PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Defined Benefit and Post-retirement Healthcare Plans

ABX sponsors a qualified defined benefit pension plan for ABX crewmembers and a qualified defined benefit pension plan for a major portion of its other ABX employees that meet minimum eligibility requirements. ABX also sponsors non-qualified defined benefit pension plans for certain employees. These non-qualified plans are unfunded. Employees are no longer accruing benefits under any of the defined benefit pension plans. ABX also sponsors a post-retirement healthcare plan for its ABX employees, which is unfunded.

The accounting and valuation for these post-retirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long term nature of these benefit payouts increases the sensitivity of certain estimates of our post-retirement costs. The assumptions considered most sensitive in actuarially valuing ABX’s pension obligations and determining related expense amounts are discount rates and expected long term investment returns on plan assets. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our results of operations.

ABX measures plan assets and benefit obligations as of December 31 of each year. Information regarding ABX’s sponsored defined benefit pension plans and post-retirement healthcare plans follow below. The accumulated benefit obligation reflects pension benefit obligations based on the actual earnings and service to-date of current employees.

Funded Status (in thousands):



	Pension Plans						Post-retirement Healthcare Plans
	2013			2012			2013			2012
Accumulated benefit obligation	$	761,774		$	860,463		$	7,482		$	8,781
Change in benefit obligation
Obligation as of January 1	$	860,463		$	772,612		$	8,781		$	9,275
Service cost	—			—			275			269
Interest cost	35,957			37,089			264			379
Curtailment gain	—			—			—			—
Special termination benefits	—			—			—			—
Plan amendment	—			—			—			(460		)
Plan transfers	2,448			1,657			—			—
Benefits paid	(28,966		)	(26,130		)	(1,364		)	(974		)
Actuarial (gain) loss	(108,128		)	75,235			(474		)	292
Obligation as of December 31	$	761,774		$	860,463		$	7,482		$	8,781
Change in plan assets
Fair value as of January 1	$	682,553		$	594,697		$	—		$	—
Actual gain on plan assets	67,719			87,598			—			—
Plan transfers	2,448			1,657			—			—
Employer contributions	27,492			24,731			1,364			974
Benefits paid	(28,966		)	(26,130		)	(1,364		)	(974		)
Fair value as of December 31	$	751,246		$	682,553		$	—		$	—
Funded status
Overfunded plans, net asset	$	14,855		$	—		$	—		$	—
Underfunded plans
Current liabilities	$	(1,339	)	$	(1,331	)	$	(888	)	$	(1,105	)
Non-current liabilities	$	(24,044	)	$	(176,579	)	$	(6,594	)	$	(7,676	)

Components of Net Periodic Benefit Cost

ABX’s net periodic benefit costs for its defined benefit pension plans and post-retirement healthcare plans for the years ended December 31, 2013, 2012 and 2011, are as follows (in thousands):



	Pension Plans									Post-Retirement Healthcare Plan
	2013			2012			2011			2013			2012			2011
Service cost	$	—		$	—		$	—		$	275		$	269		247
Interest cost	35,957			37,089			37,163			264			379			389
Expected return on plan assets	(45,990		)	(39,882		)	(39,027		)	—			—			—
Amortization of prior service cost	—			—			—			419			433			529
Amortization of net (gain) loss	12,296			10,681			2,700			(5,654		)	(5,552		)	(5,552		)
Net periodic benefit cost	$	2,263		$	7,888		$	836		$	(4,696	)	$	(4,471	)	$	(4,387	)

In 2010, the Company modified the post-retirement health plans for ABX employees. Benefits for covered individuals now terminates upon reaching age 65 under the modified post-retirement healthcare plans.

Unrecognized Net Periodic Benefit Expense

The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit expense at December 31 are as follows (in thousands):



	Pension Plans				Post-Retirement Healthcare Plans
	2013		2012		2013			2012
Unrecognized prior service cost	$	—	$	—	$	(4,182	)	$	(9,836	)
Unrecognized net actuarial loss	40,190		182,342		2,027			2,920
Accumulated other comprehensive (income) loss	$	40,190	$	182,342	$	(2,155	)	$	(6,916	)

The following table sets forth the amounts of unrecognized net actuarial loss and (gain) recorded in accumulated other comprehensive loss that is expected to be recognized as components of net periodic benefit expense during 2014 (in thousands):



	Pension Plans			Post- Retirement Healthcare Plans
Amortization of actuarial loss	$	(2	)	$	320
Prior Service Cost	—			(3,487		)

Assumptions

Assumptions used in determining the funded status of ABX’s pension plans at December 31 were as follows:



	Pension Plans
	2013	2012	2011
Discount rate - crewmembers	5.25%	4.25%	5.10%
Discount rate - non-crewmembers	5.35%	4.25%	4.65%
Expected return on plan assets	6.25%	6.75%	6.75%

Net periodic benefit cost was based on the discount rate assumptions at the end of the previous year.

The discount rate used to determine post-retirement healthcare obligations was 4.15% for pilots and 3.85% for non-pilots at December 31, 2013. The discount rate used to determine post-retirement healthcare obligations was 3.35% for pilots and 2.95% for non-pilots at December 31, 2012. The discount rate used to determine post-retirement healthcare obligations was 4.60% for pilots and 4.05% for non-pilots at December 31, 2011. Post-retirement healthcare plan obligations have not been funded. The Company's retiree healthcare contributions have been fixed for each participant, accordingly, healthcare cost trend rates do not effect the post-retirement healthcare obligations.

