Note 11: Benefit Plans

Pension and Postretirement Benefit Plans

The Company sponsors a number of pension and postretirement plans worldwide. Benefits are provided to employees under defined benefit pay-related and service-related plans, which are non-contributory in nature. The Company’s funding policy for the U.S. defined benefit retirement plans is to annually contribute amounts that equal or exceed the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The Company’s annual contributions to the international retirement plans are consistent with the requirements of applicable local laws.

The Company also provides postretirement healthcare and life insurance benefits in the U.S. and South Africa to a limited group of current and retired employees. All of the Company’s postretirement benefit plans are unfunded.

The following table provides a reconciliation of the changes in the benefit obligations (the projected benefit obligation in the case of the pension plans and the accumulated postretirement benefit obligation in the case of the other postretirement plans) and in the fair value of plan assets for the years ended December 31, 2012 and 2011. The Company uses a December 31 measurement date for its pension and other postretirement benefit plans.


	Pension Benefits												Other
	U.S. Plans						Non-U.S. Plans						Postretirement Benefits
	2012			2011			2012			2011			2012			2011
Reconciliation of benefit obligations:
Obligations as of January 1	$	74,867			71,116		$	224,507			219,832		$	15,841			14,896
Service cost		—			—			1,136			1,205			27			28
Interest cost		3,191			3,505			10,697			12,179			591			769
Participant contributions		—			—			45			50			—			—
Actuarial losses (gains)		4,040			5,456			26,026			(843	)		(382	)		1,811
Plan amendments		—			—			85			—			(9,573	)		—
Benefit payments		(5,184	)		(5,210	)		(8,317	)		(8,109	)		(1,159	)		(1,497	)
Transfers		—			—			—			3,238			—			—
Effect of foreign currency exchange rate changes		—			—			9,037			(3,045	)		(32	)		(166	)
Benefit obligations as of December 31	$	76,914			74,867		$	263,216			224,507		$	5,313			15,841
Reconciliation of fair value of plan assets:
Fair value of plan assets as of January 1	$	54,687			52,169		$	161,088			158,329
Actual return on plan assets		7,097			1,150			17,770			3,734
Transfers		—			—			—			2,617
Employer contributions		3,585			6,578			5,571			5,850
Participant contributions		—			—			45			50
Benefit payments and plan expenses		(5,184	)		(5,210	)		(8,317	)		(8,109	)
Effect of foreign currency exchange rate changes		—			—			7,037			(1,383	)
Fair value of plan assets as of December 31	$	60,185			54,687		$	183,194			161,088
Funded status as of December 31	$	(16,729	)		(20,180	)	$	(80,022	)		(63,419	)	$	(5,313	)		(15,841	)

During 2012, the US postretirement medical plan was amended. The Company is transitioning to no longer subsidize expenses for the post-65 retiree medical plan. The change was phased in so that the Company and the retiree will each pay 50% of the cost effective January 1, 2013, and the retiree will pay 100% of the cost effective January 1, 2014. Due to this amendment, the other postretirement benefits liability has significantly decreased from December 31, 2011 to December 31, 2012. The Company already requires the retiree to pay 100% of the cost for the pre-65 retiree medical plan.

Amounts recognized as a component of accumulated other comprehensive income at December 31, 2012 and 2011 that have not been recognized as a component of net periodic benefit cost are presented in the following table:


	Pension Benefits								Other Postretirement Benefits
	U.S. Plans				Non-U.S. Plans				Other Postretirement Benefits
	2012		2011		2012		2011		2012			2011
Net actuarial losses (gains)	$	26,821		27,463	$	52,617		33,454	$	(6,693	)		(7,213	)
Prior-service cost (credit)		1		1		384		323		(9,431	)		(259	)
Amounts included in accumulated other comprehensive income	$	26,822		27,464	$	53,001		33,777	$	(16,124	)		(7,472	)

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the year ending December 31, 2013, are $4.0 million and zero, respectively. The estimated net gain and prior service credit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the year ending December 31, 2013, are $1.0 million and $1.4 million, respectively.

Total pension and other postretirement benefit liabilities are included in the following captions in the Consolidated Balance Sheets at December 31, 2012 and 2011:


	2012			2011
Accrued liabilities	$	(2,588	)		(2,779	)
Postretirement benefits other than pensions		(4,046	)		(14,462	)
Other liabilities		(95,430	)		(82,199	)
Total pension and other postretirement accrued benefit liability	$	(102,064	)		(99,440	)

The following table provides information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31:


	U.S. Plans				Non-U.S. Plans
	2012		2011		2012		2011
Projected benefit obligation	$	76,914		74,867	$	262,386		223,833
Accumulated benefit obligation		76,914		74,867		242,937		205,957
Fair value of plan assets		60,185		54,687		182,297		160,397

The accumulated benefit obligation for all U.S. defined benefit pension plans was $76.9 million and $74.9 million at December 31, 2012 and 2011, respectively. The accumulated benefit obligation for all non-U.S. defined benefit pension plans was $243.8 million and $206.6 million at December 31, 2012 and 2011, respectively.

