Retirement Benefits

12 Months Ended

Sep. 30, 2014

15. RETIREMENT BENEFITS

The Company and certain of its subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of its worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005 and were replaced with defined contribution plans. The principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate; a similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.

Defined Benefit Pension Plans

Pension benefits earned are generally based on years of service and compensation during active employment. The cost of our defined benefit pension plans included the following components:

		2014				2013				2012
			U.S.	International			U.S.	International			U.S.	International
Service cost		$	42.6	$	36.0	$	51.8	$	31.5	$	45.1	$	24.1
Interest cost			130.7		67.2		117.1		57.3		124.2		62.3
Expected return on plan assets			(187.8)		(78.1)		(185.4)		(71.2)		(178.2)		(66.7)
Amortization
	Net actuarial loss		78.3		36.1		116.0		27.0		78.6		17.4
	Prior service cost		2.9		.2		2.9		.2		2.7		.5
Settlement loss			4.8		.7		11.5		.9		-		1.4
Special termination benefits			.2		.1		1.2		6.2		4.6		2.2
Other			-		2.0		-		2.7		-		2.2
Net Periodic Pension Cost		$	71.7	$	64.2	$	115.1	$	54.6	$	77.0	$	43.4

Our U.S. supplemental pension plan provides for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after the retirement date. Pension settlements are recognized when cash payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. We recognized $5.5 and $12.4 of settlement losses in 2014 and 2013, respectively. Special termination benefits for 2014, 2013, and 2012 are primarily related to the cost reduction plans initiated in their respective years.

We calculate net periodic pension cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The following table sets forth the weighted average assumptions used in the calculation of net periodic pension cost:

	2014				2013				2012
	U.S.		International		U.S.		International		U.S.		International
Discount rate	4.8	%	4.3	%	3.9	%	4.3	%	4.9	%	5.5	%
Expected return on plan assets	8.3	%	6.5	%	8.3	%	6.5	%	8.8	%	6.6	%
Rate of compensation increase	4.0	%	3.7	%	4.0	%	3.4	%	4.0	%	3.8	%

The projected benefit obligation (PBO) is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The following table sets forth the weighted average assumptions used in the calculation of the PBO:

	2014				2013
	U.S.		International		U.S.		International
Discount rate	4.3	%	3.6	%	4.8	%	4.3	%
Rate of compensation increase	3.5	%	3.6	%	4.0	%	3.7	%

The following table reflects the change in the PBO and the change in the fair value of plan assets based on the plan year
measurement date, as well as the amounts recognized in the consolidated balance sheets:

	2014				2013
		U.S.	International			U.S.	International
Change in Projected Benefit Obligation
Obligation at beginning of year	$	2,809.0	$	1,585.0	$	3,077.9	$	1,408.6
Service cost		42.6		36.0		51.8		31.5
Interest cost		130.7		67.2		117.1		57.3
Amendments		1.0		(.1)		2.6		(4.4)
Actuarial (gain) loss		135.4		130.3		(318.5)		113.5
Settlement (gain) loss		5.9		(1.9)		8.9		(2.8)
Special termination benefits		.2		.1		1.2		6.2
Participant contributions		-		2.4		-		2.3
Benefits paid		(123.1)		(50.1)		(131.4)		(45.2)
Currency translation/other		1.2		(33.2)		(.6)		18.0
Obligation at End of Year	$	3,002.9	$	1,735.7	$	2,809.0	$	1,585.0

Change in Plan Assets
Fair value at beginning of year	$	2,534.2	$	1,266.6	$	2,099.8	$	1,139.3
Actual return on plan assets		317.6		116.3		313.4		117.5
Company contributions		17.5		60.7		252.4		48.4
Participant contributions		-		2.4		-		2.3
Benefits paid		(123.1)		(50.1)		(131.4)		(45.2)
Settlements		-		(1.9)		-		(2.8)
Currency translation/other		-		(25.6)		-		7.1
Fair Value at End of Year	$	2,746.2	$	1,368.4	$	2,534.2	$	1,266.6
Funded Status at End of Year	$	(256.7)	$	(367.3)	$	(274.8)	$	(318.4)

Amounts Recognized
Noncurrent assets	$	22.7	$	.2	$	19.4	$	1.1
Accrued liabilities		(37.7)		-		(14.7)		-
Noncurrent liabilities		(241.7)		(367.5)		(279.5)		(319.5)
Net Amount Recognized	$	(256.7)	$	(367.3)	$	(274.8)	$	(318.4)

The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis
during 2014 and 2013 consist of the following:

	2014				2013
		U.S.	International			U.S.	International
Net actuarial (gain) loss arising during the period	$	11.5	$	92.9	$	(437.6)	$	67.2
Amortization of net actuarial loss		(83.1)		(36.8)		(127.5)		(27.9)
Prior service cost (credit) arising during the period		.9		(.1)		2.6		(4.4)
Amortization of prior service cost		(2.9)		(.2)		(2.9)		(.2)
Total	$	(73.6)	$	55.8	$	(565.4)	$	34.7

The net actuarial (gain) loss represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statement and are included in accumulated other comprehensive loss. Actuarial losses arising during 2014 are primarily attributable to lower discount rates, partially offset by higher than expected actual returns on plan assets. Actuarial gains and losses are not recognized immediately, but instead are accumulated as a part of the unrecognized net loss balance and amortized into net periodic pension cost over the average remaining service period of participating employees as certain thresholds are met.

