12. Pension and Other Postretirement Benefit Plans

Defined Benefit Pension Plans

The company has both tax-qualified and nonqualified, noncontributory defined benefit pension plans that together cover certain domestic and foreign employees. These plans provide benefits based upon a participant’s compensation and years of service. The nonqualified plans are made up of the following arrangements: a nonqualified supplemental deferred compensation arrangement and a nonqualified excess pension deferred compensation arrangement (together, “the nonqualified plans”). The nonqualified supplemental deferred compensation arrangement provides supplemental income to key executives of the company. The benefit is determined by the accumulation of an account balance that results from a percentage of pay credit and interest. No deferrals of pay are required from participants. The balance is paid to a participant after retirement over a 15-year period. The nonqualified excess pension deferred compensation arrangement provides benefits to key employees that cannot be provided by the qualified plan due to IRS limitations.

The change in benefit obligation, change in fair value of plan assets and funded status for the plans are as follows:


	2013			2012
(dollars in millions)
Benefit obligation - beginning	$	485.0		$	421.9
Service cost		30.4			28.4
Interest cost		18.3			19.5
Actuarial (gain) loss		(20.8	)		37.2
Benefits paid		(39.5	)		(23.1	)
Currency/other		3.2			1.1

Benefit obligation - ending	$	476.6		$	485.0

Fair value of plan assets - beginning	$	355.7		$	298.7
Actual return on plan assets		64.0			38.2
Company contributions		33.4			40.3
Benefits paid		(39.5	)		(23.1	)
Currency/other		2.6			1.6

Fair value of plan assets - ending	$	416.2		$	355.7

Funded status of the plans, December 31	$	(60.4	)	$	(129.3	)

Foreign benefit plan assets at fair value included in the preceding table were $86.2 million and $73.3 million at December 31, 2013 and 2012, respectively. The foreign pension plan benefit obligations included in this table were $89.6 million and $75.9 million at December 31, 2013 and 2012, respectively. The benefit obligation for nonqualified plans also included in this table was $66.8 million and $69.8 million at December 31, 2013 and 2012, respectively. The nonqualified plans are generally not funded.

At December 31, 2013 and 2012, the accumulated benefit obligation for all pension plans was $423.7 million and $429.5 million, respectively. At December 31, 2013 and 2012, the accumulated benefit obligation for foreign pension plans was $73.7 million and $62.9 million, respectively. The accumulated benefit obligation for the nonqualified plans was $62.4 million and $65.1 million at December 31, 2013 and 2012, respectively.

For pension plans with benefit obligations in excess of plan assets at December 31, 2013 and 2012, the fair value of plan assets was $86.2 million and $288.2 million, respectively, and the benefit obligation was $156.4 million and $418.5 million, respectively. For pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2013 and 2012, the fair value of plan assets was $7.0 million and $288.2 million, respectively, and the accumulated benefit obligation was $70.2 million and $373.0 million, respectively.

Amounts recognized in accumulated other comprehensive loss at December 31 consisted of:


	2013			2012
(dollars in millions)
Net loss	$	105.8		$	178.2
Prior service credit		(3.7	)		(5.1	)

Before tax amount	$	102.1		$	173.1

After tax amount	$	66.7		$	111.1

The change in net loss in the above table included a net gain of $57.4 million ($21.3 million after tax) and a net loss of $23.4 million ($15.0 million after tax) arising during the years ended December 31, 2013 and 2012, respectively.

Amounts recognized in the consolidated balance sheets at December 31 consisted of:


	2013			2012
(dollars in millions)
Other assets	$	9.8		$	1.0
Accrued compensation and benefits		(4.6	)		(3.9	)
Other long-term liabilities		(65.6	)		(126.4	)

Net amount recognized	$	(60.4	)	$	(129.3	)

The estimated net actuarial loss for pension benefits that will be amortized from accumulated other comprehensive loss into net pension cost over the next fiscal year is expected to be $9.7 million.

The components of net periodic benefit cost for the following years ended December 31 are:


	2013			2012			2011
(dollars in millions)
Service cost, net of employee contributions	$	29.9		$	27.8		$	26.1
Interest cost		18.3			19.5			19.0
Expected return on plan assets		(26.0	)		(24.1	)		(23.2	)
Amortization of net loss		14.1			11.0			8.4
Amortization of prior service cost		(0.5	)		(0.4	)		(0.2	)

Net periodic pension cost	$	35.8		$	33.8		$	30.1

The net pension cost attributable to foreign plans included in the above table were $3.7 million, $3.2 million and $3.7 million in 2013, 2012 and 2011, respectively.

The weighted average assumptions used in determining pension plan information for the following years ended December 31 are:


	2013			2012			2011

Net Cost
Discount rate		3.89	%		4.73	%		5.15	%
Expected return on plan assets		7.27	%		7.52	%		7.93	%
Rate of compensation increase		3.38	%		3.76	%		4.34	%

Benefit Obligation
Discount rate		4.58	%		3.89	%		4.73	%
Rate of compensation increase		3.49	%		3.38	%		3.76	%

The company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities.

