, consistent with the widely accepted capital market principle that a diversified portfolio with a larger allocation to equity investments can generate a greater return over the long run. Additionally, the Company monitors the mix of investments in its portfolio to ensure alignment with its expected long-term pension obligations. The Company reviews the expected long-term rate of return annually and revises it as appropriate.
Plan assets are managed by outside investment managers or allocated to index-style funds, and rebalanced among investment alternatives periodically at the Company’s direction to realign assets according to the target allocation. Investment managers allocate assets to individual investments within guidelines specified by the Company. The Company’s strategy with respect to the plan asset investments has been to allocate a larger proportion to equities to achieve returns that sufficiently grow assets to cover the benefit obligations within acceptable risk parameters.
The plan asset allocation at the end of 2018 and 2017, and target allocation for 2019, in percentages, by asset category are as follows:
Target
Allocation
December 30,
December 31,
2019
2018
2017
Equity securities
60
%
60
%
65
%
Debt securities
37
35
32
Cash and cash equivalents
3
5
3
Total
100
%
100
%
100
%
The following table summarizes plan assets measured at fair value on December 30, 2018 and December 31, 2017 respectively (in thousands):
Quoted Prices
in Active
Markets for
Significant
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
December 30, 2018
Total
(Level 1)
(Level 2)
(Level 3)
Asset category
Equity securities(1)
$
94,465
$
74,467
$
19,998
$
—
Debt securities(2)
54,738
30,908
23,733
97
Cash and cash equivalents(3)
7,873
7,873
—
—
Total
$
157,076
$
113,248
$
43,731
$
97
Quoted Prices
in Active
Markets for
Significant
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
December 31, 2017
Total
(Level 1)
(Level 2)
(Level 3)
Asset category
Equity securities(1)
$
111,087
$
83,069
$
28,018
$
—
Debt securities(2)
55,361
33,171
22,011
179
Cash and cash equivalents(3)
4,886
4,886
—
—
Total
$
171,334
$
121,126
$
50,029
$
179
(1)
Equity securities include U.S. and foreign exchange traded common and preferred stocks and mutual funds. Common and preferred shares issued by U.S. and non‑U.S. corporations are traded actively on exchanges and price quotes for these shares are readily available. Holdings of corporate stock are categorized as Level 1 investments. The securities categorized as Level 2 investments are American Depository Receipts. While these securities are traded in an active market, the trustee uses several observable market based inputs, such as exchange rates, to obtain the pricing of the securities.
(2)
Debt securities include the debt of the U.S. Treasury and U.S. and foreign corporate issuers. U.S. Treasury notes and bonds are actively traded and price quotes for these securities are readily available. Holdings of U.S. Treasury notes and bonds are categorized as Level 1 investments. Corporate bond securities of U.S. and foreign corporate issuers are valued by independent pricing sources using a variety of market sources and observed market movements. Holdings of U.S. and foreign corporate issuers’ debt securities are categorized as Level 2 investments. Infrequently traded corporate bonds and asset‑backed securities, requiring valuation using observable as well as unobservable inputs, such as the estimation of the market manager for the security, are categorized as Level 3 investments.
(3)
Cash and cash equivalents include short‑term U.S. government investment notes, short‑term money market mutual funds, accrued income and cash held on account. Cash held on account and short‑term U.S. government investment notes (including accrued income thereon) for which there is an active market and daily pricing for the security are categorized as Level 1 investments.
