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Retirement and Other Postretirement Benefit Plans | 12 Months Ended
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Dec. 31, 2020
Compensation And Retirement Disclosure [Abstract] |
Retirement and Other Postretirement Benefit Plans | Note 7 — Retirement and Other Postretirement Benefit Plans We maintain qualified defined benefit retirement plans covering certain current and former European employees, as well as nonqualified defined benefit retirement plans, and retirement savings plans covering certain eligible U.S. and European employees and participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. In addition, we provide certain postretirement health care and life insurance benefits to eligible U.S. retirees. Accounting standards require the use of certain assumptions, such as the expected long-term rate of return, discount rate, rate of compensation increase, healthcare cost trend rates, and retirement and mortality rates, to determine the net periodic costs of such plans. These assumptions are reviewed and set annually at the beginning of each year. In addition, these models use an “attribution approach” that generally spreads individual events, such as plan amendments and changes in actuarial assumptions, over the service lives of the employees in the plan. That is, employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of retirement and postretirement benefit plans are earned in, and should follow, the same pattern. We use our actual return experience, future expectations of long-term investment returns, and our actual and targeted asset allocations to develop our expected rate of return assumption used in the net periodic cost calculations of our funded European defined benefit retirement plans. Due to the difficulty involved in predicting the market performance of certain assets, there will be a difference in any given year between our expected return on plan assets and the actual return. Following the attribution approach, each year’s difference is amortized over a number of future years. Over time, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. We annually set our discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments. The rate of compensation increases for nonqualified pension plans, which is another significant assumption used in the actuarial model for pension accounting, is determined by us based upon our long-term plans for such increases and assumed inflation. For the postretirement health care and life insurance benefits plan, we review external data and its historical trends for health care costs to determine the health care cost trend rates. Retirement and termination rates are based primarily on actual plan experience. The mortality table used for the U.S. plans is based on the Pri-2012 White Collar Healthy Annuitant Mortality Table with Improvement Scale MP-2019 and for the U.K. Plan the S3PXA base table with future improvements in line with the CMI 2019 projection model with a long-term trend rate of 1.25% p. a. Actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect the net periodic costs and recorded obligations in such future periods. While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations. U.S. Defined Benefit Retirement Plans We have nonqualified defined benefit retirement plans covering certain current and former U.S. employees that are funded as benefits are incurred. Under the provisions of these plans, we expect to contribute approximately $3.4 million in 2021 to cover unfunded benefits. Multi-Employer Plan The Company is party to a multi-employer pension plan covering certain U.S. employees with union affiliations. The plan is the Western Metal Industry Pension Fund, (“the Plan”). The Plan’s employer identification number is 91-6033499; the Plan number is 001. In 2020, 2019 and 2018 the Plan reported Hexcel Corporation as being an employer that contributed greater than 5% of the Plan’s total contributions. The collective bargaining agreement was renewed on November 20, 2020 retroactively to October 1, 2020 