Pension Plan and Postretirement Benefits Other Than Pension

12 Months Ended

Dec. 31, 2011

Pension Plan and Postretirement Benefits Other Than Pension

Pension Plan and Postretirement Benefits Other Than Pension

10.   Pension Plan and Postretirement Benefits Other Than Pension

        We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the "Pension Plan"). Benefits payable under the Pension Plan are based on employees' years of service and compensation during the final ten years of employment. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, including Waddell & Reed and Legend advisors. The medical plan is contributory with retiree contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.

        A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31, 2011, 2010 and 2009 follows:

	Pension Benefits						Other Postretirement Benefits
	2011		2010		2009		2011		2010		2009
	(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year	$	118,860		110,962		98,594		6,850		5,945		5,205
Service cost		7,101		6,140		5,276		558		443		371
Interest cost		7,195		6,596		6,386		402		364		343
Benefits paid		(6,522)		(6,589)		(11,692)		(554)		(528)		(493)
Actuarial loss		21,778		1,751		12,398		530		389		362
Retiree contributions		-		-		-		359		237		157
Net benefit obligation at end of year	$	148,412		118,860		110,962		8,145		6,850		5,945

        The accumulated benefit obligation for the Pension Plan was $124.7 million and $102.7 million at December 31, 2011 and 2010, respectively.

	Pension Benefits						Other Postretirement Benefits
	2011		2010		2009		2011		2010		2009
	(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year	$	106,568		91,551		78,020		-		-		-
Actual return on plan assets		(6,642)		9,106		15,223		-		-		-
Employer contributions		10,000		12,500		10,000		195		291		336
Retiree contributions		-		-		-		359		237		157
Benefits paid		(6,522)		(6,589)		(11,692)		(554)		(528)		(493)
Fair value of plan assets at end of year	$	103,404		106,568		91,551		-		-		-
Funded status at end of year	$	(45,008)		(12,292)		(19,411)		(8,145)		(6,850)		(5,945)

	Pension Benefits						Other Postretirement Benefits
	2011		2010		2009		2011		2010		2009
	(in thousands, except percentage data)
Amounts recognized in the statement of financial position:
Current liabilities	$	-		-		-		(289)		(303)		(250)
Noncurrent liabilities		(45,008)		(12,292)		(19,411)		(7,856)		(6,547)		(5,695)
Net amount recognized at end of year	$	(45,008)		(12,292)		(19,411)		(8,145)		(6,850)		(5,945)
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income:
Transition obligation	$	(37)		(42)		(47)		-		-		-
Prior service cost		(2,932)		(3,486)		(4,041)		(183)		(238)		(284)
Accumulated loss		(66,747)		(31,369)		(32,842)		(999)		(469)		(79)
Accumulated other comprehensive income (loss)		(69,716)		(34,897)		(36,930)		(1,182)		(707)		(363)
Cumulative employer contributions in
excess of net periodic benefit cost		24,708		22,605		17,519		(6,963)		(6,143)		(5,582)
Net amount recognized at end of year	$	(45,008)		(12,292)		(19,411)		(8,145)		(6,850)		(5,945)
Weighted average assumptions used to determine benefit obligation at December 31:
Discount rate		4.99%		6.00%		6.25%		5.00%		6.00%		6.25%
Rate of compensation increase		4.04%		3.86%		3.86%		Not applicable

        In 2011, the discount rate assumption used to determine the pension and other postretirement benefits obligations was based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds and calculating the single rate that would produce the same present value of liabilities as the yield curve. Prior to 2011, the discount rate assumption was based on the Mercer Bond Model, which calculated the yield on a theoretical portfolio of high-grade corporate bonds with cash flows that generally matched our expected benefit payments. To the extent scheduled bond proceeds exceeded the estimated benefit payments in a given period, the yield calculation assumed those excess proceeds were reinvested at the one-year forward rates implied by the Citigroup Pension Discount Curve.

