12. Pension plans and other postretirement benefits

The Company provides pension (defined benefit and defined contribution plans) and other postretirement benefits (including defined benefit health care and life insurance plans) to qualified retired employees. The Company uses a December 31 measurement date for all of its plans.

Net periodic pension expense for defined benefit plans consisted of the following:


	Year Ended December 31
	2012			2011			2010
	(In thousands)
Service cost	$	29,549		$	28,828		$	19,670
Interest cost on benefit obligation		62,037			58,545			47,905
Expected return on plan assets		(70,511	)		(60,700	)		(50,844	)
Amortization of prior service cost		(6,559	)		(6,559	)		(6,559	)
Recognized net actuarial loss		37,386			20,530			13,551

Net periodic pension expense	$	51,902		$	40,644		$	23,723

Net other postretirement benefits expense for defined benefit plans consisted of the following:


	Year Ended December 31
	2012		2011		2010
	(In thousands)
Service cost	$	668	$	535	$	383
Interest cost on benefit obligation		3,737		3,761		3,130
Amortization of prior service cost		21		107		176
Recognized net actuarial loss (gain)		530		36		(9	)

Net other postretirement benefits expense	$	4,956	$	4,439	$	3,680

Data relating to the funding position of the defined benefit plans were as follows:


	Pension Benefits						Other Postretirement Benefits
	2012			2011			2012			2011
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,496,490		$	947,993		$	90,104		$	61,675
Service cost		29,549			28,828			668			535
Interest cost		62,037			58,545			3,737			3,761
Plan participants’ contributions		—			—			3,765			3,383
Amendments		—			—			(13,313	)		—
Actuarial (gain) loss		116,237			194,622			(182	)		10,303
Settlements/curtailments		(320	)		—			—			—
Business combinations		—			315,210			—			20,689
Medicare Part D reimbursement		—			—			918			715
Benefits paid		(59,426	)		(48,708	)		(10,731	)		(10,957	)

Benefit obligation at end of year		1,644,567			1,496,490			74,966			90,104

Change in plan assets:
Fair value of plan assets at beginning of year		1,117,972			838,465			—			—
Actual return on plan assets		143,430			(6,635	)		—			—
Employer contributions		207,115			75,600			6,048			6,859
Business combinations		—			259,250			—			—
Plan participants’ contributions		—			—			3,765			3,383
Medicare Part D reimbursement		—			—			918			715
Settlements		(320	)		—			—			—
Benefits and other payments		(59,426	)		(48,708	)		(10,731	)		(10,957	)

Fair value of plan assets at end of year		1,408,771			1,117,972			—			—

Funded status	$	(235,796	)	$	(378,518	)	$	(74,966	)	$	(90,104	)

Assets and liabilities recognized in the consolidated balance sheet were:
Net prepaid asset	$	—		$	2,878		$	—		$	—
Accrued liabilities		(235,796	)		(381,396	)		(74,966	)		(90,104	)

Amounts recognized in accumulated other comprehensive income (“AOCI”) were:
Net loss	$	480,084		$	474,153		$	12,134		$	12,845
Net prior service cost		(23,455	)		(30,014	)		(13,173	)		161

Pre-tax adjustment to AOCI		456,629			444,139			(1,039	)		13,006
Taxes.		(179,227	)		(174,324	)		408			(5,105	)

Net adjustment to AOCI.	$	277,402		$	269,815		$	(631	)	$	7,901

The Company has an unfunded supplemental pension plan for certain key executives. The projected benefit obligation and accumulated benefit obligation included in the preceding data related to such plan were $130,745,000 as of December 31, 2012 and $124,877,000 and $123,085,000, respectively, as of December 31, 2011.

The accumulated benefit obligation for all defined benefit pension plans was $1,618,119,000 and $1,472,140,000 at December 31, 2012 and 2011, respectively. As of December 31, 2012, the accumulated benefit obligation for all defined benefit pension plans exceeded plan assets. As of December 31, 2011, the accumulated benefit obligation for those defined benefit pension plans in which such obligation exceeded plan assets totaled $1,422,958,000 (including $123,085,000 related to the unfunded supplemental pension plan).

