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Note 6 - Employee Retirement Benefit Plans
 12 Months Ended
Dec. 31, 2013
Notes  
Note 6 - Employee Retirement Benefit Plans

Note 6 - Employee Retirement Benefit Plans

 

Pension Plan

 

The Pension Plan is a qualified defined benefit pension plan funded by Company contributions. The Pension Plan was frozen in 2002.  Benefits at normal retirement age (65) are based upon the employees’ years of service as of the date of the curtailment for employees not yet retired, and the employees’ compensation prior to the curtailment.

 

Distress Termination Application

 

On January 7, 2013, the Company submitted a PBGC Form 600 Distress Termination, Notice of Intent to Terminate, to the PBGC. The notice filing initiated an application process by the Company with the Pension Benefit Guaranty Corporation (“PBGC”) for the distress termination of the Pension Plan. The Pension Plan benefits are guaranteed by the ERISA Title IV insurance fund, which is administered by the PBGC. The Company has proposed a termination date of March 8, 2013. Through the application process, the Company’s intent has been to demonstrate to the PBGC that it qualifies for a distress termination of the Pension Plan under either of two of the criteria of Section 4041(c)(2) of ERISA (inability to continue in business absent termination and unreasonably increased pension costs) and applicable PBGC regulations. To satisfy the criteria, the Company and its wholly owned subsidiary each must demonstrate to the satisfaction of the PBGC that, unless the termination occurs, the Company will be unable to pay its debts when they come due and will be unable to continue in business, or that the costs of the Pension Plan have become unreasonably burdensome solely as a result of a decline in the workforce covered by the Plan. A distress termination under Section 4041(c)(2) of ERISA would transfer the Pension Plan’s benefit obligations to the PBGC, up to ERISA guaranteed limits, without requiring reorganization under bankruptcy law. The Pension Plan’s actuary has informed the Company that following termination of the Plan and subject to the PBGC’s review of participant benefits, all of the benefits earned by participants as of the date of plan termination are expected to fall within ERISA guaranteed limits.

 

If the distress termination application is approved, the Company’s unfunded obligation of the Pension Plan would be replaced by a new Pension Plan termination liability to the PBGC, determined by the Pension Plan’s underfunding on a termination basis pursuant to ERISA, PBGC regulations, and other applicable legal authority, along with an ERISA special termination premium.  The Company would also be liable for any unpaid contributions to the Pension Plan (which in substance is a subset of plan termination liability) and annual insurance premiums for the Pension Plan, along with any interest and penalties. While the full Pension Plan termination liability and other pension related liabilities due to the PBGC would likely be greater than the unfunded obligation of the Pension Plan as currently reported in the Company’s financial statements, the Company is in discussions with the PBGC to negotiate a settlement of such liabilities on terms that are feasible for the Company to continue in business as a going concern, which is consistent with the purposes of the statute.

 

The Company’s goal in seeking a distress termination of the Pension Plan is to ensure that the pension benefits of all Pension Plan participants are paid up to federally guaranteed limits and that the Company continues to operate as a going concern while avoiding the costly damage and disruption to the business which would result from bankruptcy reorganization. The Company has been pursuing a conclusion of the process and a settlement of the resulting liabilities. Based upon recent correspondence with the PBGC, the Company believes that the application process will likely result in a settlement of the Pension Plan liabilities on terms that will enable the Company to continue to operate as a going concern. However, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome.

 

Supplemental Executive Retirement Plan

 

The Company maintains an unfunded Supplemental Executive Retirement Plan (“SERP”).  The SERP provides eligible executives defined pension benefits, outside the Pension Plan, based on average salary, years of service and age at retirement.  The SERP was amended in 2002 to discontinue further SERP gains from future salary increases and close the SERP to new participants.

 

401(k) Deferred Savings Plan

 

The Company has a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code.  The 401(k) plan covers all employees of the Company who have at least one year of service and who are age 18 or older.  Matching contributions are made on employee contributions after the employee has achieved one year of service.

 

Extra matching contributions can be made based on profitability and other financial and operational considerations.  No extra matching contributions have been made to date.  Contributions to the 401(k) plan for 2013 and 2012 were $175 and $172, respectively.

 

Obligations and Funded Status for Pension Plan and SERP

 

E&S uses a December 31 measurement date for both the Pension Plan and the SERP.