for a five-year term. The Plan has been listed in “critical status” and has been operating in accordance with a Rehabilitation Plan since 2010. The Plan, as amended under the Rehabilitation Plan, reduced the adjustable benefits of the participants, and levied a surcharge on employer contributions. The Company contributed $2.0 million in 2020, $2.5 million in 2019 and $2.1 million in 2018. We expect the Company’s contribution to be about $2.0 million in 2021 and remain at that level over the remaining term. U.S. Retirement Savings Plan Under the retirement savings plan, eligible U.S. employees can contribute up to 75% of their annual compensation to an individual 401(k) retirement savings account. The Company makes matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation each year. We also contribute an additional 2% to 4% of each eligible U.S. employee’s salary to an individual 401(k) retirement savings account. This increases the maximum contribution to individual U.S. employee savings accounts to between 5% and 7% per year before any profit-sharing contributions that are made when we meet or exceed certain performance targets that are set annually. These profit-sharing contributions are made at the Company’s discretion and are targeted at 3% of an eligible U.S. employee’s pay, with a maximum of 4.5%. In April 2020, the matching contributions were suspended as a result of the COVID-19 impact, however, as of January 1, 2021 they have been reinstated for all full-time employees. U.S. Postretirement Plans In addition to defined benefit and retirement savings plan benefits, we also provide certain postretirement health care and life insurance benefits to eligible U.S. retirees. Depending upon the plan, benefits are available to eligible employees who retire after meeting certain age and service requirements and were employed by Hexcel as of February 1996. Our funding policy for the postretirement health care and life insurance benefit plans is generally to pay covered expenses as they are incurred. Under the provisions of these plans, we expect to contribute approximately $0.4 million in 2021 to cover unfunded benefits. Non-Qualified Deferred Compensation Plan Under the deferred compensation plan, eligible U.S. employees may make tax-deferred contributions that cannot be made under the 401(k) Plan because of Internal Revenue Service limitations. We match 50% of a participant’s contributions up to 6% of the participants excess compensation pay as well as provide the same fixed and profit-sharing contributions as provided under the 401(k) plan. In April 2020, the matching contributions were suspended as a result of the COVID-19 impact, however, as of January 1, 2021 they have been reinstated for all full-time employees. We have elected to fund our deferred compensation obligation through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in a number of funds based on the funds available under our 401(k) plan, other than the Hexcel stock fund. The securities are carried at fair value and are included in other assets on the consolidated balance sheets. We record trading gains and losses in general and administrative expenses on the consolidated statements of income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect our exposure to liabilities for payment under the deferred plan. European Defined Benefit Retirement Plans We have defined benefit retirement plans in the United Kingdom, Belgium, France, and Austria covering certain employees of our subsidiaries in those countries. The defined benefit plan in the United Kingdom (the “U.K. Plan”), the largest of the European plans, was terminated in 2011 and replaced with a defined contribution plan. The total assets in the U.K. Plan were held in a variety of investments. Equity investments and growth fund investments are made with the objective of achieving a return on plan assets consistent with the funding requirements of the plan, maximizing portfolio return and minimizing the impact of market fluctuations on the fair value of the plan assets. In 2020, the plan bought an