NOTE 11

PENSION AND OTHER RETIREMENT BENEFITS

U.S. Plans

Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.

Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to employees hired or rehired on or after January 1, 2008 and new hires instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s DBPPs continue to accrue benefits based on existing plan benefit formulas.

Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:


	Pension Plans						Other Retirement Plans

	2012			2011			2012			2011
Change in benefit obligation:
Benefit obligation, beginning of the period	$	(298.8	)		(242.5	)	$	(20.2	)		(15.6	)
Service cost		(18.9	)		(15.1	)		(1.5	)		(1.1	)
Interest cost		(13.1	)		(13.1	)		(0.7	)		(0.8	)
Plan participants’ contributions		—			—			(0.3	)		(0.2	)
Benefits paid		5.7			13.6			1.0			0.8
Actuarial gain (loss)		(11.0	)		(4.9	)		1.1			(0.9	)
Assumption changes		(20.2	)		(36.8	)		(1.2	)		(2.4	)

Benefit obligation, end of the period		(356.3	)		(298.8	)		(21.8	)		(20.2	)

Change in plan assets:
Fair value of plan assets, beginning of the period		133.0			120.4			—			—
Actual return on plan assets		19.0			0.8			—			—
Benefits paid		(5.7	)		(13.6	)		(1.0	)		(0.8	)
Employer contributions		21.3			25.4			0.7			0.6
Plan participants’ contributions		—			—			0.3			0.2

Fair value of plan assets, end of period		167.6			133.0			—			—

Funded status of the plans		(188.7	)		(165.8	)		(21.8	)		(20.2	)

Amounts recorded on the consolidated balance sheets:
Pension and retirement benefits liability-current		(3.6	)		(3.0	)		(0.8	)		(0.8	)
Pension and retirement benefits liability-non current		(185.1	)		(162.8	)		(21.0	)		(19.4	)

Net amount recognized	$	(188.7	)		(165.8	)	$	(21.8	)		(20.2	)

Accumulated benefit obligation, end of the period	$	(298.4	)		(256.1	)

The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:


	December 31,

	2012		2011
Aggregate projected benefit obligation	$	356.3	$	298.8
Aggregate accumulated benefit obligation	$	298.4	$	256.1
Aggregate fair value of plan assets	$	167.6	$	133.0

The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:


	Pension Plans						Other Retirement Plans

	2012			2011			2012			2011
Net actuarial losses	$	(142.7	)	$	(127.1	)	$	(6.0	)	$	(6.1	)
Net prior service costs		(4.0	)		(4.7	)		—			—

Total recognized in AOCI- pretax	$	(146.7	)	$	(131.8	)	$	(6.0	)	$	(6.1	)

The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:


	Pension Plans		Other Retirement Plans
Net actuarial losses	$	11.1	$	0.4
Net prior service costs		0.6		—

Total to be recognized as components of net periodic expense	$	11.7	$	0.4

Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:


	Pension Plans									Other Retirement Plans

	2012			2011			2010			2012		2011		2010
Components of net periodic expense
Service cost	$	18.9		$	15.1		$	13.5		$	1.5	$	1.1	$	0.9
Interest cost		13.1			13.1			12.0			0.7		0.8		0.8
Expected return on plan assets		(12.5	)		(11.9	)		(10.5	)		—		—		—
Amortization of net actuarial loss from earlier periods		9.1			5.0			2.8			0.3		0.3		0.1
Amortization of net prior service costs from earlier periods		0.7			0.6			0.7			—		—		—
Settlement charges		—			1.6			1.3			—		—		—

Net periodic expense	$	29.3		$	23.5		$	19.8		$	2.5	$	2.2	$	1.8

The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:


	Pension Plans						Other Retirement Plans

	2012			2011			2012			2011
Amortization of net actuarial losses	$	9.1		$	5.0		$	0.3		$	0.3
Amortization of prior service costs		0.7			0.6			—			—
Accelerated recognition of actuarial loss due to settlement		—			1.6			—			—
Net actuarial loss arising during the period		(24.7	)		(52.8	)		(0.2	)		(3.3	)

Total recognized in OCI – pre-tax	$	(14.9	)	$	(45.6	)	$	0.1		$	(3.0	)

ADDITIONAL INFORMATION:

Assumptions – Retirement Plans

Weighted-average assumptions used to determine benefit obligations at December 31:


	Pension Plans						Other Retirement Plans

	2012			2011			2012			2011
Discount rate		3.82	%		4.25	%		3.55	%		4.05	%
Rate of compensation increase		4.00	%		4.00	%		—			—

Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:


	Pension Plans									Other Retirement Plans

	2012			2011			2010			2012			2011			2010
Discount rate		4.25	%		5.39	%		5.95	%		4.05	%		5.15	%		5.75	%
Expected return on plan assets		7.85	%		8.35	%		8.35	%		—			—			—
Rate of compensation increase		4.00	%		4.00	%		4.00	%		—			—			—

The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2012, the expected rate of return used in calculating the net periodic benefit costs was 7.85%. For 2013, the Company reduced the expected rate of return assumption to 7.30% to reflect the Company’s current view of long-term capital market outlook and is commensurate with the returns expected to be generated by the plan assets under Company’s current investment strategy.

