15. Post-employment Benefits

Certain companies in the Group have collective bargaining contracts which include defined benefit pension plans and other retirement benefits for substantially all of their employees. Additionally, the Group has defined benefit pension plans for certain eligible executives and employees. All pension benefits are based on salary and years of service rendered.

Under the provisions of the Mexican labor law, seniority premiums are payable based on salary and years of service to employees who resign or are terminated prior to reaching retirement age. Some companies in the Group have seniority premium benefits which are greater than the legal requirement. After retirement age employees are no longer eligible for seniority premiums.

Post-employment benefits are actuarially determined by using nominal assumptions and attributing the present value of all future expected benefits proportionately over each year from date of hire to age 65.

The Group used actuarial assumptions to determine the present value of defined benefit obligations, as follows:

	2017		2016
Discount rate	7.6	%	6.7	%
Salary scale	5	%	5	%
Inflation rate	3.5	%	3.5	%

Had the discount rate of 7.6% used by the Group in 2017 been decreased by 50 basis points, the impact on defined benefit obligation would have been an increase of Ps.2,552,709 as of December 31, 2017.

Had the discount rate of 6.7% used by the Group in 2016 been decreased by 50 basis points, the impact on defined benefit obligation would have been an increase of Ps.2,630,659 as of December 31, 2016.

The reconciliation between defined benefit obligations and post-employment benefit liability (asset) in the consolidated statements of financial position as of December 31, 2017 and 2016, is presented as follows:

	Pensions		Seniority Premiums			2017
Vested benefit obligations	Ps.	394,788	Ps.	324,400		Ps.	719,188
Unvested benefit obligations	1,579,238		120,727			1,699,965

Defined benefit obligations	1,974,026		445,127			2,419,153
Fair value of plan assets	1,240,732		462,326			1,703,058

Underfunded (overfunded) status of the plan assets	733,294		(17,199		)	716,095

Post-employment benefit liability (asset)	Ps.	733,294	Ps.	(17,199	)	Ps.	716,095

	Pensions		Seniority Premiums			2016
Vested benefit obligations	Ps.	332,024	Ps.	321,391		Ps.	653,415
Unvested benefit obligations	1,734,605		126,215			1,860,820

Defined benefit obligations	2,066,629		447,606			2,514,235
Fair value of plan assets	1,381,896		611,866			1,993,762

Underfunded (overfunded) status of the plan assets	684,733		(164,260		)	520,473

Post-employment benefit liability (asset)	Ps.	684,733	Ps.	(164,260	)	Ps.	520,473

The components of net periodic pensions and seniority premiums cost for the years ended December 31, consisted of the following:

	2017			2016
Service cost	Ps.	132,055		Ps.	125,952
Interest cost	149,100			144,465
Prior service cost for plan amendments	2,405			(195,396		)
Interest of assets	(124,655		)	(128,365		)

Net cost	Ps.	158,905		Ps.	(53,344	)

The Group’s defined benefit obligations, plan assets, funded status and balances in the consolidated statements of financial position as of December 31, 2017 and 2016, associated with post-employment benefits are presented as follows:

	Pensions			Seniority Premiums			2017			2016
Defined benefit obligations:
Beginning of year	Ps.	2,066,629		Ps.	447,606		Ps.	2,514,235		Ps.	2,471,725
Service cost	83,246			48,809			132,055			125,952
Interest cost	120,737			28,363			149,100			144,465
Benefits paid	(307,645		)	(261,845		)	(569,490		)	(244,560			)
Remeasurement of post-employment benefit obligations	11,059			179,789			190,848			212,049
Past service cost	—			2,405			2,405			(195,396			)

End of year	1,974,026			445,127			2,419,153			2,514,235


Fair value of plan assets:
Beginning of year	1,381,896			611,866			1,993,762			2,064,546
Remeasurement return on plan assets	85,430			39,225			124,655			128,365
Remeasurement of post-employment benefit obligations	(73,870		)	(19,939		)	(93,809		)	(70,471			)
Benefits paid	(152,724		)	(168,826		)	(321,550		)	(128,678			)

End of year	1,240,732			462,326			1,703,058			1,993,762

Unfunded (overfunded) status of the plan assets	Ps.	733,294		Ps.	(17,199	)	Ps.	716,095		Ps.		520,473

The changes in the net post-employment liability (asset) in the consolidated statements of financial position as of December 31, 2017 and 2016, are as follows:

	Pensions			Seniority Premiums			2017			2016

Beginning of net post-employment liability (asset)	Ps.	684,733		Ps.	(164,260	)	Ps.	520,473		Ps.	407,179
Net periodic cost	118,553			40,352			158,905			(53,344		)
Remeasurement of post-employment benefits	84,929			199,728			284,657			282,520
Benefits paid	(154,921		)	(93,019		)	(247,940		)	(115,882		)

