Employee Benefit Plans

Savings Plan

We offer a qualified defined contribution plan for U.S.-based employees, the Avon Personal Savings Account Plan (the "PSA"), which allows eligible participants to contribute up to 25% of eligible compensation through payroll deductions. We match employee contributions dollar for dollar up to the first 3% of eligible compensation and fifty cents for each dollar contributed from 4% to 6% of eligible compensation. We made matching contributions in cash to the PSA of $12.2 in 2012, $12.6 in 2011 and $12.5 in 2010, which were then used by the PSA to purchase our shares in the open market through June 30, 2011.

Beginning July 1, 2011, matching contributions follow the same allocation as the participant has selected for his or her own contributions.

Defined Benefit Pension and Postretirement Plans

Avon and certain subsidiaries have contributory and noncontributory retirement plans for substantially all employees of those subsidiaries. Benefits under these plans are generally based on an employee’s years of service and average compensation near retirement. Plans are funded based on legal requirements and cash flow.

We provide health care and life insurance benefits (through the end of 2012 only) subject to certain limitations to the majority of retired employees in the U.S. and certain foreign countries. In the U.S., the cost of such health care benefits is shared by us and our retirees for employees hired on or before January 1, 2005. Employees hired after January 1, 2005, will pay the full cost of the health care benefits upon retirement. In August 2009, we announced changes to our postretirement medical and life insurance benefits offered to U.S. retirees. The changes to the retiree medical benefits reduced the plan’s obligations by $36.3. This amount is being amortized as a negative prior service cost over the average future service of active participants which is approximately 12 years. The changes to the retiree life insurance benefits reduced the plan’s obligations by $27.7. This amount was amortized as a negative prior service cost over 3.3 years, which was the remaining term of the plan.

We are required, among other things, to recognize the funded status of pension and other postretirement benefit plans on the balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The recognition of prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status, are recognized as components of accumulated other comprehensive income, net of tax, in shareholders’ equity, until they are amortized as a component of net periodic benefit cost. We recognize prior service costs or credits and actuarial gains and losses beyond a 10% corridor to earnings based on the estimated future service period of the participants. The determination of the 10% corridor utilizes a calculated value of plan assets for our more significant plans, whereby gains and losses are smoothed over three- and five-year periods.

Reconciliation of Benefit Obligations, Plan Assets and Funded Status

The following table summarizes changes in the benefit obligation, plan assets and the funded status of our significant pension and postretirement plans. We use a December 31 measurement date for all of our employee benefit plans.



	Pension Plans
	U.S. Plans						Non-U.S. Plans						Postretirement Benefits
	2012			2011			2012			2011			2012			2011
Change in Benefit Obligation:
Beginning balance	$	(753.7	)	$	(702.6	)	$	(746.7	)	$	(720.3	)	$	(132.3	)	$	(133.0	)
Service cost	(15.1		)	(12.8		)	(18.0		)	(15.4		)	(1.9		)	(2.0		)
Interest cost	(29.6		)	(32.6		)	(39.8		)	(39.7		)	(5.8		)	(6.4		)
Actuarial loss	(68.7		)	(89.9		)	(49.6		)	(21.5		)	(7.4		)	(1.9		)
Plan participant contributions	—			—			(2.3		)	(2.5		)	(3.3		)	(4.0		)
Benefits paid	75.2			83.9			48.7			42.1			12.6			14.1
Plan amendments	—			—			(4.8		)	4.6			—			—
Curtailments	(.4		)	.3			1.2			—			(.2		)	(.2		)
Special termination benefits	(.4		)	—			—			—			(.2		)	—
Foreign currency changes and other	—			—			(27.2		)	6.0			.4			1.1
Ending balance	$	(792.7	)	$	(753.7	)	$	(838.5	)	$	(746.7	)	$	(138.1	)	$	(132.3	)
Change in Plan Assets:
Beginning balance	$	493.4		$	451.7		$	536.4		$	540.6		$	42.6		$	43.7
Actual return on plan assets	67.0			37.0			57.7			(.1		)	2.7			(1.1		)
Company contributions	44.0			88.6			40.7			38.4			(36.0		)	10.1
Plan participant contributions	—			—			2.3			2.5			3.3			4.0
Benefits paid	(75.2		)	(83.9		)	(48.7		)	(42.1		)	(12.6		)	(14.1		)
Foreign currency changes and other	—			—			20.9			(2.9		)	—			—
Ending balance	$	529.2		$	493.4		$	609.3		$	536.4		$	—		$	42.6
Funded Status:
Funded status at end of year	$	(263.5	)	$	(260.3	)	$	(229.3	)	$	(210.3	)	$	(138.1	)	$	(89.7	)
Amount Recognized in Balance Sheet:
Other assets	$	—		$	—		$	2.0		$	2.7		$	—		$	—
Accrued compensation	(23.1		)	(7.9		)	(2.5		)	(12.7		)	(9.4		)	(4.6		)
Employee benefit plans liability	(240.4		)	(252.4		)	(228.8		)	(200.3		)	(128.7		)	(85.1		)
Net amount recognized	$	(263.5	)	$	(260.3	)	$	(229.3	)	$	(210.3	)	$	(138.1	)	$	(89.7	)
Pretax Amounts Recognized in Accumulated Other Comprehensive Loss:
Net actuarial loss	$	483.6		$	489.6		$	314.8		$	294.6		$	52.6		$	52.3
Prior service credit	(.7		)	(1.0		)	(8.2		)	(14.9		)	(38.3		)	(53.0		)
Transition obligation	—			—			.2			.2			—			—
Total pretax amount recognized	$	482.9		$	488.6		$	306.8		$	279.9		$	14.3		$	(.7	)
Supplemental Information:
Accumulated benefit obligation	$	776.5		$	737.3		$	768.5		$	680.9		N/A			N/A
Plans with Projected Benefit Obligation in Excess of Plan Assets:
Projected benefit obligation	$	792.7		$	753.7		$	822.6		$	730.2		N/A			N/A
Fair value plan assets	529.2			493.4			591.3			517.1			N/A			N/A
Plans with Accumulated Benefit Obligation in Excess of Plan Assets:
Projected benefit obligation	$	792.7		$	753.7		$	809.4		$	720.1		N/A			N/A
Accumulated benefit obligation	776.5			737.3			761.9			675.9			N/A			N/A
Fair value plan assets	529.2			493.4			581.5			508.6			N/A			N/A

