Pensions And Other Employee Benefit Plans
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Dec. 31, 2012
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Pensions And Other Employee Benefit Plans [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pensions And Other Employee Benefit Plans | 15. Pensions and Other Employee Benefits
Pensions
We maintain a qualified pension plan and, until its termination in December 2012, we maintained a supplemental retirement plan (the “SERP”). These plans are defined benefit pension plans, and members may contribute to the qualified pension plan in order to receive enhanced benefits. Employees hired after June 30, 2006 do not participate in the defined benefit pension plans, but participate in our defined contribution savings plan with an additional Company contribution. Benefits are based primarily on members’ compensation and/or years of service. Our funding policy is to fund the qualified pension plan in accordance with the Internal Revenue Code and regulations thereon. The SERP is funded on a discretionary basis. Plan assets are generally invested in equity investments and fixed income investments. Pension plan assets are managed primarily by Russell Investment Corp. (“Russell”), which allocates the assets into funds as we direct.
Other Benefits
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees and dependents. Participants are eligible for these benefits generally when they retire from active service and meet the eligibility requirements for our pension plans. These benefits are funded primarily on a pay-as-you-go basis, with the retiree generally paying a portion of the cost through contributions, deductibles and coinsurance provisions.
Sale of SS/L
As required by the Purchase Agreement, prior to the closing of the Sale on November 2, 2012, new stand-alone SS/L pension plans were established. Pension obligations related to SS/L current and former employees and plan assets determined through an initial allocation methodology were transferred from the Loral pension plans to the newly formed plans. With the closing of the Sale, the newly formed SS/L plans were transferred to SS/L. Our actuary is currently performing a review to determine the amount of qualified plan assets that proportionately relate to the benefit liabilities of the SS/L pension participants in accordance with the asset priorities of Section 4044 of ERISA. This review may result in a true-up of the initial asset transfer between plans. If this true-up requires the transfer of assets from the Loral qualified pension plan to the SS/L qualified pension plan, a corresponding payment will be made from SS/L to Loral. If this true-up requires the transfer of assets from the SS/L qualified pension plan to the Loral qualified pension plan, a corresponding payment will be made from Loral to SS/L.
In addition, new plans were established to provide certain health care and life insurance benefits for retired employees and dependents of SS/L. These plans were transferred to SS/L at the closing of the Sale.
SERP Termination
In connection with the corporate office restructuring as a result of the Sale, on December 13, 2012, Loral’s Board of Directors approved termination of the SERP. The Company expects to make lump sum payments to the participants in the SERP between December 16, 2013 and December 31, 2013 in accordance with the requirements of Section 409A of the Internal Revenue Code and the regulations promulgated thereunder. Other current liabilities as of December 31, 2012 include approximately $18.1 million for future SERP payments based on benefits earned as of December 31, 2012, including recurring monthly payments to December 2013 and lump sum payouts in December 2013. The lump sum payouts have been calculated based on plan provisions.
Funded Status
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for 2012 and 2011, and a statement of the funded status as of December 31, 2012 and 2011, respectively. We use a December 31 measurement date for the pension plans and other post-retirement benefit plans.
The benefit obligations for pensions and other employee benefits exceeded the fair value of plan assets by $43.3 million at December 31, 2012 (the “unfunded benefit obligations”). The unfunded benefit obligations were measured using a discount rate of 4.00% and 4.75% at December 31, 2012 and 2011, respectively. Lowering the discount rate by 0.5% would have increased the unfunded benefit obligations by approximately $3.5 million and $36.5 million as of December 31, 2012 and 2011, respectively. Market conditions and interest rates will significantly affect future assets and liabilities of Loral’s pension and other employee benefits plans.
As of December 31, 2011, the unfunded benefit obligation for pensions and other employee benefits related to discontinued operations was $278.6 million.
The pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2012 and 2011 consist of (in thousands):
The amounts recognized in other comprehensive loss during the years ended December 31, 2012 and 2011 consist of (in thousands):
Amounts recognized in the balance sheet consist of (in thousands):
The estimated actuarial loss for the pension benefits that will be amortized from accumulated other comprehensive income into net periodic cost over the next fiscal year is $6.0 million.
The accumulated pension benefit obligation was $60.0 million and $530.0 million at December 31, 2012 and 2011, respectively.
During 2012, we contributed $34.7 million to the qualified pension plan and $1.0 million for other employee post-retirement benefit plans. In addition, we made benefit payments relating to the supplemental retirement plan of $1.2 million. During 2013, based on current estimates, we expect to contribute approximately $2.6 million to the qualified pension plan and expect to make regular benefit payments for the SERP of $1.0 million, in addition to the lump sum payments of $17.5 million related to the SERP termination. We expect our funding for other employee post-retirement benefit plans will be insignificant.
