Pension and Other Post-Retirement Plans

We have defined benefit pension plans for our U.K.-based union employees (the "U.K. Plan") and certain Canadian-based employees (the "Canadian Plan"). Retirement benefits under the U.K. Plan are generally based on an employee's average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contribution permissible by the applicable authorities. We estimate that approximately $3,892 will be contributed to the pension plans in fiscal year 2013.

Our pension benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, compensation increase rates, expected returns on plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience or changes in assumptions may affect our pension obligations and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets.

We used to maintain an unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP"), which had been a means of providing supplemental retirement benefits to a limited number of our senior executives. In December 2005, we discontinued the SERP and benefit accruals under the plan were frozen in amounts based on the then present value of each participant's aggregate benefit under an agreed-upon calculation. Although the aggregate benefit for each participant was frozen at that time, participants were credited with interest at a rate of 4% per annum, compounded annually, from December 31, 2005 until the benefit was distributed. In November 2011, the remaining benefit of approximately $3,101 under the SERP was distributed. The remaining distribution consisted of the cash value in a government fund account of approximately $902 and the cash value of the remaining life insurance policies of approximately $2,199. The cash value in the government fund account as of December 31, 2010 was approximately $902. The cash value of the remaining life insurance policies as of December 31, 2010 was approximately $2,228.

The following table sets forth the combined funded status of the pension plans and their reconciliation with the related amounts recognized in our Consolidated Financial Statements at our December 31 measurement dates:

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)



	December 31,
	2012			2011
Change in benefit obligation:
Benefit obligation at beginning of year	$	91,270		$	88,873
Service cost	2,128			2,097
Interest cost	4,719			4,576
Prior Service Cost	(2,518		)	—
Participant contributions	1,192			1,079
Curtailments	—			—
Actuarial (gain) loss	8,082			794
Benefits paid	(2,536		)	(2,440		)
Settlement payments	—			(3,101		)
Other, principally foreign exchange	3,516			(608		)
Benefit obligation at end of year	105,853			91,270
Change in plan assets:
Fair value of plan assets at beginning of year	73,196			73,200
Business sale	—			—
Actual gain (loss) on plan assets	9,765			(876		)
Employer contributions	3,620			2,859
Participant contributions	1,192			1,079
Benefits paid	(2,536		)	(2,440		)
Settlement payments	—			—
Other, principally foreign exchange	2,803			(626		)
Fair value of assets at end of year	88,040			73,196
Amounts recognized in the consolidated balance sheets:
Funded status (current)	—			—
Funded status (non-current)	(17,813		)	(18,074		)
Accumulated other comprehensive income (pre-tax):
Unrecognized actuarial loss	19,905			16,537
Unrecognized prior service cost	(3,444		)	(1,088		)
Net amount recognized	$	(1,352	)	$	(2,625	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

The following are the components of our net periodic pension cost:



	December 31,
	2012			2011			2010
Components of net periodic pension benefit cost:
Service cost	$	2,128		$	2,097		$	1,750
Interest cost	4,719			4,576			4,799
Expected return on plan assets	(5,176		)	(5,170		)	(4,767		)
Amortization of actuarial gains/losses	788			382			503
Curtailments	—			—			1,692
Amortization of unrecognized prior service cost	(211		)	(79		)	(51		)
Net periodic cost	$	2,248		$	1,806		$	3,926

The accumulated benefit obligation for all defined benefit pension plans was $102,066 and $83,874 as of December 31, 2012 and 2011, respectively. The underfunded status of our defined benefit pension plans recorded as a liability in our Consolidated Balance Sheets as of December 31, 2012 and 2011 was approximately $17,813 and $18,074, respectively.

