Retirement Plans and Postretirement Medical Benefits

We have several defined benefit retirement plans. Benefits are primarily based on employees' compensation and years of service. Our contributions are determined based on the funding requirements of U.S. federal and other governmental laws and regulations. We use a measurement date of December 31 for all of our retirement plans. U.S. employees hired after January 1, 2005, Canadian employees hired after April 1, 2005 and U.K. employees hired after July 1, 2005 are not eligible for our defined benefit retirement plans. Benefit accruals for all participants in our U.K. pension plans will be frozen effective June 30, 2013. Benefit accruals for participants with 16 or more years of service as of March 31, 2013 in our two largest U.S. pension plans and all participants in our Canadian pension plans, will be frozen effective December 31, 2014.

In January 2013, the Board of Directors approved a plan to freeze benefit accruals under our two largest U.S. pension plans for certain participants on March 31, 2013. The freeze is effective for those participants with less than 16 years of service as of March 31, 2013. We are in the process of re-measuring the assets and liabilities of these plans, but currently estimate that annual pension costs for 2013 will be $10-$15 million lower than 2012 pension costs.

The benefit obligations and funded status of defined benefit pension plans are as follows:



	United States						Foreign
	2012			2011			2012			2011
Accumulated benefit obligation	$	1,802,811		$	1,684,050		$	648,439		$	543,599

Projected benefit obligation
Benefit obligation at beginning of year	$	1,707,390		$	1,632,286		$	581,904		$	541,241
Service cost	18,939			19,450			7,763			7,310
Interest cost	81,040			87,738			27,793			28,329
Plan participants' contributions	—			—			1,106			1,868
Actuarial loss	145,641			94,495			45,537			30,648
Foreign currency changes	—			—			22,115			(6,424		)
Settlement / curtailment	6			2,941			(1,489		)	16
Special termination benefits	—			1,489			601			277
Benefits paid	(130,339		)	(131,009		)	(21,504		)	(21,361		)
Benefit obligation at end of year	1,822,677			1,707,390			663,826			581,904



Fair value of plan assets available for benefits
Fair value of plan assets at beginning of year	1,426,536			1,385,174			438,848			450,683
Actual return on plan assets	193,696			41,388			44,928			(7,478		)
Company contributions	94,039			130,983			30,089			18,616
Plan participants' contributions	—			—			1,106			1,868
Settlement / curtailment	—			—			(1,489		)	—
Foreign currency changes	—			—			17,353			(3,480		)
Benefits paid	(130,339		)	(131,009		)	(21,504		)	(21,361		)
Fair value of plan assets at end of year	1,583,932			1,426,536			509,331			438,848

Funded status	$	(238,745	)	$	(280,854	)	$	(154,495	)	$	(143,056	)



Amounts recognized in Consolidated Balance Sheets
Non-current asset	$	175		$	40		$	530		$	888
Current liability	(7,456		)	(11,323		)	(967		)	(852		)
Non-current liability	(231,464		)	(269,571		)	(154,058		)	(143,092		)
Net amount recognized	$	(238,745	)	$	(280,854	)	$	(154,495	)	$	(143,056	)

Information provided in the table below is only for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2012 and 2011:



	United States				Foreign
	2012		2011		2012		2011
Projected benefit obligation	$	1,821,300	$	1,705,732	$	660,110	$	579,646
Accumulated benefit obligation	$	1,801,433	$	1,682,392	$	645,361	$	541,723
Fair value of plan assets	$	1,582,379	$	1,424,837	$	505,084	$	435,702



Pretax amounts recognized in AOCI consists of:
	United States				Foreign
	2012		2011		2012			2011
Net actuarial loss	$	879,323	$	858,531	$	242,668		$	224,731
Prior service cost	1,229		2,159		541			541
Transition asset	—		—		(263		)	(273		)
Total	$	880,552	$	860,690	$	242,946		$	224,999

The estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2013 are as follows:



	United States		Foreign
Net actuarial loss	$	72,382	$	13,191
Prior service cost	803		99
Transition asset	—		(10		)
Total	$	73,185	$	13,280