insurance policy referred to as a buy-in which immunized a significant portion of the liability. Liability driven investments are made to further reduce balance sheet volatility. As a result of an annual review of historical returns and market trends, and the insurance policy, the expected long-term weighted average rate of return for the U.K. Plan for the 2021 plan year will be 1.5% and 3.0% for the other European plans as a group. U.K. Defined Contribution Pension Plan Under the Defined Contribution Plan, eligible U.K. employees can belong to the Deferred Contribution Plan on a non-participatory basis or can elect to contribute 3%, 5% or 7% of their pensionable salary. The Company will contribute 5%, 9% and 13% respectively. The plan also provides life insurance and disability insurance benefits for members. Retirement and Other Postretirement Plans – France The employees of our French subsidiaries are entitled to receive a lump-sum payment upon retirement subject to certain service conditions under the provisions of the national chemicals and textile workers collective bargaining agreements. The amounts attributable to the French plans have been included within the total expense and obligation amounts noted for the European plans. Net Periodic Pension Expense Net periodic expense for our U.S. and European qualified and nonqualified defined benefit pension plans and our retirement savings plans for the three years ended December 31, 2020 is detailed in the table below.
(In millions) |  | 2020 |  |  | 2019 |  |  | 2018 |
Defined benefit retirement plans |  | $ | 0.1 |  |  | $ | (1.0 | ) |  | $ | (1.6 | )
Union sponsored multi-employer pension plan |  | 2.0 |  |  | 2.5 |  |  | 2.1 |
Retirement savings plans-matching contributions |  | 5.9 |  |  | 11.4 |  |  | 10.2 |
Retirement savings plans-profit sharing contributions |  | 2.7 |  |  | 10.4 |  |  | 10.2 |
Net periodic expense |  | $ | 10.7 |  |  | $ | 23.3 |  |  | $ | 20.9 |
Defined Benefit Retirement and Postretirement Plans Net periodic cost of our defined benefit retirement and postretirement plans for the three years ended December 31, 2020, were:
(In millions) |  | U.S. Plans |  |  | European Plans |
Defined Benefit Retirement Plans |  | 2020 |  |  | 2019 |  |  | 2018 |  |  | 2020 |  |  | 2019 |  |  | 2018 |
Service cost |  | $ | 1.2 |  |  | $ | 1.2 |  |  | $ | 1.2 |  |  | $ | 1.1 |  |  | $ | 1.0 |  |  | $ | 1.1 |
Interest cost |  |  | 0.5 |  |  |  | 0.6 |  |  |  | 0.6 |  |  |  | 3.5 |  |  |  | 4.5 |  |  |  | 4.4 |
Expected return on plan assets |  |  | — |  |  | — |  |  | — |  |  |  | (6.9 | ) |  |  | (8.7 | ) |  |  | (9.4 | )
Net amortization |  |  | 0.3 |  |  |  | 0.1 |  |  |  | 0.2 |  |  |  | 0.4 |  |  |  | 0.3 |  |  |  | 0.3 |
Termination benefits and settlement losses |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Net periodic pension cost (income) |  | $ | 2.0 |  |  | $ | 1.9 |  |  | $ | 2.0 |  |  | $ | (1.9 | ) |  | $ | (2.9 | ) |  | $ | (3.6 | )
(In millions) |  |  |  |  |  |  |  |  |  |  |  |
U.S. Postretirement Plans |  | 2020 |  |  | 2019 |  |  | 2018 |
Interest cost |  | $ | 0.1 |  |  | $ | 0.1 |  |  | $ | 0.1 |
Net amortization and deferral |  |  | (1.0 | ) |  |  | (1.1 | ) |  |  | (1.0 | )
Net periodic postretirement benefit (income) loss |  | $ | (0.9 | ) |  | $ | (1.0 | ) |  | $ | (0.9 | )
|  | Defined Benefit Retirement Plans |  |  |  |
(In millions) |  | U.S. Plans |  |  | European Plans |  |  | Postretirement Plans |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net loss (gain) |  | $ | 1.6 |  |  | $ | 0.9 |  |  | $ | 20.2 |  |  | $ | 8.3 |  |  | $ | (0.5 | ) |  | $ | 0.1 |
Amortization of actuarial (losses) gains |  |  | — |  |  |  | — |  |  |  | (0.5 | ) |  |  | (0.3 | ) |  |  | 1.0 |  |  |  | 1.1 |
Prior service cost |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (0.1 | ) |  |  | — |  |  |  | — |
Effect of foreign exchange |  |  | — |  |  |  | — |  |  |  | 1.7 |  |  |  | 0.8 |  |  |  | — |  |  |  | — |
Total recognized in other comprehensive loss, (pre-tax) |  | $ | 1.6 |  |  | $ | 0.9 |  |  | $ | 21.4 |  |  | $ | 8.7 |  |  | $ | 0.5 |  |  | $ | 1.2 |
