05.5
Notes to Consolidated Financial Statements
10. EMPLOYEE BENEFIT PLANS
GENERAL
FMC-AG & Co. KGaA recognizes pension costs and related pension liabilities for current and future benefits to qualified current and former employees of the Company. The Company’s pension plans are structured differently according to the legal, economic and fiscal circumstances in each country. The Company currently has two types of plans, defined benefit and defined contribution plans. In general plan benefits in defined benefit plans are based on all or a portion of the employees’ years of services and final salary. Plan benefits in defined contribution plans are determined by the amount of contribution by the employee and the employer, both of which may be limited by legislation, and the returns earned on the investment of those contributions.
Upon retirement under defined benefit plans, the Company is required to pay defined benefits to former employees when the defined benefits become due. Defined benefit plans may be funded or unfunded. The Company has two major defined benefit plans, one funded plan in North America and an unfunded plan in Germany.
Actuarial assumptions generally determine benefit obligations under defined benefit plans. The actuarial calculations require the use of estimates. The main factors used in the actuarial calculations affecting the level of the benefit obligations are: assumptions on life expectancy, the discount rate, salary and pension level trends. Under the Company’s funded plans, assets are set aside to meet future payment obligations. An estimated return on the plan assets is recognized as income in the respective period. Actuarial gains and losses are generated when there are variations in the actuarial assumptions and differences between the actual and the estimated return on plan assets for that year. The Company’s pension liability is impacted by these actuarial gains or losses.
In the case of the Company’s funded plan, the defined benefit obligation is offset against the fair value of plan assets. A pension liability is recognized in the balance sheet if the defined benefit obligation exceeds the fair value of plan assets. A pension asset is recognized (and reported under other assets in the balance sheet) if the fair value of plan assets exceeds the defined benefit obligation and if the Company has a right of reimbursement against the fund or a right to reduce future payments to the fund.
Under defined contribution plans, the Company pays defined contributions during the employee’s service life which satisfies all obligations of the Company to the employee. The Company has a defined contribution plan in North America.
DEFINED BENEFIT PENSION PLANS
During the first quarter of 2002, FMCH, the Company’s North America subsidiary, curtailed its defined benefit and supplemental executive retirement plans. Under the curtailment amendment for substantially all employees eligible to participate in the plan, benefits have been frozen as of the curtailment date and no additional defined benefits for future services will be earned. The Company has retained all employee benefit obligations as of the curtailment date. Each year FMCH contributes at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. There was no minimum funding requirement for FMCH for the defined benefit plan in 2008. FMCH voluntarily contributed $684 during 2008. Expected funding for 2009 is $827.
The benefit obligation for all defined benefit plans at December 31, 2008, is $353,961 (2007: $331,649) which consists of the benefit obligation of $245,070 (2007: $218,009) for the North America funded plan and the benefit obligation of $108,891 (2007: $113,640) for the German unfunded plan. The benefit obligation includes $245,070 (2007: $218,009) which is funded by plan assets and $108,891 (2007: $113,640) which is unfunded.
The following table shows the changes in benefit obligations, the changes in plan assets, and the funded status of the pension plans. Benefits paid as shown in the changes in benefit obligations represent payments made from both the funded and unfunded plans while the benefits paid as shown in the changes in plan assets include only benefit payments from the Company’s funded benefit plan.
| Table 05.5.17 | FUNDED STATUS OF EMPLOYEE BENEFIT PLANS |
| $ in thousands | 2008 | 2007 |
|---|---|---|
| Change in benefit obligation | ||
| Benefit obligation at beginning of year | 331,649 |
334,375 |
| Foreign currency translation | (6,288) |
12,193 |
| Service cost | 8,357 |
8,835 |
| Interest cost | 20,393 |
18,506 |
| Transfer of plan participants | 2,228 |
670 |
| Actuarial (gain) loss | 4,472 |
(36,637) |
| Benefits paid | (6,850) |
(6,293) |
| BENEFIT OBLIGATION AT END OF YEAR | 353,961 |
331,649 |
| Change of plan assets | ||
| Fair value of plan assets at beginning of year | 228,581 |
220,367 |
| Actual return on plan assets | (9,092) |
12,276 |
| Employer contributions | 684 |
1,173 |
| Benefits paid | (5,557) |
(5,235) |
| FAIR VALUE OF PLAN ASSETS AT END OF YEAR | 214,616 |
228,581 |
| FUNDED STATUS AT YEAR END | 139,345 |
103,068 |
The Company had a pension liability of $139,345 at December 31, 2008. The pension liability consists of a current portion of $2,590 (2007: $2,288) which is recognized as a current liability in the line item “accrued expenses and other current liabilities” in the balance sheet. The non-current portion of $136,755 (2007: $111,352) is recorded as non-current pension liability in the balance sheet. The net amount recognized at December 31, 2007, consisted of Balance Sheet items of a pension liability of $113,640 and prepaid pension costs of $10,572. The prepaid pension costs related to the North America plan and were recorded within Other Assets in the balance sheet. Approximately 85 % of the beneficiaries are located in North America with the majority of the remaining 15 % located in Germany.
