NOTE 13. EMPLOYEE BENEFITS

We have pension and/or other retirement benefit plans covering approximately one-third of active employees. In 2007 the Company amended its U.S. qualified and non-qualified pension plans under which accrual of future benefits was suspended for all participants that did not meet the rule of 70 (age plus years of service equal to at least 70 at December 31, 2007). Pension benefits are generally based on years of service and on compensation during the final years of employment. Plan assets consist primarily of equity securities and corporate and government fixed income securities. Substantially all pension benefit costs are funded as accrued; such funding is limited, where applicable, to amounts deductible for income tax purposes. Certain other retirement benefits are provided by general corporate assets.

We sponsor a qualified defined contribution plan covering substantially all U.S. employees. Under this plan, we match 100% of participants’ contributions up to 4% of compensation and 75% of participants’ contributions from over 4% to 8%. Employees that are still eligible to accrue benefits under the defined benefit plan are limited to a 50% match up to 6% of the participants’ compensation.

In addition to pension benefits, certain health care and life insurance benefits are provided to qualifying United States employees upon retirement from IFF. Such coverage is provided through insurance plans with premiums based on benefits paid. We do not generally provide health care or life insurance coverage for retired employees of foreign subsidiaries; such benefits are provided in most foreign countries by government-sponsored plans, and the cost of these programs is not significant to us.

We offer a non-qualified Deferred Compensation Plan (DCP) for certain key employees and non-employee directors. Eligible employees and non-employee directors may elect to defer receipt of salary, incentive payments and Board of Directors’ fees into participant directed investments, which are generally invested by the Company in individual variable life insurance contracts we own that are designed to informally fund savings plans of this nature. The cash surrender value of life insurance is based on the net asset values of the underlying funds available to plan participants. At December 31, 2012 and December 31, 2011, the Consolidated Balance Sheet reflects liabilities of $27.0 million, for both years, related to the DCP in Other liabilities and $12.3 million and $12.0 million, respectively, included in Capital in excess of par value related to the portion of the DCP that will be paid out in IFF shares.

The total cash surrender value of life insurance contracts the Company owns in relation to the DCP and post-retirement life insurance benefits amounted to $51.3 million and $56.2 million at December 31, 2012 and 2011, respectively, and are recorded in Other assets in the Consolidated Balance Sheet.

The plan assets and benefit obligations of our defined benefit pension plans are measured at December 31 of each year.


	U.S. Plans									Non-U.S. Plans
(DOLLARS IN THOUSANDS)	2012			2011			2010			2012			2011			2010
Components of net periodic benefit cost
Service cost for benefits earned	$	3,121		$	3,602		$	3,781		$	12,585		$	10,560		$	9,804
Interest cost on projected benefit obligation		24,314			24,373			24,191			30,944			34,033			32,954
Expected return on plan assets		(24,329	)		(25,070	)		(24,146	)		(43,728	)		(45,386	)		(41,569	)
Net amortization and deferrals		20,180			11,888			7,441			6,443			5,360			5,214
Settlement and curtailment		—			444			—			873			3,139			182
Special termination benefits		—			—			—			—			738			178

Net periodic benefit cost		23,286			15,237			11,267			7,117			8,444			6,763
Defined contribution and other retirement plans		7,039			6,550			7,169			4,837			4,113			4,459

Total expense	$	30,325		$	21,787		$	18,436		$	11,954		$	12,557		$	11,222

Changes in plan assets and benefit obligations recognized in OCI
Net actuarial loss	$	32,569		$	77,924					$	53,469		$	32,218
Recognized actuarial loss		(19,810	)		(11,441	)					(7,181	)		(8,352	)
Prior service cost		(370	)		(891	)					—			(191	)
Recognized prior service cost		—			—						(135	)		(147	)
Currency translation adjustment		—			—						6,068			355

Total recognized in OCI (before tax effects)	$	12,389		$	65,592					$	52,221		$	23,883

During the second quarter 2011, we settled a portion of the Ireland pension plan as discussed in Note 2. As a result, we recorded a settlement charge and a special termination benefit charge of $3.9 million to recognize a portion of the unrecognized loss related to those employees who have accepted the settlement and for additional benefits credited to those participants accepting a settlement. This settlement was funded primarily through pension plan investment trust assets.