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
Ending balance at December 31, 2017
$
179
Actual return on plan assets:
Assets held at end of year
97
Assets sold during the year
—
Purchases, sales and settlements
(179)
Transfers in and/or out of Level 3
—
Ending balance at December 30, 2018
$
97
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
Ending balance at January 1, 2017
$
449
Actual return on plan assets:
Assets held at end of year
(2)
Assets sold during the year
—
Purchases, sales and settlements
(268)
Transfers in and/or out of Level 3
—
Ending balance at December 31, 2017
$
179
The Company seeks to maximize medium‑ to long‑term returns of overall pension plan assets with reasonable levels of investment risk. One element of controlling overall investment risk is through diversification of asset allocation, among domestic and international equity and debt instruments. The plan’s equity investments include foreign and domestic exchange traded equities across a range of industries and countries, but primarily in the domestic markets. The plan’s debt securities are primarily invested in government and corporate issuers primarily in the domestic market.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
2019
$
7,471
2020
7,822
2021
8,413
2022
9,238
2023
9,565
2024 - 2028
54,796
Multi‑employer Pension Plan
The Company participates in and contributes to a multi‑employer pension plan on behalf of union employees in its Smart Foodservice operations. At December 30, 2018 and December 31, 2017, there were 219 and 202 union employees covered under this plan, respectively. The Company’s employer contributions and corresponding pension expense for this plan were $1.8 million, $1.5 million for the years ended December 30, 2018 and December 31, 2017, respectively.
The multi‑employer plan is the Western Conference of Teamsters Pension Plan (the “Teamsters Plan”), which was established pursuant to the Western Conference of Teamsters Pension Agreement and Declaration of Trust dated April 26, 1955 (“Trust Agreement”). The Teamsters Plan (EIN 91‑6145047; Plan Number 001) provides and maintains retirement, death and termination benefits for employees in collective bargaining units represented by local unions affiliated with the Western Conference of Teamsters. The Teamsters Plan is subject to the provisions of ERISA, as amended.
The Trust Agreement provides that the trustees of the Teamsters Plan shall establish and adjust the levels of prospective plan benefits so that employer contributions received by the Teamsters Plan will always meet the minimum funding standards of Section 302 of ERISA and Section 412 of the Internal Revenue Code of 1986. The trustees have established a funding policy that specifies funding targets that may result in more rapid funding than prescribed by the minimum funding standards and that provides for benefit adjustments based on specified funding targets. The Teamsters Plan’s actuary has advised the Company that the minimum funding requirements of ERISA are being met as of December 31, 2017 (based on the most recent information available).
As of January 1, 2018, the Teamsters Plan actuarial present value of accumulated plan benefits was $43,771 million and the actuarial value of assets for funding the standard account was $40,212 million, resulting in a funded percentage of 91.9%. The Teamsters Plan covered approximately 585,000 participants as of January 1, 2018. Approximately 1,470 employers participate in the Teamsters Plan and total employer contributions for the plan year ended January 1, 2018, aggregated $1,828.9 million.
Defined Contribution Plan
The Company offers eligible employees the opportunity to participate in a defined contribution plan, which is qualified under the requirements of Section 401(k) of the Internal Revenue Code of 1986, as amended. The Smart & Final 401(k) Savings Plan (the “S&F Savings Plan”) confers eligibility to all of the Company’s employees who have completed at least three months of service. The Company automatically enrolls newly eligible employees into the S&F Savings Plan at 5% of their eligible compensation unless they choose to opt out of such enrollment. The S&F Savings Plan allowed participants to contribute up to 100% of their eligible compensation, not exceeding $ 18,500 for participants under the age of 50 or $24,500 for employees at the age of 50 or over for 2018, and not exceeding $18,000 for participants under the age of 50 or $24,000 for employees at the age of 50 or over for 2017. For eligible participants other than Active Pension Participants, the Company matched 50% of each dollar contributed up to 6% of the participant’s eligible compensation during 2018 and 2017. For Active Pension Participants, the Company matched 33% of each dollar contributed up to 6% of the participant’s eligible compensation during 2018 and 2017. Contributions made to the S&F Savings Plan were $8.0 million and $7.2 million for the years ended December 30, 2018 and December 31, 2017, respectively.
Deferred Compensation Plan
The Company maintains a voluntary, contributory, nonqualified deferred compensation plan which, for each year, permits key employees and members of our board of directors to elect to defer up to 100% of their compensation for such year until retirement. The retirement benefit to be provided under the plan is a function of the participant’s deferred compensation and earnings thereupon. The plan is designed to primarily fund the retirement benefit liability through maintenance of certain investments, including participant cash deferrals. The liability to the deferred compensation plan participants was $18.0 million and $19.2 million at December 30, 2018 and December 31, 2017, respectively, and is included in “Other long‑term liabilities” in the consolidated balance sheets. The Company has certain investments, including corporate‑owned life insurance policies, which had a market value that offset the participant liabilities at each of these measurement dates.