The amounts included in accumulated other comprehensive income as of December 31, 2012 expected to be recognized as components of net periodic pension cost during the fiscal year ending December 31, 2013 are as follows:




Net (gain) or loss	$	(260	)
Net prior service cost	1,044
Net amount expected to be recognized	$	784

The U.K. Plan

In the third quarter of 2012, we remeasured the U.K. Plan valuation as a result of a plan amendment, which resulted in a decrease to our pension benefit obligation of $5,825. As a result of the amendment, the U.K. Plan is closed to new participants and pensionable earnings used to calculate retirement benefits are limited to a 2% annual increase while the plan is less than 100% funded.

The U.K. Plan investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable investments that avoids over-concentration of investment and spreads assets both over industry and geography. In setting investment strategy, the trustees considered the lowest risk strategy that they could adopt in relation to the U.K. Plan's liabilities and designed their asset allocation to achieve a higher return while maintaining a cautious approach to meeting the plan's liabilities. The trustees undertook a review of investment strategy and took advice from their investment advisors. They considered a full range of asset classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and the need for appropriate diversification. The current strategy is to hold approximately 35% in a global return fund, approximately 20% in U.K. equities, approximately 15% in non-U.K. equities, approximately 15% in long lease property, approximately 10% in corporate bonds and approximately 5% in real estate.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

The fair value of our U.K. Plan assets at December 31, 2012 by asset category is as follows:



Asset Category	Market Value at 12/31/2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities in U.K. companies (a)	$	10,950	$	—	$	10,950	$	—
Equity securities in non-U.K. companies (a)	7,490		—		7,490		—
Global Return Fund (a)	17,660		—		17,660		—
Corporate bonds (a)	5,215		—		5,215		—
Real estate	10,431		—		—		10,431
Cash (b)	374		374		—		—
Total pension assets	$	52,120	$	374	$	41,315	$	10,431

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(a)	The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.


(b)	The fair value of cash equals its book value.

The change in fair value of the pension assets valued using significant unobservable inputs (Level 3) was due to the following:




	General Account
Beginning balance at December 31, 2011	$	9,356
Purchases	192
Unrealized gain on asset still held at December 31, 2012	883

Ending balance at December 31, 2012	$	10,431

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

The fair value of our U.K. Plan assets at December 31, 2011 by asset category is as follows:



Asset Category	Market Value at 12/31/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities in U.K. companies (a)	$	7,056	$	—	$	7,056	$	—
Equity securities in non-U.K. companies (a)	6,326		—		6,326		—
Global Return Fund (a)	15,386		—		15,386		—
Corporate bonds (a)	4,243		—		4,243		—
Real estate	9,356		—		—		9,356
Cash (b)	171		171		—		—
Total pension assets	$	42,538	$	171	$	33,011	$	9,356

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(a)	The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.


(b)	The fair value of cash equals its book value.

The change in fair value of the pension assets valued using significant unobservable inputs (Level 3) was due to the following:




	General Account
Beginning balance at December 31, 2010	2,416
Purchases	6,616
Unrealized gain on asset still held at December 31, 2011	324

Ending balance at December 31, 2011	9,356

The Canadian Plan

The Canadian Plan investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable investments that avoids over-concentration of investment and spreads assets both over industry and geography. In setting investment strategy, the Company considered the lowest risk strategy that it could adopt in relation to the Canadian Plan's liabilities and designed the asset allocation to achieve a higher return while maintaining a cautious approach to meeting the plan's liabilities. The Company considered a full range of asset classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and the need for appropriate diversification. The current strategy is to hold approximately 20% in Canadian equities, approximately 40% in non-Canadian equities and approximately 40% in bonds.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

The fair value of our Canadian Plan assets at December 31, 2012 by asset category is as follows:



Asset Category	Market Value at 12/31/2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities in Canadian companies (a)	$	6,908	$	6,908	$	—	$	—
Equity securities in non-Canadian companies (a)	15,348		15,348		—		—
Government bonds	5,690		—		5,690		—
Corporate bonds	6,778		—		6,778		—
Corporate bonds in non-Canadian companies	118		—		118		—
Other short-term investment (b)	839		839		—		—
Cash and cash equivalents (c)	240		240		—		—
Total pension assets	$	35,921	$	23,335	$	12,586	$	—

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(a)	Direct investments in equity securities are valued at quoted prices in active markets for identical assets. Equity securities invested through pooled funds are valued using inputs derived principally from the quoted prices in active markets for the underlying assets in the pool.