In connection with negotiations completed during the second quarter 2011, we have amended the pension plan for one of our North American Ingredients plants. We recorded a curtailment charge of $0.4 million during the second quarter 2011 to recognize a portion of the unrecognized prior service costs associated with the years of service no longer expected to be rendered and credited as service under the plan.


	Postretirement Benefits
(DOLLARS IN THOUSANDS)	2012			2011			2010
Components of net periodic benefit cost
Service cost for benefits earned	$	1,357		$	1,178		$	1,378
Interest cost on projected benefit obligation		5,656			5,861			6,468
Net amortization and deferrals		(1,770	)		(2,552	)		(2,232	)

Expense	$	5,243		$	4,487		$	5,614


Changes in plan assets and benefit obligations recognized in OCI
Net actuarial loss (gain)	$	(10,921	)	$	16,909
Recognized actuarial loss		(2,951	)		(2,167	)
Recognized prior service credit		4,721			4,719

Total recognized in OCI (before tax effects)	$	(9,151	)	$	19,461

The amounts expected to be recognized in net periodic cost in 2013 are:


(DOLLARS IN THOUSANDS)	U.S. Plans		Non-U.S. Plans		Postretirement Benefits
Actuarial loss recognition	$	23,171	$	9,765	$	2,060
Prior service cost recognition		308		15		(4,712	)


Weighted-average actuarial assumption used to determine expense	U.S. Plans						Non-U.S. Plans
	2012		2011		2010		2012		2011		2010
Discount rate		4.70%		5.60%		6.10%		4.71%		5.37%		5.66%
Expected return on plan assets		7.30%		7.75%		7.75%		6.27%		6.55%		6.63%
Rate of compensation increase		3.25%		3.25%		3.25%		2.88%		2.66%		3.00%

Changes in the postretirement benefit obligation and plan assets, as applicable, are detailed in the following table:


	U.S. Plans						Non-U.S. Plans						Postretirement Benefits
(DOLLARS IN THOUSANDS)	2012			2011			2012			2011			2012			2011
Benefit obligation at beginning of year	$	523,298		$	440,646		$	670,231		$	625,052		$	128,719		$	108,710
Service cost for benefits earned		3,121			3,602			12,585			10,560			1,357			1,178
Interest cost on projected benefit obligation		24,314			24,373			30,944			34,033			5,656			5,861
Actuarial loss (gain)		47,547			78,026			76,786			43,067			(10,921	)		16,909
Plan amendments		—			—			—			(191	)		—			—
Adjustments for expense/tax contained in service cost		—			—			(2,282	)		(2,382	)		—			—
Plan participants’ contributions		—			—			2,492			2,523			979			1,015
Benefits paid		(24,574	)		(23,349	)		(27,234	)		(28,923	)		(6,482	)		(4,954	)
Curtailments / settlements		—			—			(2,641	)		(11,290	)		—			—
Special termination benefits		—			—			—			738			—			—
Translation adjustments		—			—			19,283			(2,956	)		—			—

Benefit obligation at end of year	$	573,706		$	523,298		$	780,164		$	670,231		$	119,308		$	128,719

Fair value of plan assets at beginning of year	$	372,142		$	347,084		$	702,366		$	671,559
Actual return on plan assets		39,306			25,172			64,765			53,853
Employer contributions		18,415			23,235			16,767			18,817
Participants’ contributions		—			—			2,492			2,523
Benefits paid		(24,574	)		(23,349	)		(27,234	)		(28,923	)
Settlements		—			—			(2,641	)		(11,290	)
Translation adjustments		—			—			19,673			(4,173	)

