Annual report pursuant to Section 13 and 15(d)

Retirement Benefits

v2.4.0.6
Retirement Benefits
12 Months Ended
Sep. 30, 2012
Retirement Benefits  
Retirement Benefits

6.              Retirement Benefits

 

Defined Benefit Retirement PlansApproximately 55% of our employees participate in one of three defined benefit retirement programs, including the master defined benefit retirement plan, the defined benefit plan of our Swiss subsidiary, and the supplemental executive defined benefit retirement plan.  We fund the pension trusts in compliance with ERISA or local funding requirements and as necessary to provide for current service and for any unfunded projected future benefit obligation over a reasonable period.  The benefits for these plans are based primarily on years of service and the employee’s level of compensation during specific periods of employment.  All pension plans have a September 30 measurement date.

 

Effect on Operations - The components of net pension costs under defined benefit retirement plans were:

 

 

 

Fiscal Year Ended September 30,

 

 

 

2012

 

2011

 

2010

 

Service cost

 

$

5.8

 

$

6.3

 

$

5.6

 

Interest cost

 

12.8

 

12.8

 

12.7

 

Expected return on plan assets

 

(13.7

)

(15.4

)

(13.9

)

Amortization of unrecognized prior service cost, net

 

0.9

 

0.9

 

0.9

 

Amortization of actuarial loss

 

5.7

 

4.0

 

3.0

 

Net pension costs

 

$

11.5

 

$

8.6

 

$

8.3

 

 

Obligations and Funded Status — The change in benefit obligation and funded status of the Company’s defined benefit retirement plans were:

 

 

 

September 30,

 

 

 

2012

 

2011

 

Change in benefit obligation:

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

302.3

 

$

269.3

 

Projected benefit obligation attributable to acquisitions

 

 

3.6

 

Service cost

 

5.8

 

6.3

 

Interest cost

 

12.8

 

12.8

 

Plan amendment

 

0.8

 

 

Actuarial loss

 

20.4

 

17.1

 

Benefits paid

 

(13.1

)

(9.5

)

Employee contributions

 

0.8

 

0.8

 

Effect of exchange rates on projected benefit obligation

 

(1.0

)

1.9

 

Projected benefit obligation at end of year

 

328.8

 

302.3

 

 

 

 

 

 

 

Change in plan assets:

 

 

 

 

 

Fair value of plan assets at beginning of year

 

203.2

 

195.7

 

Fair value of pension assets attributable to acquisitions

 

 

2.9

 

Actual return on plan assets

 

34.5

 

9.6

 

Employee and employer contributions

 

3.9

 

3.3

 

Benefits paid

 

(13.1

)

(9.5

)

Administrative expenses paid

 

(1.2

)

(1.0

)

Effect of exchange rates on plan assets

 

(1.0

)

2.2

 

Fair value of plan assets at end of year

 

226.3

 

203.2

 

 

 

 

 

 

 

Funded status:

 

 

 

 

 

Plan assets less than benefit obligations

 

$

(102.5

)

$

(99.1

)

 

 

 

 

 

 

Amounts recorded in the consolidated balance sheets:

 

 

 

 

 

Other assets

 

$

0.7

 

$

0.4

 

Accrued pension costs, current portion

 

(1.7

)

(1.6

)

Accrued pension costs, long-term portion

 

(101.5

)

(97.9

)

Plan assets less than benefit obligations

 

$

(102.5

)

$

(99.1

)

 

Net actuarial losses of $92.0 and prior service costs of $4.3, less an applicable aggregate tax effect of $35.3, are included as components of accumulated other comprehensive loss at September 30, 2012.  Net actuarial losses of $97.1 and prior service costs of $4.4, less an applicable aggregate tax effect of $37.3, are included as components of accumulated other comprehensive loss at September 30, 2011.  The amount that will be amortized from accumulated other comprehensive loss into net pension costs in fiscal 2013 is expected to be $8.1.