The accumulated benefit obligation for all defined benefit pension plans was $334,951 and $312,459 at December 31, 2008 and 2007, respectively. The accumulated benefit obligation for all defined benefit pension plans with an obligation in excess of plan assets was $334,951 and $96,659 at December 31, 2008 and 2007, respectively; the related plan assets had a fair value of $214,616 at December 31, 2008.
The pre-tax changes in the following table reflect actuarial losses (gains) in other comprehensive income relating to pension liabilities. As of December 31, 2008, there are no cumulative effects of prior service costs included in other comprehensive income.
| Table 05.5.18 | OTHER COMPREHENSIVE INCOME (LOSS) RELATED TO PENSION LIABILITIES |
| $ in thousands | Actuarial losses ( gains ) |
|---|---|
| ADJUSTMENTS RELATED TO PENSIONS AT JANUARY 1, 2007 | 84,104 |
| Additions | (32,551) |
| Releases | (5,163) |
| Foreign currency translation adjustment | 1,985 |
| ADJUSTMENTS RELATED TO PENSIONS AT DECEMBER 31, 2007 | 48,375 |
| Additions | 30,494 |
| Releases | (1,944) |
| Foreign currency translation adjustment | 1 |
| ADJUSTMENTS RELATED TO PENSIONS AT DECEMBER 31, 2008 | 76,926 |
The actuarial loss expected to be amortized from other comprehensive income into net periodic pension cost over the next year is $6,412.
The discount rates for all plans are based upon yields of portfolios of equity and highly rated debt instruments with maturities that mirror the plan’s benefit obligation. The Company’s discount rate is the weighted average of these plans based upon their benefit obligations at December 31, 2008. The following weighted-average assumptions were utilized in determining benefit obligations as of December 31:
| Table 05.5.19 | WEIGHTED AVERAGE ASSUMPTIONS FOR BENEFIT OBLIGATIONS |
| 2008 | 2007 | |
|---|---|---|
| Discount rate | 6.15 % |
6.16 % |
| Rate of compensation increase | 4.19 % |
4.16 % |
The defined benefit pension plans’ net periodic benefit costs are comprised of the following components for each of the years ended December 31:
| Table 05.5.20 | COMPONENTS OF NET PERIODIC BENEFIT COSTS |
| $ in thousands | 2008 | 2007 |
|---|---|---|
| Service cost | 8,357 |
8,835 |
| Interest cost | 20,393 |
18,506 |
| Expected return on plan assets | (16,931) |
(16,362) |
| Amortization of unrealized losses | 1,944 |
5,163 |
| NET PERIODIC BENEFIT COSTS | 13,763 |
16,142 |
The following weighted-average assumptions were used in determining net periodic benefit cost for the year ended December 31:
| Table 05.5.21 | WEIGHTED AVERAGE ASSUMPTIONS FOR NET PERIODIC BENEFIT COSTS |
| 2008 | 2007 | |
|---|---|---|
| Discount rate | 6.16 % |
5.52 % |
| Expected return of plan assets | 7.50 % |
7.50 % |
| Rate of compensation increase | 4.16 % |
4.18 % |
Expected benefit payments for the next five years and in the aggregate for the five years thereafter are as follows:
| Table 05.5.22 | EXPECTED BENEFIT PAYMENTS |
| $ in thousands | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 through 2018 |
|---|---|---|---|---|---|---|
| Expected benefit payments | 9,138 |
9,994 |
10,763 |
12,366 |
13,172 |
89,250 |
PLAN INVESTMENT POLICY AND STRATEGY
For the North America funded plan, the Company periodically reviews the assumption for long-term expected return on pension plan assets. As part of the assumptions review, a range of reasonable expected investment returns for the pension plan as a whole was determined based on an analysis of expected future returns for each asset class weighted by the allocation of the assets. The range of returns developed relies both on forecasts, which include the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator, and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class. As a result, the Company’s expected rate of return on pension plan assets was 7.5 % for 2008.
The investment policy, utilizing a revised target investment allocation of 31 % equity and 69 % long-term U.S. bonds, considers that there will be a time horizon for invested funds of more than 5 years. The total portfolio will be measured against a policy index that reflects the asset class benchmarks and the target asset allocation. The Plan policy does not allow investments in securities of the Company or other related party securities. The performance benchmarks for the separate asset classes include: S & P 500 Index, Russell 2000 Growth Index, MSCI EAFE Index, Barclays Capital Long Term Government Credit Index and Barclays Capital us Strips 20+ Year Index.
The following schedule describes FMCH’s allocation for its plans:
| Table 05.5.23 | CATEGORIES OF PLAN ASSETS |
| Allocation 2008 | Allocation 2007 | Target allocation | |
|---|---|---|---|
| Equity securities | 33 % |
32 % |
31 % |
| Debt securities | 67 % |
68 % |
69 % |
| TOTAL | 100 % |
100 % |
100 % |
DEFINED CONTRIBUTION PLANS
Most FMCH employees are eligible to join a 401(k) savings plan. Employees can deposit up to 75 % of their pay up to a maximum of $15.5 if under 50 years old ($20.5 if 50 or over) under this savings plan. The Company will match 50 % of the employee deposit up to a maximum Company contribution of 3 % of the employee’s pay. The Company’s total expense under this defined contribution plan for the years ended December 31, 2008 and 2007 was $26,096 and $23,534, respectively.