Ending net post-employment liability (asset)	Ps.	733,294		Ps.	(17,199	)	Ps.	716,095		Ps.	520,473

The post-employment benefits as of December 31, 2017 and 2016 and remeasurements adjustments for the years ended December 31, 2017 and 2016, are summarized as follows:

	2017			2016
Pensions:
Defined benefit obligations	Ps.	1,974,026		Ps.	2,066,629
Plan assets	1,240,732			1,381,896
Unfunded status of plans	733,294			684,733
Remeasurements adjustments(1)	84,929			181,161

Seniority premiums:
Defined benefit obligations	Ps.	445,127		Ps.	447,606
Plan assets	462,326			611,866
Unfunded status of plans	(17,199		)	(164,260		)
Remeasurements adjustments(1)	199,728			101,359

(1)

On defined benefit obligations and plan assets.

Pensions and Seniority Premiums Plan Assets

The plan assets are invested according to specific investment guidelines determined by the technical committees of the pension plan and seniority premiums trusts and in accordance with actuarial computations of funding requirements. These investment guidelines require a minimum investment of 30% of the plan assets in fixed rate instruments, or mutual funds comprised of fixed rate instruments. The plan assets that are invested in mutual funds are all rated “AA” or “AAA” by at least one of the main rating agencies. These mutual funds vary in liquidity characteristics ranging from one day to one month. The investment goals of the plan assets are to preserve principal, diversify the portfolio, maintain a high degree of liquidity and credit quality, and deliver competitive returns subject to prevailing market conditions. Currently, the plan assets do not engage in the use of financial derivative instruments. The Group’s target allocation in the foreseeable future is to maintain approximately 20% in equity securities and 80% in fixed rate instruments.

The weighted average asset allocation by asset category as of December 31, 2017 and 2016, was as follows:

	2017		2016

Equity securities(1)	29.6	%	28.2	%
Fixed rate instruments	70.4	%	71.8	%

Total	100.0	%	100.0	%

(1)

Included within plan assets at December 31, 2017 and 2016, are shares of the Company held by the trust with a fair value of Ps.227,004 and Ps.265,599, respectively.

The weighted average expected long-term rate of return of plan assets of 7.6% and 6.7% were used in determining net periodic pension cost in 2017 and 2016, respectively. The rate used reflected an estimate of long-term future returns for the plan assets. This estimate was primarily a function of the asset classes (equities versus fixed income) in which the plan assets were invested and the analysis of past performance of these asset classes over a long period of time.

This analysis included expected long-term inflation and the risk premiums associated with equity investments and fixed income investments.

The following table summarizes the Group’s plan assets measured at fair value on a recurring basis as of December 31, 2017 and 2016:

	Balance as of December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Internal Models with Significant Observable Inputs (Level 2)		Internal Models with Significant Unobservable Inputs (Level 3)
Common Stocks(1)	Ps.	227,004	Ps.	227,004	Ps.	—	Ps.	—
Mutual funds (fixed rate instruments)(2)	300,549		300,549		—		—
Money market securities(3)	912,626		912,626		—		—
Other equity securities	262,879		262,879		—		—

Total investment assets	Ps.	1,703,058	Ps.	1,703,058	Ps.	—	Ps.	—

	Balance as of December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Internal Models with Significant Observable Inputs (Level 2)		Internal Models with Significant Unobservable Inputs (Level 3)
Common Stocks(1)	Ps.	265,599	Ps.	265,599	Ps.	—	Ps.	—
Mutual funds (fixed rate instruments)(2)	434,323		434,323		—		—
Money market securities(3)	1,013,674		1,013,674		—		—
Other equity securities	280,166		280,166		—		—

Total investment assets	Ps.	1,993,762	Ps.	1,993,762	Ps.	—	Ps.	—

(1)

Common stocks are valued at the closing price reported on the active market on which the individual securities are traded. All common stock included in this line item relate to the Company’s CPOs.

(2)

Mutual funds consist of fixed rate instruments. These are valued at the net asset value provided by the administrator of the fund.

(3)

Money market securities consist of government debt securities, which are valued based on observable prices from the new issue market, benchmark quotes, secondary trading and dealer quotes.

The Group did not make contributions to its plan assets in 2017 and 2016, and does not expect to make significant contributions to its plan assets in 2018.

The weighted average durations of the defined benefit plans as of December 31, 2017 and 2016, were as follows:

	2017	2016
Seniority Premiums	7.9 years	14.5 years
Pensions	9.7 years	12.3 years