15. Employee Benefit Plans

Prior to the Separation, eligible U.S. employees and retirees of the Company participated in a defined benefit pension plan sponsored by Dover. Effective December 31, 2013, the Company’s participants in this plan no longer accrue benefits. The Company did not assume any funding requirements or obligations related to the U.S. defined benefit pension plan upon the distribution date as this obligation is being maintained and serviced by Dover. As a result, the portion of the Company’s liability associated with this U.S. plan is not reflected in the Company’s Consolidated Balance Sheets.

Dover also provided to certain management employees, through non-qualified plans, supplemental retirement benefits in excess of qualified plan limits imposed by federal tax law. Effective December 31, 2013, the Company’s participants no longer accrue benefits. In connection with the distribution from Dover on February 28, 2014, Dover transferred the corresponding liability to Knowles.

Dover provided a defined contribution plan to its eligible U.S. employees and retirees in which Knowles employees participated. Knowles adopted its own defined contribution plan effective January 1, 2014. The Company's expense relating to defined contribution plans was $5.9 million, $5.5 million and $3.8 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Knowles sponsors four defined benefit pension plans to certain non-U.S. employees. All four plans are closed to new participants; however, all active participants in these plans continue to accrue benefits. These plans are considered direct obligations of the Company and have been recorded within the accompanying Consolidated Financial Statements.

The Company does not have any other post-retirement employee benefit plans other than those plans mentioned above.

Non-U.S. Defined Benefit Pension Plans

Obligations and Funded Status

The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with the Company's four defined benefit plans for non-U.S. participants at December 31, 2015 and 2014. None of these plans are individually significant (in millions).



	December 31,
	2015			2014
Change in benefit obligation:
Benefit obligation at beginning of year	$	58.3		$	59.8
Benefits earned during the year	0.3			0.5
Interest cost	2.0			2.5
Benefits paid	(2.5		)	(2.0		)
Actuarial (loss) gain	(1.4		)	6.3
Settlement and curtailment gains	(2.0		)	(4.7		)
Currency translation and other	(2.6		)	(4.1		)
Benefit obligation at end of year	52.1			58.3
Change in plan assets:
Fair value of plan assets at beginning of year	45.9			45.8
Actual return on plan assets	0.7			4.0
Company contributions	5.0			5.8
Benefits paid	(2.5		)	(2.0		)
Settlements and curtailments	(2.0		)	(4.7		)
Currency translation and other	(2.0		)	(3.0		)
Fair value of plan assets at end of year	45.1			45.9
Funded status	$	(7.0	)	$	(12.4	)

Amounts recognized in the balance sheets consist of:
Other assets and deferred charges	$	0.4		$	—
Accrued compensation and employee benefits	(0.2		)	(1.8		)
Other liabilities	(7.2		)	(10.6		)
Funded status	$	(7.0	)	$	(12.4	)

Accumulated Other Comprehensive Loss:
Net actuarial losses	$	14.8		$	14.7
Deferred taxes	(3.6		)	(3.6		)
Total Accumulated Other Comprehensive Loss, net of tax	11.2			11.1
Net amount recognized at December 31,	$	4.2		$	(1.3	)

Accumulated benefit obligations	$	50.5		$	56.2

Pension plans with accumulated benefit obligations in excess of plan assets consisted of the following at December 31, 2015 and 2014 (in millions):



	December 31,
	2015		2014
Projected benefit obligation	$	32.4	$	58.3
Accumulated benefit obligation	31.0		56.2
Fair value of plan assets	25.0		45.9

Net Periodic Benefit Cost

Components of the net periodic benefit cost were as follows (in millions):



	Non-U.S. Plans
	Years Ended December 31,
	2015			2014			2013
Service cost	$	0.3		$	0.5		$	0.6
Interest cost	2.0			2.5			2.4
Expected return on plan assets	(2.9		)	(2.8		)	(2.4		)
Amortization of recognized actuarial loss	0.4			0.2			0.2
Settlement and curtailment loss	0.3			0.8			0.4
Total net periodic benefit cost	$	0.1		$	1.2		$	1.2

The Company expects to amortize an actuarial loss of $0.4 million from accumulated other comprehensive loss into net periodic benefit cost during the year ended December 31, 2016.

Assumptions

The Company determines actuarial assumptions on an annual basis. The actuarial assumptions used for the Company’s four defined benefit plans for non-U.S. participants will vary depending on the applicable country and as such, the tables below include these assumptions by country, as well as in total.