Assumed Healthcare Cost Trend Rates at December 31:

2012

2011

2010

Pre-age 65

Post-age 65

Pre-age 65

Post-age 65

Pre-age 65

Post-age 65

Healthcare cost trend rate assumed

for the following year

6.9

7.9

7.4

8.4

7.9

8.9

Ultimate rate to which the cost trend

rate is assumed to decline (ultimate

trend rate)

5.0%

5.0%

Year that the rate reaches the ultimate trend rate

2020

2020

The assumed health cost trend rate reflects different expectations for the medical and prescribed medication components of health care costs for pre and post-65 retirees. As the Company subsidies for retiree healthcare coverage are capped at the 2005 level, for the majority of the retirement health plan participants, retiree contributions are assumed to increase at the same rate as the healthcare cost trend rates.

In 2012, the Company amended its retiree medical plan to modify its current design. Effective January 1, 2013, the newly implemented plan design will provide current retirees age 65 and older with the option over the next three years to either enroll in a new Health Reimbursement Account (HRA) Program and receive a fixed amount annual subsidy or continue to stay in the current retiree medical plan. All future retirees age 65 and older will have to participate in the new HRA Program. There will be no change to pre-65 coverage. As the new plan is designed to be cost neutral to the Company, the amendment of the plan has no significant impact to the plan and a one percentage-point increase or decrease in assumed healthcare cost trend rates would not have affected total service and interest cost and would have a minimal impact on the retiree medical benefit obligation.

Plan Assets

Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring of the plan, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company’s monitoring of the plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies, and investment portfolio reviews.

The Company’s current target asset allocation is approximately 60% (range of 50% to 70%) in equity securities, 30% (range of 25% to 35%) in fixed income securities and 10% (range of 7% to 13%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. Approximately 3% of total plan assets may be invested in funds which invest in debts rated below investment grade and 3% may be invested in emerging market debt. The plan’s other investments are made through private real estate and convertible securities funds and these investments are expected to provide additional diversification benefits and absolute return enhancement to the plan assets. The Company does not use derivatives to leverage the portfolio. The overall allocation is expected to help protect the plan’s funded status while generating sufficiently stable returns over the long-term.

Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2012 and 2011 is determined based on the hierarchy of fair value measurements as defined in Note 2 to these financial statements and is as follows:


	Fair Value Measurement as of December 31, 2012
Asset Category	Balance		Level 1		Level 2		Level 3		% of total assets
Cash and cash equivalent	$	0.2	$	—	$	0.2	$	—		—	%

Emerging markets equity fund		13.3	$	13.3	$	—		—		8	%
Common/collective trust funds – equity securities
U.S. large-cap		32.0		—		32.0		—		19	%
U.S. small and mid-cap		10.7		—		10.7		—		6	%
International		44.1		—		44.1		—		27	%

Total equity investments		100.1		13.3		86.8		—		60	%

Common/collective trust funds – fixed income securities
Long-term government/treasury bonds		13.8		—		13.8		—		8	%
Long-term investment grade corporate bonds		17.5		—		17.5		—		11	%
U.S. Treasury Inflation-Protected Securities (TIPs)		8.5		—		8.5		—		5	%
Emerging markets bonds		5.4		—		5.4		—		3	%
High yield bonds		5.2		—		5.2		—		3	%

Total fixed-income investments		50.4		—		50.4		—		30	%

Common/collective trust funds – convertible securities		4.8		—		4.8		—		3	%
Private real estate fund		12.1		—		—		12.1		7	%

Total other investment		16.9		—		4.8		12.1		10	%

Total Assets	$	167.6	$	13.3	$	142.2	$	12.1		100	%


	Fair Value Measurement as of December 31, 2011
Asset Category	Balance		Level 1		Level 2		Level 3		% of total assets
Cash and cash equivalent	$	0.2	$	—	$	0.2	$	—		—	%

Emerging markets equity fund		7.7	$	7.7	$	—		—		6	%
Common/collective trust funds – equity securities
U.S. large-cap		26.4		—		26.4		—		20	%
U.S. small and mid-cap		9.3		—		9.3		—		7	%
International		30.4		—		30.4		—		23	%

