For the Years Ended December 31, 2011, 2010 and 2009
The Company has a non-contributory qualified defined benefit pension plan (the "Qualified Pension Plan"). On February 23, 2010, the Company's Board of Directors approved an amendment to the Qualified Pension Plan that, among other things, closed the Qualified Pension Plan to all new hires on or after March 1, 2010 and changed the benefit calculation for existing employees related to pay and years of service. Specifically, changes in pay were taken into account for benefit calculation purposes until the end of calendar year 2010, the benefit formula was improved to use the highest five years out of the last ten years of service up to December 31, 2010, whether consecutive or not, and years of service will continue to be added for purposes of the benefit calculations through December 31, 2015, with no further accrual of benefits for service thereafter except for vesting purposes. The changes to the Qualified Pension Plan resulted in a net curtailment loss of $0.2 million, a $25.2 million reduction of accumulated other comprehensive loss, a $15.5 million decrease of deferred tax assets and a $40.7 million reduction of the pension liability on the Company's Consolidated Balance Sheet.
In 2011, the Company elected to change its method of recognizing pension expense. See Note 2, Accounting Changes, for further discussion of the accounting change and the retrospective application of the new policy to all periods presented.
The Company also has a Supplemental Employees' Retirement Plan ("SERP"), which is considered a non-qualified pension plan. The SERP provides certain key executives, whose compensation is in excess of the limitations imposed by federal law on the qualified defined benefit pension plan, with supplemental benefits based upon eligible earnings, years of service and age at retirement. During 2010, the Company's Board of Directors also approved an amendment to the SERP. The SERP amendment contains the changes necessary for the SERP to be consistent with the pension plan amendment except that the SERP already provided for the use of non-consecutive years of service for benefit calculation purposes and there was no provision needed regarding limitations on future participation because executives must be approved for SERP participation by the Board's Personnel & Compensation Committee (the "Committee") and the Board of Directors. The Committee and the Board have not approved any new participants to the SERP since February 28, 2010 and do not intend to do so at any time in the future. The measurement date for both these plans is December 31.
The changes in the actuarial present value of the projected benefit obligation and fair value of plan assets are as follows:
| For the year ended December 31, | ||||
| Qualified Pension Plan | SERP | |||
| 2011 | 2010 | 2011 | 2010 | |
| In thousands | ||||
| Projected benefit obligation at beginning of year | $ 553,165 | $ 544,735 | $ 15,652 | $ 18,037 |
| Service cost | 12,082 | 11,527 | 361 | 371 |
| Interest cost | 28,326 | 29,104 | 515 | 789 |
| Actuarial liability (gain) loss (a) | 77,527 | 32,073 | (48) | (1,083) |
| Benefit payments | (23,728 ) | (23,558 ) | (4,405 ) | (3,397 ) |
| (Curtailment) / Settlement | — | (40,716 ) | — | 935 |
| Projected benefit obligation at end of year | $ 647,372 | $ 553,165 | $ 12,075 | $ 15,652 |
| Fair value of plan assets at beginning of year | $ 454,541 | $ 387,469 | $ — | $ — |
| Actual return on plan assets | 61,130 | 54,930 | — | — |
| Employer contributions | 19,600 | 35,700 | 4,405 | 3,397 |
| Benefit payments | (23,728) | (23,558) | (4,405) | (3,397) |
| Fair value of plan assets at end of year | $ 511,543 | $ 454,541 | $ — | $ — |
| Funded status at end of year | $ (135,829) | $ (98,624) | $ (12,075) | $ (15,652) |
| Accumulated benefit obligation | $ 647,372 | $ 553,165 | $ 12,075 | $ 15,652 |
The Company has recorded liabilities related to our qualified pension plan and SERP as follows:
| At December 31, | ||||
| Qualified Pension Plan | SERP | |||
| 2011 | 2010 | 2011 | 2010 | |
| In thousands | ||||
| Current liabilities (a) | $ — | $ — | $ (529) | $ (4,673) |
| Noncurrent liabilities | (135,829) | (98,624) | (11,546) | (10,979) |
| Total | $ (135,829) | $ (98,624) | $ (12,075) | $ (15,652) |
Certain amounts included in accumulated other comprehensive income on the Consolidated Balance Sheets represent costs that will be recognized as components of pension cost in future periods. These consist of:
| At December 31, | ||||
| Qualified Pension Plan | SERP | |||
| 2011 | 2010 | 2011 | 2010 | |
| In thousands | ||||
| Unrecognized (gain) or loss | $ 153,503 | $ 104,866 | $ 1,707 | $ 2,467 |
| Unrecognized prior service cost (credit) |
353 | 451 | — | — |
| Amount included in accumulated other comprehensive income (loss) |
$ 153,856 | $ 105,317 | $ 1,707 | $ 2,467 |
The estimated net loss and prior service cost (credit) for the qualified pension plan and the SERP that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year will be $8.6 million and $0.2 million, respectively.