The components of net periodic benefit cost for defined benefit pension plans were as follows:



	United States									Foreign
	2012			2011			2010			2012			2011			2010
Service cost	$	18,939		$	19,450		$	23,157		$	7,763		$	7,310		$	6,907
Interest cost	81,040			87,738			89,602			27,793			28,329			27,507
Expected return on plan assets	(121,623		)	(123,058		)	(123,095		)	(32,299		)	(31,784		)	(28,838		)
Amortization of transition credit	—			—			—			(10		)	(10		)	(9		)
Amortization of prior service cost	803			147			(2,575		)	112			170			214
Recognized net actuarial loss	52,957			37,522			32,343			14,103			11,135			10,205
Special termination benefits	—			1,489			8,148			601			277			291
Settlement / curtailment	(48		)	3,036			10,712			444			274			1,285
Net periodic benefit cost	$	32,068		$	26,324		$	38,292		$	18,507		$	15,701		$	17,562

Other changes in plan assets and benefit obligations for defined benefit pension plans recognized in other comprehensive income were as follows:



	United States						Foreign
	2012			2011			2012			2011
Curtailments effects and settlements	$	48		$	(95	)	$	(444	)	$	(274	)
Net actuarial loss	73,701			176,164			32,596			67,934
Prior service credit	(127		)	—			—			—
Amortization of net actuarial (loss) gain	(52,957		)	(37,522		)	(14,103		)	(11,135		)
Amortization of prior service (cost) credit	(803		)	(147		)	(112		)	(170		)
Net transitional obligation (asset)	—			—			10			9
Total recognized in other comprehensive income	$	19,862		$	138,400		$	17,947		$	56,364

Weighted-average actuarial assumptions used to determine end of year benefit obligations and net periodic benefit cost for defined benefit pension plans include:



	2012				2011				2010
United States
Used to determine benefit obligations
Discount rate	4.05%				4.95%				5.60%
Rate of compensation increase	3.50%				3.50%				3.50%

Used to determine net periodic benefit cost
Discount rate	4.95%				5.60%				5.75%
Expected return on plan assets	7.75%				8.00%				8.00%
Rate of compensation increase	3.50%				3.50%				3.50%

Foreign
Used to determine benefit obligations
Discount rate	1.95	%	-	4.65%	1.80	%	-	6.10%	2.25	%	-	5.50%
Rate of compensation increase	1.50	%	-	3.50%	2.10	%	-	4.60%	2.50	%	-	5.50%

Used to determine net periodic benefit cost
Discount rate	1.80	%	-	6.10%	2.00	%	-	5.50%	2.25	%	-	6.00%
Expected return on plan assets	3.25	%	-	7.50%	4.00	%	-	7.75%	4.50	%	-	7.75%
Rate of compensation increase	2.10	%	-	4.60%	2.10	%	-	5.50%	2.50	%	-	5.60%

A discount rate is used to determine the present value of our future benefit obligations. The discount rate for our U.S. pension and postretirement medical benefit plans is determined by matching the expected cash flows associated with our benefit obligations to a yield curve based on long-term, high-quality fixed income debt instruments available as of the measurement date. For the U.K. retirement benefit plan, our largest foreign plan, the discount rate is determined by discounting each year's estimated benefit payments by an applicable spot rate, derived from a yield curve created from a large number of high-quality corporate bonds. For our other smaller foreign pension plans, the discount rate is selected based on high-quality fixed income indices available in the country in which the plan is domiciled.

The expected return on plan assets is based on historical and expected rates of return for current and planned asset classes in the plans' investment portfolio after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. The overall expected rate of return for the portfolio is based on the asset allocation at the end of the year for our U.S. pension plans and the target asset allocation for our international pension plans, adjusted for historical and expected experience of active portfolio management results, when compared to the benchmark returns. When assessing the expected future returns for the portfolio, management places more emphasis on the expected future returns than historical returns.