The U.S. pension plans include funded qualified plans and unfunded non-qualified plans. As of December 31, 2012, the U.S. qualified pension plans had benefit obligations of $728.8 and plan assets of $529.2. As of December 31, 2011, the U.S. qualified pension plans had benefit obligations of $683.5 and plan assets of $493.4. We believe we have adequate investments and cash flows to fund the liabilities associated with the unfunded non-qualified plans.

During the second quarter of 2012, approximately $40 of assets previously designated and intended to be used solely for postretirement benefits were transferred to a trust that funds both active and retiree benefits (the "healthcare trust"). We treated the transfer of these assets as a negative contribution in our net benefit obligation. At December 31, 2012, the balance in this healthcare trust was $26.9.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss



	Pension Benefits
	U.S. Plans									Non-U.S. Plans									Postretirement Benefits
	2012			2011			2010			2012			2011			2010			2012			2011			2010
Net Periodic Benefit Cost:
Service cost	$	15.1		$	12.8		$	11.9		$	18.0		$	15.4		$	14.6		$	1.9		$	2.0		$	2.0
Interest cost	29.6			32.6			35.6			39.8			39.7			39.3			5.8			6.4			7.1
Expected return on plan assets	(36.0		)	(36.2		)	(36.9		)	(39.1		)	(41.1		)	(37.7		)	—			(2.2		)	(2.4		)
Amortization of prior service credit	(.3		)	(.3		)	(.3		)	(1.3		)	(1.6		)	(1.3		)	(13.2		)	(16.0		)	(17.0		)
Amortization of net actuarial losses	43.7			45.4			38.5			17.6			13.5			13.0			4.1			3.2			3.5
Amortization of transition obligation	—			—			—			—			.1			.1			—			—			—
Settlements/curtailments	.8			(.3		)	1.2			1.9			1.4			1.6			(1.0		)	(.8		)	—
Other	—			—			—			.7			.6			.6			—			—			—
Net periodic benefit cost	$	52.9		$	54.0		$	50.0		$	37.6		$	28.0		$	30.2		$	(2.4	)	$	(7.4	)	$	(6.8	)
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss:
Actuarial losses (gains)	$	37.7		$	89.2		$	20.9		$	31.0		$	62.7		$	(3.0	)	$	4.7		$	5.2		$	(3.8	)
Prior service cost (credit)	—			—			(.2		)	4.8			(4.6		)	—			—			—			—
Amortization of prior service credit	.3			.2			.3			2.4			1.6			1.3			14.6			17.0			17.0
Amortization of net actuarial losses	(43.7		)	(45.4		)	(38.4		)	(21.8		)	(14.8		)	(14.5		)	(4.1		)	(3.2		)	(3.6		)
Amortization of transition obligation	—			—			—			—			(.1		)	(.1		)	—			—			—
Settlements/curtailments	—			—			.2			—			—			—			—			—			—
Foreign currency changes	—			—			—			10.4			(2.9		)	(9.5		)	(.2		)	(.3		)	.1
Total recognized in other comprehensive loss*	(5.7		)	44.0			(17.2		)	26.8			41.9			(25.8		)	15.0			18.7			9.7
Total recognized in net periodic benefit cost and other comprehensive loss	$	47.2		$	98.0		$	32.8		$	64.4		$	69.9		$	4.4		$	12.6		$	11.3		$	2.9