 

Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $312.6 and $288.1 at September 30, 2012 and 2011.  Selected information for plans with accumulated benefit obligations in excess of plan assets was:

 

 

 

September 30,

 

 

 

2012

 

2011

 

Projected benefit obligation

 

$

300.5

 

$

272.7

 

Accumulated benefit obligation

 

286.1

 

263.8

 

Fair value of plan assets

 

197.2

 

173.1

 

 

The weighted-average assumptions used in accounting for defined benefit retirement plans were:

 

 

 

Fiscal Year Ended September 30,

 

 

 

2012

 

2011

 

2010

 

Discount rate for obligation, end of year

 

3.9

%

4.3

%

4.8

%

Discount rate for expense, during the year

 

4.3

%

4.5

%

5.3

%

Expected rate of return on plan assets

 

6.4

%

6.9

%

7.6

%

Rate of compensation increase

 

2.4

%

2.4

%

2.4

%

 

The discount rates are evaluated annually based on current market conditions.  In setting these rates we utilize long-term bond indices and yield curves as a preliminary indication of interest rate movements, then make adjustments to the respective indices to reflect differences in the terms of the bonds covered under the indices in comparison to the projected outflow of pension obligations.  The overall expected long-term rate of return is based on historical and expected future returns, which are inflation-adjusted and weighted for the expected return for each component of the investment portfolio.  The rate of assumed compensation increase is also based on our specific historical trends of past wage adjustments in recent years.

 

Plan Assets — The investment strategies and policies are set by the plans’ fiduciaries.  Long-term strategic investment objectives utilize a diversified mix of equity and fixed income securities to preserve the funded status of the trusts, and balance risk and return.  The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets, and monitoring asset allocations.  Target allocation ranges are guidelines, not limitations, and plan fiduciaries may occasionally approve allocations above or below a target range or elect to rebalance the portfolio within the targeted range.  The primary investment strategy currently employed is a dynamic target allocation method that periodically rebalances among various investment categories depending on the current funded position.  This program is designed to actively move from return-seeking investments (such as equities) toward liability-hedging investments (such as long-duration fixed income) as funding levels improve.  The investment in return-seeking assets is not to exceed 60% of total domestic plan assets.

 

Trust assets in the domestic plan are invested subject to the following policy restrictions:  short-term securities must be rated A2/P2 or higher; fixed-income securities will maintain an average credit quality of A- or better; and investments in equities in any one company may not exceed 10% of the equity portfolio.  None of Hillenbrand’s common stock was owned by the trust at September 30, 2012.  Holdings in our common stock are subject to a statutory maximum limit of 10% of total trust assets.

 

The tables below provide the fair value of our pension plan assets by asset category at September 30, 2012 and 2011.

 

 

 

Fair Value at September 30, 2012 Using Input Considered as:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Cash equivalents

 

$

7.6

 

$

5.3

 

$

2.3

 

$

 

Equity securities

 

7.3

 

7.3

 

 

 

Corporate bonds

 

10.1

 

10.1

 

 

 

Other types of investments:

 

 

 

 

 

 

 

 

 

Government index funds

 

4.4

 

4.4

 

 

 

Equity mutual funds

 

93.4

 

 

93.4

 

 

Corporate bond funds

 

101.5

 

 

101.5

 

 

Real estate and real estate funds

 

2.0

 

 

 

2.0

 

Total

 

$

226.3

 

$

27.1

 

$

197.2

 

$

2.0

 

 

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2, and 3).  See Note 13 for a definition of level 1, 2, and 3 categories.

 

Fair values are determined as follows:

·                  Cash equivalents are based on the carrying amount, which approximates fair value, or at the fund’s net asset value.

·                  Equity securities are stated at the last reported sales price on the day of valuation.

·                  Corporate bonds actively traded are valued at the closing price reported in the active markets in which the bonds are traded.

·                  Corporate bond funds and equity mutual funds are valued based on the closing price reported in the active markets in which the underlying securities of the funds are traded.

·                  Government index funds are valued at the closing price reported in the active market in which the fund is traded.

·                  Real estate is valued on the basis of a discounted cash flow approach, which includes the future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.

 

 

 

Fair Value at September 30, 2011 Using Input Considered as:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Cash equivalents

 

$

7.6

 

$

5.3

 

$

2.3

 

$

 

Equity securities

 

20.1

 

20.1

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

71.5

 

10.5

 

61.0

 

 

Municipal bonds

 

8.6

 

 

8.6

 

 

Asset-backed debt securities in trust

 

0.1

 

 

0.1

 

 

U.S. Government securities

 

2.1

 

 

2.1

 

 

Other types of investment:

 

 

 

 

 

 

 

 

 

Government index funds

 

8.3

 

8.3

 

 

 

Equity mutual funds

 

82.8

 

82.8

 

 

 

Real estate and real estate funds

 

2.1

 

 

 

2.1

 

Total

 

$

203.2

 

$

127.0

 

$

74.1

 

$

2.1

 

 

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2, and 3).  See Note 13 for a definition of level 1, 2, and 3 categories.

