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, 2012, 2011 and 2010 follows:

	Pension Benefits						Other Postretirement Benefits

	2012		2011		2010		2012		2011		2010
	(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year	$	148,412		118,860		110,962		8,145		6,850		5,945
Service cost		9,373		7,101		6,140		693		558		443
Interest cost		7,570		7,195		6,596		400		402		364
Benefits paid		(5,760)		(6,522)		(6,589)		(560)		(554)		(528)
Actuarial (gain) loss		24,570		21,778		1,751		(223)		530		389
Retiree contributions		—		—		—		337		359		237

Net benefit obligation at end of year	$	184,165		148,412		118,860		8,792		8,145		6,850

The accumulated benefit obligation for the Pension Plan was $150.8 million and $124.7 million at December 31, 2012 and 2011, respectively.

As part of the agreement to sell Legend, the Company retained the liability for pension and other postretirement benefits related to Legend, and these liabilities are included in the tables above.

	Pension Benefits						Other Postretirement Benefits

	2012		2011		2010		2012		2011		2010
	(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year	$	103,404		106,568		91,551		—		—		—
Actual return on plan assets		21,267		(6,642)		9,106		—		—		—
Employer contributions		15,000		10,000		12,500		223		195		291
Retiree contributions		—		—		—		337		359		237
Benefits paid		(5,760)		(6,522)		(6,589)		(560)		(554)		(528)

Fair value of plan assets at end of year	$	133,911		103,404		106,568		—		—		—

Funded status at end of year	$	(50,254)		(45,008)		(12,292)		(8,792)		(8,145)		(6,850)

	Pension Benefits						Other Postretirement Benefits

	2012		2011		2010		2012		2011		2010
	(in thousands, except percentage data)
Amounts recognized in the statement of financial position:
Current liabilities	$	-		-		-		(304)		(289)		(303)
Noncurrent liabilities		(50,254)		(45,008)		(12,292)		(8,488)		(7,856)		(6,547)

Net amount recognized at end of year	$	(50,254)		(45,008)		(12,292)		(8,792)		(8,145)		(6,850)

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income:
Transition obligation	$	(32)		(37)		(42)		-		-		-
Prior service cost		(2,377)		(2,932)		(3,486)		(127)		(183)		(238)
Accumulated loss		(74,286)		(66,747)		(31,369)		(765)		(999)		(469)

Accumulated other comprehensive loss		(76,695)		(69,716)		(34,897)		(892)		(1,182)		(707)
Cumulative employer contributions in excess of net periodic benefit cost		26,441		24,708		22,605		(7,900)		(6,963)		(6,143)

Net amount recognized at end of year	$	(50,254)		(45,008)		(12,292)		(8,792)		(8,145)		(6,850)

Weighted average assumptions used to determine benefit obligation at December 31:
Discount rate		4.22%		4.99%		6.00%		4.18%		5.00%		6.00%
Rate of compensation increase		3.99%		4.04%		3.86%		Not applicable

In 2012 and 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, 2012 and 2011 is as follows:

Plan assets by category


Cash	11%	7%
Equity securities:
Domestic	38%	43%
International	40%	38%
Private equity	1%	-
Gold bullion	10%	12%

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, 2012, 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, 2012, 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 40% international equities, of which a third was invested in Chinese equities. The Pension Plan also had 10% of plan assets invested in gold bullion.

Risk management is primarily the responsibility of the investment portfolio manager, who incorporates it with 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 above in Note 4. The following tables summarize our Pension Plan assets as of December 31, 2012 and 2011. There were no transfers between levels for the years ended December 31, 2012 or 2011.

