Pension | Pension We have pension plans covering the majority of our employees. Benefits generally are based on compensation and service for salaried employees and job grade and length of service for hourly employees. In addition, we have an unfunded supplemental employee retirement plan (SERP) that covers salaried U.S.-based employees of Libbey hired before January 1, 2006. The U.S. pension plans cover the salaried U.S.-based employees of Libbey hired before January 1, 2006 and most hourly U.S.-based employees (excluding employees hired at Shreveport after 2008 and at Toledo after September 30, 2010). Effective January 1, 2013, we ceased annual company contribution credits to the cash balance accounts in our Libbey U.S. Salaried Pension Plan and SERP. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries in the Netherlands and Mexico. The plan in Mexico is primarily unfunded. In the fourth quarter of 2015, we executed an agreement with Pensioenfonds voor de Grafische Bedrijven (“PGB”), an industry wide pension fund, and unwound direct ownership of our defined benefit pension plan in the Netherlands. In accordance with this agreement, we transferred all assets of the plan and made a cash contribution of $5.2 million to PGB. In return, PGB assumed the related liabilities and administrative responsibilities of the plan. As a result, there is no longer a pension liability on the Consolidated Balance Sheet at December 31, 2015. This event also resulted in a settlement charge of $21.6 million being recorded in the Consolidated Statement of Operations in the fourth quarter of 2015. Beginning in 2016, Libbey Holland will continue to make cash contributions to PGB as participating employees earn pension benefits. These related costs will be expensed as incurred, similar to the accounting associated with a defined contribution retirement plan. Effect on Operations The components of our net pension expense, including the SERP, are as follows: Year ended December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2015 2014 2013 2015 2014 2013 2015 2014 2013 Service cost (benefits earned during the period) $ 4,365 $ 3,664 $ 4,739 $ 2,965 $ 2,264 $ 2,862 $ 7,330 $ 5,928 $ 7,601 Interest cost on projected benefit obligation 14,715 15,378 14,093 4,332 5,566 4,981 19,047 20,944 19,074 Expected return on plan assets (22,661 ) (22,387 ) (22,374 ) (2,447 ) (2,447 ) (1,995 ) (25,108 ) (24,834 ) (24,369 ) Amortization of unrecognized: Prior service cost 417 1,059 1,172 (244 ) 164 164 173 1,223 1,336 Actuarial loss 7,291 4,057 8,604 1,599 1,012 919 8,890 5,069 9,523 Transition obligations — — — — 60 84 — 60 84 Settlement charge 13 483 1,805 21,574 291 447 21,587 774 2,252 Curtailment charge (credit) — — — (14 ) — — (14 ) — — Pension expense $ 4,140 $ 2,254 $ 8,039 $ 27,765 $ 6,910 $ 7,462 $ 31,905 $ 9,164 $ 15,501 In 2015, 2014 and 2013, we incurred pension settlement charges of $21.6 million , $0.8 million and $2.3 million , respectively. The pension settlement charges in 2015 were triggered primarily by the liquidation of the Dutch pension fund in 2015. The pension settlement charges in 2014 and 2013 were triggered by excess lump sum distributions taken by employees, which required us to record unrecognized gains and losses in our pension plan accounts. Actuarial Assumptions The assumptions used to determine the benefit obligations were as follows: U.S. Plans Non-U.S. Plans 2015 2014 2015 2014 Discount rate 4.60% to 4.73% 4.17% to 4.29% 8.10% 2.30% to 7.60% Rate of compensation increase —% —% 4.30% 2.00% to 4.30% The assumptions used to determine net periodic pension costs were as follows: U.S. Plans Non-U.S. Plans 2015 2014 2013 2015 2014 2013 Discount rate 4.17 % to 4.29 % 4.83 % to 5.12 % 3.98 % to 4.97 % 2.30 % to 7.60 % 3.70 % to 8.50 % 3.70 % to 7.00 % Expected long-term rate of return on plan assets 7.25% 7.25% 7.50% 4.00% 4.10% 3.60% Rate of compensation increase —% —% —% 2.00 % to 4.30 % 2.00 % to 4.30 % 2.00 % to 4.30 % The discount rate enables us to estimate the present value of expected future cash flows on the measurement date. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments at our December 31 measurement date. The discount rate at December 31 is used to measure the year-end benefit obligations and the earnings effects for the subsequent year. A higher discount rate decreases the present value of benefit obligations and decreases pension expense. To determine the expected long-term rate of return on plan assets for our funded plans, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. The expected long-term rate of return on plan assets at December 31 st is used to measure the earnings effects for the subsequent year. Future benefits are assumed to increase in a manner consistent with past experience of the plans except for the Libbey U.S. Salaried Pension Plan and SERP as discussed above, which, to the extent benefits are based on compensation, includes assumed compensation increases as presented above. Amortization included in net pension expense is based on the average remaining service of employees. We account for our defined benefit pension plans on an expense basis that reflects actuarial funding methods. The actuarial valuations require significant estimates and assumptions to be made by management, primarily with respect to the discount rate and expected long-term return on plan assets. These assumptions are all susceptible to changes in market conditions. The discount rate is based on a selected settlement portfolio from a universe of high quality bonds. In determining the expected long-term rate of return on plan assets, we consider historical market and portfolio rates of return, asset allocations and expectations of future rates of return. We evaluate these critical assumptions on our annual measurement date of December 31st. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect our experience. Actual results in any given year often will differ from actuarial assumptions because of demographic, economic and other factors. During 2014, the Society of Actuaries released a new mortality table, which is believed to better reflect current mortality expectations and is to be used in calculating pension obligations. In 2014, we adopted these new tables for our U.S. pension plans for use in determining our projected benefit obligations. Adoption of the new mortality tables increased our projected benefit obligation by approximately $22.1 million at December 31, 2014. In 2015, the Society of Actuaries published a new mortality projection scale which reflected two additional years of mortality experience. We adopted this 2015 update. Projected Benefit Obligation (PBO) and Fair Value of Assets The changes in the projected benefit obligations and fair value of plan assets are as follows: Year ended December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2015 2014 2015 2014 2015 2014 Change in projected benefit obligation: Projected benefit obligation, beginning of year $ 351,477 $ 310,109 $ 119,986 $ 102,719 $ 471,463 $ 412,828 Service cost 4,365 3,664 2,965 2,264 7,330 5,928 Interest cost 14,715 15,378 4,332 5,566 19,047 20,944 Exchange rate fluctuations — — (13,948 ) (14,668 ) (13,948 ) (14,668 ) Actuarial (gain) loss (26,796 ) 51,066 11,105 28,051 (15,691 ) 79,117 Plan participants' contributions — — 1,359 1,249 1,359 1,249 Plan amendments — — (4,354 ) (780 ) (4,354 ) (780 ) Curtailment effect — — (7,414 ) — (7,414 ) — Settlements paid (96 ) (12,825 ) (74,485 ) — (74,581 ) (12,825 ) Benefits paid (17,802 ) (15,915 ) (3,631 ) (4,415 ) (21,433 ) (20,330 ) Projected benefit obligation, end of year $ 325,863 $ 351,477 $ 35,915 $ 119,986 $ 361,778 $ 471,463 Change in fair value of plan assets: Fair value of plan assets, beginning of year $ 340,082 $ 332,827 $ 74,279 $ 70,422 $ 414,361 $ 403,249 Actual return on plan assets (6,096 ) 33,342 (213 ) 12,643 (6,309 ) 45,985 Exchange rate fluctuations — — (7,761 ) (9,328 ) (7,761 ) (9,328 ) Employer contributions 96 2,653 10,452 3,708 10,548 6,361 Plan