Investment Strategy and Asset Allocation - U.S. Pension Plans

The investment strategy of our U.S. pension plans is to maximize returns within reasonable and prudent levels of risk, to achieve and maintain full funding of the accumulated benefit obligation and the actuarial liabilities and to earn a nominal rate of return of at least 7.25%. The fund has established a strategic asset allocation policy to achieve these objectives. Investments are diversified across asset classes and within each class to reduce the risk of large losses and are periodically rebalanced. Derivatives, such as swaps, options, forwards and futures contracts may be used for market exposure, to alter risk/return characteristics and to manage foreign currency exposure. Investments within the private equity and real estate portfolios are comprised of limited partnership units in primary and secondary fund of funds and units in open-ended commingled real estate funds, respectively. These types of investment vehicles are used in an effort to gain greater asset diversification. We do not have any significant concentrations of credit risk within the plan assets. The pension plans' liabilities, investment objectives and investment managers are reviewed periodically.

The target asset allocation for 2013 and the actual asset allocations at December 31, 2012 and 2011, for the U.S. pension plans are as follows:



	Target allocation		Percent of Plan Assets at December 31,
	2013		2012		2011
Asset category
U.S. equities	14	%	14	%	18	%
Non-U.S. equities	14	%	15	%	16	%
Fixed income	62	%	61	%	56	%
Real estate	2	%	4	%	4	%
Private equity	8	%	6	%	6	%
Total	100	%	100	%	100	%

The target asset allocation used to manage the investment portfolio is based on the broad asset categories shown above. The plan asset categories presented in the fair value hierarchy are subsets of the broad asset categories.

Investment Strategy and Asset Allocation - Foreign Pension Plans

Our foreign pension plan assets are managed by outside investment managers and monitored regularly by local trustees and our corporate personnel. The investment strategies adopted by our foreign plans vary by country and plan, with each strategy tailored to achieve the expected rate of return within an acceptable or appropriate level of risk, depending upon the liability profile of plan participants, local funding requirements, investment markets and restrictions. The U.K. plan represents 73% of the non-U.S. pension assets. The U.K. pension plan's investment strategy is to maximize returns within reasonable and prudent levels of risk, to achieve and maintain full funding of the accumulated benefit obligation and the actuarial liabilities and to earn a nominal rate of return of at least 7.25%. The fund has established a strategic asset allocation policy to achieve these objectives. Investments are diversified across asset classes and within each class to minimize the risk of large losses and are periodically rebalanced. Derivatives, such as swaps, options, forwards and futures contracts may be used for market exposure, to alter risk/return characteristics and to manage foreign currency exposure. We do not have any significant concentrations of credit risk within the plan assets. The pension plans' liabilities, investment objectives and investment managers are reviewed periodically.

The target asset allocation for 2013 and the actual asset allocations at December 31, 2012 and 2011, for the U.K. pension plan are as follows:



	Target Allocation		Percent of Plan Assets at December 31,
	2013		2012		2011
Asset category
U.K. equities	32	%	32	%	34	%
Non-U.K. equities	33	%	31	%	28	%
Fixed income	35	%	36	%	32	%
Cash	—	%	1	%	6	%
Total	100	%	100	%	100	%

The fair value of the U.K. plan assets was $370 million and $326 million at December 31, 2012 and 2011, respectively, and the expected long-term rate of return on these plan assets was 7.25% in both 2012 and 2011.

Fair Value Measurements of Plan Assets

The following tables show, by level within the fair value hierarchy, the financial assets and liabilities that are accounted for at fair value on a recurring basis at December 31, 2012 and 2011, respectively, for the U.S. and foreign pension plans. Financial assets and liabilities 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 placement within the fair value hierarchy levels.

United States Pension Plans



	December 31, 2012
	Level 1		Level 2		Level 3		Total
Money market funds	$	—	$	17,363	$	—	$	17,363
Equity securities	250,303		203,766		—		454,069
Commingled fixed income securities	—		200,899		—		200,899
Debt securities - U.S. and foreign governments, agencies and municipalities	53,984		35,461		—		89,445
Debt securities - corporate	—		621,691		—		621,691
Mortgage-backed securities	—		39,552		3,191		42,743
Asset-backed securities	—		547		—		547
Private equity	—		—		91,805		91,805
Real estate	—		—		63,168		63,168
Derivatives	738		—		—		738
Securities lending collateral ⁽¹⁾	—		104,375		—		104,375
Total plan assets at fair value	$	305,025	$	1,223,654	$	158,164	$	1,686,843
Securities lending payable ⁽¹⁾							(104,375		)
Cash							618
Other							846
Fair value of plan assets available for benefits							$	1,583,932

(1) Securities lending collateral is offset by a corresponding securities lending payable amount.



