12.

Benefit Plans

Pension and post-retirement benefits

We sponsor domestic and foreign defined-benefit pension and other post-retirement plans. Pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. In addition, we also provide certain post-retirement health care and life insurance benefits. Generally, the post-retirement health care and life insurance plans require contributions from retirees. We use a December 31 measurement date each year. In December 2007, we announced that we will be freezing certain pension plans as of December 31, 2017.

Obligations and funded status

The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans and the funded status of the plans:


	Pension benefits						Post-retirement
*In thousands*	2011			2010			2011			2010

Change in benefit obligation
Benefit obligation beginning of year	$	586,808		$	552,309		$	33,715		$	35,301
Service cost		12,466			11,588			180			200
Interest cost		32,768			31,671			1,889			2,013
Amendments		—			(281	)		—			—
Settlements		(257	)		(104	)		—			—
Actuarial (gain) loss		62,751			24,677			2,494			(647)
Translation (gain) loss		(2,477	)		(4,208	)		—			—
Benefits paid		(30,488	)		(28,844	)		(3,197	)		(3,152)

Benefit obligation end of year	$	661,571		$	586,808		$	35,081		$	33,715

Change in plan assets
Fair value of plan assets beginning of year	$	385,483		$	329,188		$	—		$	—
Actual gain (loss) return on plan assets		27,971			35,495			—			—
Company contributions		37,097			49,840			3,197			3,152
Settlements		(257	)		(104	)		—			—
Translation gain (loss)		(35	)		(92	)		—			—
Benefits paid		(30,488	)		(28,844	)		(3,197	)		(3,152)

Fair value of plan assets end of year	$	419,771		$	385,483		$	—		$	—

Funded status
Plan assets less than benefit obligation	$	(241,800	)	$	(201,325	)	$	(35,081	)	$	(33,715)

Net amount recognized	$	(241,800	)	$	(201,325	)	$	(35,081	)	$	(33,715)

Of the $241.8 million under funding at December 31, 2011, $137.9 million relates to foreign pension plans and our supplemental executive retirement plans which are not commonly funded.

Amounts recognized in the Consolidated Balance Sheets are as follows:


	Pension benefits						Post-retirement
*In thousands*	2011			2010			2011			2010

Current liabilities	$	(5,745	)	$	(5,343	)	$	(3,307	)	$	(3,390)
Noncurrent liabilities		(236,055	)		(195,982	)		(31,774	)		(30,325)

Net amount recognized	$	(241,800	)	$	(201,325	)	$	(35,081	)	$	(33,715)

The accumulated benefit obligation for all defined benefit plans was $625.9 million and $557.7 million at December 31, 2011 and 2010, respectively.

Information for pension plans with an accumulated benefit obligation or projected benefit obligation in excess of plan assets are as follows:


In thousands	2011		2010

Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets	$	419,771	$	385,483
Accumulated benefit obligation		625,884		557,712
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets	$	419,771	$	385,483
Accumulated benefit obligation		661,571		586,808

Components of net periodic benefit cost are as follows:


	Pension benefits									Post-retirement
In thousands	2011			2010			2009			2011			2010			2009

Service cost	$	12,466		$	11,588		$	12,334		$	180		$	200		$	214
Interest cost		32,768			31,671			32,612			1,889			2,013			2,377
Expected return on plan assets		(31,849	)		(30,910	)		(30,286	)		—			—			—
Amortization of transition obligation		—			13			25			—			—			—
Amortization of prior year service cost (benefit)		—			7			23			(27	)		(27	)		(41)
Recognized net actuarial (gain) loss		3,887			1,674			82			(3,306	)		(3,295	)		(3,326)
Settlement gain		23			(8	)		(9	)		—			—			—

Net periodic benefit cost	$	17,295		$	14,035		$	14,781		$	(1,264	)	$	(1,109	)	$	(776)

Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (pre-tax):


	Pension benefits						Post-retirement
In thousands	2011			2010			2011			2010

Prior service cost (benefit)		(171	)		(162	)		(850	)		(878)
Net actuarial (gain) loss		201,093			138,558			(14,982	)		(20,781)

Accumulated other comprehensive (income) loss	$	200,922		$	138,396		$	(15,832	)	$	(21,659)

The estimated amount that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2012 is as follows:


	Pension		Post-
In thousands	benefits		retirement

Prior service cost (benefit)	$	—	$	(27)
Net actuarial (gain) loss		10,308		(3,306)

Total estimated 2012 amortization	$	10,308	$	(3,333	)

Additional information

Change in accumulated other comprehensive income, net of tax:


In thousands	2011			2010

Beginning of the year	$	(71,210	)	$	(58,448)
Additional prior service cost incurred during the year		—			171
Actuarial gains (losses) incurred during the year		(42,139	)		(11,861)
Translation gains (losses) incurred during the year		118			(75)
Amortization during the year:
Transition obligation		—			8
Unrecognized prior service cost (benefit)		(16	)		(12)
Actuarial gains		354			(993)

End of the year	$	(112,893	)	$	(71,210)

Assumptions

Weighted-average assumptions used to determine domestic benefit obligations at December 31 are as follows:


	Pension benefits						Post-retirement
Percentages	2011		2010		2009		2011		2010		2009

Discount rate		5.05		5.90		6.00		5.05		5.90		6.00
Rate of compensation increase		4.00		4.00		4.00

Weighted-average assumptions used to determine the domestic net periodic benefit cost for years ending December 31 are as follows:


	Pension benefits						Post-retirement
Percentages	2011		2010		2009		2011		2010		2009

Discount rate		5.90		6.00		6.50		5.90		6.00		6.50
Expected long-term return on plan assets		8.00		8.50		8.50
Rate of compensation increase		4.00		4.00		4.00

Discount rate

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year based on our December 31 measurement date. The discount rate was determined by matching our expected benefit payments to payments from a stream of AA or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions. This produced a discount rate for our U.S. plans of 5.05% in 2011, 5.90% in 2010 and 6.00% in 2009. The discount rates on our foreign plans ranged from 0.75% to 5.00% in 2011, 0.75% to 5.40% in 2010 and 2.00% to 6.00% in 2009. There are no other known or anticipated changes in our discount rate assumption that will impact our pension expense in 2012.

Expected rate of return

Our expected rate of return on plan assets was 8.0% for 2011 and 8.5%, 2010 and 2009. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecasted economic conditions, our asset allocations, input from external consultants and broader longer-term market indices. In 2011, the pension plan assets yielded returns of 7.8% and returns of 11.2% and 19.5% in 2010 and 2009. Our expected rate of return on plan assets assumption is 7.5% for 2012.

We base our determination of pension expense or income on a market-related valuation of assets which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five- year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a five-year-period, the future value of assets will be impacted as previously deferred gains or losses are recorded.

Unrecognized pension and post-retirement losses

As of our December 31, 2011 measurement date, our plans have $186.1 million of cumulative unrecognized losses. To the extent the unrecognized losses, when adjusted for the difference between market and market related values of assets, exceeds 10% of the projected benefit obligation, it will be amortized into expense each year on a straight-line basis over the remaining expected future-working lifetime of active participants (currently approximating 12 years).

The assumed health care cost trend rates at December 31 are as follows:


	2011		2010

Health care cost trend rate assumed for next year		7.50 %		7.50 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.50 %		4.50 %
Year that the rate reaches the ultimate trend rate		2027		2027

The assumed health care cost trend rates can have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:


In thousands	1-Percentage- point increase		1-Percentage- point decrease

Effect on total annual service and interest cost	$	45	$	(40	)
Effect on post-retirement benefit obligation		905		(801	)

Plan assets

Objective

The primary objective of our investment strategy is to meet the pension obligation to our employees at a reasonable cost to us. This is primarily accomplished through growth of capital and safety of the funds invested. The plans will therefore be actively invested to achieve real growth of capital over inflation through appreciation of securities held and through the accumulation and reinvestment of dividend and interest income.

Asset allocation

Our actual overall asset allocation for the plans as compared to our investment policy goals is as follows:


	Plan assets				Target allocation
Asset class	2011		2010		2011		2010

Equity securities		42 %		47 %		40 %		50 %
Fixed income investments		50 %		37 %		50 %		40 %
Alternative investments		5 %		12 %		10 %		10 %
Cash		3 %		4 %		- %		- %

While the target allocations do not have a percentage allocated to cash, the plan assets will always include some cash due to cash flow requirements.

As part of our strategy to reduce U.S. pension plan funded status volatility, we plan to increase the allocation to long duration fixed income securities in future years as the funded status of our U.S. pension plans improve. In 2011 we increased our fixed income investments from 40% to 50% and from 30% to 40% in 2010.

Fair value measurement

The following table presents our plan assets using the fair value hierarchy as of December 31, 2011 and December 31, 2010.


