EMPLOYEE BENEFIT PLANS

Defined Benefit Plans and Postretirement Plans:

Defined Benefit Plans. The Company sponsors three defined benefit pension plans (two qualified and one non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994. Future accruals of benefits under these three defined benefit plans were frozen between 1993 and 1995. These benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of service. Contributions are made to the two qualified pension plans in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The plans’ assets and benefit obligations were measured at December 31, 2011 and 2010, respectively.

The Company also sponsors a Supplemental Retirement Plan (“SERP”) where the Company will pay supplemental retirement benefits to certain key employees, including executive officers of the Company. In January 2006, the Company amended and restated its SERP (the “Amended SERP”), effective January 1, 2005. The amendments to the plan were intended, among other things, to cause the plan to meet the applicable requirements of Section 409A of the Internal Revenue Code. The Amended SERP is intended to be unfunded for tax purposes, and payments under the Amended SERP will be made out of the general assets of the Company. Under the Amended SERP, the benefit payable to a participant at his normal retirement date is a lump sum amount which is the actuarial equivalent of a predetermined annual retirement benefit set by the Company’s board of directors. Normal retirement date is defined as the January 1 following the attainment by the participant of the later of age 60 or the completion of eight years of employment following January 1, 2002 with the Company or a subsidiary.

In connection with the retirement of the Company’s Chairman, he received in July 2009 a payment of $20,860 under the terms of the SERP.

In April 2008, the SERP was amended to provide the Company’s President and Chief Executive Officer with an additional benefit under the SERP equal to a $736 lifetime annuity beginning January 1, 2013. This additional benefit vests in full on January 1, 2013, subject to his remaining continuously employed by the Company through that date, subject to partial vesting for termination of employment under certain circumstances. In addition, in the event of a termination of his employment under the circumstances where he is entitled to severance payments under his employment agreement, he will be credited with an additional 36 months of service towards vesting under the SERP. As a result of the additional benefit granted to him, the President and Chief Executive Officer will be eligible to receive a total lump sum retirement benefit of $20,546 in 2013, an increase of $7,122 over the benefit he would have been entitled to receive under the SERP prior to the amendment, assuming a January 1, 2013 retirement date. The $7,122 increase will be recognized as an expense in the years ended December 31, 2010, 2011 and 2012.

At December 31, 2011, the aggregate lump sum equivalents of the annual retirement benefits payable under the Amended SERP at normal retirement dates occurring during the following years is as follows: 2012 – $1,713; 2013 – $22,584; 2014 – $7,233; 2015 – $0; 2016 – $0 and 2017 to 2021 – $2,100. In the case of a participant who becomes disabled prior to his normal retirement date or whose service is terminated without cause, the participant’s benefit consists of a pro-rata portion of the full projected retirement benefit to which he would have been entitled had he remained employed through his normal retirement date, as actuarially discounted back to the date of payment. A participant who dies while working for the Company or a subsidiary (and before becoming disabled or attaining his normal retirement date) will be paid an actuarially discounted equivalent of his projected retirement benefit; conversely, a participant who retires beyond his normal retirement date will receive an actuarially increased equivalent of his projected retirement benefit.

Postretirement Medical and Life Plans. The Company provides certain postretirement medical and life insurance benefits to certain employees. Substantially all of the Company’s manufacturing employees as of December 31, 2011 are eligible for postretirement medical benefits if they reach retirement age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to union contracts, Liggett reimburses approximately 334 hourly retirees, who retired prior to 1991, for Medicare Part B premiums. In addition, the Company provides life insurance benefits to approximately 200 active employees and 458 retirees who reach retirement age and are eligible to receive benefits under one of the Company’s defined benefit pension plans. The Company’s postretirement liabilities are comprised of Medicare Part B and life insurance premiums.

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the pension plans and other postretirement benefits:



	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
Change in benefit obligation:
Benefit obligation at January 1	$	(148,968	)	$	(142,043	)	$	(9,850	)	$	(9,405	)
Service cost	(1,422		)	(1,360		)	(13		)	(13		)
Interest cost	(7,481		)	(8,131		)	(500		)	(521		)
Plan amendment	—			(6,055		)	—			—
Benefits paid	11,448			11,787			534			574
Expenses paid	430			479			—			—
Actuarial (gain) loss	(5,015		)	(3,645		)	194			(485		)
Benefit obligation at December 31	$	(151,008	)	$	(148,968	)	$	(9,635	)	$	(9,850	)
Change in plan assets:
Fair value of plan assets at January 1	$	132,993		$	125,166		$	—		$	—
Gap period cash flow	—			—			—			—
Actual return on plan assets	537			19,733			—			—
Expenses paid	(430		)	(479		)	—			—
Contributions	360			360			534			574
Benefits paid	(11,448		)	(11,787		)	(534		)	(574		)
Fair value of plan assets at December 31	$	122,012		$	132,993		$	—		$	—
Funded status at December 31	$	(28,996	)	$	(15,975	)	$	(9,635	)	$	(9,850	)
Amounts recognized in the consolidated balance sheets:
Prepaid pension costs	$	10,046		$	13,935		$	—		$	—
Other accrued liabilities	(2,057		)	(347		)	(656		)	(665		)
Non-current employee benefit liabilities	(36,985		)	(29,563		)	(8,979		)	(9,185		)
Net amounts recognized	$	(28,996	)	$	(15,975	)	$	(9,635	)	$	(9,850	)