Fair value of plan assets at end of year	$	405,289		$	372,142		$	776,188		$	702,366

Funded status at end of year	$	(168,417	)	$	(151,156	)	$	(3,976	)	$	32,135


	U.S. Plans						Non-U.S. Plans
(DOLLARS IN THOUSANDS)	2012			2011			2012			2011
Amounts recognized in the balance sheet:
Other assets	$	—		$	—		$	33,345		$	67,518
Other current liabilities		(3,855	)		(3,615	)		(621	)		(631	)
Retirement liabilities		(164,562	)		(147,541	)		(36,700	)		(34,752	)

Net amount recognized	$	(168,417	)	$	(151,156	)	$	(3,976	)	$	32,135


	U.S. Plans				Non-U.S. Plans						Postretirement Benefits
(DOLLARS IN THOUSANDS)	2012		2011		2012			2011			2012			2011
Amounts recognized in AOCI consist of:
Net actuarial loss	$	209,156	$	196,398	$	231,857		$	179,512		$	31,087		$	44,959
Prior service cost (credit)		786		1,156		(431	)		(307	)		(19,719	)		(24,440	)

Total AOCI (before tax effects)	$	209,942	$	197,554	$	231,426		$	179,205		$	11,368		$	20,519


	U.S. Plans						Non-U.S. Plans
(DOLLARS IN THOUSANDS)	2012			2011			2012			2011
Accumulated Benefit Obligation — end of year	$	570,655		$	516,747		$	745,828		$	644,548

Information for Pension Plans with an ABO in excess of Plan Assets:
Projected benefit obligation	$	573,706		$	523,298		$	43,403		$	39,664
Accumulated benefit obligation		570,655			516,747			41,720			38,470
Fair value of plan assets		405,289			372,142			16,776			16,520

Weighted-average assumptions used to determine obligations at December 31
Discount rate		4.10	%		4.70	%		4.14	%		4.71	%
Rate of compensation increase		3.25	%		3.25	%		2.73	%		2.88	%


(DOLLARS IN THOUSANDS)	U.S. Plans		Non-U.S. Plans		Postretirement Benefits
Estimated Future Benefit Payments
2013		27,565		28,597		5,050
2014		28,916		28,488		5,493
2015		30,338		29,627		5,888
2016		31,466		30,172		6,294
2017		32,702		31,708		6,725
2018-2022		179,188		174,217		38,443

Contributions
Required Company Contributions in the Following Year (2013)	$	3,933	$	18,142	$	5,050

We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities, fixed income, real estate and alternative asset classes. The asset allocation is monitored on an ongoing basis.

We consider a variety of factors in determining and selecting our assumptions for the discount rate at December 31. For the U.S. plans, the discount rate was based on the internal rate of return for a portfolio of Moody’s Aaa, Aa and Merrill Lynch AAA-AA high quality bonds with maturities that are consistent with the projected future benefit payment obligations of the plan. The rate of compensation increase for all plans and the medical cost trend rate for the applicable U.S. plans are based on plan experience.


	U.S. Plans						Non-U.S. Plans
	2012			2011			2012			2011
Percentage of assets invested in:
Cash and cash equivalents		1	%		2	%		2	%		1	%
Equities		50	%		50	%		22	%		22	%
Fixed income		49	%		48	%		59	%		59	%
Property		0	%		0	%		9	%		10	%
Alternative and other investments		0	%		0	%		8	%		8	%

With respect to the U.S. plans, the expected return on plan assets was determined based on an asset allocation model using the current target allocation, real rates of return by asset class and an anticipated inflation rate. In late 2011 the Company changed its target investment allocation to 50% equity securities and 50% fixed income securities from 60% – 65% in equity securities and 35% – 40% in fixed income securities in order to reduce funded status volatility.

The expected annual rate of return for the non-U.S. plans employs a similar set of criteria adapted for local investments, inflation rates and in certain cases specific government requirements. The target asset allocation, for the non-U.S. plans, consists of approximately: 55% – 60% in fixed income securities; 20% – 25% in equity securities; 5% – 10% in real estate; and 5% – 10% in alternative investments.