The pension plan net periodic benefit costs on the Consolidated Statements of Operations and other amounts recognized in other comprehensive loss on the Consolidated Statements of Shareholders' Equity were computed using the projected unit credit actuarial cost method and included the following components:
| For the year ended December 31, | ||||||
| Qualified Pension Plan | SERP | |||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |
| In thousands | ||||||
| Service cost for benefits earned during the year | $ 12,082 | $ 11,527 | $ 13,423 | $ 361 | $ 371 | $ 389 |
| Interest cost on projected benefit obligation | 28,326 | 29,104 | 30,462 | 515 | 789 | 1,012 |
| Expected return on plan assets | (36,423) | (30,089) | (26,270) | — | — | — |
| Amortization of prior service credit (cost) | 98 | 98 | 61 | — | (192) | (962) |
| Recognized net loss | 4,183 | 5,003 | 10,423 | 153 | 501 | 291 |
| Additional amount recognized due to curtailment/settlement | — | 221 | — | 560 | 737 | 767 |
| Net pension benefit cost | $ 8,266 | $ 15,864 | $ 28,099 | $ 1,589 | $ 2,206 | $ 1,497 |
| Change in prior service cost | $ — | $ (221) | $ 444 | $ — | $ — | $ — |
| Change in net gain or loss | 52,820 | (33,482) | (16,300) | (608) | (886) | 820 |
| Amortization of prior service cost (credit) | (98) | (98) | (61) | — | 192 | 962 |
| Amortization of net gain (loss) | (4,183) | (5,003) | (10,423) | (153) | (501) | (291) |
| Total recognized in other comprehensive loss | $ 48,539 | $ (38,804) | $ (26,340) | $ (761) | $ (1,195) | $ 1,491 |
| Total recognized in net periodic benefit cost and other comprehensive loss | $ 56,805 | $ (22,940) | $ 1,759 | $ 828 | $ 1,011 | $ 2,988 |
The Company expects to contribute $10.0 million to the qualified pension plan and $0.5 million to the SERP for the 2012 plan year. For the 2011 plan year, the Company contributed $19.6 million to the Qualified Pension Plan and $4.4 million to the SERP. For the 2010 plan year, the Company made contributions of $35.7 million to the Qualified Pension Plan and $3.4 million to the SERP.
Expected future benefit payments, which reflect expected future service, are as follows (in thousands):
| Qualified Pension Plan | SERP | |
| 2012 | $ 27,448 | $ 529 |
| 2013 | 28,873 | 524 |
| 2014 | 30,381 | 517 |
| 2015 | 31,926 | 938 |
| 2016 | 33,350 | 2,875 |
| 2017-2021 | 187,976 | 7,703 |
Effective January 1, 2011, changes in pay are no longer taken into account for benefit calculation purposes. The discount rates take into consideration the populations of our pension plans and the anticipated payment streams as compared to the Citigroup Discount Yield Curve index and rounds the results to the nearest fifth basis point. The actuarial assumptions used in determining benefit obligations of the pension plans are as follows:
| At December 31, | ||||
| Qualified Pension Plan | SERP | |||
| 2011 | 2010 | 2011 | 2010 | |
| Discount rate | 4.20 % | 5.30 % | 3.55 % | 4.50 % |
The actuarial assumptions used in determining the net periodic benefit cost of the pension plans are as follows:
| For the year ended December 31, | ||||
| Qualified Pension Plan | SERP | |||
| 2011 | 2010 | 2011 | 2010 | |
| Discount rate | 5.30 % | 5.85 % | 4.50 % | 5.15 % |
| Expected return on plan assets |
8.00 % | 8.00 % | N/A | N/A |
| Average rate of increase in compensation levels |
N/A | 3.50 % | N/A | 3.50 % |
The expected return on plan assets rate was determined based upon historical returns adjusted for estimated future market fluctuations. During 2011 and 2010, the actual return on pension plan assets was significantly higher than our expected rate of return on pension plan assets of 8%. However, in calculating the anticipated pension expense for 2012 management has reduced the expected return on plan assets to 7.5%. The reduction was primarily driven by the changes in the allocation targets of the Company's investments during the year.
Plan assets are invested in a diversified portfolio consisting of equity and fixed income securities (including $16.4 million of common stock of Kaman Corporation at December 31, 2011). In April 2010, the Company updated its Qualified Pension Plan investment policy. The updated investment policies and goals for pension plan assets are to improve and/or maintain the Plan's funded status by generating long-term asset returns that exceed the rate of growth of the Plan's liabilities. The Plan shall invest assets in a manner that seeks to (a) maximize return within reasonable and prudent levels of risk of loss of funded status; and (b) maintain sufficient liquidity to meet benefit payment obligations and other periodic cash flow requirements on a timely basis. The return generation/liability matching asset allocation ratio is currently 47%/53%. As the plan's funded status changes, the pension plan's Administrative Committee (the management committee that is responsible for plan administration) will act through an immediate or gradual process, as appropriate, to reallocate assets.