	Pension Benefits									Other Postretirement Benefits
	2011			2010			2009			2011			2010			2009
Service cost — benefits earned during the period	$	1,422		$	1,360		$	1,319		$	13		$	13		$	15
Interest cost on projected benefit obligation	7,481			8,131			9,385			500			521			567
Expected return on assets	(8,834		)	(8,271		)	(7,817		)	—			—			—
Prior service cost	—			—			801			—			—			—
Time contractual termination benefits	—			—			(1,808		)	—			—			—
Amortization of net loss (gain)	2,807			3,376			2,136			(88		)	(129		)	(163		)
Net expense	$	2,876		$	4,596		$	4,016		$	425		$	405		$	419

The following table summarizes amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost for the year ending 2012.



	Defined Benefit Pension Plans		Post- Retirement Plans			Total
Prior service cost	$	2,018	$	—		$	2,018
Actuarial loss (gain)	1,584		(121		)	1,463

As of December 31, 2011, current year accumulated other comprehensive income, before income taxes, consists of the following:



	Defined Benefit Pension Plans			Post- Retirement Plans			Total
Prior year accumulated other comprehensive income	$	(30,210	)	$	388		$	(29,822	)
Amortization of prior service costs	2,018			—			2,018
Effect of settlement	—			—			—
Amortization of gain (loss)	789			(88		)	701
Net (loss) gain arising during the year	(13,314		)	195			(13,119		)
Current year accumulated other comprehensive (loss) income	$	(40,717	)	$	495		$	(40,222	)

As of December 31, 2011, there was $40,222 of items not yet recognized as a component of net periodic pension benefit, which consisted of future pension benefits of $40,717 associated with the amortization of net loss.

As of December 31, 2011, there was $495 of items not yet recognized as a component of net periodic postretirement benefit, which consisted of future benefits associated with the amortization of net gains.

As of December 31, 2010, current year accumulated other comprehensive income, before income taxes, consisted of the following:



	Defined Benefit Pension Plans			Post- Retirement Plans			Total
Prior year accumulated other comprehensive income	$	(35,348	)	$	1,003		$	(34,345	)
Amortization of prior service costs	2,018			—			2,018
Effect of settlement	—			—			—
Amortization of gain (loss)	1,358			(130		)	1,228
Net gain (loss) arising during the year	1,762			(485		)	1,277
Current year accumulated other comprehensive (loss) income	$	(30,210	)	$	388		$	(29,822	)

As of December 31, 2010, there was $29,822 of items not yet recognized as a component of net periodic pension benefit, which consisted of future pension benefits of $30,210 associated with the amortization of net loss.

As of December 31, 2010, there was $388 of items not yet recognized as a component of net periodic postretirement benefit, which consisted of future benefits associated with the amortization of net gains.

As of December 31, 2011, three of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which in the aggregate the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $100,970, $100,970 and $61,928, respectively. As of December 31, 2010, two of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which in the aggregate the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $29,973, $29,973 and $0, respectively.



	Pension Benefits					Other Postretirement Benefits
	2011	2010		2009		2011		2010		2009
Weighted average assumptions:
Discount rates — benefit obligation	3.75% - 4.75%	5.25	%	5.75	%	5.00	%	5.25	%	5.75	%
Discount rates — service cost	5.25%	5.75	%	6.75	%	5.25	%	5.75	%	6.75	%
Assumed rates of return on invested assets	7.00%	7.00	%	7.50	%	—		—		—
Salary increase assumptions	N/A	N/A		N/A		3.00	%	3.00	%	3.00	%

Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis analyzes the cash flow from each of the Company’s four benefit plans as well as a separate analysis of the cash flows from the postretirement medical and life insurance plans sponsored by Liggett. The aforementioned analyses then construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived from the two independent analyses in the computation of the benefit obligation and service cost for each respective retirement liability. The Company uses the discount rate derived from the analysis in the computation of the benefit obligation and service cost for all the plans respective retirement liability.