*in thousands*	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Cash equivalents	$	—	$	13,084	$	—	$	13,084
Fixed income:
Corporate and non U.S. government		—		76,046		150		76,196
U.S. treasuries		—		82,989		—		82,989
Mortgage-backed securities		—		40,286		629		40,915
Other		—		7,958		219		8,177
Global equity securities:
Small cap equity		7,094		—		—		7,094
Mid cap equity		7,528		4		—		7,532
Large cap equity		—		47,398		—		47,398
International equity		19,942		19,652		—		39,594
Long/short equity		—		56,575		—		56,575
Pentair company stock		16,645		—		—		16,645
Other investments		—		4,563		19,009		23,572

Total as of December 31, 2011	$	51,209	$	348,555	$	20,007	$	419,771


*in thousands*	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Cash equivalents	$	—	$	13,803	$	—	$	13,803
Fixed income:
Corporate and non U.S. government		—		42,544		284		42,828
U.S. treasuries		—		60,710		—		60,710
Mortgage-backed securities		—		30,052		1,368		31,420
Other		—		6,818		125		6,943
Global equity securities:
Small cap equity		7,982		—		—		7,982
Mid cap equity		8,811		—		—		8,811
Large cap equity		—		45,700		—		45,700
International equity		23,964		21,895		—		45,859
Long/short equity		—		56,639		—		56,639
Pentair company stock		18,255		—		—		18,255
Other investments		—		33,542		12,991		46,533

Total as of December 31, 2010	$	59,012	$	311,703	$	14,768	$	385,483

Valuation methodologies used for investments measured at fair value are as follows:

•

Cash equivalents: Consist of investments in commingled funds valued based on observable market data. Such investments are classified as Level 2.

•

Fixed income: Investments in corporate bonds, government securities, mortgages and asset backed securities are value based upon quoted market prices for identical or similar securities and other observable market data. Investments in commingled funds are generally valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments are classified as Level 2. Certain investments in commingled funds are valued based on unobservable inputs due to liquidation restrictions. These investments are classified as Level 3.

•

Global equity securities: Equity securities and Pentair common stock are valued based on the closing market price in an active market and are classified as Level 1. Investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service. Such investments are classified as Level 2.

•

Other investments: Other investments include investments in commingled funds with diversified investment strategies. Investments in commingled funds that are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices or by a pricing service are classified as Level 2. Investments in commingled funds that are valued based on unobservable inputs due to liquidation restrictions are classified as Level 3.

The following tables present a reconciliation of Level 3 assets held during the years ended December 31, 2011 and December 31, 2010, respectively.


	Balance January 1, 2011		Net realized and unrealized gains (losses)		Net purchases, issuances and settlements			Net transfers into (out of) level 3		Balance December 31, 2011
Other investments	$	12,991	$	251	$	5,767		$	—	$	19,009
Fixed income investments		1,777		87		(866	)		—		998

	$	14,768	$	338	$	4,901		$	—	$	20,007


	Balance January 1, 2010		Net realized and unrealized gains (losses)		Net purchases, issuances and settlements			Net transfers into (out of) level 3		Balance December 31, 2010
Other investments	$	14,427	$	678	$	(2,114	)	$	—	$	12,991
Fixed income investments		2,739		334		(1,296	)		—		1,777

	$	17,166	$	1,012	$	(3,410	)	$	—	$	14,768

Cash flows

Contributions

Pension contributions totaled $37.1 million and $49.8 million in 2011 and 2010, respectively. Our 2012 required pension contributions are expected to be in the range of $40 million to $45 million. The 2012 expected contributions will equal or exceed our minimum funding requirements.

Estimated future benefit payments

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


In millions	Pension benefits		Post-retirement
2012	$	31.8	$	3.3
2013		32.6		3.2
2014		33.5		3.1
2015		35.9		3.0
2016		38.7		2.9
2017-2021		221.4		13.1

Savings plan

We have a 401(k) plan (“the plan”) with an employee stock ownership (“ESOP”) bonus component, which covers certain union and nearly all non-union U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. We match contributions made by employees who meet certain eligibility and service requirements. Our matching contribution is 100% of eligible employee contributions for the first 1% of eligible compensation and 50% of the next 5% of eligible compensation. In June 2009, we temporarily suspended the company match of the plan and ESOP. We reinstated the company match in 2010.

In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution equal to 1.5% of annual eligible compensation.

Our combined expense for the plan and ESOP was approximately $15.8 million, $11.0 million and $6.7 million, in 2011, 2010 and 2009, respectively.

Other retirement compensation

Total other accrued retirement compensation was $12.6 million and $13.9 million in 2011 and 2010, respectively and is included in the Pension and other retirement compensation line of our Consolidated Balance Sheet.