* Amounts represent the pre-tax effect included within other comprehensive loss. The net of tax amounts are included within the Consolidated Statements of Changes in Shareholders’ Equity.

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2013 are as follows:



	Pension Benefits
	U.S. Plans			Non-U.S. Plans			Postretirement Benefits
Net actuarial loss	$	45.1		$	18.9		$	3.3
Prior service credit	(.3		)	(1.1		)	(4.8		)
Transition obligation	—			—			—

Assumptions

Weighted-average assumptions used to determine benefit obligations recorded on the Consolidated Balance Sheets as of December 31 were as follows:



	Pension Benefits								Postretirement
	U.S. Plans				Non-U.S. Plans				Benefits
	2012		2011		2012		2011		2012		2011
Discount rate	3.55	%	4.10	%	4.63	%	5.30	%	3.99	%	4.66	%
Rate of compensation increase	3.86	%	3.82	%	3.88	%	4.13	%	N/A		N/A

The discount rate used for determining future pension obligations for each individual plan is based on a review of long-term bonds that receive a high-quality rating from a recognized rating agency. The discount rates for our most significant plans were based on the internal rate of return for a portfolio of high-quality bonds with maturities that are consistent with the projected future benefit payment obligations of each plan. The weighted-average discount rate for U.S. and non-U.S. plans determined on this basis has decreased to 4.11% at December 31, 2012, from 4.69% at December 31, 2011.

Weighted-average assumptions used to determine net benefit cost recorded in the Consolidated Statements of Income for the years ended December 31 were as follows:



	Pension Benefits
	U.S. Plans						Non-U.S. Plans						Postretirement Benefits
	2012		2011		2010		2012		2011		2010		2012		2011		2010
Discount rate	4.10	%	4.80	%	5.35	%	5.30	%	5.60	%	6.04	%	4.66	%	5.28	%	5.83	%
Rate of compensation increase	3.82	%	4.00-6.00%		4.00-6.00%		4.13	%	4.00	%	4.04	%	N/A		N/A		N/A
Rate of return on assets	7.75	%	8.00	%	8.00	%	6.85	%	7.16	%	7.31	%	N/A		N/A		N/A

In determining the long-term rates of return, we consider the nature of each plan’s investments, an expectation for each plan’s investment strategies, historical rates of return and current economic forecasts, among other factors. We evaluate the expected rate of return on plan assets annually and adjust as necessary. In determining the net cost for the year ended December 31, 2012, the assumed rate of return on assets globally was 7.28%, which represents the weighted-average rate of return on all plan assets, including the U.S. and non-U.S. plans.

The assumed rate of return for determining 2012 net costs for the U.S. plan was 7.75%. In addition, the current rate of return assumption for the U.S. plan was based on an asset allocation of approximately 35% in corporate and government bonds and mortgage-backed securities (which are expected to earn approximately 2% to 4% in the long term) and approximately 65% in equity securities and high yield securities (which are expected to earn approximately 6% to 10% in the long term). Similar assessments were performed in determining rates of return on non-U.S. pension plan assets, to arrive at our weighted-average assumed rate of return of 6.85% for determining 2012 net cost.

Plan Assets

Our U.S. and non-U.S. funded pension and postretirement plans target and weighted-average asset allocations at December 31, 2012 and 2011, by asset category were as follows:



	U.S. Pension Plan						Non-U.S. Pension Plans						U.S. Postretirement Plan
	% of Plan Assets						% of Plan Assets						% of Plan Assets
	Target		at Year End				Target		at Year End				Target	at Year End
Asset Category	2013		2012		2011		2013		2012		2011		2013	2012	2011
Equity securities	55-60%		58	%	57	%	55-65%		60	%	61	%	N/A	N/A	47	%
Debt securities	30-35		34		35		30-40		33		32		N/A	N/A	53
Real Estate	—		—		—		—		2		3		N/A	N/A	—
Other	5-10		8		8		0-10		5		4		N/A	N/A	—
Total	100	%	100	%	100	%	100	%	100	%	100	%	N/A	N/A	100	%