The long-term rate of return for plan assets is derived from return assumptions determined for each of the significant asset classes. Under this approach, the historical real returns (net of inflation) on different asset classes are combined with long-term expectations for inflation to determine an expected return on assets within that class. These real rates of return for each asset class reflect the long-term historical relationships between equities and fixed income investments. Current market factors such as inflation and interest rates are evaluated before long-term assumptions are determined. The long-term portfolio return is established based on the combination of these asset class real returns and inflation with proper consideration of the effects of diversification and rebalancing.

Plan Assets—Plan assets consist of a diversified portfolio of equity securities, fixed income securities and cash equivalents. The company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk and are not impacted significantly by short-term fluctuations. Equity investments include a diversified mix of growth, value and small and large capitalization securities. Investment risks and returns are measured and monitored on an ongoing basis through quarterly investment portfolio reviews.

The weighted average target asset allocations for the plans at December 31, are as follows:


	Target Allocation
	2013			2012
Asset Categories
Equity securities		61	%		61	%
Fixed income securities		33	%		33	%
Cash equivalents		6	%		6	%

Total		100	%		100	%

Due to short-term fluctuations in asset performance, allocation percentages may temporarily deviate from these target allocation percentages before a rebalancing occurs. Cash equivalents are used to satisfy benefit disbursement requirements and will vary throughout the year.

The following table summarizes fair value measurements of plan assets at December 31:


	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Total^(B)
	2013		2012		2013		2012		2013		2012
(dollars in millions)
Cash equivalents	$	—	$	—	$	6.7	$	5.1	$	6.7	$	5.1
Equity securities:
U.S. large-cap		—		—		117.8		94.6		117.8		94.6
U.S. mid-cap		35.3		28.6		—		—		35.3		28.6
U.S. small-cap		45.8		38.7		—		—		45.8		38.7
Foreign		30.2		27.8		44.9		36.5		75.1		64.3
Fixed income securities:
Diversified bond fund^(A)		—		—		106.9		98.6		106.9		98.6
Foreign government bonds		—		—		10.6		9.8		10.6		9.8
Foreign corporate notes and bonds		—		—		11.0		10.2		11.0		10.2
Guaranteed insurance contracts		—		—		7.0		5.8		7.0		5.8

Total plan assets	$	111.3	$	95.1	$	304.9	$	260.6	$	416.2	$	355.7

^(A)	Diversified bond fund consists of U.S. Treasury bonds, mortgage backed securities, and corporate bonds.

^(B)	There were no plan assets categorized as Level 3 at December 31, 2013 and 2012, respectively.

Plan assets categorized as Level 2 primarily consist of commingled funds invested in cash equivalents, equities and fixed income securities. These assets are valued using other inputs, such as net asset values provided by the fund administrators or by dealer quotes for similarly-rated instruments that are observable or that can be corroborated by observable market data for substantially the remaining term of the plan instruments.

Funding Policy and Expected Contributions—The company’s objective in funding its domestic tax-qualified plan is to accumulate funds sufficient to provide for all benefits and to satisfy the minimum contribution requirements of ERISA. Outside the United States, the company’s objective is to fund the international retirement costs over time within the limits of minimum requirements and allowable tax deductions. The company’s annual funding decisions also consider the relationship between the returns on each asset compared to the plan’s corresponding expense and consider the relationship between each tax-qualified plan’s benefit obligation and its corresponding funded status. The company expects to make discretionary contributions of up to $30 million to its qualified plans in 2014.

The total expected benefit payments are as follows:


(dollars in millions)
2014	$	31.8
2015		31.7
2016		32.8
2017		34.8
2018		36.6
2019 through 2023		201.6

Defined Contribution Retirement Plans

All domestic employees of the company not covered by a collective bargaining agreement who have been scheduled for 1,000 hours of service are eligible to participate in the company’s defined contribution plan. The amounts charged to income for this plan were $12.8 million, $9.8 million and $7.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. Outside the United States, the company maintains defined contribution plans along with small pension arrangements that are typically funded with insurance products. These arrangements had a total expense of $4.2 million, $2.6 million and $2.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. In addition, the company maintains a long-term deferred compensation arrangement for directors that allows deferral of the annual retainer and meeting fees at the director’s election. The company annually accrues for long-term compensation, which is paid out upon the director’s retirement from the board. The total 2013 expense for these arrangements was not material.

Other Postretirement Benefit Plan

The company does not provide subsidized postretirement healthcare benefits and life insurance coverage except for a limited number of former employees. As this plan is unfunded, contributions are made as benefits are incurred. The benefit obligation for this plan was $7.9 million and $8.9 million at December 31, 2013 and 2012, respectively. Amounts recognized in accumulated other comprehensive loss were $2.4 million ($1.5 million after tax) for the year ended December 31, 2013 and $3.2 million ($2.0 million after tax) for the year ended December 31, 2012. The net periodic benefit cost was $0.5 million for the year ended December 31, 2013 and $0.6 million for each of the years ended December 31, 2012 and 2011.