Plan Assets

The weighted-average asset allocations by asset category are as shown below:



	Composition of Plan Assets as of December 31
Asset category	2013		2012
Cash	—	%	—	%
Equity securities	50	%	48	%
Fixed income securities	47	%	49	%
Real estate	3	%	3	%
	100	%	100	%

ABX uses an investment management firm to advise it in developing and executing an investment policy. The portfolio is managed with consideration for diversification, quality and marketability. The investment policy permits the following ranges of asset allocation: equities – 22.5% to 69.3%; fixed income securities – 38.0% to 76.5%; real estate – 3% to 7%; cash – 0% to 10%. Except for U.S. Treasuries, no more than 10% of the fixed income portfolio and no more than 5% of the equity portfolio can be invested in securities of any single issuer.

The overall expected long term rate of return was developed using various market assumptions in conjunction with the plans’ targeted asset allocation. The assumptions were based on historical market returns.

Cash Flows

In 2013 and 2012, the Company made contributions to its defined benefit plans of $27.5 million and $24.7 million, respectively. The Company estimates that its contributions in 2014 will be approximately $6.3 million for its defined benefit pension plans and $0.9 million for its post-retirement healthcare plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid out of the respective plans as follows (in thousands):



	Pension Benefits		Post-retirement Healthcare Benefits
2014	$	31,260	$	888
2015	33,144		844
2016	37,769		764
2017	37,332		755
2018	39,860		749
Years 2019 to 2023	232,378		3,775

Fair Value Measurements

The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Temporary Cash Investments—These investments consist of U.S. dollars and foreign currencies held in master trust accounts at The Northern Trust Company. Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. These temporary cash investments are classified as Level 1 investments.

Corporate Stock—This investment category consists of common and preferred stock issued by domestic and international corporations that are regularly traded on exchanges and price quotes for these shares are readily available. These investments are classified as Level 1 investments.

Common Trust Funds—Common trust funds are composed of shares or units in non-publicly traded funds whereby the underlying assets in these funds (cash, cash equivalents, fixed income securities and equity securities) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Holdings of common trust funds are classified as Level 2 investments.

Mutual Funds—Investments in this category include shares in registered mutual funds, unit trust and commingled funds. These funds consist of domestic equity, international equity and fixed income strategies. Investments in this category that are publicly traded on an exchange and have a share price published at the close of each business day are classified as Level 1 investments and holdings in the other mutual funds are classified as Level 2 investments.

Fixed Income Investments—Securities in this category consist of U.S. Government or Agency securities, state and local government securities, corporate fixed income securities or pooled fixed income securities. Securities in this category that are valued utilizing published prices at the close of each business day are classified as Level 1 investments. Those investments valued by bid data prices provided by independent pricing sources are classified as Level 2 investments.

Real Estate—The real estate investment in a commingled trust account consists of publicly traded real estate investment trusts and collateralized mortgage backed securities as well as private market direct property investments. The valuations for the holdings in these investments are not based on readily observable inputs and are classified as Level 3 investments.

Hedge Funds and Private Equity—These investments are not readily tradeable and have valuations that are not based on readily observable data inputs. The fair value of these assets is estimated based on information provided by the fund managers or the general partners. Therefore, these assets are classified as Level 3.

The pension plan assets measured at fair value on a recurring basis were as follows (in thousands):



As of December 31, 2013	Fair Value Measurement Using						Total
	Level 1		Level 2		Level 3		Total
Plan assets
Temporary cash investments	$	—	$	—	$	—	$	—
Common trust funds	—		10,503		—		10,503
Corporate stock	63,313		—		—		63,313
Mutual funds	107,635		164,230		—		271,865
Fixed income investments	6,761		349,904		—		356,665
Real estate	—		—		19,561		19,561
Hedge funds and private equity	—		—		29,339		29,339
Total plan assets	$	177,709	$	524,637	$	48,900	$	751,246



As of December 31, 2012	Fair Value Measurement Using						Total
	Level 1		Level 2		Level 3		Total
Plan assets
Temporary cash investments	$	—	$	—	$	—	$	—
Common trust funds	—		5,720		—		5,720
Corporate stock	63,396		2,123		—		65,519
Mutual funds	96,008		138,846		—		234,854
Fixed income investments	5,832		326,478		—		332,310
Real estate	—		—		17,181		17,181
Hedge funds and private equity	—		—		26,969		26,969
Total plan assets	$	165,236	$	473,167	$	44,150	$	682,553

ABX’s pension investments include hedge funds, private equity and real estate funds whose fair values have been estimated in the absence of readily determinable fair values. Management’s estimates are based on information provided by the fund managers or general partners of those funds. The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant Level 3 unobservable inputs (in thousands):



	Hedge Funds & Private Equity			Real Estate Investments		Total
January 1, 2012	$	25,759		$	14,557	$	40,316
Unrealized gains	3,612			2,624		6,236
Purchases & settlements	(2,402		)	—		(2,402		)
December 31, 2012	$	26,969		$	17,181	$	44,150
Unrealized gains	3,884			2,380		6,264
Purchases & settlements	(1,514		)	—		(1,514		)
December 31, 2013	$	29,339		$	19,561	$	48,900

Defined Contribution Plans

The Company sponsors defined contribution capital accumulation plans (401k) that are funded by both voluntary employee salary deferrals and by employer contributions. Expenses for defined contribution retirement plans were as follows (in thousands):



	Years Ended December 31
	2013		2012		2011
Capital accumulation plans	$	5,131	$	5,300	$	4,938
Total expense	$	5,131	$	5,300	$	4,938