The following table provides the components of net periodic benefit cost and other amounts recognized in other comprehensive income, before income tax effects, for the years ended December 31, 2012, 2011 and 2010:


	Pension Benefits																		Other Postretirement Benefits
	U.S. Plans									Non-U.S. Plans									Other Postretirement Benefits
	2012			2011			2010			2012			2011			2010			2012			2011			2010
Net periodic benefit cost (income):
Service cost	$	—			—			—		$	1,136			1,205			1,054		$	27			28			26
Interest cost		3,191			3,505			3,738			10,697			12,179			11,650			591			769			888
Expected return on plan assets		(4,192	)		(4,118	)		(3,603	)		(10,337	)		(11,256	)		(10,390	)		—			—			—
Amortization of prior-service cost (credit)		—			—			—			36			37			29			(401	)		(59	)		(128	)
Amortization of net loss (gain)		1,778			1,231			1,340			1,243			904			983			(893	)		(1,271	)		(1,446	)
Net periodic benefit cost (income)		777			618			1,475			2,775			3,069			3,326		$	(676	)		(533	)		(660	)
Gain due to settlements or curtailments		—			—			—			—			—			(818	)		—			—			—
Total net periodic benefit cost (income) recognized	$	777			618			1,475		$	2,775			3,069			2,508		$	(676	)		(533	)		(660	)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss (gain)	$	1,136			8,423			(1,032	)	$	18,593			6,641			(582	)	$	(382	)		1,812			(1,304	)
Amortization of net actuarial (loss) gain		(1,778	)		(1,231	)		(1,340	)		(1,243	)		(904	)		(917	)		893			1,271			1,446
Prior service cost (credit)		—			—			—			84			—			127			(9,573	)		—			—
Amortization of prior service (cost) credit		—			—			—			(36	)		(37	)		(29	)		401			59			128
Effect of foreign currency exchange rate changes		—			—			—			1,827			(442	)		(3,704	)		9			39			(16	)
Total recognized in other comprehensive income	$	(642	)		7,192			(2,372	)	$	19,225			5,258			(5,105	)	$	(8,652	)		3,181			254
Total recognized in net periodic benefit cost and other comprehensive income	$	135			7,810			(897	)	$	22,000			8,327			(2,597	)	$	(9,328	)		2,648			(406	)

The discount rate selected to measure the present value of the Company’s benefit obligations was derived by examining the rates of high-quality, fixed income securities whose cash flows or duration match the timing and amount of expected benefit payments under a plan. The Company selects the expected long-term rate of return on plan assets in consultation with the plans’ actuaries. This rate is intended to reflect the expected average rate of earnings on the funds invested or to be invested to provide plan benefits and the Company’s most recent plan assets target allocations. The plans are assumed to continue in force for as long as the assets are expected to be invested. In estimating the expected long-term rate of return on plan assets, appropriate consideration is given to historical performance of the major asset classes held or anticipated to be held by the plans and to current forecasts of future rates of return for those asset classes. Because assets are held in qualified trusts, expected returns are not adjusted for taxes. The following weighted-average actuarial assumptions were used to determine net periodic benefit cost for the years ended December 31:


	Pension Benefits																		Other Postretirement Benefits
	U.S. Plans									Non-U.S. Plans									Other Postretirement Benefits
	2012			2011			2010			2012			2011			2010			2012			2011			2010
Discount rate		4.6	%		5.3	%		5.7	%		4.8	%		5.4	%		5.7	%		4.8	%		5.5	%		6.0	%
Expected long-term rate of return on plan assets		8.0	%		7.8	%		7.8	%		6.3	%		6.8	%		7.2	%		N/A			N/A			N/A
Rate of compensation increases		N/A			N/A			N/A			3.0	%		3.6	%		3.8	%		N/A			N/A			N/A

The following weighted-average actuarial assumptions were used to determine benefit obligations at December 31:


	Pension Benefits																		Other Postretirement Benefits
	U.S. Plans									Non-U.S. Plans									Other Postretirement Benefits
	2012			2011			2010			2012			2011			2010			2012			2011			2010
Discount rate		3.8	%		4.6	%		5.3	%		4.2	%		4.8	%		5.4	%		4.3	%		4.8	%		5.5	%
Rate of compensation increases		N/A			N/A			N/A			3.0	%		3.0	%		3.6	%		N/A			N/A			N/A

