Pension Plans and Defined Contribution Plan | 13. Pension Plans and Defined Contribution Plan Pension Plans As of December 31, 2016, the Company has pension plans covering approximately 2,250 of its active associates. A non-contributory plan covering non-union associates provides pension benefits that are based on years of credited service and a percentage of annual compensation. Beginning in 2009, benefits were frozen in the plan covering non-union employees. A non-contributory plan covering union members generally provides benefits of stated amounts based on years of service. The Company funds the plans in accordance with all applicable laws and regulations. The Company uses December 31 as its measurement date to determine its pension obligations. Change in Projected Benefit Obligation The following table sets forth the plans’ changes in Projected Benefit Obligation for the years ended December 31, 2016 and 2015 (in thousands): 2016 2015 Benefit obligation at beginning of year $ 211,389 $ 224,086 Service cost—benefit earned during the period 1,269 1,495 Interest cost on projected benefit obligation 8,073 8,997 Actuarial (gain) loss 4,547 (16,846 ) Benefits paid (2,952 ) (6,343 ) Settlements (40,073 ) - Benefit obligation at end of year $ 182,253 $ 211,389 The accumulated benefit obligation for the plans as of December 31, 2016 totaled $182.3 million. The Company has taken several actions to mitigate the interest rate, mortality and investment risks of the Essendant Pension Plan. These actions include a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants As a result of the lump sum offer, a settlement and remeasurement of the Essendant Pension Plan was performed. The remeasurement and activity in 2016 had no cash impact to the Company since the payments were made by the Essendant Pension Trust, and was a component in a $7.1 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. However, the settlement caused a loss of $12.5 million, which was partially offset by the $14.9 million reduction in Accumulated Other Comprehensive Income related to the unrecognized actuarial loss, for a net impact on shareholders’ equity of $2.4 million as of December 31, 2016 when compared to December 31, 2015. This offer also reduces future pension expense recognized by the Company and volatility related to future obligations of the plan. Plan Assets and Investment Policies and Strategies The following table sets forth the change in the plans’ assets for the years ended December 31, 2016 and 2015 (in thousands): 2016 2015 Fair value of plan assets at beginning of year $ 162,977 $ 173,771 Actual return on plan assets 12,136 (6,451 ) Company contributions 10,000 2,000 Benefits paid (2,952 ) (6,343 ) Settlements (40,073 ) - Fair value of plan assets at end of year $ 142,088 $ 162,977 The Company’s pension plan investment allocations, as a percentage of the fair value of total plan assets, as of December 31, 2016 and 2015, by asset category are as follows: Asset Category 2016 2015 Cash 0.6 % 0.4 % Equity securities 50.8 % 37.8 % Fixed income 27.4 % 40.5 % Real assets 4.8 % 10.8 % Hedge funds 11.9 % 10.5 % Master Limited Partnerships 4.5 % - Total 100.0 % 100.0 % The investment policies and strategies for the Company’s pension plan assets are established with the goals of generating above-average investment returns over time, while containing risks within acceptable levels and providing adequate liquidity for the payment of plan obligations. The Company recognizes that there typically are tradeoffs among these objectives, and strives to minimize risk associated with a given expected return. The Company’s defined benefit plan assets are measured at fair value on a recurring basis and are invested primarily in a diversified mix of fixed income investments and equity securities. The Company establishes target ranges for investment allocation and sets specific allocations. The target allocations for the non-union plan assets are 45.0% fixed income, 36.0% equity securities, 9.0% real assets, and 10.0% hedge funds. The target allocations for the union plan assets are 16.0% fixed income, 62.0% equity securities, 12.0% real assets and 10.0% hedge funds. Equity securities include investments in large cap and small cap corporations located in the U.S. and a mix of both international and emerging market corporations. Fixed income securities include investment grade bonds and U.S. treasuries. Other types of investments include commodity futures, real estate investment trusts (REITs) and hedge funds. Fair values for equity and fixed income securities are primarily based on valuations for identical instruments in active markets. The fair values of the Company’s pension plan assets at December 31, 2016 and 2015 by asset category are as follows: Fair Value Measurements at December 31, 2016 (in thousands) Quoted Prices In Significant Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) Cash $ 874 $ 874 $ - $ - Equity