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 December 15, 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 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 related to this pension plan. 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 made cash contributions to PGB as participating employees earned pension benefits. These related costs were expensed as incurred, similar to the accounting associated with a defined contribution retirement plan and amounted to $1.9 million in 2016. 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 2016 2015 2014 2016 2015 2014 2016 2015 2014 Service cost (benefits earned during the period) $ 3,717 $ 4,365 $ 3,664 $ 1,226 $ 2,965 $ 2,264 $ 4,943 $ 7,330 $ 5,928 Interest cost on projected benefit obligation 14,963 14,715 15,378 2,594 4,332 5,566 17,557 19,047 20,944 Expected return on plan assets (23,027 ) (22,661 ) (22,387 ) — (2,447 ) (2,447 ) (23,027 ) (25,108 ) (24,834 ) Amortization of unrecognized: Prior service cost 263 417 1,059 (207 ) (244 ) 164 56 173 1,223 Actuarial loss 4,272 7,291 4,057 782 1,599 1,012 5,054 8,890 5,069 Transition obligations — — — — — 60 — — 60 Settlement charge 42 13 483 126 21,574 291 168 21,587 774 Curtailment charge (credit) — — — — (14 ) — — (14 ) — Pension expense $ 230 $ 4,140 $ 2,254 $ 4,521 $ 27,765 $ 6,910 $ 4,751 $ 31,905 $ 9,164 In 2016, 2015 and 2014, we incurred pension settlement charges of $0.2 million , $21.6 million and $0.8 million , respectively. The pension settlement charges in 2015 were triggered primarily by the liquidation of the Dutch pension fund. The pension settlement charges in 2016 and 2014 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 2016 2015 2016 2015 Discount rate 4.18% to 4.23% 4.60% to 4.73% 9.30% 8.10% Rate of compensation increase Not applicable Not applicable 4.30% 4.30% The assumptions used to determine net periodic pension costs were as follows: U.S. Plans Non-U.S. Plans 2016 2015 2014 2016 2015 2014 Discount rate 4.66 % to 4.73 % 4.17 % to 4.29 % 4.83 % to 5.12 % 8.10% 2.30 % to 7.60 % 3.70 % to 8.50 % Expected long-term rate of return on plan assets 7.25% 7.25% 7.25% —% 4.00% 4.10% Rate of compensation increase Not applicable Not applicable Not applicable 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 31 st . 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. In 2015 and 2016, the Society of Actuaries published new mortality projection scales which reflected additional years of mortality experience. We adopted these updates in each respective year. 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 2016 2015 2016 2015 2016 2015 Change in projected benefit obligation: Projected benefit obligation, beginning of year $ 325,863 $ 351,477 $ 35,915 $ 119,986 $ 361,778 $ 471,463 Service cost 3,717 4,365 1,226 2,965 4,943 7,330 Interest cost 14,963 14,715 2,594 4,332 17,557 19,047 Exchange rate fluctuations — — (5,821 ) (13,948 ) (5,821 ) (13,948 ) Actuarial (gain) loss 11,108 (26,796 ) (2,477 ) 11,105 8,631 (15,691 ) Plan participants' contributions — — — 1,359 — 1,359 Plan amendments — — — (4,354 ) — (4,354 ) Curtailment effect — — — (7,414 ) — (7,414 ) Settlements paid (259 ) (96 ) — (74,485 ) (259 ) (74,581 ) Benefits paid (18,744 ) (17,802 ) (3,276 ) (3,631 ) (22,020 ) (21,433 ) Projected benefit obligation, end of year $ 336,648 $ 325,863 $ 28,161 $ 35,915 $ 364,809 $ 361,778 Change in fair value of plan assets: Fair value of plan assets, beginning of year $ 316,184 $ 340,082 $ — $ 74,279 $ 316,184 $ 414,361 Actual return on plan assets 20,974 (6,096 ) — (213 ) 20,974 (6,309 ) Exchange rate fluctuations — — — (7,761 ) — (7,761 ) Employer contributions 259 96 3,276 10,452 3,535 10,548 Plan participants' contributions — — — 1,359 — 1,359 Settlements paid (259 ) (96 ) — (74,485 ) (259 ) (74,581 ) Benefits paid (18,744 ) (17,802 ) (3,276 ) (3,631 ) (22,020 ) (21,433 ) Fair value of plan assets, end of year $ 318,414 $ 316,184 $ — $ — $ 318,414 $ 316,184 Funded ratio 94.6 % 97.0 % — % — % 87.3 % 87.4 % Funded status and net accrued pension benefit asset (cost) $ (18,234 ) $ (9,679 ) $ (28,161 ) $ (35,915 ) $ (46,395 ) $ (45,594 ) 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) 2016 2015 Non-current asset $ — $ 977 Current liability (2,461 ) (2,297 ) Long-term liability (43,934 ) (44,274 ) Net accrued pension liability $ (46,395 ) $ (45,594 ) The pretax amounts recognized in accumulated other comprehensive loss as of December 31, 2016 and 2015, are as follows : Year ended December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2016 2015 2016 2015 2016 2015 Net actuarial loss $ 105,830 $ 96,983 $ 11,077 $ 16,988 $ 116,907 $ 113,971 Prior service cost (credit) 237 500 (2,704 ) (3,472 ) (2,467 ) (2,972 ) Total cost $ 106,067 $ 97,483 $ 8,373 $ 13,516 $ 114,440 $ 110,999 The pretax amounts in accumulated other comprehensive loss as of December 31, 2016, that are expected to be recognized as components of net periodic benefit cost during 2017 are as follows: (dollars in thousands) U.S. Plans Non-U.S. Plans Total Net actuarial loss $ 5,409 $ 543 $ 5,952 Prior service cost (credit) 236 (187 ) 49 Total cost $ 5,645 $ 356 $ 6,001 Estimated contributions for 2017, as well as, contributions made in 2016 and 2015 to the pension plans are as follows: (dollars in thousands) U.S. Plans Non-U.S. Plans Total Estimated contributions in 2017 $ 286 $ 2,278 $ 2,564 Contributions made in 2016 $ 259 $ 3,276 $ 3,535 Contributions made in 2015 $ 96 $ 10,452 $ 10,548 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 2017 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 2017 $ 19,038 $ 2,278 $ 21,316 2018 $ 19,957 $ 1,668 $ 21,625 2019 $ 20,146 $ 1,786 $ 21,932 2020 $ 20,164 $ 1,903 $ 22,067 2021 $ 20,497 $ 2,258 $ 22,755 2022-2026 $ 105,868 $ 12,215 $ 118,083 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, 2016 and 2015 were as follows: December 31, (dollars in thousands) U.S. Plans Non-U.S. Plans Total 2016 2015 2016 2015 2016 2015 Projected benefit obligation $ 336,648 $ 268,218 $ 28,161 $ 35,915 $ 364,809 $ 304,133 Accumulated benefit obligation $ 336,648 $ 268,218 $ 23,194 $ 29,102 $ 359,842 $ 297,320 Fair value of plan assets $ 318,414 $ 257,562 $ — $ — $ 318,414 $ 257,562 Plan Assets 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 are 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 short-term investments would exist within the plans, since each investment manager is likely to hold some short-term investments 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 state the investments at fair value. All investments are valued at their respective NAV as a practical expedient and calculated by the Trustee. The real estate, equity securities and fixed income investments are held in a Group Trust which is valued at the unit prices established by the Trustee and are valued using NAV as a practical expedient. Underlying equity securities (including large and small cap domestic and international equities), 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. 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. Investments in registered investment companies or collective pooled funds, if any, are valued at their respective NAV. Short-term investments are valued at their respective NAV and have no redemption restrictions. The hedge fund investments are valued by using estimated month-end NAV and performance numbers provided by the fund administrator. The Plan is required to provide a month’s advance written notice to liquidate its entire share in the Group Trust. Certain investments in the hedge funds can only be liquidated on either a quarterly or semi-annual basis and require advance notification. In connection with the unwinding of 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. In accordance with our adoption of ASU 2015-07 in 2016, all investments measured at NAV as a practical expedient for fair value have been excluded from the fair value hierarchy. The fair value measurements table presented below of our U.S. pension plan assets has been recasted to conform to the current year presentation under ASU 2015-07. See note 2 for more information. December 31, (dollars in thousands) Measured at NAV Target Allocation 2016 2015 2017 Short-term investments $ 8,766 $ 9,558 3 % Real estate 15,812 17,376 5 % Equity securities 148,302 138,497 45 % Debt securities 96,658 101,895 32 % Hedge funds 48,876 48,858 15 % Total $ 318,414 $ 316,184 100 % |