The following tables present the fair value hierarchy for pension and postretirement assets measured at fair value on a recurring basis as of December 31, 2012:



	U.S. Pension Plans
Asset Category	Level 1		Level 2		Total
Equity Securities:
Domestic equity	$	—	$	186.4	$	186.4
International equity	—		71.0		71.0
Emerging markets	—		50.5		50.5
	—		307.9		307.9
Fixed Income Securities:
Corporate bonds	—		148.0		148.0
Government securities	—		72.2		72.2
	—		220.2		220.2
Cash	1.1		—		1.1
Total	$	1.1	$	528.1	$	529.2



	Non-U.S. Pension Plans
Asset Category	Level 1		Level 2		Level 3		Total
Equity Securities:
Domestic equity	$	—	$	71.3	$	—	$	71.3
International equity	—		297.4		—		297.4
	—		368.7		—		368.7
Fixed Income Securities:
Corporate bonds	—		85.9		—		85.9
Government securities	—		113.3		—		113.3
Other	—		11.5		—		11.5
	—		210.7		—		210.7
Other:
Cash	16.4		—		—		16.4
Real estate	—		—		13.1		13.1
Other	—		—		.4		.4
	16.4		—		13.5		29.9
Total	$	16.4	$	579.4	$	13.5	$	609.3

As mentioned above, during the second quarter of 2012 approximately $40 of assets previously designated and intended to be used solely for postretirement benefits were transferred to a trust that funds both active and retiree benefits (the "healthcare trust"). At December 31, 2012, there were no U.S. or non-U.S. postretirement assets.

The following tables present the fair value hierarchy for pension and postretirement assets measured at fair value on a recurring basis as of December 31, 2011:



	U.S. Pension and Postretirement Plans
Asset Category	Level 1		Level 2		Total
Equity Securities:
Domestic equity	$	—	$	193.3	$	193.3
International equity	—		64.4		64.4
Emerging markets	—		42.7		42.7
	—		300.4		300.4
Fixed Income Securities:
Corporate bonds	—		180.7		180.7
Government securities	—		53.3		53.3
	—		234.0		234.0
Cash	1.6		—		1.6
Total	$	1.6	$	534.4	$	536.0



	Non-U.S. Pension Plans
Asset Category	Level 1		Level 2		Level 3		Total
Equity Securities:
Domestic equity	$	—	$	104.4	$	—	$	104.4
International equity	14.7		206.2		—		220.9
	14.7		310.6		—		325.3
Fixed Income Securities:
Corporate bonds	—		64.3		—		64.3
Government securities	—		103.4		—		103.4
Other	—		7.9		—		7.9
	—		175.6		—		175.6
Other:
Cash	19.6		—		—		19.6
Real estate	—		—		14.6		14.6
Other	—		—		1.3		1.3
	19.6		—		15.9		35.5
Total	$	34.3	$	486.2	$	15.9	$	536.4

At December 31, 2011, there were no non-U.S. postretirement assets.

A reconciliation of the beginning and ending balances for our Level 3 investments is provided in the table below:




	Amount
Balance as of January 1, 2011	$	15.4
Actual return on plan assets held	.4
Foreign currency changes	.1

Balance as of December 31, 2011	15.9
Actual return on plan assets held	(2.6		)
Foreign currency changes	.2

Balance as of December 31, 2012	$	13.5

Investments in equity securities classified as Level 1 in the fair value hierarchy are valued at quoted market prices. Investments in equity securities classified as Level 2 in the fair value hierarchy include collective funds that are valued at quoted market prices for non-active securities. Fixed income securities are based on broker quotes for non-active securities. Mutual funds are valued at quoted market prices. Real estate is valued by reference to investment and leasing transactions at similar types of property, supplemented by third party appraisals.

The overall objective of our U.S. pension plan is to provide the means to pay benefits to participants and their beneficiaries in the amounts and at the times called for by the plan. This is expected to be achieved through the investment of our contributions and other trust assets and by utilizing investment policies designed to achieve adequate funding over a reasonable period of time.

Pension trust assets are invested so as to achieve a return on investment, based on levels of liquidity and investment risk that are prudent and reasonable as circumstances change from time to time. While we recognize the importance of the preservation of capital, we also adhere to the theory of capital market pricing which maintains that varying degrees of investment risk should be rewarded with compensating returns. Consequently, prudent risk-taking is justifiable.