participants' contributions — — 1,359 1,249 1,359 1,249 Settlements paid (96 ) (12,825 ) (74,485 ) — (74,581 ) (12,825 ) Benefits paid (17,802 ) (15,915 ) (3,631 ) (4,415 ) (21,433 ) (20,330 ) Fair value of plan assets, end of year $ 316,184 $ 340,082 $ — $ 74,279 $ 316,184 $ 414,361 Funded ratio 97.0 % 96.8 % — % 61.9 % 87.4 % 87.9 % Funded status and net accrued pension benefit asset (cost) $ (9,679 ) $ (11,395 ) $ (35,915 ) $ (45,707 ) $ (45,594 ) $ (57,102 ) The non-U.S. settlements paid in 2015 relate to us unwinding our direct ownership of the defined benefit pension plan in the Netherlands. The current portion of the pension liability reflects the amount of expected benefit payments that are greater than the plan assets on a plan-by-plan basis. The net accrued pension benefit liability at December 31 of the respective year-ends were included in the Consolidated Balance Sheets as follows: December 31, (dollars in thousands) 2015 2014 Non-current asset $ 977 $ 848 Current liability (2,297 ) (1,488 ) Long-term liability (44,274 ) (56,462 ) Net accrued pension liability $ (45,594 ) $ (57,102 ) The pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2015 and 2014, are as follows : Year ended December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2015 2014 2015 2014 2015 2014 Net actuarial loss $ 96,983 $ 102,328 $ 16,988 $ 38,843 $ 113,971 $ 141,171 Prior service cost (credit) 500 918 (3,472 ) 16 (2,972 ) 934 Total cost $ 97,483 $ 103,246 $ 13,516 $ 38,859 $ 110,999 $ 142,105 The pre-tax amounts in accumulated other comprehensive loss as of December 31, 2015, that are expected to be recognized as components of net periodic benefit cost during 2016 are as follows: (dollars in thousands) U.S. Plans Non-U.S. Plans Total Net actuarial loss $ 4,482 $ 848 $ 5,330 Prior service cost (credit) 263 (224 ) 39 Total cost $ 4,745 $ 624 $ 5,369 Estimated contributions for 2016, as well as, contributions made in 2015 and 2014 to the pension plans are as follows: (dollars in thousands) U.S. Plans Non-U.S. Plans Total Estimated contributions in 2016 $ 125 $ 2,388 $ 2,513 Contributions made in 2015 $ 96 $ 10,452 $ 10,548 Contributions made in 2014 $ 2,653 $ 3,708 $ 6,361 Included in the above table, related to the non-U.S. plans, we paid $5.2 million in connection with unwinding the direct ownership of our defined benefit pension plan in the Netherlands in the fourth quarter of 2015. It is difficult to estimate future cash contributions to the pension plans, as such amounts are a function of actual investment returns, withdrawals from the plans, changes in interest rates and other factors uncertain at this time. It is possible that greater cash contributions may be required in 2016 than the amounts in the above table. Although a decline in market conditions, changes in current pension law and uncertainties regarding significant assumptions used in the actuarial valuations may have a material impact in future required contributions to our pension plans, we currently do not expect funding requirements to have a material adverse impact on current or future liquidity. Pension benefit payment amounts are anticipated to be paid from the plans (including the SERP) as follows: Year (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2016 $ 18,715 $ 2,388 $ 21,103 2017 $ 19,165 $ 1,929 $ 21,094 2018 $ 20,198 $ 2,065 $ 22,263 2019 $ 20,357 $ 2,526 $ 22,883 2020 $ 20,840 $ 2,335 $ 23,175 2021-2025 $ 107,972 $ 13,859 $ 121,831 Accumulated Benefit Obligation in Excess of Plan Assets The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2015 and 2014 were as follows: December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2015 2014 2015 2014 2015 2014 Projected benefit obligation $ 268,218 $ 289,157 $ 35,915 $ 44,271 $ 304,133 $ 333,428 Accumulated benefit obligation $ 268,218 $ 289,157 $ 29,102 $ 33,645 $ 297,320 $ 322,802 Fair value of plan assets $ 257,562 $ 276,914 $ — $ 475 $ 257,562 $ 277,389 Plan Asset Allocation The asset allocation for our U.S. pension plans at the end of 