The following actuarial assumptions were used to determine other postretirement benefit plans costs and obligations as of December 31:


	2012			2011			2010
Healthcare cost trend rate assumed for next year		8.2	%		9.8	%		7.0	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.6	%		5.1	%		5.2	%
Year that the rate reaches the ultimate trend rate		2020			2021			2015

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement medical plans. The following table provides the effects of a one-percentage-point change in assumed healthcare cost trend rates as of December 31, 2012:


	1% Increase		1% Decrease
Effect on total of service and interest cost components of net periodic benefit cost — increase (decrease)	$	10	$	(8	)
Effect on the postretirement benefit obligation — increase (decrease)		89		(74	)

The following table reflects the estimated benefit payments for the next five years and for the years 2018 through 2022. The estimated benefit payments for the non-U.S. pension plans were calculated using foreign exchange rates as of December 31, 2012.


	Pension Benefits
	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
2013	$	6,166		7,963		1,291
2014		5,880		8,350		333
2015		5,372		9,515		303
2016		5,409		10,291		284
2017		4,896		11,018		278
Aggregate 2018-2022		24,769		64,664		1,264

According to an actuarial assessment, the Company was providing prescription drug benefits to certain retired employees in the U.S. which are actuarially equivalent to the Medicare prescription drug benefit, and, therefore, the Company qualified for the federal subsidy introduced in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The reduction in accumulated postretirement benefit obligation as of December 31, 2011 and in net periodic postretirement benefit cost during the years ended December 31, 2012, 2011 and 2010 related to this federal subsidy were not material. As of December 31, 2012, the Company no longer receives the federal subsidy.

In March of 2010, the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (the “Acts”) became law in the U.S. The Acts have not had a material impact on the Company’s financial statements since becoming law. The Company will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available.

In 2013, the Company expects to contribute approximately $1.8 million to the U.S. pension plans and approximately $6.1 million to the non-U.S. pension plans. The expected total contributions to the U.S. pension plans include the impact of the Pension Protection Act (“PPA”) of 2006, which became effective on August 17, 2006, the Worker, Retiree, and Employee Recovery Act of 2008 (“WRERA”) and the Moving Ahead of Progress in the 21^st Century Act (“MAP-21”). While the PPA and WRERA have some effect on specific plan provisions of the U.S. pension plans, their primary effect is to increase the minimum funding requirements for future plan years and to require contributions greater than the minimum funding requirements to avoid benefit restrictions. The primary effect of MAP-21 is to decrease the minimum funding requirements for 2012. The Company’s expected contributions to the U.S. pension plans in 2013, covering both the 2012 and 2013 plan years, are forecasted to be more than the required minimum funding requirements and to satisfy the required minimum funded ratio for the U.S. pension plans to prevent any benefit restrictions.

Plan Asset Investment Strategy

The Company’s overall investment strategy and objectives for its pension plan assets is to (i) meet current and future benefit payment needs through diversification across asset classes, investing strategies and investment managers to achieve an optimal balance between risk and return and between income and growth of assets through capital appreciation, (ii) secure participant retirement benefits, (iii) minimize reliance on contributions as a source of benefit security, and (iv) maintain sufficient liquidity to pay benefit obligations and proper expenses. The composition of the actual investments in various securities changes over time based on short and long-term investment opportunities. None of the plan assets of Gardner Denver’s defined benefit plans are invested in the Company’s common stock. The Company uses both active and passive investment strategies.

Plan Asset Risk Management

The Company’s Benefits Committee, with oversight from the Audit and Finance Committee of the Board of Directors, is responsible for the ongoing monitoring and review of the investment program including plan asset performance, current trends and developments in capital markets, and appropriateness of the overall investment strategy. The Benefits Committee meets regularly with representatives of the Company’s investment advisor to consider potential changes in the plan asset allocation and monitor the performance of investment managers.

The target financial objectives for the pension plans are established in conjunction with periodic comprehensive reviews of each plan’s liability structure. The Company’s asset allocation policy is based on detailed asset and liability model (“ALM”) analyses. A formal ALM study of each major plan is undertaken every 2-5 years or whenever there has been a material change in plan demographics, benefit structure or funded status. In order to determine the recommended asset allocation, the advisors model varying return and risk levels for different theoretical portfolios, using a relative measure of excess return over treasury bills, divided by the standard deviation of the return (the “Sharpe Ratio”). The Sharpe Ratio for different portfolio options was used to compare each portfolio’s potential return, on a risk-adjusted basis. The Company selected a recommended portfolio that achieved the targeted composite return with the least amount of risk.