	December 31, 2011
	Level 1		Level 2		Level 3		Total
Money market funds	$	—	$	22,064	$	—	$	22,064
Equity securities	218,010		262,152		—		480,162
Commingled fixed income securities	—		177,349		—		177,349
Debt securities - U.S. and foreign governments, agencies and municipalities	60,411		16,745		—		77,156
Debt securities - corporate	—		467,281		—		467,281
Mortgage-backed securities	—		57,922		3,702		61,624
Asset-backed securities	—		919		—		919
Private equity	—		—		88,870		88,870
Real estate	—		—		57,918		57,918
Derivatives	293		—		—		293
Securities lending collateral ⁽¹⁾	—		119,528		—		119,528
Total plan assets at fair value	$	278,714	$	1,123,960	$	150,490	$	1,553,164
Securities lending payable ⁽¹⁾							(119,528		)
Cash							1,108
Other							(8,208		)
Fair value of plan assets available for benefits							$	1,426,536

(1) Securities lending collateral is offset by a corresponding securities lending payable amount.

Foreign Plans



	December 31, 2012
	Level 1		Level 2			Level 3		Total
Money market funds	$	—	$	7,130		$	—	$	7,130
Equity securities	96,442		213,662			—		310,104
Commingled fixed income securities	—		157,332			—		157,332
Debt securities - U.S. and foreign governments, agencies and municipalities	—		18,937			—		18,937
Debt securities - corporate	—		6,935			—		6,935
Derivatives	—		(114		)	—		(114		)
Total plan assets at fair value	$	96,442	$	403,882		$	—	$	500,324
Cash								4,414
Other								4,593
Fair value of plan assets available for benefits								$	509,331



	December 31, 2011
	Level 1		Level 2		Level 3		Total
Money market funds	$	—	$	7,236	$	—	$	7,236
Equity securities	113,257		150,787		—		264,044
Commingled fixed income securities	—		127,611		—		127,611
Debt securities - U.S. and foreign governments, agencies and municipalities	—		13,616		—		13,616
Debt securities - corporate	—		7,150		—		7,150
Derivatives	—		382		—		382
Total plan assets at fair value	$	113,257	$	306,782	$	—	$	420,039
Cash							16,424
Other							2,385
Fair value of plan assets available for benefits							$	438,848

The following information relates to our classification of investments into the fair value hierarchy:


•	Money Market Funds: Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies and other highly liquid, low-risk securities. Money market funds are principally used for overnight deposits. The money market funds are classified as Level 2 since they are not actively traded on an exchange.

•

Equity Securities: Equity securities include U.S. and foreign common stock, American Depository Receipts, preferred stock and commingled funds. Equity securities classified as Level 1 are valued using active, high volume trades for identical securities. Equity securities classified as Level 2 represent those not listed on an exchange in an active market. These securities are valued based on quoted market prices of similar securities.

•

Commingled Fixed Income Securities: Mutual funds that invest in a variety of fixed income securities including securities of the U.S. government and its agencies, corporate debt, mortgage-backed securities and asset-backed securities. Value of the funds is based on the net asset value (NAV) per unit as reported by the fund manager. NAV is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled fixed income securities are not listed on an active exchange and are classified as Level 2.

•

Debt Securities - U.S. and Foreign Governments, Agencies and Municipalities: Government securities include treasury notes and bonds, foreign government issues, U.S. government sponsored agency debt and commingled funds. Municipal debt securities include general obligation securities and revenue-backed securities. Debt securities classified as Level 1 are valued using active, high volume trades for identical securities. Debt securities classified as Level 2 are valued through benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities.


