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Employee benefits
 12 Months Ended
Dec. 31, 2021
Employee benefits  
Pension and postretirement benefits

Note 30 – Employee benefits

 

Certain employees of BPPR are covered by three non-contributory defined benefit pension plans, the Banco Popular de Puerto Rico Retirement Plan and two Restoration Plans (the “Pension Plans”). Pension benefits are based on age, years of credited service, and final average compensation.

The Pension Plans are currently closed to new hires and the accrual of benefits are frozen to all participants. The Pension Plans’ benefit formula is based on a percentage of average final compensation and years of service as of the plan freeze date. Normal retirement age under the retirement plan is age 65 with 5 years of service. Pension costs are funded in accordance with minimum funding standards under the Employee Retirement Income Security Act of 1974 (“ERISA”). Benefits under the Pension Plans are subject to the U.S. and Puerto Rico Internal Revenue Code limits on compensation and benefits. Benefits under restoration plans restore benefits to selected employees that are limited under the Banco Popular de Puerto Rico Retirement Plan due to U.S. and Puerto Rico Internal Revenue Code limits and a compensation definition that excludes amounts deferred pursuant to nonqualified arrangements.

In addition to providing pension benefits, BPPR provides certain health care benefits for certain retired employees (the “OPEB Plan”). Regular employees of BPPR, hired before February 1, 2000, may become eligible for health care benefits, provided they reach retirement age while working for BPPR.

The Corporation’s funding policy is to make annual contributions to the plans, when necessary, in amounts which fully provide for all benefits as they become due under the plans.

The Corporation’s pension fund investment strategy is to invest in a prudent manner for the exclusive purpose of providing benefits to participants. A well defined internal structure has been established to develop and implement a risk-controlled investment strategy that is targeted to produce a total return that, when combined with BPPR contributions to the fund, will maintain the fund’s ability to meet all required benefit obligations. Risk is controlled through diversification of asset types, such as investments in domestic and international equities and fixed income.

Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee periodically reviews the performance of the pension plans’ investments and assets allocation. The Trustee and the money managers are allowed to exercise investment discretion, subject to limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee.

The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place.

The Pension Plans weighted average asset allocation as of December 31, 2021 and 2020 and the approved asset allocation ranges, by asset category, are summarized in the table below.

 

Minimum allotment

Maximum allotment

2021

2020

Equity

0

%

70

%

30

%

38

%

Debt securities

0

%

100

%

67

%

60

%

Popular related securities

0

%

5

%

2

%

1

%

Cash and cash equivalents

0

%

100

%

1

%

1

%

The following table sets forth by level, within the fair value hierarchy, the Pension Plans’ assets at fair value at December 31, 2021 and 2020. Investments measured at net asset value per share (“NAV”) as a practical expedient have not been classified in the fair value hierarchy, but are presented in order to permit reconciliation of the plans’ assets. During the year ended December 31, 2021 investments in certain government obligations classified as Level 2 were substituted by proprietary funds of a money manager that invest in government obligations that are measured at NAV.

 

 

2021

 

2020

(In thousands)

 

Level 1

 

Level 2

 

Level 3

 

Measured at NAV

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Measured at NAV

 

Total

Obligations of the U.S. Government, its agencies, states and political subdivisions

$

-

$

9,259

$

-

$

188,377

$

197,636

$

-

$

187,065

$

-

$

7,377

$

194,442

Corporate bonds and debentures

 

-

 

375,875

 

-

 

8,485

 

384,360

 

-

 

326,344

 

-

 

8,180

 

334,524

Equity securities - Common Stocks

 

41,414

 

-

 

-

 

-

 

41,414

 

101,081

 

-

 

-

 

-

 

101,081

Equity securities - ETF's

 

111,365

 

25,446

 

-

 

-

 

136,811

 

94,009

 

38,229

 

-

 

-

 

132,238

Foreign commingled trust funds

 

-

 

-

 

-

 

82,912

 

82,912

 

-

 

-

 

-

 

98,431

 

98,431

Mutual fund

 

-

 

5,262

 

-

 

-

 

5,262

 

-

 

4,526

 

-

 

-

 

4,526

Private equity investments

 

-

 

-

 

56

 

-

 

56

 

-

 

-

 

70

 

-

 

70

Cash and cash equivalents

 

7,523

 

-

 

-

 

-

 

7,523

 

9,626

 

-

 

-

 

-

 

9,626

Accrued investment income

 

-

 

-

 

4,510

 

-

 

4,510

 

-

 

-

 

3,847

 

-

 

3,847

Total assets

$

160,302

$

415,842

$

4,566

$

279,774

$

860,484

$

204,716

$

556,164

$

3,917

$

113,988

$

878,785

The closing prices reported in the active markets in which the securities are traded are used to value the investments.

