Note 11: Pension Plans
Snap-on has several non-contributory defined benefit pension plans covering most U.S. employees and certain employees in foreign countries. Snap-on also has foreign contributory defined benefit pension plans covering certain foreign employees. Retirement benefits are generally provided based on employees’ years of service and average earnings or stated amounts for years of service. Normal retirement age is 65, with provisions for earlier retirement. In 2012, the company settled a Canadian pension plan following the 2011 closure of its Newmarket, Canada, facility.
The status of Snap-on’s pension plans as of 2013 and 2012 year end are as follows:
| (Amounts in millions) | 2013 | 2012 | ||||||
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Change in projected benefit obligation: |
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Benefit obligation at beginning of year |
$ | 1,229.3 | $ | 1,169.7 | ||||
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Service cost |
20.3 | 21.1 | ||||||
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Interest cost |
51.4 | 52.0 | ||||||
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Plan participants’ contributions |
1.2 | 1.3 | ||||||
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Plan settlements |
– | (13.6) | ||||||
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Plan curtailments |
(0.1) | (0.1) | ||||||
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Benefits paid |
(59.5) | (55.8) | ||||||
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Plan amendments |
(0.5) | (10.2) | ||||||
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Actuarial (gain) loss |
(88.9) | 57.9 | ||||||
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Foreign currency impact |
(0.9) | 7.0 | ||||||
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Benefit obligation at end of year |
$ | 1,152.3 | $ | 1,229.3 | ||||
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| 2013 | 2012 | |||||||
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Change in plan assets: |
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Fair value of plan assets at beginning of year |
$ | 964.0 | $ | 846.1 | ||||
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Actual return on plan assets |
75.1 | 94.3 | ||||||
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Plan participants’ contributions |
1.2 | 1.3 | ||||||
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Employer contributions |
35.3 | 87.5 | ||||||
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Benefits paid |
(59.5) | (55.8) | ||||||
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Plan settlements |
– | (13.6) | ||||||
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Foreign currency impact |
(0.7) | 4.2 | ||||||
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Fair value of plan assets at end of year |
$ | 1,015.4 | $ | 964.0 | ||||
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Unfunded status at end of year |
$ | (136.9) | $ | (265.3) | ||||
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Amounts recognized in the Consolidated Balance Sheets as of 2013 and 2012 year end are as follows:
| (Amounts in millions) | 2013 | 2012 | ||||||
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Other assets |
$ | 3.7 | $ | – | ||||
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Accrued benefits |
(4.8) | (4.6) | ||||||
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Pension liabilities |
(135.8) | (260.7) | ||||||
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Net liability |
$ | (136.9) | $ | (265.3) | ||||
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Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2013 and 2012 year end are as follows:
| (Amounts in millions) | 2013 | 2012 | ||||||
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Net loss, net of tax of $96.5 million and $147.1 million, respectively |
$ | (175.4) | $ | (260.4) | ||||
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Prior service credit, net of tax of $2.3 million and $2.5 million, respectively |
4.0 | 4.0 | ||||||
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| $ | (171.4) | $ | (256.4) | |||||
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The accumulated benefit obligation for Snap-on’s pension plans as of 2013 and 2012 year end was $1,101.4 million and $1,170.6 million, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for Snap-on’s pension plans in which the accumulated benefit obligation exceeds the fair value of plan assets as of 2013 and 2012 year end are as follows:
| (Amounts in millions) | 2013 | 2012 | ||||||
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Projected benefit obligation |
$ | 1,010.7 | $ | 1,229.3 | ||||
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Accumulated benefit obligation |
979.5 | 1,170.6 | ||||||
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Fair value of plan assets |
875.5 | 964.0 | ||||||
The components of net periodic benefit cost and changes recognized in “Other comprehensive income (loss)” (“OCI”) are as follows:
| (Amounts in millions) | 2013 | 2012 | 2011 | |||||||||
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Net periodic benefit cost: |
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Service cost |
$ | 20.3 | $ | 21.1 | $ | 19.1 | ||||||
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Interest cost |
51.4 | 52.0 | 53.9 | |||||||||
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Expected return on plan assets |
(70.5) | (66.6) | (58.7) | |||||||||
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Amortization of unrecognized loss |
41.4 | 41.4 | 31.1 | |||||||||
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Amortization of prior service (credit) cost |
(0.7) | 1.2 | 1.1 | |||||||||
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Settlement loss recognized |
– | 6.8 | – | |||||||||
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Net periodic benefit cost |
$ | 41.9 | $ | 55.9 | $ | 46.5 | ||||||
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Changes in benefit obligations recognized in OCI, net of tax: |
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Prior service credit |
