Pension Plans

We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, and CoCreate, which we acquired in 2008, and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after one to five years of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.

The following table presents the actuarial assumptions used in accounting for the pension plans:



	2018		2017		2016
Weighted average assumptions used to determine benefit obligations at September 30 measurement date:
Discount rate	1.9	%	1.8	%	1.3	%
Rate of increase in future compensation	3.0	%	2.8	%	2.8	%
Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30:
Discount rate	1.8	%	1.3	%	2.2	%
Rate of increase in future compensation	2.8	%	2.8	%	3.0	%
Rate of return on plan assets	5.4	%	5.4	%	5.7	%

In selecting the expected long-term rate of return on assets, we considered the current investment portfolio and the investment return goals in the plans’ investment policy statements. We, with input from the plans’ professional investment managers and actuaries, also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits. This process included determining expected returns for the various asset classes that comprise the plans’ target asset allocation. This basis for selecting the long-term asset return assumptions is consistent with the prior year. Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the plans’ long-term liabilities to employees. Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary.

As of September 30, 2018, the weighted long-term rate of return assumption is 5.4%. These rates of return, together with the assumptions used to determine the benefit obligations as of September 30, 2018 in the table above, will be used to determine our 2019 net periodic pension cost, which we expect to be approximately $1.2 million.

The actuarially computed components of net periodic pension cost recognized in our Consolidated Statements of Operations for each year are shown below:



	Year ended September 30,
	2018			2017			2016
	(in thousands)
Interest cost of projected benefit obligation	$	1,260		$	815		$	1,374
Service cost	1,535			1,696			1,599
Expected return on plan assets	(4,180		)	(3,327		)	(3,305		)
Amortization of prior service cost	(5		)	(5		)	(5		)
Recognized actuarial loss	2,293			3,385			2,292
Settlement loss	9			—			—
Net periodic pension cost	$	912		$	2,564		$	1,955

The following tables display the change in benefit obligation and the change in the plan assets and funded status of the plans as well as the amounts recognized in our Consolidated Balance Sheets:



	Year ended September 30,
	2018			2017
	(in thousands)
Change in benefit obligation:
Projected benefit obligation—beginning of year	$	87,168		$	92,695
Service cost	1,535			1,696
Interest cost	1,260			815
Actuarial loss (gain)	2,157			(8,496		)
Foreign exchange impact	(1,669		)	2,379
Participant contributions	212			183
Benefits paid	(1,637		)	(2,104		)
Settlements	(1,162		)	—
Projected benefit obligation—end of year	$	87,864		$	87,168
Change in plan assets and funded status:
Plan assets at fair value—beginning of year	$	70,494		$	61,935
Actual return on plan assets	1,025			6,261
Employer contributions	2,459			2,036
Participant contributions	212			183
Foreign exchange impact	(1,250		)	2,183
Settlements	(1,162		)	—
Benefits paid	(1,637		)	(2,104		)
Plan assets at fair value—end of year	70,141			70,494
Projected benefit obligation—end of year	87,864			87,168
Underfunded status	$	(17,723	)	$	(16,674	)
Accumulated benefit obligation—end of year	$	85,103		$	84,298
Amounts recognized in the balance sheet:
Non-current liability	$	(17,502	)	$	(16,674	)
Current liability	$	(221	)	$	—
Amounts in accumulated other comprehensive loss:
Unrecognized actuarial loss	$	27,027		$	24,738

We expect to recognize approximately $2.4 million of the unrecognized actuarial loss as of September 30, 2018 as a component of net periodic pension cost in 2019.

The following table shows change in accumulated other comprehensive loss:



	Year ended September 30,
	2018			2017
	(in thousands)
Accumulated other comprehensive loss- beginning of year	$	24,738		$	38,667
Recognized during year - net actuarial (losses)	(2,288		)	(3,380		)
Occurring during year - settlement loss	(9		)	—
Occurring during year - net actuarial losses (gains)	5,312			(11,430		)
Foreign exchange impact	(726		)	881
Accumulated other comprehensive loss- end of year	$	27,027		$	24,738

The following table shows the percentage of total plan assets for each major category of plan assets:



	September 30,
	2018		2017
Asset category:
Equity securities	35	%	23	%
Fixed income securities	46	%	57	%
Commodities	1	%	6	%
Insurance company funds	12	%	12	%
Cash	6	%	2	%
	100	%	100	%

We periodically review the pension plans’ investments in the various asset classes. The current asset allocation target is 60% equity securities and 40% fixed income securities for the CoCreate plan in Germany, and 100% fixed income securities for the other international plans. The fixed income securities for the other international plans primarily include investments held with insurance companies with fixed returns. The plans’ investment managers are provided specific guidelines under which they are to invest the assets assigned to them. In general, investment managers are expected to remain fully invested in their asset class with further limitations on risk as related to investments in a single security, portfolio turnover and credit quality.

The German CoCreate plan's investment policy prohibits the use of derivatives associated with leverage and speculation or investments in securities issued by PTC, except through index-related strategies and/or commingled funds. An investment committee oversees management of the pension plans’ assets. Plan assets consist primarily of investments in mutual funds invested in equity and fixed income securities.

In 2018, 2017 and 2016 our actual return on plan assets was $1.0 million, $6.3 million and $1.7 million, respectively.

Based on actuarial valuations and additional voluntary contributions, we contributed $2.5 million, $2.0 million, and $2.0 million in 2018, 2017 and 2016, respectively, to the plans.

As of September 30, 2018, benefit payments expected to be paid over the next ten years are outlined in the following table:



	Future Benefit Payments
	(in thousands)
Year ending September 30,
2019	$	2,721
2020	2,989
2021	3,265
2022	3,871
2023	3,873
2024 to 2028	23,493

Fair Value of Plan Assets

The International Plan assets are comprised primarily of investments in a trust and an insurance company. The underlying investments in the trust are primarily publicly traded European DJ EuroStoxx50 equities and European governmental fixed income securities. They are classified as Level 1 because the underlying units of the trust are traded in open public markets. The fair value of the underlying investments in equity securities and fixed income are based upon publicly-traded exchange prices.



	September 30, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Plan assets:
Fixed income securities:
Government	$	29,754	$	—	$	—	$	29,754
European corporate investment grade	2,499		—		—		2,499
European large capitalization stocks	24,502		—		—		24,502
Commodities	724		—		—		724
Insurance company funds (1)	—		8,413		—		8,413
Cash	4,249		—		—		4,249
	$	61,728	$	8,413	$	—	$	70,141



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Plan assets:
Fixed income securities:
Government	$	29,445	$	—	$	—	$	29,445
European corporate investment grade	10,675		—		—		10,675
European large capitalization stocks	16,164		—		—		16,164
Commodities	3,966		—		—		3,966
Insurance company funds (1)	—		8,714		—		8,714
Cash	1,530		—		—		1,530
	$	61,780	$	8,714	$	—	$	70,494

(1) These investments are comprised primarily of funds invested with an insurance company in Japan with a guaranteed rate of return. The insurance company invests these assets primarily in government and corporate bonds.