The following table provides the components of net periodic cost for the plans for the years ended December 31, 2012, 2011 and 2010 (in thousands):
Assumptions
Assumptions used to determine net periodic cost:
Assumptions used to determine the benefit obligation:
As a result of the termination of the SERP in December 2012, a discount rate of 0.6% has been used to discount the lump sum payments expected to be made in December 2013, calculated under provisions of the plan, to December 31, 2012.
The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the projected benefit obligation for the plans, the asset mix of the plans and the fact that the plan assets are actively managed to mitigate risk. The expected long-term rate of return on plan assets determined on this basis was 8.0% for the years ended December 31, 2012, 2011 and 2010. Our expected long-term rate of return on plan assets for 2013 is 7.25%.
Actuarial assumptions to determine the benefit obligation for other benefits as of December 31, 2012 used a health care cost trend rate of 9.5% decreasing gradually to 5% by 2021. Actuarial assumptions to determine the benefit obligation for other benefits as of December 31, 2011, used a health care cost trend rate of 9.0% decreasing gradually to 5% by 2019. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates for 2012 would have the following effects (in thousands):
Plan Assets
The Company has established the pension plan as a retirement vehicle for participants and as a funding vehicle to secure promised benefits. The investment goal is to provide a total return that over time will earn a rate of return to satisfy the benefit obligations given investment risk levels, contribution amounts and expenses. The pension plan invests in compliance with the Employee Retirement Income Security Act 1974, as amended (“ERISA”), and any subsequent applicable regulations and laws.
The Company has adopted an investment policy for the management and oversight of the pension plan. It sets forth the objectives for the pension plans, the strategies to achieve these objectives, procedures for monitoring and control and the delegation of responsibilities for the oversight and management of pension plan assets.
The Company’s Board of Directors has delegated primary fiduciary responsibility for pension assets to an investment committee. In carrying out its responsibilities, the investment committee establishes investment policy, makes asset allocation decisions, determines asset class strategies and retains investment managers to implement asset allocation and asset class strategy decisions. It is responsible for the investment policy and may amend such policy from time to time.
Pension plan assets are invested in various asset classes in what we believe is a prudent manner for the exclusive purpose of providing benefits to participants. U.S. equities are held for their long-term expected return premium over fixed income investments and inflation. Non-U.S. equities are held for their expected return premium (along with U.S. equities), as well as diversification relative to U.S. equities and other asset classes. Fixed income investments are held for diversification relative to equities. Alternative investments are held for both diversification and higher returns than those typically available in traditional asset classes. Asset allocation policy is reviewed regularly.
Asset allocation policy is the principal method for achieving the pension plans’ investment objectives stated above. Asset allocation policy is reviewed regularly by the investment committee. The pension plans’ actual and targeted asset allocations are as follows:
The target and target range levels can be further defined as follows:
The pension plan’s assets are actively managed using a multi-asset, multi-style, multi-manager investment approach. Portfolio risk is controlled through this diversification process and monitoring of money managers. Consideration of such factors as differing rates of return, volatility and correlation are utilized in the asset and manager selection process. Diversification reduces the impact of losses in single investments. Performance results and fund accounting are provided to the Company by Russell on a monthly basis. Periodic reviews of the portfolio are performed by the investment committee with Russell. These reviews typically consist of a market and economic review, a performance review, an allocation review and a strategy review. Performance is judged by investment type against market indexes. Allocation adjustments or fund changes may occur after these reviews. Performance is reported to the Company’s Board of Directors at quarterly board meetings.
Fair Value Measurements
The values of the fund trusts are calculated using systems and procedures widely used across the investment industry. Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, discounted cash flow methodology, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers.
The table below provides the fair values of the Company’s pension plan assets at December 31, 2012 and 2011, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category. The Company’s pension plan assets are mainly held in commingled employee benefit fund trusts. Assets were allocated between Loral and SS/L at September 30, 2012 based upon a plan accounting by company maintained by Russell. A true-up of the asset split will occur after completion of a final allocation in accordance with Section 4044 of ERISA.
(1) Investments in common stocks that rank among the largest 1,000 companies in the U.S. stock market.
(2) Investments in common stocks that rank among the small capitalization stocks in the U.S. stock market.
(3) Investments in common stocks across the world without being limited by national borders or to specific regions.
(4) Investments in common stocks of companies from developed and emerging countries outside the United States.
(5) Investments primarily in long and short positions in equity securities of U.S. and non-U.S. companies. At December 31, 2012, we are invested in one fund that has semi-annual tender offer redemption periods on June 30 and December 31 and is reported on a one month lag. During 2012, we sold out of the second fund that we were invested in at December 31, 2011 that had no limitations on redemptions and was reported on a current basis.