The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our defined benefit retirement plans and postretirement plans, as of and for the years ended December 31, 2020 and 2019, were:
|  | Defined Benefit Retirement Plans |  |  |  |
|  | U.S. Plans |  |  | European Plans |  |  | Postretirement Plans |
(In millions) |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Change in benefit obligation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Benefit obligation - beginning of year |  | $ | 20.3 |  |  | $ | 18.2 |  |  | $ | 188.6 |  |  | $ | 160.9 |  |  | $ | 3.1 |  |  | $ | 3.3 |
Service cost |  |  | 1.2 |  |  |  | 1.2 |  |  |  | 1.1 |  |  |  | 1.0 |  |  |  | — |  |  |  | — |
Interest cost |  |  | 0.5 |  |  |  | 0.6 |  |  |  | 3.5 |  |  |  | 4.5 |  |  |  | 0.1 |  |  |  | 0.1 |
Plan participants’ contributions |  |  | — |  |  | — |  |  |  | — |  |  | — |  |  |  | — |  |  |  | 0.3 |
Actuarial loss (gain) |  |  | 1.9 |  |  |  | 0.9 |  |  |  | 28.7 |  |  |  | 22.0 |  |  |  | (0.5 | ) |  |  | 0.2 |
Plan amendments and acquisitions |  |  | — |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Curtailments and settlements |  |  | — |  |  |  | — |  |  |  | (3.2 | ) |  |  | (0.4 | ) |  |  | — |  |  |  | — |
Benefits and expenses paid |  |  | (0.6 | ) |  |  | (0.6 | ) |  |  | (5.7 | ) |  |  | (5.2 | ) |  |  | (0.1 | ) |  |  | (0.8 | )
Currency translation adjustments |  |  | — |  |  | — |  |  |  | 7.9 |  |  |  | 5.8 |  |  |  | — |  |  | — |
Benefit obligation - end of year |  | $ | 23.3 |  |  | $ | 20.3 |  |  | $ | 220.9 |  |  | $ | 188.6 |  |  | $ | 2.6 |  |  | $ | 3.1 |
Change in plan assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value of plan assets - beginning of year |  | $ | — |  |  | — |  |  | $ | 214.3 |  |  | $ | 184.3 |  |  | $ | — |  |  | — |
Actual return on plan assets |  |  | — |  |  | — |  |  |  | 13.2 |  |  |  | 22.2 |  |  |  | — |  |  | — |
Employer contributions |  |  | 0.6 |  |  |  | 0.6 |  |  |  | 5.7 |  |  |  | 5.2 |  |  |  | 0.1 |  |  |  | 0.5 |
Plan participants’ contributions |  |  | — |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 0.3 |
Benefits and expenses paid |  |  | (0.6 | ) |  |  | (0.6 | ) |  |  | (5.8 | ) |  |  | (5.2 | ) |  |  | (0.1 | ) |  |  | (0.8 | )
Curtailments and settlements |  |  | — |  |  | — |  |  |  | (0.9 | ) |  |  | (0.2 | ) |  |  | — |  |  | — |
Currency translation adjustments |  |  | — |  |  | — |  |  |  | 7.3 |  |  |  | 8.0 |  |  |  | — |  |  | — |
Fair value of plan assets - end of year |  | $ | — |  |  | $ | — |  |  | $ | 233.8 |  |  | $ | 214.3 |  |  | $ | — |  |  | $ | — |
Amounts recognized in Consolidated Balance Sheets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-current assets |  | $ | — |  |  | $ | — |  |  | $ | 31.5 |  |  | $ | 45.2 |  |  | $ | — |  |  | $ | — |
Current liabilities |  | $ | 3.8 |  |  | $ | 1.4 |  |  | $ | 0.9 |  |  | $ | 0.6 |  |  | $ | 0.4 |  |  | $ | 0.5 |
Non-current liabilities |  |  | 19.4 |  |  |  | 18.9 |  |  |  | 17.7 |  |  |  | 18.9 |  |  |  | 2.2 |  |  |  | 2.6 |
Total liabilities (a) |  | $ | 23.2 |  |  | $ | 20.3 |  |  | $ | 18.6 |  |  | $ | 19.5 |  |  | $ | 2.6 |  |  | $ | 3.1 |
Amounts recognized in Accumulated Other Comprehensive Loss: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Actuarial net (loss) gain |  | $ | (4.5 | ) |  | $ | (3.0 | ) |  | $ | (50.1 | ) |  | $ | (28.8 | ) |  | $ | 1.6 |  |  | $ | 1.8 |
Prior service cost |  | — |  |  | — |  |  |  | (1.4 | ) |  |  | (1.3 | ) |  |  | — |  |  | — |
Total amounts recognized in accumulated other comprehensive loss |  | $ | (4.5 | ) |  | $ | (3.0 | ) |  | $ | (51.5 | ) |  | $ | (30.1 | ) |  | $ | 1.6 |  |  | $ | 1.8 |
(a) The current and non-current portions of the accrued benefit costs for the defined benefit retirement plans and postretirement benefit plans are included within “accrued compensation and benefits” and “retirement obligations”, respectively, in the accompanying consolidated balance sheets. |