•	Corporate Debt Securities: Investments are comprised of both investment grade debt (≥BBB-) and high-yield debt (≤BBB-). The fair value of corporate debt securities is valued using recently executed transactions, market price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities are classified as Level 2.

•

Mortgage-Backed Securities (MBS): Investments are comprised of agency-backed MBS, non-agency MBS, collateralized mortgage obligations, commercial MBS, and commingled funds. These securities are valued based on external pricing indices. When external index pricing is not observable, MBS are valued based on external price/spread data. If neither pricing method is available, broker quotes are utilized. When inputs are observable and supported by an active market, MBS are classified as Level 2 and when inputs are unobservable, MBS are classified as Level 3.


•	Asset-Backed Securities (ABS): Investments are primarily comprised of credit card receivables, auto loan receivables, student loan receivables, and Small Business Administration loans. These securities are valued based on external pricing indices or external price/spread data and are classified as Level 2.


•	Private Equity: Investments are comprised of units in fund-of-fund investment vehicles. Fund-of-funds consist of various private equity investments and are used in an effort to gain greater diversification. The investments are valued in accordance with the most appropriate valuation techniques, and are classified as Level 3 due to the unobservable inputs used to determine a fair value.


•	Real Estate: Investments include units in open-ended commingled real estate funds. Properties that comprise these funds are valued in accordance with the most appropriate valuation techniques, and are classified as Level 3 due to the unobservable inputs used to determine a fair value.

•

Derivatives: Instruments are comprised of futures, forwards, options and warrants and are used to gain exposure to a desired investment as well as for defensive hedging purposes against currency and interest rate fluctuations. Derivative instruments classified as Level 1 are valued through a readily available exchange listed price. Derivative instruments classified as Level 2 are valued using observable inputs but are not listed or traded on an exchange.

•

Securities Lending Fund: Investment represents a commingled fund through our custodian's securities lending program. The U.S. pension plan lends securities that are held within the plan to other banks and/or brokers, and receives collateral, typically cash. This collateral is invested in a short-term fixed income securities commingled fund. The commingled fund is not listed or traded on an exchange and is classified as Level 2. This amount invested in the fund is offset by a corresponding liability reflected in the U.S. pension plan's net assets available for benefits.

Level 3 Gains and Losses

The following table summarizes the changes in the fair value of Level 3 assets for the year ended December 31, 2012:



	Mortgage-backed securities			Private equity			Real estate			Total
Balance at beginning of year	$	3,702		$	88,870		$	57,918		$	150,490
Realized (losses) gains	(3		)	(13		)	1,780			1,764
Unrealized (losses) gains	(20		)	742			5,711			6,433
Net purchases, sales and settlements	(488		)	2,206			(2,241		)	(523		)
Balance at end of year	$	3,191		$	91,805		$	63,168		$	158,164

There are no shares of our common stock included in the plan assets of our pension plans.

During 2013, we anticipate making contributions of $10 million to our U.S. pension plans and $20 million to our foreign pension plans. We will reassess our funding alternatives as the year progresses.

Nonpension Postretirement Benefits

We provide certain health care and life insurance benefits in the U.S. and Canada to eligible retirees and their dependents. The cost of these benefits is recognized over the period the employee provides credited service to the company. Employees hired before January 1, 2005 in the U.S. and before April 1, 2005 in Canada become eligible for retiree health care benefits after reaching age 55 or in the case of employees of Pitney Bowes Management Services after reaching age 60 and with the completion of the required service period. U.S. employees hired after January 1, 2005 and Canadian employees hired after April 1, 2005, are not eligible for retiree health care benefits. Effective January 1, 2013, we amended our retiree medical coverage for certain eligible retirees by eliminating company provided coverage in some instances in favor of a Retirement Reimbursement Account and a third party health insurance exchange to assist retirees in making health care coverage choices. These changes do not impact active employees or pre-age 65 retirees who are not otherwise Medicare eligible.