Following is a description of the valuation methodologies used for investments measured at fair value:

Obligations of U.S. Government, its agencies, states and political subdivisions - The fair value of Obligations of U.S. Government and its agencies obligations are based on an active exchange market and on quoted market prices for similar securities. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value incorporates an option adjusted spread in deriving their fair value. The fair value of municipal bonds are based on trade data on these instruments reported on Municipal Securities Rulemaking Board (“MSRB”) transaction reporting system or comparable bonds from the same issuer and credit quality. These securities are classified as Level 2, except for the governmental index funds that are measured at NAV.

Corporate bonds and debentures - Corporate bonds and debentures are valued at fair value at the closing price reported in the active market in which the bond is traded. These securities are classified as Level 2, except for the corporate bond funds that are measured at NAV.

Equity securities – common stocks - Equity securities with quoted market prices obtained from an active exchange market and high liquidity are classified as Level 1.

Equity securities – ETF’s – Exchange Traded Funds shares with quoted market prices obtained from an active exchange market. Highly liquid ETF’s are classified as Level 1 while less liquid ETF’s are classified as Level 2.

Foreign commingled trust fund- Collective investment funds are valued at the NAV of shares held by the plan at year end.

Mutual funds – Mutual funds are valued at the NAV of shares held by the plan at year end. Mutual funds are classified as Level 2.

Mortgage-backed securities – The fair value is based on trade data from brokers and exchange platforms where these instruments regularly trade. Certain agency mortgage and other asset backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread and prepayment projections. The agency MBS are classified as Level 2.

Private equity investments - Private equity investments include an investment in a private equity fund. The fund value is recorded at its net realizable value which is affected by the changes in the fair market value of the investments held in the fund. This fund is classified as Level 3.

Cash and cash equivalents - The carrying amount of cash and cash equivalents is a reasonable estimate of the fair value since it is available on demand or due to their short-term maturity. Cash and cash equivalents are classified as Level 1.

Accrued investment income – Given the short-term nature of these assets, their carrying amount approximates fair value. Since there is a lack of observable inputs related to instrument specific attributes, these are reported as Level 3.

The preceding valuation methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table presents the change in Level 3 assets measured at fair value.

(In thousands)

 

2021

 

2020

Balance at beginning of year

$

3,917

$

4,670

Purchases, sales, issuance and settlements (net)

 

649

 

(753)

Balance at end of year

$

4,566

$

3,917

There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the years ended December 31, 2021 and 2020. There were no transfers in and/or out of Level 1 and Level 2 during the years ended December 31, 2021 and 2020.Information on the shares of common stock held by the pension plans is provided in the table that follows.

(In thousands, except number of shares information)

 

2021

 

2020

Shares of Popular, Inc. common stock

 

167,182

 

162,936

Fair value of shares of Popular, Inc. common stock

$

13,716

$

9,177

Dividends paid on shares of Popular, Inc. common stock held by the plan

$

280

$

238

The following table presents the components of net periodic benefit cost for the years ended December 31, 2021, 2020 and 2019.

 

 

Pension Plans

 

OPEB Plan

(In thousands)

 

2021

 

2020

 

2019

 

2021

 

2020

 

2019

Personnel costs:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

-

$

-

$

-

$

642

$

713

$

759

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

15,993

 

23,389

 

28,439

 

3,573

 

4,913

 

5,955

Expected return on plan assets

 

(38,679)

 

(38,104)

 

(32,388)

 

-

 

-

 

-

Recognized net actuarial loss

 

18,876

 

20,880

 

23,508

 

1,873

 

567

 

-

Net periodic benefit cost

$

(3,810)

$

6,165

$

19,559

$

6,088

$

6,193

$

6,714

Total benefit cost

$

(3,810)

$

6,165

$

19,559

$

6,088

$

6,193

$

6,714

The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31, 2021 and 2020.

