14. Pension Benefits

Argo Group US sponsors a qualified defined benefit plan and non-qualified unfunded supplemental defined benefit plans, all of which were curtailed effective February 2004. The following tables set forth the change in plan assets and the change in projected benefit obligation, as of December 31 with respect to these plans. The assets and liabilities of the plans were measured as of December 31 of the respective years presented.


(in millions)	2013			2012
Change in plan assets
Fair value of plan assets at beginning of year	$	20.1		$	19.7
Actual return on plan assets		1.9			2.0
Employer contributions		0.2			0.2
Settlements and benefits paid		(2.0	)		(1.8	)

Fair value of plan assets at end of year	$	20.2		$	20.1


(in millions)	2013			2012
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	24.6		$	22.7
Interest cost		0.8			1.0
Actuarial (gain) loss		(0.8	)		2.7
Benefits paid		(2.0	)		(1.8	)

Projected benefit obligation at end of year	$	22.6		$	24.6

As of December 31, 2013 and 2012, the qualified pension plan was underfunded by $0.3 million and $2.2 million, respectively, and the non-qualified pension plans were unfunded by $2.2 million and $2.3 million, respectively. Underfunded and unfunded amounts are included in “Other liabilities” in our Consolidated Balance Sheets.

Assumptions used to determine benefit obligations at December 31 were as follows:


	2013			2012
Weighted average discount rate		4.42	%		3.63	%
Expected rate of increase in future compensation levels		n/a			n/a

Assumptions used to determine net periodic benefit cost for the years ended December 31:


	2013			2012			2011
Weighted average discount rate		3.63	%		4.50	%		4.98	%
Expected return on plan assets		6.00	%		6.00	%		6.00	%
Expected rate of increase in future compensation levels		n/a			n/a			n/a

In 2013, 2012 and 2011, the expected return on plan assets was ascertained using multiple factors that include market conditions, duration of the fixed maturity portion of the portfolio and long-term return forecasts provided by several asset management companies.

Components of net periodic benefit cost for the years ended December 31 were as follows:


(in millions)	2013			2012			2011
Interest cost	$	0.8		$	1.0		$	1.0
Expected return on plan assets		(1.0	)		(1.1	)		(1.2	)
Settlement charge		0.0			0.0			0.2
Amortization of actuarial loss		0.3			0.3			0.2

Net periodic benefit cost	$	0.1		$	0.2		$	0.2

We estimate that $0.3 million of unrecognized actuarial loss will be amortized from accumulated other comprehensive gain into net periodic benefit cost during 2014.

The projected benefit obligation for the non-qualified unfunded supplemental defined benefit plans, with accumulated benefit obligations in excess of plan assets, was $2.2 million and $2.3 million as of December 31, 2013 and 2012, respectively. The fair value of plan assets for these plans was zero for these same periods. The accumulated benefit obligation for all defined benefit plans is equal to the projected benefit obligation for each of the years presented.

Our investment policy for the qualified plan requires the investments be prudently selected and properly diversified so as to minimize the risk of large losses in accordance with applicable laws including the Employee Retirement Income Security Act of 1974. The overall investment strategy is to achieve a balance of long-term growth of capital and current income, taking into account the need for liquidity to pay benefits as they come due. Periodic shifts in the asset allocation may be made based on the assessment of current and prospective market conditions.

The investment policy for the qualified plan contains asset allocation guidelines with target allocations that remain effective until such time as the investment policy is revised. At December 31, 2013, the target allocations were 65% fixed maturity investments, highly liquid fixed maturity investments, and cash; and 35% equity investments. The target asset allocation percentages were selected based on risk diversification needs, expected distribution patterns and asset manager recommendations. The actual asset allocation as of December 31, 2013 was 67.4% fixed maturity investments, highly liquid fixed maturity investments and cash; and 32.6% equity investments, of which 25.4% and 7.2% were allocated between U.S. and international equities, respectively. These allocations were in compliance with the investment policy that allows the investment manager based on its judgment and market conditions to deviate from the target allocations.

Following is a description of the valuation techniques used to measure the plan’s assets at fair value.

Mutual funds: Fair value is determined using observable, market-based inputs on the valuation date.

Common collective trust and money market mutual fund: We determine fair value based on the net asset values provided by the plan trustee recalculated daily.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while it is believed the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The fair values of the plan assets at December 31, 2013 and 2012 by asset category are as follows:


			Fair Value Measurements
			at Reporting Date Using
(in millions)	December 31, 2013		Level 1 ^(a)		Level 2 ^(b)		Level 3 ^(c)
Equity Securities:
Mutual Funds:
Large cap U.S. equity	$	3.2	$	3.2	$	0.0	$	0.0
Small-mid cap U.S. equity		1.4		1.4		0.0		0.0
International equity		1.5		1.5		0.0		0.0
Real estate		0.5		0.5		0.0		0.0
Convertible bonds and equities		0.2		0.2		0.0		0.0
U.S. and global government and corporate fixed maturity		12.9		12.9		0.0		0.0
Cash and short-term investments:
Short-term investment fund⁽¹⁾		0.5		0.0		0.5		0.0

Total	$	20.2	$	19.7	$	0.5	$	0.0

^(a)	Quoted prices in active markets for identical assets

^(b)	Significant other observable inputs

^(c)	Significant unobservable inputs

⁽¹⁾	Assets invested in one common collective trust composed of high-grade money market money instruments with short maturities.


			Fair Value Measurements
			at Reporting Date Using
(in millions)	December 31, 2012		Level 1 ^(a)		Level 2 ^(b)		Level 3 ^(c)
Equity Securities:
Mutual Funds:
Large cap U.S. equity	$	2.6	$	2.6	$	0.0	$	0.0
Small-mid cap U.S. equity		1.0		1.0		0.0		0.0
International equity		1.3		1.3		0.0		0.0
Real estate		0.5		0.5		0.0		0.0
Convertible bonds and equities		0.1		0.1		0.0		0.0
U.S. and global government and corporate fixed maturity		13.9		13.9		0.0		0.0
Cash and short-term investments:
Short-term investment fund⁽¹⁾		0.7		0.0		0.7		0.0

Total	$	20.1	$	19.4	$	0.7	$	0.0

^(a)	Quoted prices in active markets for identical assets

^(b)	Significant other observable inputs

^(c)	Significant unobservable inputs

⁽¹⁾	Assets invested in one common collective trust composed of high-grade money market money instruments with short maturities.

Based on the current funding status of the pension plan, effects of the curtailment and expected changes in pension plan asset values and pension obligations, we do not believe any significant funding of the pension plan will be required during the year ending December 31, 2014.

We expect to make the following benefit payments:


	Pension
(in millions)	Benefits
2014	$	1.7
2015		1.8
2016		1.6
2017		1.9
2018		1.6
Years 2019 to 2023		7.6

Total	$	16.2

Substantially all of our employees are either eligible or mandated by applicable laws to participate in employee savings plans. Under these plans, a percentage of the employee’s pay may be or is mandated based on applicable laws to be contributed to various savings alternatives. The plans also call for Company contributions under several formulae. Charges to income related to our contributions were $6.8 million in 2013, $6.3 million in 2012 and $5.6 million in 2011.