The following tables present our plan assets for the U.S. and non-U.S. plans using the fair value hierarchy as of December 31, 2012 and 2011. Our plans’ assets were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and their placement within the fair value hierarchy levels. For more information on a description of the fair value hierarchy, see Note 14.


	U.S. Plans for the year ended December 31, 2012
(DOLLARS IN THOUSANDS)	Level 1		Level 2		Level 3		Total
*Cash Equivalents*	$	—	$	1,976	$	—	$	1,976
*Equity Securities*
U.S. Common Stock		43,338		—		—		43,338
Non-U.S. Common Stock		700		—		—		700
Balanced Funds		—		8,077		—		8,077
Pooled Funds		—		150,372		—		150,372
*Fixed Income Securities*
Government & Government Agency Bonds		—		6,662		—		6,662
Mutual Funds		—		123,447		—		123,447
Corporate Bonds		—		61,382		—		61,382
Municipal Bonds		—		8,696		—		8,696
Asset Backed Securities		—		—		—		—

Total	$	44,038	$	360,612	$	—	$	404,650

Receivables							$	639

Total							$	405,289


	U.S. Plans for the year ended December 31, 2011
(DOLLARS IN THOUSANDS)	Level 1		Level 2		Level 3		Total
*Cash Equivalents*	$	—	$	6,125	$	—	$	6,125
*Equity Securities*
U.S. Common Stock		40,045		—		—		40,045
Balanced Funds		—		7,631		—		7,631
Pooled Funds		—		136,634		—		136,634
*Fixed Income Securities*
Government & Government Agency Bonds		—		76,095		—		76,095
Corporate Bonds		—		93,062		—		93,062
Municipal Bonds		—		8,283		—		8,283
Asset Backed Securities		—		1,982		—		1,982

Total	$	40,045	$	329,812	$	—	$	369,857

Receivables							$	2,285

Total							$	372,142


	Non-U.S. Plans for the year ended December 31, 2012
(DOLLARS IN THOUSANDS)	Level 1		Level 2		Level 3		Total
*Cash*	$	14,075	$	—	$	—	$	14,075
*Equity Securities*
U.S. Large Cap		28,009		—		—		28,009
Non-U.S. Large Cap		116,473		—		—		116,473
Non-U.S. Mid Cap		132		—		—		132
Non-U.S. Small Cap		35		—		—		35
Emerging Markets		25,876		—		—		25,876
*Fixed Income Securities*
U.S. Treasuries/Government Bonds		52		—		—		52
U.S. Corporate Bonds		—		—		—		—
Non-U.S. Treasuries/Government Bonds		131,764		68,453		—		200,217
Non-U.S. Corporate Bonds		64,583		182,068		—		246,651
Non-U.S. Mortgage-Backed Securities		—		—		—		—
Non-U.S. Asset-Backed Securities		—		—		—		—
Non-U.S. Other Fixed Income		1,460		9,944		—		11,404
*Alternative Types of Investments*
Insurance Contracts		945		—		—		945
Hedge Funds		—		—		14,436		14,436
Private Equity		—		—		7		7
Absolute Return Funds		—		51,156		—		51,156
*Real Estate*
Non-U.S. Real Estate		—		65,468		1,252		66,720