The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of:

	2014				2013
		U.S.	International			U.S.	International
Net actuarial loss	$	798.2	$	597.9	$	869.8	$	541.8
Prior service cost		11.7		1.1		13.7		1.4
Net transition liability		-		.4		-		.4
Total	$	809.9	$	599.4	$	883.5	$	543.6

The amount of accumulated other comprehensive loss at 30 September 2014 that is expected to be recognized as a component of
net periodic pension cost during fiscal year 2015, excluding amounts that may be recognized through settlement losses, is as follows:

		U.S.	International
Net actuarial loss	$	79.7	$	43.2
Prior service cost		2.6		.2

The accumulated benefit obligation (ABO) is the actuarial present value of benefits attributed to employee service rendered to a particular date, based on current salaries. The ABO for all defined benefit pension plans was $4,360.0 and $3,990.7 at the end of 2014 and 2013, respectively.

The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:

	30 September 2014				30 September 2013
	U.S.		International		U.S.		International
Pension Plans with PBO in Excess of Plan Assets:
PBO	$	2,786.6	$	1,723.9	$	2,607.6	$	1,558.7
Fair value of plan assets		2,507.3		1,356.6		2,313.4		1,239.4
Pension Plans with ABO in Excess of Plan Assets:
ABO	$	131.4	$	1,553.9	$	139.3	$	1,401.3
Fair value of plan assets		-		1,318.4		-		1,205.8

Included in the tables above are several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans for 2014 were $136.7 and $147.7, respectively.

Pension Plan Assets

Our pension plan investment strategy is to invest in diversified portfolios to earn a long-term return consistent with acceptable risk in order to pay retirement benefits and meet regulatory funding requirements while minimizing company cash contributions over time. The plans invest primarily in passive and actively managed equity and debt securities. Equity investments are diversified geographically and by investment style and market capitalization. Company stock is only included in plan assets as a component of index funds. Fixed income investments include sovereign, corporate and asset-backed securities generally denominated in the currency of the plan.

Asset allocation targets are established based on the long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans’ liabilities, and acceptable levels of risk. Actual allocations vary from target due to market changes and are reviewed regularly. Assets are routinely rebalanced through contributions, benefit payments, and otherwise as deemed appropriate. The actual and target allocations at the measurement date are as follows:

	2014 Target Allocation		2014 Actual Allocation		2013 Actual Allocation
Asset Category	U.S.	International	U.S.	International	U.S.	International
Equity securities	60–80%	55–66%	70%	61%	71%	61%
Debt securities	20–30%	33–44%	25%	37%	23%	36%
Real estate/other	0–10%	0–2%	5%	1%	5%	1%
Cash	—	—	0%	1%	1%	2%
Total			100%	100%	100%	100%

The 8.3% expected return for U.S. plan assets is based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. The estimated long-term return for equity, debt securities, and real estate is 9.2%, 5.6%, and 7.3%, respectively. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as other economic and market factors.

The 6.5% expected rate of return for international plan assets is based on a weighted average return for plans outside the U.S., which vary significantly in size, asset structure and expected returns. The expected asset return for the U.K. plan, which represents over 75% of the assets of our International plans, is 7.0% and can be derived from expected equity and debt security returns of 7.6% and 4.6%, respectively.

The following table summarizes pension plan assets measured at fair value by asset class (see Note 14, Fair Value Measurements,
for definition of the levels):

			30 September 2014								30 September 2013
				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
U.S. Qualified Pension
	Plans
Cash and cash equivalents			$	9.9	$	9.9	$	-	$	-	$	10.1	$	10.1	$	-	$	-
Equity securities				724.5		724.5		-		-		764.3		764.3		-		-
Equity mutual funds				535.0		535.0		-		-		487.0		487.0		-		-
Equity pooled funds				651.6		-		651.6		-		561.4		-		561.4		-
Fixed income:
	Bonds (government and
		corporate)		636.8		-		636.8		-		12.5		-		12.5		-
	Mortgage and asset-
		backed securities		12.8		-		12.8		-		14.7		-		14.7		-
	Mutual funds			25.4		25.4		-		-		24.0		24.0		-		-
	Pooled funds			-		-		-		-		527.4		-		527.4		-
Real estate pooled funds				150.2		-		-		150.2		132.8		-		-		132.8
Total U.S. Qualified
	Pension Plans		$	2,746.2	$	1,294.8	$	1,301.1	$	150.2	$	2,534.2	$	1,285.4	$	1,116.0	$	132.8
International Pension
	Plans
Cash and cash equivalents			$	11.0	$	11.0	$	-	$	-	$	16.9	$	16.9	$	-	$	-
Equity pooled funds				837.2		-		837.2		-		776.0		-		776.0		-
Fixed income pooled funds				440.9		-		440.9		-		385.3		-		385.3		-
Other pooled funds				19.6		-		10.3		9.3		20.1		-		10.7		9.4
Insurance contracts				59.7		-		-		59.7		68.3		-		-		68.3
Total International
	Pension Plans		$	1,368.4	$	11.0	$	1,288.4	$	69.0	$	1,266.6	$	16.9	$	1,172.0	$	77.7