2012	Level 1				Total


	(in thousands)
Equity securities:
Domestic	$	51,289	-	-		51,289
International		53,291	-	-		53,291
Fixed income securities:
Mortgage-backed securities		-	50	-		50
Private equity		-	-	1,772		1,772
Gold bullion		13,452	-	-		13,452

Total investment securities		118,032	50	1,772		119,854
Cash and other						14,057

Total					$	133,911

2011	Level 1				Total


	(in thousands)
Equity securities:
Domestic	$	44,818	-	-		44,818
International		38,942	-	-		38,942
Fixed income securities:
Mortgage-backed securities		-	98	-		98
Gold bullion		12,857	-	-		12,857

Total investment securities		96,617	98	-		96,715
Cash and other						6,689

Total					$	103,404

The fair value of the private equity investment classified as Level 3 as of December 31, 2012 was determined to be the investment cost. As a result, this investment's valuation had no effect on the plan's asset value in 2012. There was no Level 3 activity during the year ended December 31, 2011.

The following table summarizes the activity of plan assets categorized as Level 3 for the year ended December 31, 2012:

	Private Equity

	(in thousands)
Balance at December 31, 2011	$	-
Purchases, issuances and settlements		1,772
Actual return on plan assets, sold during the period		-
Proceeds from sales		-

Balance at December 31, 2012	$	1,772

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 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 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 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, 2012, 2011 and 2010:

	Pension Benefits						Other Postretirement Benefits

	2012		2011		2010		2012		2011		2010
	(in thousands)
Components of net periodic benefit cost:
Service cost	$	9,373		7,101		6,140		693		558		443
Interest cost		7,570		7,195		6,596		400		402		364
Expected return on plan assets		(8,799)		(8,764)		(7,499)		—		—		—
Actuarial loss amortization		4,563		1,805		1,617		12		—		—
Prior service cost amortization		555		555		555		55		55		45
Transition obligation amortization		5		5		5		—		—		—

Net periodic benefit cost (1)	$	13,267		7,897		7,414		1,160		1,015		852

(1): Net periodic pension benefit cost related to discontinued operations and included in the table above was $738 thousand, $525 thousand and $489 thousand for the years ended December 31, 2012, 2011 and 2010, respectively. Net periodic cost for the postretirement medical plan related to discontinued operations and included in the table above was $11 thousand, $18 thousand and $20 thousand for the years ended December 31, 2012, 2011 and 2010, respectively.

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 2013 are $4.4 million, $555 thousand and $5 thousand, respectively. The estimated prior service cost for the postretirement medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2013 is $55 thousand.

	Pension Benefits						Other Postretirement Benefits

	2012		2011		2010		2012		2011		2010
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
Discount rate		4.99%		6.00%		6.25%		5.00%		6.00%		6.25%
Expected return on plan assets		7.75%		7.75%		7.75%		Not applicable
Rate of compensation increase		4.04%		3.86%		3.86%		Not applicable

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

	Pension Benefits

	(in thousands)
2013	$	7,985	304
2014		9,567	317
2015		8,022	349
2016		10,691	377
2017		10,147	402
2018 through 2022		60,647	2,961

	$	107,059	4,710

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 2012, 2011 and 2010 were voluntary. Contributions are not expected to exceed $20 million for 2013. A contribution of $10 million was made to the Pension Plan in January 2013.

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 2013 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $337 thousand, $359 thousand and $237 thousand for the years ended December 31, 2012, 2011 and 2010, respectively.

For measurement purposes, the initial health care cost trend rate was 9.01% for 2012, 9.51% for 2011 and 10% for 2010. The health care cost trend rate reflects anticipated increases in health care costs. The initial assumed growth rate of 9.01% for 2012 is assumed to gradually decline over the next 15 years to a rate of 4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2012 accumulated postretirement benefit obligation by approximately $1.2 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2012 by approximately $180 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2012 accumulated postretirement benefit obligation by approximately $985 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2012 by approximately $150 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 2012, 2011 or 2010. Additionally, each calendar year, participants' accounts are credited (or charged) with an amount equal to the performance of certain hypothetical 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, 2012 and 2011, the aggregate liability to participants was $3.7 million.

At December 31, 2012, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $50.3 million, a liability for postretirement benefits in the amount of $8.5 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. At December 31, 2011, the accrued pension and postretirement liability recorded on the 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.