Supplemental Executive Retirement Plan
The Company maintains a noncontributory, nonqualified defined benefit supplemental executive retirement plan (the "SERP"), which provides supplemental income payments for certain current and former corporate officers in retirement. No new participants are eligible for participation and service and compensation accruals were frozen effective June 1, 2008. Accordingly, the retirement benefit for SERP participants who remained employed by the Company was frozen, and future service or compensation increases will not adjust the SERP benefit amount. In 2018, the Society of Actuaries released revised mortality scales. In consideration of these scales, the Company modified the mortality assumptions used in determining its SERP obligation as of December 30, 2018. The impact of these new mortality assumptions has resulted in a slight decrease to the Company's SERP obligation and a decrease in future related expense.
The liability to SERP participants was $29.7 million and $32.5 million at December 30, 2018 and December 31, 2017, respectively, and is included in “Post-retirement and post-employment benefits” in the Company’s consolidated balance sheets. The Company uses a measurement date of December 31 for the SERP. To provide partial funding for the SERP, the Company invests in corporate‑owned life insurance policies. The cash surrender value of these policies was $19.7 million and $21.6 million at December 30, 2018 and December 31, 2017, respectively, and is included in “Other assets” in the Company’s consolidated balance sheets.
The following tables set forth the changes in benefit obligation and plan assets for each of the periods indicated (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Benefit obligation, beginning of period
$
(32,459)
$
(31,721)
Interest cost
(1,002)
(1,091)
Actuarial gain (loss)
1,708
(1,702)
Benefits paid
2,079
2,055
Benefit obligation, end of period
(29,674)
(32,459)
Employer contribution
2,079
2,055
Benefits paid
(2,079)
(2,055)
Fair value of plan assets, end of period
—
—
Funded status
(29,674)
(32,459)
Unrecognized net actuarial loss
1,463
3,170
Accrued benefit cost
$
(28,211)
$
(29,289)
Amounts before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
December 30,
December 31,
2018
2017
Other accrued liabilities
$
(2,077)
$
(2,037)
Postretirement and postemployment benefits
(27,597)
(30,422)
Net amount recognized
$
(29,674)
$
(32,459)
Amounts before income tax effect recognized in accumulated other comprehensive loss consist of the following (in thousands):
December 30,
December 31,
2018
2017
Net actuarial loss
$
(1,463)
$
(3,170)
Accumulated other comprehensive loss
$
(1,463)
$
(3,170)
During 2019, no accumulated other comprehensive loss is expected to be recognized as a component of net periodic benefit cost.
The projected benefit obligation for this plan was $29.7 million and $32.5 million at December 30, 2018 and December 31, 2017, respectively.
The components included in the net periodic benefit cost for each of the periods indicated are as follows (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Interest cost component
$
1,002
$
1,091
Net periodic benefit cost
$
1,002
$
1,091
The weighted‑average assumptions used to determine benefit obligations at the fiscal year ends indicated are as follows:
December 30,
December 31,
2018
2017
Discount rate
3.86
%
3.19
%
Rate of compensation increase
N/A
N/A
The weighted‑average assumptions used to determine net periodic benefit cost for each of the periods indicated are as follows:
Fiscal Year
Fiscal Year
2018
2017
Discount rate
3.19
%
3.55
%
Rate of compensation increase
N/A
N/A
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Fiscal Year:
2019
$
2,255
2020
2,280
2021
2,567
2022
2,567
2023
2,455
2024 - 2028
10,383
Postretirement and Postemployment Benefit Obligations
The Company provides health care benefits for certain retired employees. Prior to June 1, 2008, substantially all full-time employees could become eligible for such benefits if they reached retirement age while still working for the Company. The Company froze the accruing of benefits for eligible participants effective June 1, 2008. Participants who were eligible for a retiree medical benefit and retired prior to June 1, 2009 continued to be eligible for retiree medical coverage. The Company retains the right to make further amendments to the benefit formula and eligibility requirements. This postretirement health care plan is contributory with participants’ contributions adjusted annually. The plan limits benefits to the lesser of the actual cost for the medical coverage selected or a defined dollar benefit based on years of service, applicable to eligible retirees. The Company uses a measurement date of December 31 for this health care plan. In 2018, the Society of Actuaries released revised mortality tables. In consideration of these tables, the Company modified the mortality assumptions used in determining its postretirement health care plan obligation as of December 30, 2018. The impact of these new mortality assumptions has resulted in a slight decrease to the Company’s postretirement health care plan obligation and a decrease in future related expense.
