5.              Retirement Benefits

 

Defined Benefit Retirement Plans — Approximately 42% of our employees participate in one of four defined benefit retirement programs, including the master defined benefit retirement plan, the defined benefit plans of our German and Swiss subsidiaries, 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 obligations 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:

 

		U.S. Pension Benefits									Non-U.S. Pension Benefits
		Year Ended September 30,									Year Ended September 30,
		2013			2012			2011			2013			2012			2011
Service cost		$	4.7		$	4.5		$	4.2		$	1.6		$	1.3		$	1.3
Interest cost		12.7			12.1			12.1			3.9			0.7			0.7
Expected return on plan assets		(12.9		)	(12.7		)	(14.2		)	(1.0		)	(1.0		)	(1.2		)
Amortization of unrecognized prior service cost, net		0.9			0.9			0.9			—			—			—
Amortization of actuarial loss		7.2			5.7			4.0			—			—			—
Net pension costs		$	12.6		$	10.5		$	7.0		$	4.5		$	1.0		$	0.8

 

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

 

		U.S. Pension Benefits						Non-U.S. Pension Benefits
		September 30,						September 30,
		2013			2012			2013			2012
Change in benefit obligation:
Projected benefit obligation at beginning of year		$	300.4		$	272.7		$	28.4		$	29.6
Projected benefit obligation attributable to acquisitions		31.5			—			110.1			—
Service cost		4.7			4.5			1.6			1.3
Interest cost		12.7			12.1			3.9			0.7
Plan amendment		—			0.8			—			—
Actuarial (gain) loss		(29.2		)	20.7			1.1			(0.3		)
Benefits paid		(12.7		)	(10.4		)	(11.3		)	(2.7		)
Employee contributions		—			—			0.8			0.8
Effect of exchange rates on projected benefit obligation		—			—			5.4			(1.0		)
Projected benefit obligation at end of year		307.4			300.4			140.0			28.4
Change in plan assets:
Fair value of plan assets at beginning of year		197.2			173.1			29.1			30.1
Fair value of pension assets attributable to acquisitions		16.0			—			—			—
Actual return on plan assets		16.4			33.7			0.9			0.8
Employee and employer contributions		12.1			2.0			8.8			1.9
Benefits paid		(12.8		)	(10.4		)	(11.3		)	(2.7		)
Administrative expenses paid		(0.8		)	(1.2		)	—			—
Effect of exchange rates on plan assets		—			—			1.1			(1.0		)
Fair value of plan assets at end of year		228.1			197.2			28.6			29.1
Funded status:
Plan assets less than benefit obligations		$	(79.3	)	$	(103.2	)	$	(111.4	)	$	0.7
Amounts recorded in the consolidated balance sheets:
Other assets		$	—		—			$	1.1		$	0.7
Accrued pension costs, current portion		(2.0		)	(1.7		)	(8.5		)	—
Accrued pension costs, long-term portion		(77.3		)	(101.5		)	(104.0		)	—
Plan assets less than benefit obligations		$	(79.3	)	$	(103.2	)	$	(111.4	)	$	0.7

 

Net actuarial losses ($54.2) and prior service costs ($3.4), less an aggregate tax effect ($21.5), are included as components of accumulated other comprehensive loss at September 30, 2013.  Net actuarial losses ($92.0) and prior service costs ($4.3), less an aggregate tax effect ($35.3), are included as components of accumulated other comprehensive loss at September 30, 2012.  The amount that will be amortized from accumulated other comprehensive loss into net pension costs in 2014 is expected to be $4.7.

 

Accumulated Benefit Obligation — The accumulated benefit obligation for all defined benefit retirement plans was $430.8 and $312.6 at September 30, 2013 and 2012.  Selected information for plans with accumulated benefit obligations in excess of plan assets was:

 

		U.S. Pension Benefits						Non-U.S. Pension Benefits
		September 30,						September 30,
		2013			2012			2013			2012
Projected benefit obligation		$	307.4		$	300.5		$	112.5		$	—
Accumulated benefit obligation		293.3			286.1			112.5			—
Fair value of plan assets		228.1			197.2			—			—

 

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

 

		U.S. Pension Benefits						Non-U.S. Pension Benefits
		Year Ended September 30,						Year Ended September 30,
		2013		2012		2011		2013		2012		2011
Discount rate for obligation, end of year		4.9	%	4.0	%	4.5	%	3.5	%	2.3	%	2.5	%
Discount rate for expense, during the year		4.0	%	4.5	%	5.0	%	3.3	%	2.3	%	2.5	%
Expected rate of return on plan assets		6.6	%	6.6	%	7.2	%	3.5	%	3.5	%	3.5	%
Rate of compensation increase		2.6	%	2.5	%	2.5	%	0.2	%	1.5	%	1.5	%

 

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 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.

 

U.S. Pension Plan Assets — 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 primary investment strategy 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.

 

Non-U.S. Pension Plan Assets — Long-term strategic investment objectives utilize a diversified mix of suitable assets of appropriate liquidity to generate income and capital growth that, together with contributions from participants and Hillenbrand, will meet the cost of the current and future benefits that the plan provides.  Long-term strategic investment objectives also seek to limit the risk of the assets failing to meet the liabilities over the long term.

