NOTE 13—PENSION, PROFIT SHARING AND OTHER BENEFIT PLANS

Deferred Compensation Plans

Deferred compensation includes amounts due under an arrangement in which participating members of management may elect to defer receiving payment for a portion of their compensation a minimum of five years, or until periods after their respective retirements. Our deferred compensation plans specify that we accrue interest on deferred compensation at the Prompt Payment Act interest rate as determined by the U.S. Department of the Treasury, until such time as it is paid in full. For the year ended September 30, 2013, the average interest rate used to accrue interest on our deferred compensation was 1.4%.

Defined Contribution Plans

We have profit sharing and other defined contribution retirement plans that provide benefits for most U.S. employees. Certain of these plans require the company to match a portion of eligible employee contributions up to specified limits. These plans also allow for additional company contributions at the discretion of the Board of Directors. In 2013, 2012 and 2011, more than half of our contributions to these plans were discretionary contributions. We also have a defined contribution plan for European employees that were formerly eligible for the European defined benefit plan described below. Under this plan, the company matches a portion of the eligible employee contributions up to limits specified in the plan. Company contributions to defined contribution plans aggregated $19.7 million, $18.6 million and $18.4 million in 2013, 2012 and 2011, respectively.

Defined Benefit Pension Plans

Certain employees in the U.S. are covered by a noncontributory defined benefit pension plan for which benefits were frozen as of December 31, 2006 (curtailment). The effect of the U.S. plan curtailment is that no new benefits have been accrued after that date. Approximately one-half of our European employees are covered by a contributory defined benefit pension plan for which benefits were frozen as of September 30, 2010. Although the effect of the European plan curtailment is that no new benefits will accrue after September 30, 2010, the plan is a final pay plan, which means that benefits will be adjusted for increases in the salaries of participants until their retirement or departure from the company. During 2013, the European plan was amended to reduce the amount of participant compensation used in computing the pension liability for certain participants. We recognized a $1.2 million decrease in our benefit obligation as a result of this plan amendment. U.S. and European employees hired subsequent to the dates of the curtailment of the respective plans are not eligible for participation in the defined benefit plans.

Our funding policy for the defined benefit pension plans provides that contributions will be at least equal to the minimum amounts mandated by statutory requirements. Based on our known requirements for the U.S. and U.K. plans, as of September 30, 2013, we expect to make contributions of approximately $3.6 million in 2014. September 30 is used as the measurement date for these plans.

The unrecognized amounts recorded in accumulated other comprehensive income (loss) will be subsequently recognized as net periodic pension cost, consistent with our historical accounting policy for amortizing those amounts. We will recognize actuarial gains and losses that arise in future periods and are not recognized as net periodic pension cost in those periods as increases or decreases in other comprehensive income (loss), net of tax, in the period they arise. We adjust actuarial gains and losses recognized in other comprehensive income (loss) as they are subsequently recognized as a component of net periodic pension cost. The unrecognized actuarial gain or loss included in accumulated other comprehensive income (loss) at September 30, 2013 and expected to be recognized in net pension cost during fiscal 2014 is a loss of $0.8 million ($0.6 million net of income tax). No plan assets are expected to be returned to us in 2013.

The projected benefit obligation, accumulated benefit obligation (ABO) and fair value of plan assets for the defined benefit pension plans in which the ABO was in excess of the fair value of plan assets were as follows (in thousands):

September 30,	2013		2012
Projected benefit obligation	$	209,118	$	215,706
Accumulated benefit obligation	202,916		209,135
Fair value of plan assets	188,337		169,323

The following table sets forth changes in the projected benefit obligation and fair value of plan assets and the funded status for these defined benefit plans (in thousands):

September 30,	2013			2012
Change in benefit obligations:
Net benefit obligation at the beginning of the year	$	215,706		$	185,485
Service cost	532			508
Interest cost	8,867			9,565
Actuarial loss (gain)	(5,726		)	22,761
Plan amendments	(1,178		)	57
Gross benefits paid	(8,576		)	(5,928		)
Foreign currency exchange rate changes	(507		)	3,258
Net benefit obligation at the end of the year	209,118			215,706

Change in plan assets:
Fair value of plan assets at the beginning of the year	169,323			144,319
Actual return on plan assets	24,707			24,769
Employer contributions	3,915			4,354
Gross benefits paid	(8,576		)	(5,928		)
Administrative expenses	(843		)	(657		)
Foreign currency exchange rate changes	(189		)	2,466
Fair value of plan assets at the end of the year	188,337			169,323

Unfunded status of the plans	(20,781		)	(46,383		)
Unrecognized net actuarial loss	31,657			52,911
Net amount recognized	$	10,876		$	6,528