$ | – | $ | (7.0) | $ | (0.2) | ||||||
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Net (gain) loss |
(85.0) | (7.6) | 61.1 | |||||||||
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Total recognized in OCI |
$ | (85.0) | $ | (14.6) | $ | 60.9 | ||||||
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Amounts in Accumulated OCI that are expected to be amortized as net expense into net periodic benefit cost during 2014 are as follows:
| (Amounts in millions) | Amount | |||
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Amortization of prior service credit |
$ | (0.8) | ||
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Amortization of unrecognized loss |
21.8 | |||
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Total to be recognized in net periodic benefit cost |
$ | 21.0 | ||
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The worldwide weighted-average assumptions used to determine Snap-on’s full-year pension costs are as follows:
| 2013 | 2012 | 2011 | ||||||||||
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Discount rate |
4.3% | 4.5% | 5.3% | |||||||||
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Expected long-term rate of return on plan assets |
7.6% | 7.7% | 7.8% | |||||||||
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Rate of compensation increase |
3.6% | 3.6% | 3.6% | |||||||||
The worldwide weighted-average assumptions used to determine Snap-on’s projected benefit obligation as of 2013 and 2012 year end are as follows:
| 2013 | 2012 | |||||||
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Discount rate |
5.1% | 4.3% | ||||||
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Rate of compensation increase |
3.6% | 3.6% | ||||||
The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2013 and 2012 year end was selected based on a cash flow matching methodology developed by the company’s outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans’ yearly projected benefit cash flows to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans’ projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate.
The weighted-average discount rate for Snap-on’s domestic pension plans of 5.2% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s domestic discount rate assumption by 50 basis points (100 basis points equals 1.0 percent) would have increased Snap-on’s 2013 domestic pension expense and projected benefit obligation by approximately $5.3 million and $50.9 million, respectively. As of 2013 year end, Snap-on’s domestic projected benefit obligation comprised approximately 81% of Snap-on’sworldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 4.5% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s foreign discount rate assumption by 50 basis points would have increased Snap-on’s 2013 foreign pension expense and projected benefit obligation by approximately $2.0 million and $19.9 million, respectively.
Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of affected active participants or over the remaining life expectancy of affected retired participants.
Snap-on uses the last day of its fiscal year end as the measurement date for its plans. Snap-on funds its pension plans as required by governmental regulation and may consider discretionary contributions as conditions warrant. Snap-on intends to make contributions of $11.0 million to its foreign pension plans and $1.8 million to its domestic pension plans in 2014, as required by law. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its pension plans in 2014.
The following benefit payments, which reflect expected future service, are expected to be paid as follows:
| (Amounts in millions) | Amount | |||
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Year: |
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2014 |
$ | 66.1 | ||
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2015 |
68.7 | |||
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2016 |
70.6 | |||
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2017 |
73.5 | |||
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2018 |
75.2 | |||
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2019-2023 |
406.7 | |||
Snap-on’s domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. The long-term investment performance objective for Snap-on’s domestic plans’ assets is to achieve net of expense returns that meet or exceed the 7.6% domestic long-term, rate-of-return-on-assets assumption used for reporting purposes. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans’ assets.
The basis for determining the overall expected long-term, rate-of-return-on-assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums are then adjusted based on current relative valuation levels and macro-economic conditions.
For risk and correlation assumptions, the actual experience for each asset class is reviewed for the longest time period available. Expected relationships for a 10 to 20 year time horizon are determined based upon historical results, with adjustments made for material changes.
Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow. Asset/liability studies are conducted periodically to determine if any revisions to the strategic asset allocation policy are necessary.
Snap-on’s domestic pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2013 and 2012 year end are as follows:
| Target | 2013 | 2012 | ||||||||||
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Asset category: |
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Equity securities |
50% | 51% | 48% | |||||||||
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Debt securities and cash |
35% | 34% | 37% | |||||||||
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Real estate and other real assets |
5% | 4% | 6% | |||||||||
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Hedge funds |
10% | 11% | 9% | |||||||||
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Total |
100% | 100% | 100% | |||||||||
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Fair value of plan assets (Amounts in millions) |
$ | 863.4 | $ | 830.6 | ||||||||
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The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority.