        Our Pension Plan asset allocation at December 31, 2011 and 2010 is as follows:

Plan assets by category	Percentage of Plan Assets at December 31, 2011		Percentage of Plan Assets at December 31, 2010
Cash		7%		5%
Equity securities:
Domestic		43%		34%
International		38%		47%
Gold bullion		12%		14%
Total		100%		100%

        The primary investment objective is to maximize growth of the Pension Plan assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the Company's earnings strength and risk tolerance. Asset allocation is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the Company's financial strength and long-term asset class risk/return expectations since the obligations are long-term in nature. As of December 31, 2011, our Pension Plan assets were invested in our Asset Strategy style, and are managed by our in-house investment professionals.

        Asset Strategy invests in the domestic or foreign market that is believed to offer the greatest probability of return or, alternatively, that provides the highest degree of safety in uncertain times. This style may allocate its assets among stocks, bonds and short-term investments and since the allocation is dynamically managed and able to take advantage of opportunities as they are presented by the market, there is not a predetermined asset allocation. Dependent on the outlook for the U.S. and global economies, our investment managers make top-down allocations among stocks, bonds, cash, precious metals and currency markets around the globe. After determining allocations, we seek the best opportunities within each market. Derivative instruments play an important role in this style's investment process, to manage risk and maximize stability of the assets in the portfolio.

        At December 31, 2011, the Pension Plan had multiple investment concentrations that are not typical of a classic pension plan, including a significant weighting of plan assets invested in equity securities, including 38% international equities, of which a third was invested in Chinese equities. The Pension Plan also had 12% of plan assets invested in gold bullion.

        Risk management is primarily the responsibility of the investment portfolio manager, who incorporates it with their day-to-day research and management. Although investment flexibility is essential to this style's investment process, the Pension Plan does not invest in a number of asset classes that are commonly referred to as alternative investments, namely venture capital, private equity funds, direct real estate properties, timber, or oil, gas or other mineral explorations or development programs or leases. The Pension Plan also has a number of specific guidelines that serve to manage investment risk by placing limits on net securities exposure and concentration of assets within specific companies or industries.

        We determine the fair value of our Pension Plan assets using broad levels of inputs as defined by related accounting standards and categorized as Level 1, Level 2 or Level 3, as previously defined in Note 4. The following tables summarize our Pension Plan assets as of December 31, 2011 and 2010:

2011	Level 1		Level 2		Level 3		Total
	(in thousands)
Equity securities:
Domestic	$	44,818		-		-		44,818
International		38,942		-		-		38,942
Fixed income securities:
Mortgage-backed security		-		98		-		98
Gold bullion		12,857		-		-		12,857
Total investment securities		96,617		98		-		96,715
Cash and other								6,689
Total							$	103,404

2010	Level 1		Level 2		Level 3		Total
	(in thousands)
Equity securities:
Domestic	$	36,488		-		-		36,488
International		49,864		-		-		49,864
Fixed income securities:
Foreign bonds		-		73		-		73
Mortgage-backed security		-		130		-		130
Gold bullion		14,382		-		-		14,382
Total investment securities		100,734		203		-		100,937
Cash and other								5,631
Total							$	106,568

        The table that follows summarizes the activity of plan assets categorized as Level 3 for the year ended December 31, 2009. There was no Level 3 activity during the years ended December 31, 2011 or 2010.

	Options
	(in thousands)
Balance at December 31, 2008	$	(11)
Purchases, issuances and settlements		262
Actual return on plan assets, sold during the period		(123)
Proceeds from sales		(128)
Balance at December 31, 2009	$	-

        The 7.75% expected long-term rate of return on Pension Plan assets reflects management's expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The plan expects a relatively high return because of the types of investment the portfolio incorporates, the success the portfolio managers have had with generating returns in excess of passive management in those types of investments, and the past history of returns. The ability to use a high concentration of equities, especially international equities, within the plan's investment policy presents portfolio managers the opportunity to earn higher returns than other investment strategies that are restricted to owning lower returning asset classes. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy.