(b)	Other short-term investments are investments in pooled money market funds that are valued using inputs derived principally from the quoted prices in active markets for the underlying assets in the pool.


(c)	The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

The fair value of our Canadian Plan assets at December 31, 2011 by asset category is as follows:



Asset Category	Market Value at 12/31/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities in Canadian companies (a)	$	9,759	$	9,049	$	710	$	—
Equity securities in non-Canadian companies (a)	9,169		4,773		4,396		—
Government bonds	4,629		4,629		—		—
Corporate bonds	6,470		6,470		—		—
Corporate bonds in non-Canadian companies	—		—		—		—
Other short-term investment (b)	377		—		377		—
Cash and cash equivalents (c)	254		254		—		—
Total pension assets	$	30,658	$	25,175	$	5,483	$	—

_______________________________________________________________________________


(a)	Direct investments in equity securities are valued at quoted prices in active markets for identical assets. Equity securities invested through pooled funds are valued using inputs derived principally from the quoted prices in active markets for the underlying assets in the pool.


(b)	Other short-term investments are investments in pooled money market funds that are valued using inputs derived principally from the quoted prices in active markets for the underlying assets in the pool.


(c)	The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

The table below provides the weighted-average actuarial assumptions used to determine the benefit obligation and net periodic benefit cost for the U.K. Plan and the Canadian Plan.



	U.K. Plan						Canadian Plan
	2012		2011		2010		2012		2011		2010
Discount rates:
Benefit obligation	4.50	%	4.80	%	5.40	%	4.50	%	5.30	%	5.50	%
Net periodic pension cost	4.80	%	5.40	%	5.80	%	5.30	%	5.50	%	6.40	%
Rate of compensation increase	2.00	%	3.50	%	4.00	%	3.25	%	3.25	%	3.25	%
Expected return on assets	6.80	%	7.50	%	7.80	%	6.50	%	7.00	%	7.00	%

The overall expected long-term rate of return on assets assumption for the U.K. Plan has been determined as a weighted-average of the expected returns on the above asset classes for the U.K. Plan. The expected return on bonds is taken as the current redemption yield on the appropriate index. The expected return on equities and property is determined by assuming a measure of outperformance over the gilt-yield. The expected return on cash is related to the Bank of England base rate. Returns so determined are reduced to allow for investment manager expenses.

The overall expected long-term rate of return on assets assumption for the Canadian Plan has been determined by consideration of the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except per share amounts)

(17) Pension and Other Post-Retirement Plans (Continued)

future returns of each asset class. Since our investment policy is to actively manage certain asset classes where the potential exists to outperform the broader market, the expected returns for those asset classes were adjusted to reflect the expected additional returns. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio. Finally, we have adjusted the expected long-term rate of return on assets to allow for investment and administration expenses paid from the pension fund.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



Year	U.K. Plan		Canadian Plan
2013	$	894	$	1,507
2014	$	910	$	1,537
2015	$	926	$	1,637
2016	$	942	$	1,707
2017	$	959	$	1,853
2018 - 2022	$	5,085	$	12,210

U.S. Plan

We have a 401(k) plan for U.S.-based employees. Those employees who participate in our 401(k) plan are eligible to receive matching contributions from us for the first 6% of participant contributions. Effective January 1, 2010, we increased the matching contributions to 37.5 cents on the dollar for the first 6% of contributions for a match of up to 2.25% of eligible compensation. Contribution expense for the years ended December 31, 2012, 2011 and 2010 amounted to approximately $1,700, $1,412 and $1,718, respectively.