 

Information concerning the obligations, plan assets and funded status of employee retirement defined benefit plans are provided below:

 

 

Pension Plan

SERP

 

2013

2012

2013

2012

Changes in benefit obligation

 

 

 

 

Projected benefit obligation at beginning of the year

$53,075

$50,610

$5,571

$5,690

Service cost

-

-

-

-

Interest cost

1,591

1,870

164

205

Actuarial (gain) loss

(6,000)

3,200

(389)

216

Benefits paid

(575)

(222)

(500)

(540)

Settlement payments

-

(2,383)

-

-

Projected benefit obligation at end of the year

$48,091

$53,075

$4,846

$5,571

 

  

 

 

 

 

 

Pension Plan

SERP

Changes in plan assets

2013

2012

2013

2012

Fair value of plan assets at beginning of the year

$24,760

$23,226

-

-

Actual return on plan assets

4,785

2,655

-

-

Contributions

103

1,484

500

540

Benefits paid

(575)

(222)

(500)

(540)

Settlements payments

-

(2,383)

-

-

   Fair value of plan assets at end of the year

$29,073

$24,760

-

-

 

 

 

 

Pension Plan

SERP

 

2013

2012

2013

2012

Net Amount Recognized

 

 

 

 

Unfunded status

$(19,018)

$(28,315)

$(4,846)

$(5,571)

Accrued PBGC insurance premiums

(234)

-

-

-

Unrecognized net actuarial loss

16,261

25,913

1,455

1,912

Unrecognized prior service cost

-

-

(107)

(156)

   Net amount recognized

$(2,991)

$(2,402)

$(3,498)

$(3,815)

 

Amounts recognized in the consolidated balance sheets consisted of:

 

  

Pension Plan

SERP

 

2013

2012

2013

2012

Accrued liability

$(19,018)

$(28,315)

$(4,846)

$(5,571)

Accrued PBGC insurance premiums

(234)

-

-

-

Accumulated other comprehensive loss

16,261

25,913

1,348

1,756

   Net amount recognized

$(2,991)

$(2,402)

$(3,498)

$(3,815)

 

Components of net periodic benefit cost:

 

  

Pension Plan

SERP

 

2013

2012

2013

2012

Service cost

-

-

-

-

Interest cost

1,591

1,870

164

205

Expected return on assets

(1,841)

(1,815)

-

-

Amortization of actuarial loss

709

682

68

58

Amortization of prior year service cost

-

-

(48)

(48)

Settlement charge

-

1,163

-

-

   Net periodic benefit cost

459

1,900

184

215

Other pension related expenses

322

-

-

-

 

$781

$1,900

$184

$215

 

Additional information

 

Pension expense was $965 for the year ended December 31, 2013, which included net periodic benefit expense of $459 for the pension, $184 for the SERP, $234 of insurance premium due to the PBGC and $88 of federal excise tax related to non-payment of minimum pension funding requirements.  Pension expense for the year ended December 31, 2012 included net periodic benefit expense of $1,900 for the pension and $215 for the SERP.

 

There was an unrecognized net actuarial gain of $9,653 in 2013 due to an increase in the discount rate used to remeasure the Pension Plan of 3.1% as of December 31, 2012 compared to 4.8% as of December 31, 2013.  In 2012 the unrecognized net actuarial loss of $514 due to a decrease in the discount rate used to remeasure the Pension Plan liability of 3.8% as of December 31, 2011 to 3.1% as of December 31, 2012. The discount rate is estimated based on an index of similar fixed income securities. During 2014, E&S expects to recognize $406 of accumulated other comprehensive loss as a component of 2014 net periodic benefit cost.

 

There was a decrease to the SERP minimum liability recorded in other comprehensive income of $409 in 2013, compared to an increase of $206 during 2012.  The decrease in 2013 reflected the increase to the discount rate used to measure the SERP as of December 31, 2013 of 4.8% compared to 3.1% as of December 31, 2012.

 

Assumptions

 

The weighted average assumptions used to remeasure benefit obligations as of December 31, 2013 and 2012 included a discount rate of 4.8% and 3.1%, respectively, for the Pension Plan and SERP.  The weighted average assumptions used to determine net periodic cost for the periods ended December 31, 2013 and 2012, included a discount rate of 3.1% and 3.8%, respectively, in each period for the Pension Plan and SERP. The weighted average assumption used to determine an expected long-term rate of return on Pension Plan assets was 8.0%.