The asset allocation decision includes consideration of the non-investment aspects of the Avon Products, Inc. Personal Retirement Account Plan, including future retirements, lump-sum elections, growth in the number of participants, company contributions, and cash flow. These characteristics of the plan place certain demands upon the level, risk, and required growth of trust assets. We regularly conduct analyses of the plan’s current and likely future financial status by forecasting assets, liabilities, benefits and company contributions over time. In so doing, the impact of alternative investment policies upon the plan’s financial status is measured and an asset mix which balances asset returns and risk is selected.

Our decision with regard to asset mix is reviewed periodically. Asset mix guidelines include target allocations and permissible ranges for each asset category. Assets are monitored on an ongoing basis and rebalanced as required to maintain an asset mix within the permissible ranges. The guidelines will change from time to time, based on an ongoing evaluation of the plan’s tolerance of investment risk.

Cash flows

We expect to make contributions in the range of $55 to $60 to our U.S. pension and postretirement plans and in the range of $40 to $45 to our international pension and postretirement plans during 2013.

Total benefit payments expected to be paid from the plans are as follows:



	Pension Benefits
	U.S. Plans		Non-U.S. Plans		Total		Postretirement Benefits
2013	$	92.8	$	38.3	$	131.1	$	9.4
2014	61.5		39.7		101.2		9.4
2015	58.1		40.4		98.5		9.5
2016	56.3		42.9		99.2		9.5
2017	55.3		44.0		99.3		9.4
2018 - 2022	261.5		268.3		529.8		43.9

Postretirement Benefits

For 2012, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 9.7% for all claims and is assumed to gradually decrease each year thereafter to 5.1% in 2017 and beyond for our U.S. plan. A one-percentage point change in the assumed health care cost trend rates for all postretirement plans would have the following effects:



	1 Percentage Point Increase		1 Percentage Point Decrease
Effect on total of service and interest cost components	$	.2	$	(.2	)
Effect on postretirement benefit obligation	2.5		(2.3		)

Postemployment Benefits

We provide postemployment benefits, which include salary continuation, severance benefits, disability benefits, continuation of health care benefits and life insurance coverage (through the end of 2012 only) to eligible former employees after employment

but before retirement. The accrued cost for postemployment benefits was $52.2 at December 31, 2012 and $69.5 at December 31, 2011, and was included in employee benefit plans liability.

Supplemental Retirement Programs

We offer a non-qualified deferred compensation plan, the Avon Products, Inc. Deferred Compensation Plan (the "DCP"), for certain higher paid key employees. The DCP is an unfunded, unsecured plan for which obligations are paid to participants out of our general assets. The DCP allows for the deferral of up to 50% of a participant’s base salary, the deferral of up to 100% of incentive compensation bonuses, the deferral of performance restricted stock units for certain employees, and the deferral of contributions that would normally have been made to the PSA but are not deferred because the amount was in excess of U.S. Internal Revenue Code limits on contributions to the PSA. Participants may elect to have their deferred compensation invested in one or more of three investment alternatives. Expense associated with the DCP was $1.7 for 2012, $1.4 for 2011, and $3.3 for 2010. The accrued liability for the DCP was $69.7 at December 31, 2012 and $75.7 at December 31, 2011 and was included in other liabilities.

We maintain supplemental retirement programs consisting of the Supplemental Executive Retirement Plan of Avon Products, Inc. ("SERP") and the Benefit Restoration Pension Plan of Avon Products, Inc. under which non-qualified supplemental pension benefits are paid to higher paid key employees in addition to amounts received under our qualified retirement plan, which is subject to IRS limitations on covered compensation. The annual cost of these programs has been included in the determination of the net periodic benefit cost shown previously and amounted to $8.4 in 2012, $9.8 in 2011 and $10.0 in 2010. The benefit obligation under these programs was $63.9 at December 31, 2012, and $68.4 at December 31, 2011 and was included in employee benefit plans and accrued compensation.

We also maintain a Supplemental Life Plan ("SLIP") under which additional death benefits ranging from $.4 to $2.0 are provided to certain active and retired officers. The SLIP has not been offered to new officers since January 1, 2010.

We established a grantor trust to provide assets that may be used for the benefits payable under the SERP and SLIP. The trust is irrevocable and, although subject to creditors’ claims, assets contributed to the trust can only be used to pay such benefits with certain exceptions. The assets held in the trust are included in other assets and at December 31 consisted of the following:



	2012			2011
Corporate-owned life insurance policies	$	42.7		$	41.9
Cash and cash equivalents	(.1		)	.7
Total	$	42.6		$	42.6

The assets are recorded at fair market value, except for investments in corporate-owned life insurance policies which are recorded at their cash surrender values as of each balance sheet date, which is a proxy of fair value. Changes in the cash surrender value during the period are recorded as a gain or loss in the Consolidated Statements of Income.