Securities U.S. Large Cap (a) 27,779 27,779 - - International (b) 21,960 21,960 - - Emerging Markets (c) 12,504 12,504 - - U.S. Small Cap (d) 9,974 9,974 - - Fixed Income U.S. Fixed Income (e) 36,778 36,778 - - U.S. Inflation Protected Bonds (f) 403 403 - - High Yield Bonds (g) 912 912 - - International Fixed Income (h) 807 807 - - Real Assets Domestic Real Estate (i) 4,204 4,204 - - Commodities (j) 2,563 2,563 - - Hedge Funds Hedge Funds (k) 16,962 - 16,962 - Master Limited Partnerships (l) Master Limited Partnerships 6,368 6,368 - - Total $ 142,088 $ 125,126 $ 16,962 $ - (a) A daily valued mutual fund investment. The fund invests in publically traded, large capitalization companies domiciled predominantly in the U.S. (b) A daily valued mutual fund investment. This fund invests in common stocks of companies domiciled in developed market countries outside of the U.S. (c) A daily valued mutual fund investment. The fund invests in publically traded companies domiciled in emerging market countries. (d) Two daily mutual fund investments with different investment styles (one core, one value, one growth) that invest in publicly traded small capitalization companies. The majority of holdings are domiciled in the U.S. though the funds may hold international stocks. (e) (f) A daily valued mutual fund investment. The fund invests in publically traded bonds backed by the full faith and credit of the federal government and whose principal is adjusted quarterly based on inflation. (g) A daily valued mutual fund investment. The fund invests in publically traded, higher-quality (top-tier BB and B rated) corporate high yield bonds. (h) A daily valued mutual fund investment. The fund invests in publically traded bonds of governments, agencies and companies domiciled in countries outside of the U.S. ( i ) A daily valued mutual fund investment. The fund invests in publically traded REITs. This is an index mutual fund that tracks the Morgan Stanley REIT Index. The fund normally invests at least 98% of assets that are included in the Morgan Stanley REIT Index. (j) A daily valued mutual fund investment. This fund combines a commodities position, typically through swap agreements, with a portfolio of inflation indexed bonds and other fixed income securities. The commodities position is constructed to track the performance of the Bloomberg Commodity Index. (k) Two separately managed funds of hedge funds. These funds seek attractive risk-adjusted returns through investments in a well-diversified group of managers that employ a variety of unique investment strategies. They target low volatility and low correlation to traditional asset classes. These funds may allocate their assets among a select group of non-traditional portfolio managers that invest or trade in a wide range of securities and other instruments. (l) A publically traded, managed fund of master limited partnerships that primarily derives revenue from energy infrastructure assets or activities. Fair Value Measurements at December 31, 2015 (in thousands) Quoted Prices In Significant Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) Cash $ 655 $ 655 $ - $ - Equity Securities U.S. Large Cap (a) 23,072 23,072 - - International (b) 18,211 18,211 - - Emerging Markets (c) 13,127 13,127 - - U.S. Small Cap (d) 7,256 7,256 - - Fixed Income U.S. Fixed Income (e) 59,517 59,517 - - U.S. Inflation Protected Bonds (f) 1,236 1,236 - - High Yield Bonds (g) 2,295 2,295 - - International Fixed Income (h) 2,900 2,900 - - Real Assets Domestic Real Estate (i) 10,464 10,464 - - Commodities (J) 7,089 7,089 - - Hedge Funds Hedge Funds (k) 17,155 - 17,155 - Total $ 162,977 $ 145,822 $ 17,155 $ - (a) A daily valued mutual fund investment. The fund invests in publically traded, large capitalization companies domiciled predominantly in the U.S. (b) A daily valued mutual fund investment. This fund invests in common stocks of companies domiciled in developed market countries outside of the U.S. (c) A daily valued mutual fund investment. The fund invests in publically traded companies domiciled in emerging market countries. (d) Three daily mutual fund investments with different investment styles (one core, one value, one growth) that invest in publicly traded small capitalization companies. The majority of holdings are domiciled in the U.S. though the funds may hold international stocks. (e) Principally consists of a separately managed fixed income portfolio utilized to match the duration of plan liabilities. This liability-driven investment portfolio is comprised of Treasury securities including STRIPS and zero coupon bonds, as well as high quality corporate bonds. Also includes a daily valued mutual fund that invests in publically traded U.S. government, asset-backed, mortgage-backed and corporate fixed-income securities. (f) A daily valued mutual fund investment. The fund invests in publically traded bonds backed by the full faith and credit of the federal