GAAP requires an employer to recognize in its balance sheet as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of other comprehensive income. As indicated in the preceding table, as of December 31, 2012 the Company recorded a minimum liability adjustment of $455,590,000 ($456,629,000 related to pension plans and $(1,039,000) related to other postretirement benefits) with a corresponding reduction of shareholders’ equity, net of applicable deferred taxes, of $276,771,000. In aggregate, the benefit plans realized a net gain during 2012 that resulted from actual experience differing from the plan assumptions utilized, from changes in actuarial assumptions and from plan amendments. The main factors contributing to that gain were actual investment returns from assets in the qualified defined benefit pension plan that exceeded expected returns plus an amendment to the postretirement medical plan to conform the benefits of former employees of Wilmington Trust with those of other employees of the Company. However, those gains were almost entirely offset by the impact of a reduction in the discount rate used to measure the benefit obligations at December 31, 2012 to 3.75% from the 4.25% rate used at December 31, 2011. As a result, the Company decreased its minimum liability adjustment from that which was recorded at December 31, 2011 by $1,555,000 with a corresponding increase to shareholders’ equity that, net of applicable deferred taxes, was $945,000. The table below reflects the changes in plan assets and benefit obligations recognized in other comprehensive income related to the Company’s postretirement benefit plans.


	Pension Plans			Other Postretirement Benefit Plans			Total
	(In thousands)
2012
Net loss (gain)	$	43,318		$	(182	)	$	43,136
Prior service cost (credit)		—			(13,313	)		(13,313	)
Amortization of prior service (cost) credit		6,559			(21	)		6,538
Amortization of loss		(37,386	)		(530	)		(37,916	)

Total recognized in other comprehensive income, pre-tax	$	12,491		$	(14,046	)	$	(1,555	)

2011
Net loss	$	261,957		$	10,303		$	272,260
Amortization of prior service (cost) credit		6,559			(107	)		6,452
Amortization of loss		(20,530	)		(36	)		(20,566	)

Total recognized in other comprehensive income, pre-tax	$	247,986		$	10,160		$	258,146

The following table reflects the amortization of amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit expense during 2013:


	Pension Plans			Other Postretirement Benefit Plans
	(In thousands)
Amortization of net prior service cost (credit)	$	(6,559	)	$	(1,356	)
Amortization of net loss		41,593			347

The Company also provides a qualified defined contribution pension plan to eligible employees who were not participants in the defined benefit pension plan as of December 31, 2005 and to other employees who have elected to participate in the defined contribution plan. The Company makes contributions to the defined contribution plan each year in an amount that is based on an individual participant’s total compensation (generally defined as total wages, incentive compensation, commissions and bonuses) and years of service. Participants do not contribute to the defined contribution pension plan. Pension expense recorded in 2012, 2011 and 2010 associated with the defined contribution pension plan was approximately $17 million, $13 million and $14 million, respectively.

Assumptions

The assumed weighted-average rates used to determine benefit obligations at December 31 were:


	Pension Benefits						Other Postretirement Benefits
	2012			2011			2012			2011
Discount rate		3.75	%		4.25	%		3.75	%		4.25	%
Rate of increase in future compensation levels		4.50	%		4.50	%		—			—

The assumed weighted-average rates used to determine net benefit expense for the years ended December 31 were:


	Pension Benefits									Other Postretirement Benefits
	2012			2011			2010			2012			2011			2010
Discount rate		4.25	%		5.25	%		5.75	%		4.25	%		5.25	%		5.75	%
Long-term rate of return on plan assets		6.50	%		6.50	%		6.50	%		—			—			—
Rate of increase in future compensation levels		4.50	%		4.50	%		4.50	%		—			—			—

On May 16, 2011 pension and other postretirement benefit obligations were assumed as a result of the acquisition of Wilmington Trust. Initial liabilities and net costs were determined using a 5.25% discount rate, a 4.0% increase in compensation and a 6.50% expected return on assets.