 

The long-term rate of return on plan assets was estimated as the weighted average of expected return of each of the asset classes in the target allocation of plan assets.  The expected return of each asset class is based on historical market returns.

 

Pension Plan Assets

 

The Pension Plan’s weighted-average asset allocations and weighted-average targeted asset allocations for each of the years presented are as follows:

 

 

 

2013

2012

Asset allocation category of plan assets

Target %

Actual %

Actual %

Mutual funds - equity securities

60

61

59

Mutual funds - debt securities

25

38

25

Real estate investment trust

5

-

6

Hedge funds

10

-

9

Cash and cash equivalents

-

1

1

 

The asset allocation policy, consistent with the long-term growth objectives of the Pension Plan, is to invest on a diversified basis among various asset classes as determined by the Pension Plan Administrative Committee.  Assets will be invested in a manner that will provide for long-term growth with a goal to achieve returns equal to or greater than applicable benchmarks.  Investments will be managed by registered investment advisors.

 

No securities of the Company were part of the Pension Plan assets as of December 31, 2013 or 2012.

 

Fair Value Measurements

 

The Pension Plan assets include a significant amount of mutual funds invested in equity and debt securities that are classified within Level 1 because the underlying investments have readily available market prices. Fair values of real estate investments within the real estate investment trust are classified as Level 3 because they were valued using real estate valuation techniques and other methods that include reference to third-party sources and sales comparables where available.  Hedge fund investments are classified in Level 2 and the fair values are generally calculated from pricing models with market input parameters from third-party sources.  

The Pension Plan assets fair value measurements are summarized below:

 

 

Description

December 31, 2013

Level 1

Level 2

Level 3

Pension Plan Assets:

 

 

 

 

  Mutual funds - equity securities

$17,871

$17,871

-

-

  Mutual funds - debt securities

10,924

10,924

-

-

  Hedge fund

243

-

243

-

  Money market mutual funds

35

35

-

-

    Total

$29,073

$28,830

$243

-

 

Description

December 31, 2012

Level 1

Level 2

Level 3

Pension Plan Assets:

 

 

 

 

  Mutual funds - equity securities

$14,716

$14,716

-

-

  Mutual funds - debt securities

6,092

6,092

-

-

  Real estate investment trust

1,395

-

-

1,395

  Hedge fund

2,273

-

2,273

-

  Money market mutual funds

284

284

-

-

    Total

$24,760

$21,092

$2,273

$1,395

 

 

The following table provides further details of the Level 3 fair value measurements.

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

December 31,

Pension Plan Assets – Real estate investment trust:

2013

2012

Beginning balance

$1,395

$1,630

  Actual return on plan assets – gains

(412)

102

  Purchases, sales, issuances and settlements (net)

(983)

(337)

    Ending balance

-

$1,395

 

Cash Flows

 

Employer contributions

 

Through September 15, 2012, the Company’s funding policy was to contribute to the Pension Plan trust amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. Beginning in October 2012, the Company discontinued this policy in order to preserve necessary liquidity. As a result, a lien in favor of the PBGC has arisen against the assets of the Company to secure aggregate unpaid contributions which amount to $2,571, including interest, as of January 15, 2014. Independent actuarial valuations have determined that additional contributions of approximately $4,100 will become due through January 15, 2015. The Company’s legal counsel has advised that the PBGC usually does not take enforcement action under its lien rights while it is still considering the application for the distress termination which is consistent with the Company’s dialog with the PBGC through the application process. Based upon recent correspondence with the PBGC, the Company believes that the application process will likely result in a settlement of the Pension Plan liabilities on terms that will enable the Company to continue to operate as a going concern, although there can be no assurance as to the timing and ultimate outcome of such settlement discussions.

 

The Company is not currently required to fund the SERP.  All benefit payments are made by E&S directly to those who receive benefits from the SERP.  As such, these payments are treated as both contributions and benefits paid for reporting purposes.

 

The Company expects to contribute and pay benefits of approximately $531 related to the SERP in 2014.  This contribution is expected to be partially made by liquidating marketable securities with the remainder from cash.

 

Estimated future benefit payments

 

As of December 31, 2013, the following benefits are expected to be paid based on actuarial estimates and prior experience:

 

Years Ending

 

Pension

 

December 31,

 

Plan

SERP

2014

 

$719

$531

2015

 

980

551

2016

 

1,284

520

2017

 

1,568

529

2018

 

1,923

497

2019-2023

 

13,926

2,061