 

 

 

Pension Plans

 

OPEB Plan

(In thousands)

 

2021

 

2020

 

2021

 

2020

Change in benefit obligation:

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

$

914,353

$

852,551

$

179,210

$

168,681

Service cost

 

-

 

-

 

642

 

713

Interest cost

 

15,993

 

23,389

 

3,573

 

4,913

Actuarial (gain)/loss[1]

 

(34,297)

 

83,277

 

(17,286)

 

11,247

Benefits paid

 

(44,578)

 

(44,864)

 

(6,181)

 

(6,344)

Benefit obligation at end of year

$

851,471

$

914,353

$

159,958

$

179,210

Change in fair value of plan assets:

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

$

878,785

$

799,935

$

-

$

-

Actual return on plan assets

 

26,049

 

123,484

 

-

 

-

Employer contributions

 

228

 

230

 

6,181

 

6,344

Benefits paid

 

(44,578)

 

(44,864)

 

(6,181)

 

(6,344)

Fair value of plan assets at end of year

$

860,484

$

878,785

$

-

$

-

Funded status of the plan:

 

 

 

 

 

 

 

 

Benefit obligation at end of year

$

(851,471)

$

(914,353)

$

(159,958)

$

(179,210)

Fair value of plan assets at end of year

 

860,484

 

878,785

 

-

 

-

Funded status at year end

$

9,013

$

(35,568)

$

(159,958)

$

(179,210)

Amounts recognized in accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

225,356

 

265,899

 

12,993

 

32,152

Accumulated other comprehensive loss (AOCL)

$

225,356

$

265,899

$

12,993

$

32,152

Reconciliation of net (liabilities) assets:

 

 

 

 

 

 

 

 

Net liabilities at beginning of year

$

(35,568)

$

(52,616)

$

(179,210)

$

(168,681)

Amount recognized in AOCL at beginning of year, pre-tax

 

265,899

 

288,882

 

32,152

 

21,472

Amount prepaid at beginning of year

 

230,331

 

236,266

 

(147,058)

 

(147,209)

Net periodic benefit cost

 

3,810

 

(6,165)

 

(6,088)

 

(6,193)

Contributions

 

228

 

230

 

6,181

 

6,344

Amount prepaid at end of year

 

234,369

 

230,331

 

(146,965)

 

(147,058)

Amount recognized in AOCL

 

(225,356)

 

(265,899)

 

(12,993)

 

(32,152)

Net asset/(liabilities) at end of year

$

9,013

$

(35,568)

$

(159,958)

$

(179,210)

[1]

For 2021, significant components of the Pension Plans actuarial gain that changed the benefit obligation were mainly related to an increase in the single weighted-average discount rates partially offset by a lower return on the fair value of plan assets. For OPEB Plans significant components of the actuarial gain that change the benefit obligation were mainly related to an increase in discount rates and the per capita claim assumption at year-end which was lower than expected. The per capita claim methodology for the fully insured Medicare Advantage plans changed from age-based per capita cost to cost that do not vary by age. For 2020, significant components of the Pension Plans actuarial loss that changed the benefit obligation were mainly related to a decrease in discount rates partially offset by a greater return on the fair value of plan assets. For OPEB Plans significant components of the actuarial loss that change the benefit obligation were mainly related to a decrease in discount rates partially offset by the per capita claim assumption at year-end which was lower than expected and the healthcare trend rate assumption which was updated at year-end.

 

The following table presents the change in accumulated other comprehensive loss (“AOCL”), pre-tax, for the years ended December 31, 2021 and 2020.

(In thousands)

 

Pension Plans

 

OPEB Plan

 

 

 

2021

 

2020

 

2021

 

2020

Accumulated other comprehensive loss at beginning of year

$

265,899

$

288,882

$

32,152

$

21,472

Increase (decrease) in AOCL:

 

 

 

 

 

 

 

 

Recognized during the year:

 

 

 

 

 

 

 

 

 

Amortization of actuarial losses

 

(18,876)

 

(20,880)

 

(1,873)

 

(567)

Occurring during the year:

 

 

 

 

 

 

 

 

 

Net actuarial (gains)/losses

 

(21,667)

 

(2,103)

 

(17,286)

 

11,247

Total (decrease) increase in AOCL

 

(40,543)

 

(22,983)

 

(19,159)

 

10,680

Accumulated other comprehensive loss at end of year

$

225,356

$

265,899

$

12,993

$

32,152

The Corporation estimates the service and interest cost components utilizing a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows.