The expected long-term rate of return assumption as of each measurement date was developed through analysis of historical market returns, current market conditions, anticipated future asset allocations, the funds’ past experience, and expectations on potential future market returns. The expected rate of return assumption represents a long-term average view of the performance of the plan assets, a return that may or may not be achieved during any one calendar year.

For measurement of other postretirement benefits, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2013. The rate was assumed to decrease to 5% over 30 years. A one-percentage point change in assumed health care cost trend rates would have had the following effects:


	+1%		-1%
	(In thousands)
Increase (decrease) in:
Service and interest cost	$	141	$	(126	)
Accumulated postretirement benefit obligation		3,099		(2,790	)

Plan Assets

The Company’s policy is to invest the pension plan assets in a prudent manner for the purpose of providing benefit payments to participants and mitigating reasonable expenses of administration. The Company’s investment strategy is designed to provide a total return that, over the long-term, places a strong emphasis on the preservation of capital. The strategy attempts to maximize investment returns on assets at a level of risk deemed appropriate by the Company while complying with applicable regulations and laws. The investment strategy utilizes asset allocation as a principal determinant for establishing an appropriate risk profile. The target allocations for plan assets are generally 55 to 70 percent equity securities, 25 to 40 percent debt securities, and 3 to 10 percent money-market funds or other short-term investments, although holdings could be more or less than these general guidelines based on market conditions at the time and actions taken or recommended by the investment managers providing advice to the Company. Equity securities include investments in large-cap and mid-cap companies located in the United States and equity mutual funds with domestic and international investments, and, to a lesser extent, direct investments in foreign-based companies. Debt securities include corporate bonds of companies from diversified industries, mortgage-backed securities guaranteed by government agencies, U.S. Treasury securities, and mutual funds that invest in debt securities. Additionally, primarily as a result of the Wilmington Trust acquisition, the Company’s defined benefit pension plan held $61,874,000 (4% of total assets) of real estate, private equity and other investments at December 31, 2012. Returns on invested assets are periodically compared with target market indices for each asset type to aid management in evaluating such returns. Furthermore, management regularly reviews the investment policy and may, if deemed appropriate, make changes to the target allocations noted above.

The fair values of the Company’s pension plan assets at December 31, 2012, by asset category, were as follows:


	Fair Value Measurement of Plan Assets At December 31, 2012
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Asset category:
Money-market funds	$	46,657	$	46,657	$	—	$	—
Equity securities:
M&T		120,914		120,914		—		—
Domestic(a)		147,382		147,382		—		—
International		8,561		8,561		—		—
Mutual funds:
Domestic		188,950		188,950		—		—
International		208,696		208,696		—		—

		674,503		674,503		—		—

Debt securities:
Corporate(b)		307,712		—		307,712		—
Government		141,224		—		141,224		—
International		10,230		—		10,230		—
Mutual funds:
Domestic(c)		107,576		107,576		—		—
International		54,362		54,362		—		—

		621,104		161,938		459,166		—

Other:
Diversified mutual fund		10,415		10,415		—		—
Private real estate		4,603		—		—		4,603
Private equity		5,347		—		—		5,347
Hedge funds		41,509		10,000		—		31,509

		61,874		20,415		—		41,459

Total(d)	$	1,404,138	$	903,513	$	459,166	$	41,459

The fair values of the Company’s pension plan assets at December 31, 2011, by asset category, were as follows:


	Fair Value Measurement of Plan Assets At December 31, 2011
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Asset category:
Money-market funds	$	63,842	$	63,842	$	—	$	—
Equity securities:
M&T		93,740		93,740		—		—
Domestic(a)		151,235		151,235		—		—
International		8,264		8,264		—		—
Mutual funds:
Domestic		125,223		125,223		—		—
International		127,071		127,071		—		—

		505,533		505,533		—		—

Debt securities:
Corporate(b)		275,079		—		275,079		—
Government		88,261		—		88,261		—
International		7,586		—		7,586		—
Mutual funds:
Domestic(c)		72,680		72,680		—		—
International		23,234		23,234		—		—

		466,840		95,914		370,926		—

Other:
Diversified mutual fund		17,557		17,557		—		—
Private real estate		4,677		—		—		4,677
Private equity		10,190		—		—		10,190
Hedge funds		44,927		—		—		44,927

		77,351		17,557		—		59,794

Total(d)	$	1,113,566	$	682,846	$	370,926	$	59,794

(a)

This category is comprised of equities of companies primarily within the mid-cap and large-cap sector of the U.S. economy and range across diverse industries.