Shares of certain equity and debt securities and real estate and other real assets valued at quoted market prices for which an official close or last trade pricing on an active exchange is available are categorized as Level 1 in the fair value hierarchy. Shares of commingled equity and debt fund securities, corporate bonds, commingled multi-strategy funds and insurance contracts are valued at the net asset value (“NAV”) as reported by the fund managers based on the value of the underlying assets less liabilities, with this NAV divided by the number of units outstanding. The unit price is quoted on a private market and based on the value of the underlying investment, which is primarily based on observable inputs; such investments are categorized as Level 2 in the fair value hierarchy. Private equity partnership funds, hedge funds, and certain real estate and other real assets, all of which have redemption restrictions, are stated at estimated fair value (based on the estimated fair market value of the underlying investments) as reported by the fund manager and are classified as Level 3 in the fair value hierarchy. The company regularly reviews fund performance directly with its investment advisor and the fund managers, and performs qualitative analysis to corroborate the reasonableness of the reported net asset values. For Level 3 funds for which the company did not receive a year-end net asset value, the company recorded an estimate of the change in fair value for the latest period based on return estimates and other fund activity obtained from the fund managers.
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2013 year end:
|
Quoted Prices for
Identical |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
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| (Amounts in millions) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
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Asset category: |
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Cash and cash equivalents |
$ | 18.0 | $ | – | $ | – | $ | 18.0 | ||||||||
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Equity securities: |
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Domestic |
59.9 | – | – | 59.9 | ||||||||||||
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Foreign |
65.4 | – | – | 65.4 | ||||||||||||
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Commingled funds – domestic |
– | 162.6 | – | 162.6 | ||||||||||||
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Commingled funds – foreign |
– | 105.5 | – | 105.5 | ||||||||||||
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Private equity partnerships |
– | – | 49.4 | 49.4 | ||||||||||||
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Debt securities: |
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Government |
110.8 | – | – | 110.8 | ||||||||||||
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Corporate bonds |
– | 166.1 | – | 166.1 | ||||||||||||
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Real estate and other real assets |
– | – | 35.4 | 35.4 | ||||||||||||
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Hedge funds |
– | – | 90.3 | 90.3 | ||||||||||||
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Total |
$ | 254.1 | $ | 434.2 | $ | 175.1 | $ | 863.4 | ||||||||
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The following is a summary of the fiscal 2013 changes in fair value of the domestic plans’ assets with Level 3 inputs:
| (Amounts in millions) | Hedge Funds |
Private Equity Partnerships |
Real Estate and Other Real Assets |
Total | ||||||||||||
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Balance as of 2012 year end |
$ | 75.0 | $ | 49.6 | $ | 39.0 | $ | 163.6 | ||||||||
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Realized (losses) gains on assets sold |
(1.5) | 5.4 | 0.1 | 4.0 | ||||||||||||
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Unrealized gains attributable to assets held |
13.4 | 1.6 | 0.6 | 15.6 | ||||||||||||
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Net purchases and settlements |
3.4 | (7.2) | (4.3) | (8.1) | ||||||||||||
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Balance as of 2013 year end |
$ | 90.3 | $ | 49.4 | $ | 35.4 | $ | 175.1 | ||||||||
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The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2012 year end:
| Quoted Prices for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
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| (Amounts in millions) | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
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Asset category: |
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Cash and cash equivalents |
$ | 25.5 | $ | – | $ | – | $ | 25.5 | ||||||||
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Equity securities: |
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Domestic |
45.1 | – | – | 45.1 | ||||||||||||
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Foreign |
63.4 | – | – | 63.4 | ||||||||||||
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Commingled funds – domestic |
– | 140.2 | – | 140.2 | ||||||||||||
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Commingled funds – foreign |
– | 96.8 | – | 96.8 | ||||||||||||
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Private equity partnerships |
– | – | 49.6 | 49.6 | ||||||||||||
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Debt securities: |
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Government |
91.9 | – | – | 91.9 | ||||||||||||
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Corporate bonds |
– | 192.5 | – | 192.5 | ||||||||||||
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Real estate and other real assets |
11.6 | – | 39.0 | 50.6 | ||||||||||||
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Hedge funds |
– | – | 75.0 | 75.0 | ||||||||||||
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Total |
$ | 237.5 | $ | 429.5 | $ | 163.6 | $ | 830.6 | ||||||||
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In 2013, the company corrected the above disclosure classification of certain prior-year 2012 pension plan investments related to the fair value hierarchy and/or asset category. The prior-year classification of corporate bonds was changed from Level 1 to Level 2 assets; within the equity securities asset category, domestic securities decreased and foreign securities increased by $63.4 million, and commingled funds - domestic decreased and commingled funds – foreign increased by $32.0 million.