The benefit obligation and funded status for nonpension postretirement benefit plans are as follows:



	2012			2011
Benefit obligation
Benefit obligation at beginning of year	$	285,828		$	280,386
Service cost	3,563			3,328
Interest cost	11,187			13,528
Plan participants' contributions	9,547			8,861
Actuarial loss	4,150			20,792
Foreign currency changes	697			(648		)
Plan amendment	8,501			—
Curtailment	—			3,245
Special termination benefits	—			300
Benefits paid	(40,616		)	(43,964		)
Benefit obligation at end of year ⁽¹⁾	$	282,857		$	285,828


(1)	The benefit obligation for the U.S. nonpension postretirement plans was $256 million and $262 million at December 31, 2012 and 2011, respectively.



	2012			2011
Fair value of plan assets
Fair value of plan assets at beginning of year	$	—		$	—
Company contribution	31,069			35,103
Plan participants' contributions	9,547			8,861
Gross benefits paid	(40,616		)	(43,964		)
Fair value of plan assets at end of year	$	—		$	—

Funded status	$	(282,857	)	$	(285,828	)



Amounts recognized in the Consolidated Balance Sheets
Current liability	$	(25,483	)	$	(28,855	)
Non-current liability	(257,374		)	(256,973		)
Net amount recognized	$	(282,857	)	$	(285,828	)

Pretax amounts recognized in AOCI consist of:



	2012		2011
Net actuarial loss	$	106,654	$	115,713
Prior service credit	8,872		(5,696		)
Total	$	115,526	$	110,017

The components of net periodic benefit cost for nonpension postretirement benefit plans were as follows:



	2012			2011			2010
Service cost	$	3,563		$	3,328		$	3,724
Interest cost	11,187			13,528			13,828
Amortization of prior service benefit	(1,724		)	(2,504		)	(2,511		)
Recognized net actuarial loss	8,214			7,666			6,793
Curtailment	—			2,839			6,954
Special termination benefits	—			300			191
Net periodic benefit cost	$	21,240		$	25,157		$	28,979

Other changes in plan assets and benefit obligation for nonpension postretirement benefit plans recognized in other comprehensive income were as follows:



	2012			2011
Net actuarial loss	$	(195	)	$	22,201
Amortization of net actuarial loss	4,631			(9,980		)
Amortization of prior service credit	1,724			2,504
Adjustment for actual Medicare Part D Premium	(651		)	(2,040		)
Curtailment	—			308
Total recognized in other comprehensive income	$	5,509		$	12,993

The estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2013 are as follows:



Net actuarial loss	$	8,961
Prior service credit	661
Total	$	9,622

The weighted-average discount rates used to determine end of year benefit obligation and net periodic pension cost include:



	2012		2011		2010
Discount rate used to determine benefit obligation
U.S.	3.50	%	4.50	%	5.15	%
Canada	3.90	%	4.15	%	5.15	%

Discount rate used to determine net period benefit cost
U.S.	4.50	%	5.15	%	5.35	%
Canada	4.15	%	5.15	%	5.85	%

The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for the U.S. plan was 7.50% for 2012 and 7.50% for 2011. The assumed health care trend rate is 7.00% for 2013 and will gradually decline to 5.0% by the year 2017 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in the assumed health care cost trend rates would have the following effects:



	1% Increase	1% Decrease
Effect on total of service and interest cost components	573	(477	)
Effect on postretirement benefit obligation	10,086	(8,703	)

Estimated Future Benefit Payments

Benefit payments expected to be paid, which reflect expected future service, are shown in the table below. Nonpension benefit payments are net of expected Medicare Part D subsidy.



	Pension Benefits		Nonpension Benefits
Years ending December 31,
2013	$	139,394	$	25,959
2014	137,336		24,905
2015	130,778		23,826
2016	132,252		22,932
2017	134,710		22,037
2018 - 2022	700,363		98,604
	$	1,374,833	$	218,263

Savings Plans

We offer voluntary defined contribution plans to our U.S. employees designed to help them accumulate additional savings for retirement. We provide a core contribution to all employees, regardless if they participate in the plan, and match a portion of each participating employees' contribution, based on eligible pay. Total contributions to our defined contribution plans were $30 million in both 2012 and 2011.