(b)

This category represents investment grade bonds of U.S. issuers from diverse industries.

(c)

Approximately 40% of the mutual funds were invested in investment grade bonds of U.S. issuers and 60% in high-yielding bonds at December 31, 2012. Approximately 50% of the mutual funds were invested in investment grade bonds of U.S. issuers and 50% in high-yielding bonds at December 31, 2011. The holdings within the funds are spread across diverse industries.

(d)

Excludes dividends and interest receivable totaling $4,633,000 and $4,406,000 at December 31, 2012 and 2011, respectively.

Pension plan assets included common stock of M&T with a fair value of $120,914,000 (8.6% of total plan assets) at December 31, 2012 and $93,740,000 (8.4% of total plan assets) at December 31, 2011. No investment in securities of a non-U.S. Government or government agency issuer exceeded ten percent of plan assets at December 31, 2012.

The changes in Level 3 pension plan assets measured at estimated fair value on a recurring basis during the year ended December 31, 2012 were as follows:


	Balance – January 1, 2012		Sales			Total Realized/ Unrealized Gains (Losses)			Balance – December 31, 2012
	(In thousands)
Other
Private real estate	$	4,677	$	—		$	(74	)	$	4,603
Private equity		10,190		(4,892	)		49			5,347
Hedge funds		44,927		(15,000	)		1,582			31,509

Total	$	59,794	$	(19,892	)	$	1,557		$	41,459

The Company makes contributions to its funded qualified defined benefit pension plan as required by government regulation or as deemed appropriate by management after considering factors such as the fair value of plan assets, expected returns on such assets, and the present value of benefit obligations of the plan. Subject to the impact of actual events and circumstances that may occur in 2013, the Company may make contributions to the qualified defined benefit pension plan in 2013, but the amount of any such contribution has not yet been determined. The Company made cash contributions of $200 million and $70 million to the qualified defined benefit pension plan in 2012 and 2011, respectively. The Company did not make any contributions to the plan in 2010. The Company regularly funds the payment of benefit obligations for the supplemental defined benefit pension and postretirement benefit plans because such plans do not hold assets for investment. Payments made by the Company for supplemental pension benefits were $7,115,000 and $5,600,000 in 2012 and 2011, respectively. Payments made by the Company for postretirement benefits were $6,048,000 and $6,859,000 in 2012 and 2011, respectively. Payments for supplemental pension and other postretirement benefits for 2013 are not expected to differ from those made in 2012 by an amount that will be material to the Company’s consolidated financial position.

Estimated benefits expected to be paid in future years related to the Company’s defined benefit pension and other postretirement benefits plans are as follows:


	Pension Benefits		Other Postretirement Benefits
	(In thousands)
Year ending December 31:
2013	$	62,531	$	7,473
2014		66,096		7,151
2015		68,838		6,883
2016		75,769		6,652
2017		78,564		6,332
2018 through 2022		450,434		27,647

The Company has a retirement savings plan (“RSP”) that is a defined contribution plan in which eligible employees of the Company may defer up to 50% of qualified compensation via contributions to the plan. The Company makes an employer matching contribution in an amount equal to 75% of an employee’s contribution, up to 4.5% of the employee’s qualified compensation. Employees’ accounts, including employee contributions, employer matching contributions and accumulated earnings thereon, are at all times fully vested and nonforfeitable. Employee benefits expense resulting from the Company’s contributions to the RSP totaled $31,305,000, $27,738,000 and $24,683,000 in 2012, 2011 and 2010, respectively.