To determine benefit obligation at year end, the Corporation used a weighted average of annual spot rates applied to future expected cash flows for years ended December 31, 2021 and 2020.

The following table presents the discount rate and assumed health care cost trend rates used to determine the benefit obligation and net periodic benefit cost for the plans:

 

 

Pension Plans

 

OPEB Plan

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:

2021

 

2020

 

2019

 

2021

 

2020

 

2019

 

Discount rate for benefit obligation

2.41 - 2.48

%

3.22 - 3.27

%

4.20 - 4.23

%

2.65

%

3.38

%

4.30

%

Discount rate for service cost

N/A

 

N/A

 

N/A

 

3.09

%

3.72

%

4.49

%

Discount rate for interest cost

1.76 - 1.80

%

2.81 - 2.83

%

3.87 - 3.90

%

2.03

%

2.98

%

3.99

%

Expected return on plan assets

4.60 - 5.50

%

5.00 - 5.80

%

5.30 - 6.00

%

N/A

 

N/A

 

N/A

 

Initial health care cost trend rate

N/A

 

N/A

 

N/A

 

5.00

%

5.00

%

5.00

%

Ultimate health care cost trend rate

N/A

 

N/A

 

N/A

 

4.50

%

5.00

%

5.00

%

Year that the ultimate trend rate is reached

N/A

 

N/A

 

N/A

 

2023

 

2020

 

2019

 

 

 

 

 

 

 

Pension Plans

OPEB Plan

Weighted average assumptions used to determine benefit obligation at December 31:

2021

 

2020

 

2021

 

2020

 

Discount rate for benefit obligation

 

 

 

 

2.79-2.83

%

2.41-2.48

%

2.94

%

2.65

%

Initial health care cost trend rate

 

 

 

 

N/A

 

N/A

 

4.75

%

5.00

%

Ultimate health care cost trend rate

 

 

 

 

N/A

 

N/A

 

4.50

%

4.50

%

Year that the ultimate trend rate is reached

 

 

 

 

N/A

 

N/A

 

2023

 

2023

 

The following table presents information for plans with a projected benefit obligation and accumulated benefit obligation in excess of plan assets for the years ended December 31, 2021 and 2020.

 

 

Pension Plans

 

OPEB Plan

(In thousands)

 

2021

 

2020

 

2021

 

2020

Projected benefit obligation

$

851,471

$

914,353

$

159,958

$

179,210

Accumulated benefit obligation

 

851,471

 

914,353

 

159,958

 

179,210

Fair value of plan assets

 

860,484

 

878,785

 

-

 

-

The Corporation expects to pay the following contributions to the plans during the year ended December 31, 2022.

(In thousands)

2022

Pension Plans

$

227

OPEB Plan

$

5,971

Benefit payments projected to be made from the plans during the next ten years are presented in the table below.

(In thousands)

 

Pension Plans

 

OPEB Plan

2022

$

48,339

$

5,971

2023

 

45,409

 

6,117

2024

 

45,598

 

6,293

2025

 

45,742

 

6,458

2026

 

45,824

 

6,667

2027 - 2031

 

226,642

 

35,807

The table below presents a breakdown of the plans’ assets and liabilities at December 31, 2021 and 2020.

 

 

Pension Plans

 

OPEB Plan

(In thousands)

 

2021

 

2020

 

2021

 

2020

Non-current assets

$

17,792

$

-

$

-

$

-

Current liabilities

 

227

 

229

 

5,959

 

6,328

Non-current liabilities

 

8,552

 

35,339

 

153,999

 

172,882

Savings plans

The Corporation also provides defined contribution savings plans pursuant to Section 1081.01(d) of the Puerto Rico Internal Revenue Code and Section 401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of the Corporation. Investments in the plans are participant-directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in the year ended December 31, 2021 was $13.3 million (2020 - $14.0 million, 2019 - $15.1 million).

The plans held 1,279,982 (2020 – 1,362,593) shares of common stock of the Corporation with a market value of approximately $105 million at December 31, 2021 (2020 - $77 million).