government and whose principal is adjusted quarterly based on inflation. (g) A daily valued mutual fund investment. The fund invests in publically traded, higher-quality (top-tier BB and B rated) corporate high yield bonds. (h) A daily valued mutual fund investment. The fund invests in publically traded bonds of governments, agencies and companies domiciled in countries outside of the U.S. ( i ) A daily valued mutual fund investment. The fund invests in publically traded REITs. This is an index mutual fund that tracks the Morgan Stanley REIT Index. The fund normally invests at least 98% of assets that are included in the Morgan Stanley REIT Index. (j) A daily valued mutual fund investment. This fund combines a commodities position, typically through swap agreements, with a portfolio of inflation indexed bonds and other fixed income securities. The commodities position is constructed to track the performance of the Bloomberg Commodity Index. (k) Two separately managed funds of hedge funds. These funds seek attractive risk-adjusted returns through investments in a well-diversified group of managers that employ a variety of unique investment strategies. They target low volatility and low correlation to traditional asset classes. These funds may allocate their assets among a select group of non-traditional portfolio managers that invest or trade in a wide range of securities and other instruments. Plan Funded Status The following table sets forth the plans’ funded status as of December 31, 2016 and 2015 (in thousands): 2016 2015 Funded status of the plan $ (40,165 ) $ (48,412 ) Unrecognized prior service cost 2,574 2,869 Unrecognized net actuarial loss 58,957 74,461 Net amount recognized $ 21,366 $ 28,918 Amounts Recognized in Consolidated Balance Sheets The following table sets forth the amounts recognized in the consolidated balance sheets as of December 31, 2016 and 2015 (in thousands): 2016 2015 Accrued benefit liability $ (40,165 ) $ (48,412 ) Accumulated other comprehensive income 61,531 77,330 Net amount recognized $ 21,366 $ 28,918 Components of Net Periodic Benefit Cost Net periodic pension cost for the years ended December 31, 2016, 2015 and 2014 for pension and supplemental benefit plans includes the following components (in thousands): Pension Benefits For the Years Ended December 31, 2016 2015 2014 Service cost - benefit earned during the period $ 1,269 $ 1,495 $ 1,069 Interest cost on projected benefit obligation 8,073 8,997 8,960 Expected return on plan assets (9,730 ) (11,217 ) (10,286 ) Amortization of prior service cost 295 296 182 Amortization of actuarial loss 5,134 5,862 3,674 Settlements 12,510 - - Net periodic pension cost $ 17,551 $ 5,433 $ 3,599 The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost during 2017 are approximately $4.2 million and $0.3 million, respectively. Assumptions Used The following tables summarize the Company’s actuarial assumptions for discount rates, expected long-term rates of return on plan assets: 2016 2015 2014 Pension plan assumptions Assumed discount rate, general 4.18% 4.52% 4.09% Assumed discount rate, union 4.22% 4.55% 4.16% Expected long-term rate of return on plan assets, general 6.30% 6.50% 6.30% Expected long-term rate of return on plan assets, union 6.20% 6.30% 7.30% To select the appropriate actuarial assumptions, management relied on current market conditions, historical information and consultation with and input from the Company’s outside actuaries. The expected long-term rate of return on plan assets assumption is based on historical returns and the future expectation of returns for each asset category, as well as the target asset allocation of the asset portfolio. Contributions In February 2017, the Company’s Board of Directors approved cash contributions to the Company’s pension plans, totaling $5.0 million to the Essendant Union Employee Pension Plan and $5.0 million to the Essendant Pension Plan. Additional fundings, if any, for 2017 have not yet been determined. Estimated Future Benefit Payments The estimated future benefit payments under the Company’s pension plans, excluding the impact of future lump sum offerings, are as follows (in thousands): Amounts 2017 $ 9,198 2018 7,984 2019 8,833 2020 9,292 2021 9,027 2022-2026 50,839 Defined Contribution Plan The Company has a defined contribution plan. Salaried associates and non-union hourly paid associates are eligible to participate after completing six consecutive months of employment. The plan permits associates to have contributions made as 401(k) salary deferrals on their behalf, or as voluntary after-tax contributions, and provides for Company contributions, or contributions matching associates’ salary deferral contributions, at the discretion of the Board of Directors. Expense associated with the Company contributions to match associates’ contributions were approximately $7.1 million, $5.9 million and $5.5 million in 2016, 2015 and 2014, respectively. |