For the U.S. and European plans, the actuarial loss for both fiscal 2020 and 2019 was primarily due to a reduction in the discount rates from the rates that were used in the preceding fiscal year. For the Postretirement plans, fiscal year 2020 net actuarial gains in the benefit obligation were primarily the result of actual benefit payments differing from expected, lower than expected per capita claims costs, changes in the participation and mortality assumptions and the census profile different than expected. The measurement date used to determine the benefit obligations and plan assets of the defined benefit retirement and postretirement plans was December 31, 2020. All costs related to our pensions are included as a component of operating income in our consolidated statements of operations. For the years ended December 31, 2020, 2019 and 2018, amounts unrelated to service costs were a benefit of $3.1 million, $4.2 million and $4.8 million, respectively. The total accumulated benefit obligation (“ABO”) for the U.S. defined benefit retirement plans was $23.3 million and $19.9 million as of December 31, 2020 and 2019, respectively. Excluding the U.K. Plan, the European plans’ ABO exceeded plan assets as of December 31, 2020 and 2019, by $18.6 million and $14.6 million, respectively. These plans’ ABO was $26.1 million and $21.5 million as of December 31, 2020 and 2019, respectively. The U.K. Plan is overfunded; the ABO of this plan was $194.7 million and $162.3 million at December 31, 2020 and 2019, respectively. The fair value of the U.K. Plan assets was $226.3 million and $207.5 million at December 31, 2020 and 2019, respectively. Benefit payments for the plans are expected to be as follows:
|  |  |  |  |  | European |  |  | Postretirement |
(In millions) |  | U.S. Plans |  |  | Plans |  |  | Plans |
2021 |  | $ | 3.4 |  |  | $ | 8.2 |  |  | $ | 0.4 |
2022 |  |  | 1.9 |  |  |  | 5.9 |  |  |  | 0.4 |
2023 |  |  | 2.0 |  |  |  | 6.4 |  |  |  | 0.3 |
2024 |  |  | 12.5 |  |  |  | 9.8 |  |  |  | 0.3 |
2025 |  |  | 0.2 |  |  |  | 7.6 |  |  |  | 0.3 |
2026-2030 |  |  | 2.3 |  |  |  | 42.5 |  |  |  | 0.7 |
|  | $ | 22.3 |  |  | $ | 80.4 |  |  | $ | 2.4 |
Fair Values of Pension Assets The following table presents pension assets measured at fair value at December 31, 2020 and 2019 utilizing the fair value hierarchy discussed in Note 20:
|  |  |  |  |  | Fair Value Measurements at |
(In millions) |  | December 31, |  |  | December 31, 2020 |
Description |  | 2020 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Equity funds |  | $ | 17.2 |  |  | $ | — |  |  | $ | 17.2 |  |  | $ | — |
Diversified growth funds |  |  | 69.0 |  |  |  | — |  |  |  | 69.0 |  |  |  | — |
Fixed income gilts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Insurance contracts |  |  | 94.9 |  |  |  | — |  |  |  | — |  |  |  | 94.9 |
Liability driven investments |  |  | 48.0 |  |  |  | — |  |  |  | 48.0 |  |  |  | — |
Index linked gilts |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Diversified investment funds |  |  | 2.5 |  |  |  | — |  |  |  | — |  |  |  | 2.5 |
Cash and cash equivalents |  |  | 2.2 |  |  |  | 2.2 |  |  |  | — |  |  |  | — |
Total assets |  | $ | 233.8 |  |  | $ | 2.2 |  |  | $ | 134.2 |  |  | $ | 97.4 |
|  |  |  |  |  | Fair Value Measurements at |
|  | December 31, |  |  | December 31, 2019 |
Description |  | 2019 |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Equity funds |  | $ | 28.2 |  |  | $ | — |  |  | $ | 28.2 |  |  | $ | — |
Diversified growth funds |  |  | 55.6 |  |  |  | — |  |  |  | 55.6 |  |  |  | — |
Fixed income gilts |  |  | 19.9 |  |  |  | — |  |  |  | 19.9 |  |  |  | — |
Insurance contracts |  |  | 4.4 |  |  |  | — |  |  |  | — |  |  |  | 4.4 |
Liability driven investments |  |  | 29.7 |  |  |  | — |  |  |  | 29.7 |  |  |  | — |
Index linked gilts |  |  | 73.5 |  |  |  | — |  |  |  | 73.5 |  |  |  | — |
Diversified investment funds |  |  | 2.4 |  |  |  | — |  |  |  | — |  |  |  | 2.4 |
Cash and cash equivalents |  |  | 0.6 |  |  |  | 0.6 |  |  |  | — |  |  |  | — |
Total assets |  | $ | 214.3 |  |  | $ | 0.6 |  |  | $ | 206.9 |  |  | $ | 6.8 |
The U.K. plan invests funds which are not exchange listed and are, therefore, classified as Level 3.