Amounts recognized in Accumulated OCI
Liability adjustment to OCI	$	(31,657	)	$	(52,911	)
Deferred tax asset	9,292			17,440
Accumulated other comprehensive loss	$	(22,365	)	$	(35,471	)

The components of net periodic pension cost (benefit) were as follows (in thousands):

Years ended September 30,	2013			2012			2011
Service cost	$	532		$	508		$	550
Interest cost	8,867			9,565			9,387
Expected return on plan assets	(11,605		)	(10,091		)	(9,979		)
Amortization of actuarial loss	1,798			1,593			985
Administrative expenses	76			82			85
Net pension cost (benefit)	$	(332	)	$	1,657		$	1,028

Years ended September 30,	2013		2012		2011
Weighted-average assumptions used to determine benefit obligation at September 30:
Discount rate	4.8	%	4.3	%	5.2	%
Rate of compensation increase	4.4	%	3.8	%	4.3	%
Weighted-average assumptions used to determine net periodic benefit cost for the years ended September 30:
Discount rate	4.3	%	5.2	%	5.2	%
Expected return on plan assets	7.0	%	7.0	%	7.0	%
Rate of compensation increase	3.8	%	4.3	%	4.3	%

The long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligations. That assumption is determined based on a number of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, historical plan return data, plan expenses, and the potential to outperform market index returns.

We have the responsibility to formulate the investment policies and strategies for the plans’ assets. Our overall policies and strategies include: maintain the highest possible return commensurate with the level of assumed risk, and preserve benefit security for the plans’ participants.

We do not direct the day-to-day operations and selection process of individual securities and investments and, accordingly, we have retained the professional services of investment management organizations to fulfill those tasks. The investment management organizations have investment discretion over the assets placed under their management. We provide each investment manager with specific investment guidelines by asset class.

The target ranges for each major category of the plans’ assets at September 30, 2013 are as follows:

Asset Category		Allocation Range
Equity securities		40% to 75%
Debt securities		25% to 60%
Real estate and cash		0% to 10%

Our defined benefit pension plans invest in cash and cash equivalents, equity securities, fixed income securities, pooled separate accounts and common collective trusts. The following tables present the fair value of the assets of our defined benefit pension plans by asset category and their level within the fair value hierarchy (in thousands). See Note 4 for a description of each level within the fair value hierarchy. During 2013 our plans invested in a diversified growth fund that holds underlying investments in equities, fixed- income securities, commodities, and real estate.

All assets classified as Level 2 or Level 3 in the table below are invested in pooled separate accounts or common collective trusts which do not have publicly quoted prices. The fair value of the pooled separate accounts and common collective trusts are determined based on the net asset value of the underlying investments. The fair value of the underlying investments held by the pooled separate accounts and common collective trusts, other than real estate investments, is generally based upon quoted prices in active markets. The fair value of the underlying investments comprised of real estate properties is determined through an appraisal process which uses valuation methodologies including comparisons to similar real estate and discounting of income streams. For investments in the pooled separate accounts and common collective trusts categorized as Level 2 below, there are no restrictions on the ability of our benefit plans to sell these investments.

	September 30, 2013								September 30, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	2,361	$	475	$	—	$	2,836	$	—	$	2,113	$	—	$	2,113
Equity:
U.S. equity securities	—		54,870		—		54,870		—		47,998		—		47,998
U.K. equity securities	—		20,983		—		20,983		—		37,059		—		37,059
Other foreign equity securities	—		26,586		—		26,586		—		28,460		—		28,460
Fixed Income:
U.S. fixed-income funds	—		33,849		—		33,849		—		37,585		—		37,585
U.K. fixed-income funds	—		12,804		—		12,804		—		10,494		—		10,494
Diversified growth fund	—		30,146				30,146		—		—				—
Real Estate	—		—		6,263		6,263		—		—		5,614		5,614
Total	$	2,361	$	179,713	$	6,263	$	188,337	$	—	$	163,709	$	5,614	$	169,323

The following table presents the changes in the fair value of plan assets categorized as Level 3 in the preceding table (in thousands):

	Real Estate
Balance as of October 1, 2011	$	5,026
Realized and unrealized gains, net	647
Purchases, sales and settlements, net	(59		)
Balance as of September 30, 2012	5,614
Realized and unrealized gains, net	712
Purchases, sales and settlements, net	(63		)
Balance as of September 30, 2013	$	6,263

The pension plans held no direct positions in Cubic Corporation common stock as of September 30, 2013 and 2012.

We expect to pay the following pension benefit payments, which reflect expected future service, as appropriate, (in thousands):

2014	$	7,391
2015	7,825
2016	8,256
2017	8,696
2018	9,577
2019-2023	56,540