 

Fair values are determined as follows:

·                  Cash equivalents are based on the carrying amount, which approximates fair value, or at the fund’s net asset value.

·                  Equity securities are stated at the last reported sales price on the day of valuation.

·                  Corporate bonds actively traded are valued at the closing price reported in the active markets in which the bonds are traded.

·                  Corporate bond funds and equity mutual funds are valued based on the closing price reported in the active markets in which the underlying securities of the funds are traded.

·                  Government index funds are valued at the closing price reported in the active market in which the fund is traded.

·                  Real estate is valued on the basis of a discounted cash flow approach, which includes the future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.

 

Cash Flows — During fiscal years 2012, 2011, and 2010 we contributed cash of $3.1, $2.5, and $6.1, to our defined benefit retirement plans.  We estimate we will be required to make minimum contributions of $12.9 in fiscal year 2013, although we may make additional discretionary contributions.  We will evaluate business conditions and capital and equity market volatility to determine whether we will make a discretionary contribution, and if so, in what amount.

 

Estimated Future Benefit Payments - Following are the benefit payments, which reflect expected future service and are expected to be paid from plan assets or Company contributions as necessary:

 

 

 

Projected Pension
Benefits Payout

 

2013

 

$

12.7

 

2014

 

13.6

 

2015

 

14.5

 

2016

 

15.3

 

2017

 

16.1

 

2018 - 2022

 

91.3

 

 

Defined Contribution Plans — We sponsor a number of defined contribution plans.  Depending on the plan, we may make contributions up to 4% of an employee’s compensation and matching contributions up to 6% of compensation.  Under the various plans, Company contributions generally vest over a period of zero to five years.  Expenses related to our various defined contribution programs were $8.0, $6.7, and $5.8 for fiscal years 2012, 2011, and 2010.

 

Postretirement Healthcare Plan — The Company offers a domestic postretirement healthcare plan that provides healthcare benefits to eligible qualified retirees and their spouses.  The plan includes retiree cost-sharing provisions and generally extends retiree coverage for medical, prescription, and dental benefits beyond the COBRA continuation period to the date of Medicare eligibility.  We use a measurement date of September 30 for this plan.

 

The net postretirement healthcare benefit cost recorded during fiscal years 2012, 2011, and 2010 was $1.0, $1.3, and $1.2.

 

 

 

September 30,

 

 

 

2012

 

2011

 

Benefit obligation at beginning of year

 

$

11.0

 

$

14.2

 

Interest cost

 

0.5

 

0.6

 

Service cost

 

0.6

 

1.6

 

Actuarial loss

 

__

 

(5.2

)

Net benefits paid

 

(1.2

)

(0.2

)

Benefit obligation at end of year

 

$

10.9

 

$

11.0

 

 

 

 

 

 

 

Amounts recorded in the consolidated balance sheets:

 

 

 

 

 

Accrued postretirement benefits, current portion

 

$

0.8

 

$

0.4

 

Accrued postretirement benefits, long-term portion

 

10.1

 

10.6

 

Net amount recognized

 

$

10.9

 

$

11.0

 

 

The weighted-average assumptions used in revaluing our obligation under the postretirement healthcare plan were:

 

 

 

Fiscal Year Ended September 30,

 

 

 

2012

 

2011

 

2010

 

Discount rate for obligation

 

3.40

%

4.10

%

4.50

%

Healthcare cost rate assumed for next year

 

7.85

%

7.75

%

7.75

%

Ultimate trend rate

 

5.00

%

5.00

%

5.00

%

 

Net actuarial gains of $4.0 and $4.2, less applicable tax effects of $1.5 and $1.5, are included as a component of accumulated other comprehensive loss at September 30, 2012 and 2011.  The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2013 is less than $0.3.  A one percentage-point increase/decrease in the assumed healthcare cost trend rates as of September 30, 2012, would cause an increase/decrease in service and interest costs of $0.1, along with an increase/decrease in the benefit obligation of $1.0.

 

We fund the postretirement healthcare plan as benefits are paid.  Current plan benefits are expected to require net Company contributions for retirees of $0.8 per year for the foreseeable future.