|  | Balance at |  |  | Actual |  |  | Purchases, |  |  | Changes due |  |  | Balance at |
(In millions) |  | January 1, |  |  | return on |  |  | sales and |  |  | to exchange |  |  | December 31, |
Reconciliation of Level 3 Assets |  | 2020 |  |  | plan assets |  |  | settlements |  |  | rates |  |  | 2020 |
Diversified investment funds |  | $ | 2.4 |  |  | $ | 0.1 |  |  | $ | (0.2 | ) |  | $ | 0.2 |  |  | $ | 2.5 |
Insurance contracts |  |  | 4.4 |  |  |  | 0.2 |  |  |  | 88.4 |  |  |  | 1.9 |  |  |  | 94.9 |
Total level 3 assets |  | $ | 6.8 |  |  | $ | 0.3 |  |  | $ | 88.2 |  |  | $ | 2.1 |  |  | $ | 97.4 |
|  | Balance at |  |  | Actual |  |  | Purchases, |  |  | Changes due |  |  | Balance at |
|  | January 1, |  |  | return on |  |  | sales and |  |  | to exchange |  |  | December 31, |
Reconciliation of Level 3 Assets |  | 2019 |  |  | plan assets |  |  | settlements |  |  | rates |  |  | 2019 |
Diversified investment funds |  | $ | 2.0 |  |  | $ | 0.3 |  |  | $ | 0.1 |  |  | $ | — |  |  | $ | 2.4 |
Insurance contracts |  |  | 4.2 |  |  |  | 0.1 |  |  |  | 0.2 |  |  |  | (0.1 | ) |  |  | 4.4 |
Total level 3 assets |  | $ | 6.2 |  |  | $ | 0.4 |  |  | $ | 0.3 |  |  | $ | (0.1 | ) |  | $ | 6.8 |
Plan assets are invested in a number of units linked pooled funds by an independent asset management group. Equity funds are split 30/70 between U.K. and overseas equity funds (North America, Japan, Asia Pacific and Emerging Markets). The asset management firm uses quoted prices in active markets to value the assets. Diversified growth funds are invested in a broad spectrum of asset classes with reduced dependency on any particular asset class. This approach targets growth asset returns with lower risk resulting from the diversification across different asset classes. The fixed income gilts provide investment in low risk, fixed coupon bonds to reduce the volatility of return on the investments. The insurance contract in the U.K. provides guaranteed income equal to the benefit payments for the membership underwritten by the policy. This provides protection against interest rate movements, inflation, market fluctuations as well as member longevity. Insurance contracts outside of the U.K. contain a minimum guaranteed return. The insurance contracts are Level 3 investments and are valued using unobservable inputs that are based on the best information available. The fair value of the assets is equal to the total amount of all individual technical reserves plus the non-allocated employer’s financing fund reserves at the valuation date. The individual technical and financing fund reserves are equal to the accumulated paid contributions taking into account the insurance tarification and any allocated profit-sharing return. The liability driven investments’ allocation aims to hedge against the exposure to interest rate risk through the use of interest rate swaps. The index-linked gilt allocation provides a partial interest rate and inflation rate hedge against the valuation of the liabilities. The diversified investment funds represent plan assets invested in a Pensionskasse (an Austrian multi-employer pension fund). The main holdings consist of equity, bonds, real estate and bank deposits. The actual allocations for the pension assets at December 31, 2020 and 2019, and target allocations by asset class, are as follows:
|  | Percentage |  |  | Target |  |  | Percentage |  |  | Target |
|  | of Plan Assets |  |  | Allocations |  |  | of Plan Assets |  |  | Allocations |
Asset Class |  | 2020 |  |  | 2020 |  |  | 2019 |  |  | 2019 |
Diversified growth funds |  |  | 29.5 | % |  |  | 27.1 | % |  |  | 25.9 | % |  |  | 22.3 | %
Index linked gilts |  |  | — |  |  |  | — |  |  |  | 34.3 |  |  |  | 33.4 |
Fixed interest gilts |  |  | — |  |  |  | — |  |  |  | 9.3 |  |  |  | 9.1 |
Liability driven investments |  |  | 20.5 |  |  |  | 23.9 |  |  |  | 13.8 |  |  |  | 16.5 |
All other regions equity fund |  |  | 5.1 |  |  |  | 5.1 |  |  |  | 9.2 |  |  |  | 10.8 |
U.K. equity fund |  |  | 2.2 |  |  |  | 2.2 |  |  |  | 4.0 |  |  |  | 4.7 |
Diversified investment funds |  |  | 1.1 |  |  |  | 1.1 |  |  |  | 1.1 |  |  |  | 1.1 |
Insurance contracts |  |  | 40.6 |  |  |  | 40.6 |  |  |  | 2.0 |  |  |  | 2.1 |