The Company considers input from its external advisors and historical returns in developing its expected rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. The Company’s actual 10-year annual rate of return on its pension plan assets was 5.2%, 4.8% and 3.0% for the years ended December 31, 2011, 2010 and 2009, respectively, and the Company’s actual five-year annual rate of return on its pension plan assets was 2.9%, 5.7% and 3.5% for the years ended December 31, 2011, 2010 and 2009, respectively.

Gains and losses resulting from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and changes in actual returns on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10% of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2011, Liggett used a 15.77-year period for its Hourly Plan and a 17.24-year period for its Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension expense in the future.

Plan assets are invested employing multiple investment management firms. Managers within each asset class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning excess return and tracking error targets. Investment managers are monitored to evaluate performance against these benchmark indices and targets.

Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large, medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations, including convertible debentures, of private and public companies. The Company generally utilizes its short term investments, including interest-bearing cash, to pay benefits and to deploy in special situations.

In 2008, the Liggett Employee Benefits Committee temporarily suspended its target asset allocation percentages due to the volatility in the financial markets. Even though such allocation percentages were suspended, investment manager performance versus their respective benchmarks was still monitored on a regular basis. Effective January 1, 2011, the Liggett Employee Benefits Committee reinstated its target assets allocation to equal 50.0% equity investments, 27.5% investment grade fixed income, 7.5% high yield fixed income, 10.0% alternative investments (including hedge funds and private equity funds) and 5.0% short-term investments, with a rebalancing range of approximately plus or minus 5% around the target asset allocations.

Vector’s defined benefit retirement plan allocations at December 31, 2011 and 2010, by asset category, were as follows:



	Plan Assets at December 31,
	2011		2010
Asset category:
Equity securities	50	%	51	%
Investment grade fixed income securities	30	%	26	%
High yield fixed income securities	9	%	4	%
Alternative investments	9	%	9	%
Short-term investments	2	%	10	%
Total	100	%	100	%

The defined benefit plans’ recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:



	Fair Value Measurements as of December 31, 2011
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Insurance contracts	$	2,047	$	—	$	2,047	$	—
Amounts in individually managed investment accounts:
Cash	2,401		2,401		—		—
U.S. equity securities	46,630		46,630		—		—
Common collective trusts	59,954		—		48,350		11,604
Investment partnership	10,978		—		—		10,978
Total	$	122,010	$	49,031	$	50,397	$	22,582



	Fair Value Measurements as of December 31, 2010
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Insurance contracts	$	2,359	$	—	$	2,359	$	—
Amounts in individually managed investment accounts:
Cash, mutual funds and common stock	14,108		14,108		—		—
U.S. equity securities	53,916		53,916		—		—
Common collective trusts	50,631		—		45,722		4,909
Investment partnership	11,996		—		—		11,996
Total	$	133,010	$	68,024	$	48,081	$	16,905

The fair value determination disclosed above of assets as Level 3 under the fair value hierarchy was determined based on unobservable inputs and were based on company assumptions, and information obtained from the investments based on the indicated market values of the underlying assets of the investment portfolio.

The changes in the fair value of these Level 3 investments as of December 31, 2011 and 2010 were as follows:



	2011			2010
Balance as of January 1	$	16,905		$	11,640
Distributions	(517		)	(1,107		)
Contributions	6,237			4,000
Unrealized loss on long-term investments	(1,810		)	2,113
Realized gain on long-term investments	1,767			259
Balance as of December 31	$	22,582		$	16,905

For 2011 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 3.66% and 6.87% between 2012 and 2020 and 4.5% after 2020. For 2010 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between (5.25)% and 6.8% between 2011 and 2019 and 4.5% after 2019.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:



	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	7	$	(6	)
Effect on benefit obligation	135		(124		)

To comply with ERISA’s minimum funding requirements, the Company currently anticipates that it will be required to make contributions of $3,725 to the pension plan year beginning on January 1, 2012 and ending on December 31, 2012. Any additional funding obligation that the Company may have for subsequent years is contingent on several factors and is not reasonably estimable at this time.

Estimated future pension and postretirement medical benefits payments are as follows:



	Pension		Postretirement Medical
2012	$	13,338	$	656
2013	33,810		656
2014	17,977		659
2015	10,397		662
2016	9,966		664
2017 — 2021	46,078		3,369

Profit Sharing and Other Plans:

The Company maintains 401(k) plans for substantially all U.S. employees which allow eligible employees to invest a percentage of their pre-tax compensation. The Company contributed to the 401(k) plans and expensed $1,101, $1,068 and $1,098 for the years ended December 31, 2011, 2010 and 2009, respectively.