        The components of net periodic pension and other postretirement costs and the assumptions related to those costs consisted of the following for the years ended December 31, 2011, 2010 and 2009:

	Pension Benefits						Other Postretirement Benefits
	2011		2010		2009		2011		2010		2009
	(in thousands)
Components of net periodic benefit cost:
Service cost	$	7,101		6,140		5,276		558		443		371
Interest cost		7,195		6,596		6,387		402		364		343
Expected return on plan assets		(8,764)		(7,499)		(6,428)		—		—		—
Actuarial loss amortization		1,805		1,617		1,595		—		—		—
Prior service cost amortization		555		555		555		55		45		39
Transition obligation amortization		5		5		5		—		—		—
Net periodic benefit cost	$	7,897		7,414		7,390		1,015		852		753

        The estimated net loss, prior service cost and transition obligation for the Pension Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2012 are $4.1 million, $555 thousand and $5 thousand, respectively. The estimated net loss and prior service cost for the postretirement medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2012 are $12 thousand and $55, thousand respectively.

	Pension Benefits						Postretirement Benefits
	2011		2010		2009		2011		2010		2009
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
Discount rate		6.00%		6.25%		6.75%		6.00%		6.25%		6.75%
Expected return on plan assets		7.75%		7.75%		7.75%		Not applicable
Rate of compensation increase		3.86%		3.86%		(1)		Not applicable

(1)

Rate of compensation increase was 0% for 2009, 2.5% for 2010 and 3.86% for 2011 and after.

        We expect the following benefit payments to be paid, which reflect future service as appropriate:

	Pension Benefits		Other Postretirement Benefits
	(in thousands)
2012	$	6,408		289
2013		7,823		364
2014		8,572		407
2015		8,034		424
2016		10,096		450
2017 through 2021		56,878		2,952
	$	97,811		4,886

        Our policy with respect to funding the Pension Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes. All contributions made to the Pension Plan for 2011, 2010 and 2009 were voluntary. Contributions are not expected to exceed $20 million for 2012. A contribution of $10 million was made to the Pension Plan in January 2012.

        All Company contributions to other postretirement medical benefits are voluntary, as the postretirement medical plan is not funded and is not subject to any minimum regulatory funding requirements. The contributions for each year represent claims paid for medical expenses, and we anticipate making the 2012 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $359 thousand, $237 thousand and $157 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

        For measurement purposes, the initial health care cost trend rate was 9.51% for 2011, 10% for 2010 and 9% for 2009. The health care cost trend rate reflects anticipated increases in health care costs. The initial assumed growth rate of 9.51% for 2011 is assumed to gradually decline over the next 16 years to a rate of 4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2011 accumulated postretirement benefit obligation by approximately $1.0 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2011 by approximately $137 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2011 accumulated postretirement benefit obligation by approximately $866 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2011 by approximately $115 thousand.

        We also sponsor the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and restated (the "SERP"), a non-qualified deferred compensation plan covering eligible employees. The SERP provides certain benefits for Company officers that the Pension Plan is prevented from providing because of compensation and benefit limits in the Internal Revenue Code.

        The SERP was adopted to supplement the annual pension paid to certain senior executive officers. Each calendar year, the Compensation Committee of the Board of Directors (the "Compensation Committee") credits participants' SERP accounts with (i) an amount equal to 4% of the executive's base salary, less the amount of the maximum employer matching contribution available under our 401(k) plan, and (ii) a non-formula award, if any, as determined by the Compensation Committee in its discretion. There were no discretionary awards made to participants during 2011, 2010 or 2009. Additionally, each calendar year, participants' accounts are credited (or charged) with an amount equal to the performance of certain hypothetical or investment vehicles since the last preceding year. Upon a participant's separation, or at such other time based on a pre-existing election by a participant, benefits accumulated under the SERP are payable in installments or in a lump sum. As of December 31, 2011 and 2010, the aggregate liability to participants was $3.7 million.

        At December 31, 2011, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $45.0 million, a liability for postretirement benefits in the amount of $7.8 million and an accrued liability for SERP benefits of $3.7 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the balance sheet. At December 31, 2010, the accrued pension and postretirement liability recorded on the balance sheet was comprised of accrued pension costs of $12.3 million, a liability for postretirement benefits in the amount of $6.5 million and an accrued liability for SERP benefits of $3.7 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the balance sheet.