The assumptions used in determining the benefit obligations were as follows:



	Non-U.S. Plans
	December 31,
	2015		2014
Discount rate
Austria	2.10	%	2.00	%
Taiwan	1.10	%	2.00	%
United Kingdom	3.90	%	3.75	%
Weighted average	3.72	%	3.59	%
Average wage increase
Austria	3.00	%	N/A
Taiwan	4.00	%	4.00	%
United Kingdom	4.25	%	4.25	%
Weighted average	4.16	%	4.23	%

The assumptions used in determining the net periodic benefit cost were as follows:



	Years Ended December 31,
	2015		2014		2013
Discount rate
Austria	2.00	%	3.25	%	3.25	%
Taiwan	2.00	%	2.00	%	1.75	%
United Kingdom	3.75	%	4.50	%	4.75	%
Weighted average	3.59	%	4.24	%	4.52	%
Average wage increase
Austria	N/A		3.00	%	3.00	%
Taiwan	4.00	%	4.00	%	4.00	%
United Kingdom	4.25	%	4.40	%	4.00	%
Weighted average	4.23	%	4.05	%	3.21	%
Expected return on plan assets
Austria⁽¹⁾	N/A		N/A		N/A
Taiwan	1.50	%	2.00	%	2.00	%
United Kingdom	6.53	%	6.51	%	6.50	%
Weighted average	6.38	%	6.35	%	6.46	%

⁽¹⁾This plan is unfunded; therefore, no assumption of an expected return on plan assets is factored into net periodic benefit cost.

The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates.

Plan Assets

The primary financial objective of the plans is to secure participant retirement benefits. Accordingly, the key objective in the plans’ financial management is to promote stability and, to the extent appropriate, growth in the funded status. Related and supporting financial objectives are established in conjunction with a review of current and projected plan financial requirements.

As it relates to the funded defined benefit pension plans, the Company’s funding policy is consistent with the funding requirements of applicable local non-U.S. laws. The Company is responsible for overseeing the management of the investments of the plans’ assets and otherwise ensuring that the plans’ investment programs are in compliance with applicable local law, other relevant legislation and related plan documents. Where relevant, the Company has retained professional investment managers to manage the plans’ assets and implement the investment process. The investment managers, in implementing their investment processes, have the authority and responsibility to select appropriate investments in the asset classes specified by the terms of their applicable prospectus or investment manager agreements with the plans.

The assets of the plans are invested to achieve an appropriate return for the plans consistent with a prudent level of risk. The asset return objective is to achieve, as a minimum over time, the passively managed return earned by market index funds, weighted in the proportions outlined by the asset class exposures identified in the plans’ strategic allocation. The expected return on assets assumption used for pension expense is developed through analysis of historical market returns, statistical analysis, current market conditions and the past experience of plan asset investments.

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 - Unobservable inputs for which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

The fair values of plan assets by asset category within the ASC 820 hierarchy were as follows at December 31, 2015 and 2014 (in millions):



	December 31, 2015								December 31, 2014
	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Asset category:
Fixed income investments	$	—	$	14.6	$	—	$	14.6	$	—	$	14.6	$	—	$	14.6
Common stock funds	—		22.7		—		22.7		—		24.3		—		24.3
Cash and equivalents	1.1		—		—		1.1		1.1		—		—		1.1
Other	—		6.7		—		6.7		—		5.9		—		5.9
Total	$	1.1	$	44.0	$	—	$	45.1	$	1.1	$	44.8	$	—	$	45.9

There were no significant transfers between Level 1 and Level 2 assets during the year ended December 31, 2015 or 2014.

Fixed income investments include government and municipal securities and corporate bonds, which are valued based on yields currently available on comparable securities of issuers with similar credit ratings.

Common stock funds consist of mutual funds and collective trusts. Mutual funds are valued by obtaining quoted prices from nationally recognized securities exchanges. Collective trusts are valued using Net Asset Value (the “NAV”) as of the last business day of the year. The NAV is based on the underlying value of the assets owned by the fund minus its liabilities and then divided by the number of shares outstanding. The value of the underlying assets is based on quoted prices in active markets.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company 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.

Future Estimates

Benefit Payments

Estimated future benefit payments to retirees, which reflect expected future service, are as follows (in millions):



	Non-U.S. Plans
2016	$	1.8
2017	1.6
2018	1.6
2019	1.8
2020	1.9
2021-2025	10.7

Contributions

Generally, annual contributions are made at such times and in amounts as required by law and agreed with the trustees of the non-U.S. defined benefit plans. The Company estimates it will pay $1.7 million during the year ended December 31, 2016 related to contributions to these plans. This amount may vary based on updated funding agreements with the Trustees of these plans.

Non-qualified Supplemental Retirement Plan

In connection with the Separation from Dover on February 28, 2014, Dover transferred an unfunded non-qualified supplemental retirement plan liability to Knowles. The net amount recognized on the balance sheet at December 31, 2015 is shown in the table below (in millions).



	December 31, 2015
Accrued compensation and employee benefits	$	(1.8	)
Other liabilities	(1.8		)
Total Accumulated Other Comprehensive Loss, net of tax	0.3
Net amount recognized at December 31, 2015	$	(3.3	)

The actuarial loss arising during the year ended December 31, 2015 was $0.1 million ($0.1 million net of tax). The amortization of actuarial losses included in net periodic pension cost during the year ended December 31, 2015 was $0.2 million ($0.2 million net of tax).