(6) Investments in real estate through both the private and public sector. The pension plan is invested in two funds of funds. One fund invests in global public real estate securities (REITs) while the second fund invests in private real estate investments. We informed the private real estate fund that we no longer wish to be invested in the fund after December 31, 2012. At December 31, 2012, the pension plan had a receivable from the private real estate fund of $0.7 million. Settlement of the receivable will occur in 2013 with the proceeds reinvested per our allocation guidelines. The private real estate fund was valued on a quarterly lag.
(7) Fund invests in portfolios of secondary interest in established venture capital, buyout, mezzanine and special situation funds on a global basis. The pension plan committed to invest up to $10 million in this fund. The remaining outstanding commitment at December 31, 2012 is $1.15 million. Loral’s portion of the remaining commitment is $0.067 million. The amount invested in the fund, net of distributions, is $5.25 million and $6.45 million at December 31, 2012 and 2011, respectively. Loral’s portion of the amount invested as of December 31, 2012 is $0.3 million. Fund is valued on a quarterly lag with adjustment for subsequent cash activity.
(8) Investments in bonds representing many sectors of the broad bond market with both short-term and intermediate-term maturities.
(9) Investments mainly in discounted debt securities, bank loans, trade claims and other debt and equity securities of financially troubled companies. This partnership has a one year lock-up period with semi-annual withdrawal rights on June 30 and December 31 thereafter. As of December 31, 2012, no amount was subject to a lock-up period. This fund is reported on a one month lag.
The significant amount of Level 2 investments in the table results from including in this category investments in commingled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis. These commingled funds are valued at their net asset values (NAVs) that are calculated by the investment manager or sponsor. Equity investments in both U.S and non-U.S. stocks as well as public real estate investment trusts are primarily valued using a market approach based on the quoted market prices of identical securities. Fixed income investments are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
Additional information pertaining to the changes in the fair value of the pension plan assets classified as Level 3 for the years ended December 31, 2012 and 2011 is presented below:
Both the Equity Long/Short Fund and the Distressed Opportunity Limited Partnership are valued at each month-end based upon quoted market prices by the investment managers. They are included in Level 3 due to their restrictions on redemption to semi-annual periods on June 30 and December 31.
The Multi-Strategy Funds invest in various underlying securities. Each fund’s net asset value is calculated by the fund manager and is not publicly available. The fund managers accumulate all the underlying security values and use them in determining the funds’ net asset values.
During 2011, the pension plan received the cash proceeds from its investment in the Diversified Alternatives Fund.
The private equity fund and limited partnership valuations are primarily based on cost/price of recent investments, earnings/performance multiples, net assets, discounted cash flows, comparable transactions and industry benchmarks.
The real estate fund is a fund of funds. The fund records its investments at acquisition cost and the value is adjusted quarterly to reflect the fund’s share of income, appreciation or depreciation and additional contributions to or withdrawals from the underlying funds. The underlying funds’ real estate investments are independently appraised at least once per year and debt is marked to market on a quarterly basis. The real estate fund was sold effective December 31, 2012.
The annual audited financial statements of all funds are reviewed by the Company.
As of December 31, 2012, we fund benefit payments for our SERP monthly. As of December 31, 2011, other current assets included $0.8 million that was held in trust and designated to fund the obligations of our SERP.
Benefit Payments
The following benefit payments, which reflect future services, as appropriate, are expected to be paid (in thousands):
Employee Savings (401k) Plan
We have an employee savings (401k) plan, to which the Company provides contributions which match up to 6% of a participant’s base salary at a rate of 66⅔%, and retirement contributions. Retirement contributions represent contributions made by the Company to provide added retirement benefits to employees hired on or after July 1, 2006, as they are not eligible to participate in our defined benefit pension plan. Retirement contributions are provided regardless of an employee’s contribution to the savings (401k) plan. Matching contributions and retirement contributions are collectively known as Company contributions. Company contributions are made in cash and placed in each participant’s age appropriate “life cycle” fund. For the years ended December 31, 2012, 2011 and 2010, Company contributions were $10.4 million, $11.5 million and $10.0 million, respectively. For the years ended December 31, 2012, 2011 and 2010, Company contributions related to discontinued operations were $10.2 million, $11.3 million and $9.8 million, respectively. Participants of the savings (401k) plan are able to redirect Company contributions to any available fund within the plan. Participants are also able to direct their contributions to any available fund.
As required by the Purchase Agreement, prior to the closing of the Sale, a new stand-alone SS/L savings (401k) plan was established. Assets related to SS/L current and former employees were transferred from the Loral savings plan to the newly formed plan. With the closing of the Sale on November 2, 2012, the newly formed SS/L plan was transferred to SS/L.
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