The Company’s primary pension plans are in the U.S. and UK which together comprise approximately 77% and 90% of the total projected benefit obligation and plan assets, respectively as of December 31, 2012. The following table presents the long-term target allocations for these two plans as of December 31, 2012:


	U.S. Plan			UK Plan
Asset category:
Cash and cash equivalents		—			4%
Equity		60	%		50%
Fixed income		38	%		26%
Real estate and other		2	%		20%
Total		100	%		100%

Fair Value Measurements

The following tables present the fair values of the Company’s pension plan assets at December 31, 2012 and 2011:


	December 31, 2012
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Cash and cash equivalents⁽¹⁾	$	448		4,222		—		4,670
Equity securities:
U.S. large-cap		—		32,165		—		32,165
U.S. mid-cap and small-cap		—		3,638		—		3,638
International⁽²⁾		15,207		93,196		—		108,403
Total Equity securities		15,207		128,999		—		144,206
Fixed income securities:
Corporate bonds — domestic		—		16,536		—		16,536
Corporate bonds — international		—		20,575		—		20,575
UK Index-Linked Gilts		—		22,492		—		22,492
Diversified domestic securities		—		5,502		—		5,502
Total Fixed income securities		—		65,105		—		65,105
Other types of investments:
U.S. real estate⁽³⁾		—		1,445		—		1,445
International real estate⁽³⁾		—		15,766		—		15,766
Other⁽⁴⁾		—		—		12,187		12,187
Total	$	15,655		215,537		12,187		243,379


	December 31, 2011
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Cash and cash equivalents⁽¹⁾	$	—		6,403		—		6,403
Equity securities:
U.S. large-cap		—		29,329		—		29,329
U.S. mid-cap and small-cap		—		3,346		—		3,346
International⁽²⁾		—		80,409		—		80,409
Total Equity securities		—		113,084		—		113,084
Fixed income securities:
Corporate bonds — domestic		—		18,371		—		18,371
Corporate bonds — international		—		28,950		—		28,950
UK Index-Linked Gilts		—		22,041		—		22,041
Diversified domestic securities		—		1,594		—		1,594
Total Fixed income securities		—		70,956		—		70,956
Other types of investments:
U.S. real estate⁽³⁾		—		1,289		—		1,289
International real estate⁽³⁾		—		12,463		—		12,463
Other ⁽⁴⁾		—		—		11,580		11,580
Total	$	—		204,195		11,580		215,775

(1)	Cash and cash equivalents consist of traditional domestic and foreign highly liquid short-term securities with the goal of providing liquidity and preservation of capital while maximizing return on assets.

(2)	The International category consists of investment funds focused on companies operating in developed and emerging markets outside of the U.S. These investments target broad diversification across large and mid/small-cap companies and economic sectors.

(3)	U.S. and International real estate consists primarily of equity and debt investments made, directly or indirectly, in various interests in unimproved and improved real properties.

(4)

Other investments consist of insurance and reinsurance contracts securing the retirement benefits. The fair value of these contracts was calculated at the discount value of premiums paid by the Company, less expenses charged by the insurance providers. The insurance providers with which the Company has placed these contracts are well-known financial institutions with an established history of providing insurance services.

The Company changed the classification of certain non-U.S. pension assets from Level 1 to Level 2 within the fair value hierarchy as of December 31, 2011. The investments affected by this change are investment funds and comingled trusts that do not have observable prices from any or multiple sources or include redemption restrictions. The Company concluded that these investments are more appropriately classified as Level 2 within the fair value hierarchy, which is also consistent with the level classification of similar assets included in the Company’s U.S. benefit plans.

Defined Contribution Plans

The Company also sponsors defined contribution plans at various locations throughout the world. Benefits are determined and funded regularly based on terms of the plans or as stipulated in a collective bargaining agreement. The Company’s full-time salaried and hourly employees in the U.S. are eligible to participate in Company-sponsored defined contribution savings plans, which are qualified plans under the requirements of Section 401(k) of the Internal Revenue Code. The Company’s contributions to the savings plans are in the form of the Company’s common stock or cash. The Company’s total contributions to all worldwide defined contribution plans in 2012, 2011 and 2010 were $17.4 million, $17.7 million and $14.8 million, respectively.

Other Benefit Plans

The Company offers a long-term service award program for qualified employees at certain of its non-U.S. locations. Under this program, qualified employees receive a service gratuity (“Jubilee”) payment once they have achieved a certain number of years of service. The Company’s actuarially calculated obligation equaled $3.9 million and $3.8 million at December 31, 2012 and 2011, respectively.

There are various other employment contracts, deferred compensation arrangements, covenants not to compete and change in control agreements with certain employees and former employees. The liability associated with such arrangements is not material to the Company’s consolidated financial statements.