Total equity investments		73.8		7.7		66.1		—		56	%

Common/collective trust funds – fixed income securities
Long-term government/treasury bonds		13.9		—		13.9		—		10	%
Long-term investment grade corporate bonds		14.9		—		14.9		—		11	%
U.S. Treasury Inflation-Protected Securities (TIPs)		7.6		—		7.6		—		6	%
Emerging markets bonds		4.5		—		4.5		—		3	%
High yield bonds		3.6		—		3.6		—		3	%

Total fixed-income investments		44.5		—		44.5		—		33	%

Common/collective trust funds – convertible securities		4.8		—		4.8		—		4	%

Private real estate fund		9.7		—		—		9.7		7	%

Total other investment		14.5		—		4.8		9.7		11	%

Total Assets	$	133.0	$	7.7	$	115.6	$	9.7		100	%

Cash and cash equivalent is primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are readily redeemable at their NAV or else they are categorized in Level 3 of the fair value hierarchy. The Company’s investment in a private real estate fund is valued using the NAV per unit of funds that are invested in real property, and the real property is valued using independent market appraisals. Since appraisals involve utilization of significant unobservable inputs and the private real estate fund is not readily redeemable for cash, the Company’s investment in the private real estate fund is categorized in Level 3.

The table below is a summary of changes in the fair value of the Plan’s Level 3 assets:


Real estate investment fund:
Balance as of December 31, 2011	$	9.7
Return on plan assets related to assets held as of December 31, 2012		0.8
Return on plan assets related to assets sold during the period		—
Purchases (sales), net		1.6

Balance as of December 31, 2012	$	12.1

Except for the Company’s U.S. funded pension plan, all of Moody’s Retirement Plans are unfunded and therefore have no plan assets.

Cash Flows

The Company contributed $17.8 million and $13.6 million to its U.S. funded pension plan during the years ended December 31, 2012 and 2011, respectively. The Company made payments of $3.5 million and $11.8 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2012 and 2011, respectively, which included lump sum settlement payments of $6.9 million in 2011. The Company made payments of $0.7 million and $0.6 million to its Other Retirement Plans during the years ended December 31, 2012 and 2011, respectively. The Company presently anticipates making contributions of $15.5 million to its funded pension plan and anticipates making payments of $3.6 million related to its unfunded U.S. pension plans and $0.8 million related to its Other Retirement Plans during the year ended December 31, 2013.

Estimated Future Benefits Payable

Estimated future benefits payments for the Retirement Plans are as follows at ended December 31, 2012:


Year Ending December 31,	Pension Plans		Other Retirement Plans
2013	$	6.4	$	0.8
2014		7.5		0.9
2015		7.9		1.0
2016		10.5		1.2
2017		11.0		1.3
2018 – 2022	$	108.5	$	8.3

Defined Contribution Plans

Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions with cash contributions equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $24.5 million, $14.9 million and $19.4 million in 2012, 2011, and 2010, respectively.

Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.4 million and $0.3 million in dividends during the years ended December 31, 2012 and 2011, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 580,000 and 610,000 shares of Moody’s common stock at December 31, 2012 and 2011, respectively.

International Plans

Certain of the Company’s international operations provide pension benefits to their employees. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2012, 2011 and 2010 were $18.8 million, $16.3 million and $11.8 million, respectively.

For defined benefit plans, the Company maintains various unfunded DBPPs and retirement health benefit plan for certain of its non-U.S. subsidiaries located in Germany, France and Canada. These unfunded DBPPs are generally based on each eligible employee’s years of credited service and on compensation levels as specified in the plans. The DBPP in Germany was closed to new entrants in 2002. Total defined benefit pension liabilities recorded related to non-U.S. pension plans was $7.2 million, $5.3 million and $4.6 million based on a weighted average discount rate of 3.53%, 4.79% and 5.28% at December 31, 2012, 2011 and 2010, respectively. The pension liabilities recorded as of December 31, 2012 represent the unfunded status of these pension plans and were recognized in the consolidated balance sheet as non-current liabilities. Total pension expense recorded for the years ended December 31, 2012, 2011 and 2010 was approximately $0.6 million, $0.6 million and $0.5 million, respectively. These amounts are not included in the tables above. As of December 31, 2012, the Company has included in AOCI net actuarial losses of $0.5 million ($0.3 million net of tax) related to non-U.S. pension plans that have yet to be recognized as increases to net periodic pension expense and the Company expects its 2013 amortization of the net actuarial losses to be immaterial. The Company’s non-U.S. other retirement benefit obligation is not material as of December 31, 2012.