The following is a summary of the fiscal 2012 changes in fair value of the domestic plans’ assets with Level 3 inputs:
| (Amounts in millions) | Hedge Funds |
Private Equity Partnerships |
Real Estate and Other Real Assets |
Total | ||||||||||||
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Balance as of 2011 year end |
$ | 68.6 | $ | 49.9 | $ | 33.9 | $ | 152.4 | ||||||||
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Realized gains on assets sold |
1.0 | 4.0 | 0.2 | 5.2 | ||||||||||||
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Unrealized gains (losses) attributable to assets held |
5.0 | (5.1) | 3.4 | 3.3 | ||||||||||||
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Net purchases and settlements |
0.4 | 0.8 | 1.5 | 2.7 | ||||||||||||
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Balance as of 2012 year end |
$ | 75.0 | $ | 49.6 | $ | 39.0 | $ | 163.6 | ||||||||
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Snap-on’s primary investment objective for its foreign pension plans’ assets is to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s risk tolerance. The foreign asset allocation policies consider the company’s financial strength and long-term asset class risk/return expectations, since the obligations are long term in nature. The company believes the foreign pension plans’ assets, which are managed locally by professional investment firms, are well diversified.
The expected long-term rate of return on foreign plans’ assets reflects management’s expectations of long-term average rates of return on funds invested to provide benefits included in the projected benefit obligation. The expected return is based on the outlook for inflation, fixed income returns and equity returns, asset allocation and investment strategy. Differences between actual and expected returns on foreign pension plans’ assets are recorded as an actuarial gain or loss and amortized accordingly.
Snap-on’s foreign pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2013 and 2012 year end are as follows:
| Target | 2013 | 2012 | ||||||||||
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Asset category: |
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Equity securities* |
36% | 37% | 35% | |||||||||
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Debt securities and cash* |
44% | 44% | 47% | |||||||||
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Insurance contracts and hedge funds |
20% | 19% | 18% | |||||||||
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Total |
100% | 100% | 100% | |||||||||
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Fair value of plan assets (Amounts in millions) |
$ | 152.0 | $ | 133.4 | ||||||||
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| * |
Includes commingled funds – multi-strategy |
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2013 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
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Asset category: |
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Cash and cash equivalents |
$ | 0.8 | $ | – | $ | – | $ | 0.8 | ||||||||
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Commingled funds – multi-strategy |
– | 122.4 | – | 122.4 | ||||||||||||
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Insurance contracts |
– | 4.0 | – | 4.0 | ||||||||||||
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Hedge funds |
– | – | 24.8 | 24.8 | ||||||||||||
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Total |
$ | 0.8 | $ | 126.4 | $ | 24.8 | $ | 152.0 | ||||||||
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The following is a summary of the fiscal 2013 changes in fair value of the foreign plans’ assets with Level 3 inputs:
| (Amounts in millions) | Hedge Funds |
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Balance as of 2012 year end |
$ | 20.0 | ||
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Unrealized gains attributable to assets held |
1.5 | |||
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Net purchases and settlements |
3.3 | |||
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Balance as of 2013 year end |
$ | 24.8 | ||
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The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2012 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
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Asset category: |
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Cash and cash equivalents |
$ | 3.9 | $ | – | $ | – | $ | 3.9 | ||||||||
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Equity securities |
11.6 | – | – | 11.6 | ||||||||||||
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Commingled funds – multi-strategy |
– | 94.1 | – | 94.1 | ||||||||||||
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Insurance contracts |
– | 3.8 | – | 3.8 | ||||||||||||
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Hedge funds |
– | – | 20.0 | 20.0 | ||||||||||||
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Total |
$ | 15.5 | $ | 97.9 | $ | 20.0 | $ | 133.4 | ||||||||
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The following is a summary of the fiscal 2012 changes in fair value of the foreign plans’ assets with Level 3 inputs:
| (Amounts in millions) | Hedge Funds |
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Balance as of 2011 year end |
$ | 16.5 | ||
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Unrealized gains attributable to assets held |
2.0 | |||
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Net purchases and settlements |
1.5 | |||
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Balance as of 2012 year end |
$ | 20.0 | ||
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Snap-on has several 401(k) plans covering certain U.S. employees. Snap-on’s employer match to the 401(k) plans is made with cash contributions. For 2013, 2012 and 2011, Snap-on recognized $5.9 million, $5.7 million and $5.2 million, respectively, of expense related to its 401(k) plans.