2015 and 2014 and the target allocation for 2016, by asset category, are as follows: Target Allocation Percent of Plan Assets at Year End U.S. Plans Asset Category 2016 2015 2014 Equity securities 45 % 44 % 44 % Debt and fixed income securities 32 % 32 % 33 % Real estate 5 % 6 % 5 % Other 18 % 18 % 18 % Total 100 % 100 % 100 % In connection with the unwinding our defined benefit pension plan in the Netherlands in the fourth quarter of 2015, all related plan assets were transferred to PGB, an industry wide pension fund. The asset allocation for our Dutch pension plan at the end of 2014, by asset category, was as follows: Non-U.S. Plan Asset Category Percent of Plan Assets at Year End 2014 Equity securities 28 % Debt securities 61 % Real estate 6 % Other 5 % Total 100 % Our investment strategy is to control and manage investment risk through diversification across asset classes and investment styles, within established target asset allocation ranges. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. Assets will be diversified among a mix of traditional investments in equity and fixed income instruments, as well as alternative investments including real estate and hedge funds. It would be anticipated that a modest allocation to cash would exist within the plans, since each investment manager is likely to hold some cash in the portfolio with the goal of ensuring that sufficient liquidity will be available to meet expected cash flow requirements. Our investment valuation policy is to value the investments at fair value. All investments are valued at their respective net asset values as calculated by the Trustee. Underlying equity securities, for which market quotations are readily available, are valued at the last reported readily available sales price on their principal exchange on the valuation date or official close for certain markets. Fixed income investments are valued on a basis of valuations furnished by a trustee-approved pricing service, which determines valuations for normal institutional-size trading units of such securities which are generally recognized at fair value as determined in good faith by the Trustee. Short-term investments, if any, are stated at amortized cost, which approximates fair value. The fair value of investments in real estate funds is based on valuation of the fund as determined by periodic appraisals of the underlying investments owned by the respective fund. The fair value of hedge funds is based on the net asset values provided by the fund manager. Investments in registered investment companies or collective pooled funds, if any, are valued at their respective net asset value. The following table sets forth by level, within the fair value hierarchy established by FASB ASC Topic 820, our pension plan assets at fair value (see note 15 for further discussion of the fair value hierarchy) as of December 31, 2015 and 2014: December 31, 2015 (dollars in thousands) Level One Level Two Level Three Total Cash & cash equivalents $ — $ 9,558 $ — $ 9,558 Real estate — 17,376 — 17,376 Equity securities — 138,497 — 138,497 Debt securities — 101,895 — 101,895 Hedge funds — — 48,858 48,858 Total $ — $ 267,326 $ 48,858 $ 316,184 December 31, 2014 (dollars in thousands) Level One Level Two Level Three Total Cash & cash equivalents $ — $ 10,327 $ — $ 10,327 Real estate — 17,332 4,224 21,556 Equity securities — 170,324 — 170,324 Debt securities — 157,846 — 157,846 Hedge funds — — 54,308 54,308 Total $ — $ 355,829 $ 58,532 $ 414,361 The realized gain (loss) on disposition of Level 3 pension plan assets was a gain of $2.6 million in 2015 and immaterial in 2014. The following is a reconciliation for which Level 3 inputs were used in determining fair value: Year ended December 31, (dollars in thousands) 2015 2014 Assets classified as Level 3 at the beginning of the year $ 58,532 $ 60,231 Change in unrealized appreciation (depreciation) 218 801 Net purchases (sales) (9,892 ) (2,500 ) Assets classified as Level 3 at the end of the year $ 48,858 $ 58,532 |