The Company expects to fund a minimum required contribution of approximately $0.7 million during fiscal year 2019.
The reconciliation of benefit obligation and plan assets for 2018 and 2017 are aggregated as follows (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Change in Benefit Obligation
Benefit obligation, beginning of period
$
(17,022)
$
(14,880)
Service cost
(448)
(414)
Interest cost
(605)
(641)
Plan participants’ contributions
(530)
(334)
Actuarial gain (loss)
2,277
(1,615)
Prior service cost
—
(122)
Benefits paid
1,072
984
Benefit obligation, end of period
(15,256)
(17,022)
Change in Plan Assets
Employer contribution
542
649
Plan participants’ contributions
530
335
Benefits paid
(1,072)
(984)
Fair value of plan assets, end of period
—
—
Funded status
(15,256)
(17,022)
Net amount recognized
$
(15,256)
$
(17,022)
Amounts before income tax effect recognized in the consolidated balance sheets consist of the following (in thousands):
December 30,
December 31,
2018
2017
Other accrued liabilities
$
(640)
$
(823)
Postretirement and postemployment benefits
(14,616)
(16,199)
Net amount recognized
$
(15,256)
$
(17,022)
Amounts before income tax effect recognized in accumulated other comprehensive loss consist of the following (in thousands):
December 30,
December 31,
2018
2017
Net prior service cost
$
(111)
$
(122)
Net actuarial gain (loss)
2,149
(127)
Accumulated other comprehensive income (loss)
$
2,038
$
(249)
During 2019, no accumulated other comprehensive(loss) income is expected to be recognized as a component of net periodic benefit cost.
The components included in the postretirement benefit cost for each of the periods indicated are as follows (in thousands):
Fiscal Year
Fiscal Year
2018
2017
Service cost component
$
448
$
414
Interest cost component
605
641
Prior service cost amortization
11
—
Net periodic benefit cost
$
1,064
$
1,055
The weighted‑average discount rate used to determine benefit obligations for this plan was 4.35% and 3.70% for the years ended December 30, 2018 and December 31, 2017, respectively.
The weighted‑average discount rate used to determine net periodic benefit cost was 3.70% and 4.20% for the years ended December 30, 2018 and December 31, 2017, respectively.
For measurement purposes, the Company used the following assumptions in regard to health care cost trends:
2018
2017
Health care cost trend rate assumed for next year
7.00
%
7.00
%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
5.00
%
5.00
%
Year that the rate reaches the ultimate trend rate
The annual rate of health care cost of covered claims is assumed to be 7.00% for 2019 and assumed to decrease by 0.25% per year beginning in 2019 until an ultimate trend rate of 5.00% is reached in 2027 and to remain at that level thereafter.
The Company offers a defined dollar benefit plan providing a maximum fixed dollar amount of coverage that does not increase with medical inflation. A one‑percentage‑point change in the assumed health care cost trend rates would have the following effects (in thousands):
1-Percentage
1-Percentage
Point
Point
Increase
Decrease
Effect on total service and interest cost components of net periodic expense
$
3
$
(4)
Effect on accumulated postretirement benefit obligation
51
(73)
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):
Fiscal Year:
2019
$
734
2020
761
2021
797
2022
835
2023
885
2024 - 2028
4,932 |