The following table summarizes changes in fair value of the pension plan assets classified as Level 3, by asset class:

		Real Estate		Other Pooled		Insurance
		Pooled Funds		Funds		Contracts		Total
30 September 2012		$	115.0	$	8.7	$	63.5	$	187.2
Actual return on plan assets:
	Assets held at end of year		17.8		1.6		5.6		25.0
	Assets sold during the period		-		.2		-		.2
Purchases, sales, and settlements, net			-		(1.1)		(.8)		(1.9)
30 September 2013		$	132.8	$	9.4	$	68.3	$	210.5
Actual return on plan assets:
	Assets held at end of year		17.4		(.9)		-		16.5
	Assets sold during the period		-		1.2		-		1.2
Purchases, sales, and settlements, net			-		(.4)		(8.6)		(9.0)
30 September 2014		$	150.2	$	9.3	$	59.7	$	219.2

The descriptions and fair value methodologies for the U.S. and International pension plan assets are as follows:

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity.

Equity Securities

Equity securities are valued at the closing market price reported on a U.S. exchange where the security is actively traded and are therefore classified as Level 1 assets.

Mutual Funds

Shares of mutual funds are valued at their published closing net asset value (NAV) and are classified as Level 1 assets.

Pooled Funds

Securities are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments, and are classified as Level 2 assets.

Corporate and Government Bonds

Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.

Mortgage and Asset-Backed Securities

Securities are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields, credit ratings, and purpose of the underlying loan.

Real Estate Pooled Funds

Funds are classified as Level 3 assets, as they are carried at the estimated fair value of the underlying properties. Estimated fair value is calculated utilizing a combination of key inputs, such as revenue and expense growth rates, terminal capitalization rates, and discount rates. These key inputs are consistent with practices prevailing within the real estate investment management industry.

Other Pooled Funds

Securities classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments. Securities and interests classified as Level 3 are carried at the estimated fair value of the underlying investments. The underlying investments are valued based on bids from brokers or other third-party vendor sources that utilize expected cash flow streams and other uncorroborated data, including counterparty credit quality, default risk, discount rates, and the overall capital market liquidity.

Insurance Contracts

Insurance contracts are classified as Level 3 assets, as they are carried at contract value, which approximates the estimated fair value. The estimated fair value is based on the fair value of the underlying investment of the insurance company.

Contributions and Projected Benefit Payments

Pension contributions for fiscal year 2014 were $78.2. These contributions resulted from an assessment of long-term funding requirements of the plans and tax planning. We anticipate contributing $130 to $150 to the defined benefit pension plans in 2015. The increase from prior year is driven primarily by benefit payments for unfunded plans, which are dependent upon timing of retirements and actions to reorganize the business.

Projected benefit payments, which reflect expected future service, are as follows:

	U.S.		International
2015	$	122.5	$	51.8
2016		129.0		54.6
2017		138.6		55.4
2018		145.4		16.5
2019		154.0		16.3
2020–2024		899.2		111.6

These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

Defined Contribution Plans

We maintain a nonleveraged employee stock ownership plan (ESOP) which forms part of the Air Products and Chemicals, Inc. Retirement Savings Plan (RSP). The ESOP was established in May of 2002. The balance of the RSP is a qualified defined contribution plan including a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate.

We treat dividends paid on ESOP shares as ordinary dividends. Under existing tax law, we may deduct dividends which are paid with respect to shares held by the plan. Shares of the Company’s common stock in the ESOP totaled 3,617,114 as of 30 September 2014.

We match a portion of the participants’ contributions to the RSP and other various worldwide defined contribution plans. Our contributions to the RSP include a Company core contribution for certain eligible employees who do not receive their primary retirement benefit from the defined benefit pension plans, with the core contribution based on a percentage of pay that is dependent on years of service. For the RSP, we also make matching contributions on overall employee contributions as a percentage of the employee contribution and include an enhanced contribution for certain eligible employees that do not participate in the defined benefit pension plans. Worldwide contributions expensed to income in 2014, 2013, and 2012 were $45.2, $40.6, and $33.9, respectively.