Total	$	383,404	$	377,089	$	15,695	$	776,188


	Non-U.S. Plans for the year ended December 31, 2011
(DOLLARS IN THOUSANDS)	Level 1		Level 2		Level 3		Total
*Cash*	$	8,479	$	—	$	—	$	8,479
*Equity Securities*
U.S. Large Cap		26,683		—		—		26,683
Non-U.S. Large Cap		107,964		—		—		107,964
Non-U.S. Mid Cap		3,116		—		—		3,116
Non-U.S. Small Cap		455		—		—		455
Emerging Markets		14,265		—		—		14,265
*Fixed Income Securities*
U.S. Treasuries/Government Bonds		74		—		—		74
U.S. Corporate Bonds		5		—		—		5
Non-U.S. Treasuries/Government Bonds		199,266		35,308		—		234,574
Non-U.S. Corporate Bonds		52,174		109,013		—		161,187
Non-U.S. Mortgage-Backed Securities		—		—		—		—
Non-U.S. Asset-Backed Securities		—		11,734		—		11,734
Non-U.S. Other Fixed Income		—		8,664		—		8,664
*Alternative Types of Investments*
Insurance Contracts		—		320		—		320
Hedge Funds		—		—		54,036		54,036
Private Equity		—		—		1		1
*Real Estate*
Non-U.S. Real Estate		—		69,284		1,525		70,809

Total	$	412,481	$	234,323	$	55,562	$	702,366

Cash and cash equivalents are primarily held in registered money market funds which are valued using a market approach based on the quoted market prices of identical instruments. Other cash and cash equivalents are valued daily by the fund using a market approach with inputs that include quoted market prices for similar instruments.

Equity securities are primarily valued using a market approach based on the quoted market prices of identical instruments. Pooled funds are typically common or collective trusts valued at their net asset values (NAVs).

Fixed income securities are primarily valued using a market approach with inputs that include broker quotes and benchmark yields.

Derivative instruments are valued by the custodian using closing market swap curves and market derived inputs.

Real estate values are primarily based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market comparable data.

Hedge funds are valued based on valuation of the underlying securities and instruments within the funds. Quoted market prices are used when available and NAVs are used for unquoted securities within the funds.

Absolute return funds are actively managed funds mainly invested in debt and equity securities and are valued at their NAVs.

The following table presents a reconciliation of Level 3 non-U.S. plan assets held during the year ended December 31, 2012:


	Non-U.S. Plans
(DOLLARS IN THOUSANDS)	Real Estate			Private Equity		Hedge Funds			Total
Ending balance as of December 31, 2011	$	1,525		$	1	$	54,036		$	55,562
Actual return on plan assets		(273	)		—		446			173
Purchases, sales and settlements		—			6		(40,046	)		(40,040	)

Ending balance as of December 31, 2012	$	1,252		$	7	$	14,436		$	15,695

The following weighted average assumptions were used to determine our postretirement benefit expense and obligation for the years ended December 31:


	Expense						Liability
	2012			2011			2012			2011
Discount rate		4.60	%		5.50	%		4.00	%		4.60	%
Current medical cost trend rate		7.00	%		8.00	%		6.75	%		7.00	%
Ultimate medical cost trend rate		4.75	%		4.75	%		4.75	%		4.75	%
Medical cost trend rate decreases to ultimate rate in year		2021			2016			2021			2021


	Sensitivity of Disclosures to Changes in Selected Assumptions
	25 BP Decrease in Discount Rate				25 BP Decrease in Discount Rate		25 BP Decrease in Long-Term Rate of Return
(DOLLARS IN THOUSANDS)	Change in PBO		Change in ABO		Change in pension expense		Change in pension expense
U.S. Pension Plans	$	17,816	$	17,687	$	1,181	$	843
Non-U.S. Pension Plans	$	33,889	$	31,185	$	2,733	$	1,929
Postretirement Benefit Plan		N/A	$	3,677	$	236		N/A

The effect of a 1% increase in the medical cost trend rate would increase the accumulated postretirement benefit obligation and the annual postretirement expense by approximately $7.3 million and $0.4 million, respectively; a 1% decrease in the rate would decrease the obligation and expense by approximately $6.9 million and $0.4 million, respectively.

We contributed $18.4 million and $16.8 million to our qualified U.S. pension plans and non-U.S. pension plans in 2012. We made $3.4 million in benefit payments with respect to our non-qualified U.S. pension plan. In addition, $6.5 million of contributions were made with respect to our other postretirement plans.