 

None of Hillenbrand’s common stock was owned by the pension plan trusts at September 30, 2013.

 

The tables below provide the fair value of our pension plan assets by asset category at September 30, 2013 and 2012.  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 12 for definitions.

 

Fair values are determined as follows:

 

·                  Cash equivalents are stated at 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 stated at the closing price reported in the active markets in which the bonds are traded.

·                  Corporate bond funds and equity mutual funds are stated at the closing price in the active markets in which the underlying securities of the funds are traded.

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

·                  Real estate is stated based on a discounted cash flow approach, which includes 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, 2013 Using Inputs Considered as:
		Total			Level 1			Level 2			Level 3
U.S. Pension Plans
Cash equivalents		$	4.0		$	—		$	4.0		$	—
Equity securities		—			—			—			—
Corporate bonds		—			—			—			—
Other types of investments:		—			—			—
Government index funds		—			—			—			—
Equity mutual funds		103.1			—			103.1			—
Corporate bond funds		121.0			—			121.0			—
Real estate and real estate funds		—			—			—			—
Total U.S. pension plan assets		$	228.1		$	—		$	228.1		$	—
Non-U.S. Pension Plans
Cash equivalents		$	2.8		$	2.8		$	—		$	—
Equity securities		8.5			8.5			—			—
Corporate bonds		—			—			—			—
Other types of investments:
Government index funds		5.5			5.5			—			—
Equity mutual funds		—			—			—			—
Corporate bond funds		9.8			9.8			—			—
Real estate and real estate funds		2.0			—			—			2.0
Total Non-U.S. pension plan assets		$	28.6		$	26.6		$	—		$	2.0

 

		Fair Value at September 30, 2012 Using Inputs Considered as:
		Total			Level 1			Level 2			Level 3
U.S. Pension Plans
Cash equivalents		$	2.3		$	—		$	2.3		$	—
Equity securities		—			—			—			—
Corporate bonds		—			—			—			—
Other types of investments:
Government index funds		—			—			—			—
Equity mutual funds		93.4			—			93.4			—
Corporate bond funds		101.5			—			101.5			—
Real estate and real estate funds		—			—			—			—
Total U.S. pension plan assets		$	197.2		$	—		$	197.2		$	—
Non-U.S. Pension Plans
Cash equivalents		$	5.3		$	5.3		$	—		$	—
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		—			—			—			—
Corporate bond funds		—			—			—			—
Real estate and real estate funds		2.0			—			—			2.0
Total Non-U.S. pension plan assets		$	29.1		$	27.1		$	—		$	2.0

 

Cash Flows — During 2013, 2012, and 2011 we contributed cash of $20.1, $3.1, and $2.5, to our defined benefit retirement plans.  The increase in contributions was a result of the Coperion acquisition.  We will be required to make estimated minimum contributions of $20.1 in 2014, although we may make additional discretionary contributions.  We will evaluate business conditions and capital and equity market volatility to determine whether we will make discretionary contributions.

 

Estimated Future Benefit Payments — The following represents estimated future benefit payments, including expected future service, which are expected to be paid from plan assets or Company contributions as necessary:

 

		U.S. Pension Plans			Non-U.S Pension Plans
		Projected Pension Benefits Payout			Projected Pension Benefits Payout
2014		$	15.1		$	8.7
2015		15.5			8.6
2016		16.3			8.3
2017		17.8			8.1
2018		18.0			7.9
2019 - 2023		102.2			38.7

 

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.  Company contributions generally vest over a period of zero to five years.  Expenses related to our defined contribution plans were $8.2, $8.0, and $6.7 for 2013, 2012, and 2011.

 

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.  The net postretirement healthcare benefit cost recorded during 2013, 2012, and 2011 was $0.6, $1.0, and $1.3.

 

		September 30,
		2013			2012
Benefit obligation at beginning of year		$	10.9		$	11.0
Interest cost		0.4			0.5
Service cost		0.5			0.6
Plan amendments		(0.8		)	—
Actuarial gain		(0.5		)	—
Net benefits paid		(0.7		)	(1.2		)
Benefit obligation at end of year		$	9.8		$	10.9
Amounts recorded in the balance sheets:
Accrued postretirement benefits, current portion		$	0.8		$	0.8
Accrued postretirement benefits, long-term portion		9.0			10.1
Net amount recognized		$	9.8		$	10.9

 

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

 

		Year Ended September 30,
		2013		2012		2011
Discount rate for obligation		3.5	%	3.4	%	4.1	%
Healthcare cost rate assumed for next year		7.7	%	7.9	%	7.8	%
Ultimate trend rate		5.0	%	5.0	%	5.0	%

 

Net actuarial gains of $4.9 and $4.0, less tax of $1.8 and $1.5, are included as a component of accumulated other comprehensive loss at September 30, 2013 and 2012.  The estimated amount that will be amortized from accumulated other comprehensive loss as a reduction to postretirement healthcare costs in 2014 is $0.4.  A one percentage-point increase/decrease in the assumed healthcare cost trend rates as of September 30, 2013, would cause an increase/decrease in service and interest costs of $0.1, along with an increase/decrease in the benefit obligation of $0.8.

 

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.