Cash and cash equivalents |  |  | 1.0 |  |  |  | — |  |  |  | 0.4 |  |  |  | — |
Total |  |  | 100 | % |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
Assumptions The assumed discount rate for pension plans reflects the market rates for high-quality fixed income debt instruments currently available. A third party provided standard Yield Curve was used for the U.S. non-qualified and postretirement plans. For the U.K. plan, cash flows were not available and therefore we considered the derived yield to market on a representative bond of suitable duration taken from the third-party provider’s synthetic bond yield curve. We believe that the timing and amount of cash flows related to these instruments is expected to match the estimated defined benefit payment streams of our plans. The assumed discount rate for the U.S. non-qualified plans uses individual discount rates for each plan based on their associated cash flows. Salary increase assumptions are based on historical experience and anticipated future management actions. For the postretirement health care and life insurance benefit plans, we review external data and our historical trends for health care costs to determine the health care cost trend rates. Retirement rates are based primarily on actual plan experience and on rates from previously mentioned mortality tables. Actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect the net periodic costs and recorded obligations in such future periods. While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations. Assumptions used to estimate the actuarial present value of benefit obligations at December 31, 2020, 2019 and 2018 are shown in the following table. These year-end values are the basis for determining net periodic costs for the following year.
|  | 2020 |  |  | 2019 |  |  | 2018 |
U.S. defined benefit retirement plans: |  |  |  |  |  |  |  |  |  |  |  |
Discount rates |  | 0.4% - 1.8% |  |  | 2.1% - 2.8% |  |  | 2.8% - 3.2% |
Rate of increase in compensation |  | 3% |  |  | 3% |  |  | 3% |
European defined benefit retirement plans: |  |  |  |  |  |  |  |  |  |  |  |
Discount rates |  | 0.00% - 1.45% |  |  | 0.35% - 2.05% |  |  | 1.25% - 3.05% |
Rates of increase in compensation |  | 2.75% - 3.0% |  |  | 2.75% - 3.0% |  |  | 2.75% - 3.0% |
Expected long-term rates of return on plan assets |  | 1.45% – 3.0% |  |  | 2.0% – 3.2% |  |  | 2.0% – 4.75% |
Postretirement benefit plans: |  |  |  |  |  |  |  |  |  |  |  |
Discount rates |  | 1.3% |  |  | 2.5% |  |  | 3.7% |
The following table presents the impact that a one-percentage-point increase and a one-percentage-point decrease in the expected long-term rate of return and discount rate would have on the 2020 pension expense, and the impact on our retirement obligation as of December 31, 2020 for a one-percentage-point change in the discount rate:
|  | U.S. Non-Qualified |  |  | U S Retiree |  |  | U.K. |
(In millions) |  | Pension Plans |  |  | Medical Plans |  |  | Retirement Plan |
Periodic pension expense |  |  |  |  |  |  |  |  |  |  |  |
One-percentage-point increase: |  |  |  |  |  |  |  |  |  |  |  |
Expected long-term rate of return |  | N/A |  |  | N/A |  |  | $ | (1.4 | )
Discount rate |  | $ | — |  |  | $ | — |  |  | $ | (0.3 | )
One-percentage-point decrease: |  |  |  |  |  |  |  |  |  |  |  |
Expected long-term rate of return |  | N/A |  |  | N/A |  |  | $ | 1.4 |
Discount rate |  | $ | 0.1 |  |  | $ | — |  |  | $ | 0.2 |
Retirement obligation |  |  |  |  |  |  |  |  |  |  |  |
One-percentage-point increase in discount rate |  | $ | (0.8 | ) |  | $ | (0.1 | ) |  | $ | (21.6 | )
One-percentage-point decrease in discount rate |  | $ | 0.9 |  |  | $ | 0.1 |  |  | $ | 29.0 |
The annual rate of increase in the per capita cost of covered health care benefits is assumed to be 7.0% for medical and 5.0% for dental and vision for 2020. The medical rates are assumed to gradually decline to 4.75% by 2029, whereas dental and vision rates are assumed to remain constant at 5.0%. A one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend would have an insignificant impact on the total of service and interest cost components and would have an immaterial impact on the postretirement benefit obligation for both 2020 and 2019.

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