10-K
Under both U.S and U.K. defined benefit plans, benefits are based on years of service and final average earnings. Plan assets, including those of the ESOP, consist primarily of investment grade debt obligations, marketable equity securities and shares of the Company’s common stock. The asset allocation of the Company’s domestic pension plan is diversified, consisting primarily of investments in equity and debt securities. The Company seeks a long-term investment return that is reasonable given prevailing capital market expectations. Target allocations are 40% to 70% in equities (including 10% to 20% in Company stock), and 30% to 60% in cash and debt securities.
The Company uses an expected long-term rate of return assumption of 6.0% for the U.S. domestic pension plan, and 6.4% for the U.K. plan. In determining these assumptions, the Company considers the historical returns and expectations for future returns for each asset class as well as the target asset allocation of the pension portfolio as a whole. In fiscal 2012, the Company used a discount rate assumption of 3.9% for the U.S. plan and 4.4% for the U.K. plan. In determining these assumptions, the Company considers published third party data appropriate for the plans.
Other than the discount rate, pension valuation assumptions are generally long-term and not subject to short-term market fluctuations, although they may be adjusted as warranted by structural shifts in economic or demographic outlooks. Long-term assumptions are reviewed annually to ensure they do not produce results inconsistent with current market conditions. The discount rate is adjusted annually based on corporate investment grade (rated AA or better) bond yields as of the measurement date.
Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2012, the U.S. plan will require a $1.5 million contribution in fiscal 2013 and the U.K. plan will require a $1.5 million contribution in fiscal 2013.
The Company’s overall investment strategy had been to achieve a long-term rate of return of 8.0%, with a wide diversification of asset types. Based upon the Company’s current accounting policy, management began to adjust its portfolio and return in fiscal 2012 to realize a 60% fixed – 40% equity asset allocation and a 6% long-term rate return in fiscal 2013. This policy change is intended to minimize the market volatility in the future.
The table below sets forth the actual asset allocation for the assets within the Company’s plans. 2012
Asset category: Cash equivalent Fixed income Equities
Mutual and pooled funds (balanced funds) Other
0%
12% 27% 60% 1%
100% 2011
3% 6%
41% 49% 1%
100%
The Company determines its investments strategies based upon the composition of the beneficiaries in its defined benefit plans and the relative time horizons that those beneficiaries are projected to receive payouts from the plans. The Company engages an independent investment firm to manage the pension assets.
Cash equivalents are held in money market funds.
The Company’s fixed income portfolio includes mutual funds that hold a combination of short-term, investment-grade fixed income securities and a diversified selection of investment-grade, fixed income securities, including corporate securities and U. S. government securities.
The Company invests in equity securities, which are diversified across a spectrum of value and growth in large, medium and small capitalization as appropriate to achieve the objective of a balanced portfolio and optimize the expected returns and volatility in the various asset classes.
In accordance with ASC 820, the Company has categorized its financial assets (including its pension plan assets), based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
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B33
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