Under the current investment policy no Investment Manager may invest in investments deemed illiquid by the Investment Manager at the time of purchase, development programs, real estate, mortgages or private equities or securities of Kaman Corporation without prior written authorization from the Finance Committee of the Board of Directors. In addition, with the exception of U.S. Government securities, managers' holdings in the securities of any one issuer, at the time of purchase, may not exceed 7.5% of the total market value of that manager's account.
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.
Cash equivalents – Investments with maturities of three months or less when purchased, including certain short-term fixed-income securities, are considered cash equivalents and are included in the recurring fair value measurements hierarchy as Level 1.
Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and non-U.S. corporations traded actively on exchanges. Price quotes for these shares are readily available. Holdings of corporate stock are classified as Level 1 investments.
Mutual Funds – Mutual funds are traded actively on public exchanges. The share prices for these mutual funds are published at the close of each business day. Holdings of mutual funds are classified as Level 1 investments.
Common Trust Funds – Common trust funds are comprised of shares or units in commingled funds that are not publicly traded. The values of the commingled funds are not publicly quoted and must trade through a broker. For equity and fixed-income commingled funds traded through a broker, the fund administrator values the fund using the net asset value ("NAV") per fund share, derived from the value of the underlying assets. The underlying assets in these funds (equity securities, fixed income securities, and commodity-related 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.
Total Return Funds – Total return funds are comprised of shares or units in private investment funds that are not publicly traded. The values of the private investment funds are not publicly quoted and must trade through a broker. The fund administrator values the fund using the net asset value ("NAV") per fund share, derived from the value of the underlying assets. The underlying assets in these funds (equity and fixed income securities, commodities, currencies and other instruments) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. Holdings of total return funds are classified as Level 2 investments.
Fixed-income Securities - For fixed income securities, multiple prices and price types are obtained from pricing vendors whenever possible, which enables cross-provider validations. A primary price source is identified based on asset type, class or issue for each security. The fair values of fixed-income securities are based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences and are categorized as Level 2.
The fair value of the Company's qualified pension plan assets at December 31, 2011 and 2010 are as follows:
| In Thousands |
Total Carrying Value at December 31, 2011 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
| Cash & Cash Equivalents | $ 43,577 | $ 43,577 | $ — | $ — |
| Corporate Stock | 63,043 | 63,043 | — | — |
| Mutual Funds | 38,626 | 38,626 | — | — |
| Common Trust Funds | 73,105 | — | 73,105 | — |
| Fixed-income Securities: | ||||
| U.S. Government Securities (a) | 108,313 | — | 108,313 | — |
| Corporate Securities | 181,299 | — | 181,299 | — |
| Other (b) | 3,580 | — | 3,580 | — |
| Total | $ 511,543 | $ 145,246 | $ 366,297 | $ — |
| In Thousands |
Total Carrying Value at December 31, 2010 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
| Cash & Cash Equivalents | $ 17,644 | $ 17,644 | $ — | $ — |
| Corporate Stock | 102,819 | 102,819 | — | — |
| Mutual Funds | 19,854 | 19,854 | — | — |
| Common Trust Funds | 93,916 | — | 93,916 | — |
| Total Return Funds | 42,996 | — | 42,996 | — |
| Fixed-income Securities: | ||||
| U.S. Government Securities (a) | 52,667 | — | 52,667 | — |
| Corporate Securities | 112,224 | — | 112,224 | — |
| Foreign Securities | — | — | — | — |
| Other (b) | 12,421 | — | 12,421 | — |
| Total | $ 454,541 | $ 140,317 | $ 314,224 | $ — |
(a) This category represents investments in debt securities issued by the U.S. Treasury, other U.S. government corporations and agencies, states and municipalities.
(b) This category primarily represents investments in commercial and residential mortgage-backed securities.
Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures and interest rate futures.
The Company also maintains a Defined Contribution Plan that has been adopted by most of its U.S. subsidiaries. Employees of the adopting employers who meet the eligibility requirements of the plan may participate. Employer matching contributions are made to the plan based on a percentage of each participant's pre-tax contribution. Effective January 1, 2011, for each dollar that a participant contributes up to 5% of compensation, participating subsidiaries make employer contributions of one dollar. During 2010 and 2009, for each dollar that a participant contributed, up to 5% of compensation, participating subsidiaries made employer contributions of fifty cents. Employer contributions to the plan totaled $8.5 million, $3.7 million and $3.5 million in 2011, 2010 and 2009, respectively.
Two of the Company's acquired U.S. subsidiaries maintain separate defined contribution plans for their eligible employees. Employer matching contributions are made on a discretionary basis. Additionally, two of our foreign subsidiaries each maintain a defined benefit plan of their own for their local employees. The pension liabilities of $0.2 million associated with these plans are included in accrued pension costs on the Consolidated Balance Sheets.