| |
14. Pension and Other
Postretirement Plans
The Company has a qualified, defined benefit pension plan which generally
covers all eligible employees not participating in a labor negotiated
plan. Plan benefits are generally based on years of service and employees’
highest compensation during five consecutive years of employment.
Annual payments to the pension trust fund are determined in compliance
with the Employee Retirement Income Security Act (“ERISA”).
In addition, the Company has a noncontributory, supplemental executive
retirement plan (“SERP”) and a discretionary capital accumulation
plan (“CAP”), both of which are non-qualified, defined
benefit pension plans and are unfunded.
The Company also sponsors plans that provide certain health care benefits
for retired employees. Generally, employees hired by Land O’Lakes
prior to October 1, 2002 become eligible for these benefits upon meeting
certain age and service requirements; employees hired by Land O’Lakes
after September 30, 2002 are eligible for access-only retirement health
care benefits at their expense. The Company funds only the plans’
annual cash requirements.
As permitted by FASB Staff Position 106-1, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003,” the Company has elected to defer
recognizing in its 2003 consolidated financial statements the effect
of the Act. Accordingly, any measures of the accumulated postretirement
benefit obligation or net periodic postretirement benefit cost do
not reflect the effect of the Act. Specific authoritative guidance
on accounting for the federal subsidy is pending, and the issued guidance
could require the Company to change previously reported information.
The Company uses a November 30 measurement date for its plans.
Obligation and Funded Status
At December 31
 |
Pension Benefits |
|
|
Qualified Plan |
Non-qualified Plans |
|
| |
2003 |
2002 |
2003 |
2002 |
|
|
| Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at
beginning
of year |
$ |
351,823 |
|
$ |
313,680 |
|
$ |
42,068 |
|
$ |
39,217 |
|
| Service cost |
|
16,209 |
|
|
11,537 |
|
|
377 |
|
|
366 |
|
| Interest cost |
|
24,253 |
|
|
23,588 |
|
|
2,916 |
|
|
2,759 |
|
| Plan participants’ contributions |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
| Plan amendments |
|
– |
|
|
3,377 |
|
|
– |
|
|
(3,152 |
) |
| Transfer to other plans |
|
– |
|
|
(3,062 |
) |
|
– |
|
|
– |
|
| Business combinations |
|
– |
|
|
26,389 |
|
|
– |
|
|
– |
|
| Actuarial loss (gain) |
|
41,167 |
|
|
(5,517 |
) |
|
4,476 |
|
|
4,833 |
|
| Benefits paid |
|
(18,054 |
) |
|
(18,169 |
) |
|
(2,105 |
) |
|
(1,955 |
) |
|
| Benefit obligation at end of year |
$ |
415,398 |
|
$ |
351,823 |
|
$ |
47,732 |
|
$ |
42,068 |
|
|
| Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning
of year |
$ |
334,137 |
|
$ |
283,983 |
|
$ |
– |
|
$ |
– |
|
| Actual gain (loss) on plan assets |
|
45,182 |
|
|
(17,810 |
) |
|
– |
|
|
– |
|
| Company contributions |
|
– |
|
|
67,936 |
|
|
2,105 |
|
|
1,955 |
|
| Transfer to other plans |
|
– |
|
|
(3,062 |
) |
|
– |
|
|
– |
|
| Business combinations |
|
– |
|
|
21,259 |
|
|
– |
|
|
– |
|
| Plan participants’ contributions |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
| Benefits paid |
|
(18,054 |
) |
|
(18,169 |
) |
|
(2,105 |
) |
|
(1,955 |
) |
|
Fair value of plan assets
at end of
year |
$ |
361,265 |
|
$ |
334,137 |
|
$ |
– |
|
$ |
– |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Funded status |
$ |
(54,133 |
) |
$ |
(17,686 |
) |
$ |
(47,732 |
) |
$ |
(42,068 |
) |
| Unrecognized net actuarial loss |
|
135,129 |
|
|
107,545 |
|
|
10,486 |
|
|
6,573 |
|
| Unrecognized prior service cost |
|
4,652 |
|
|
5,927 |
|
|
(2,778 |
) |
|
(3,209 |
) |
| Unrecognized transition obligation |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
| Net amount recognized |
$ |
85,648 |
|
$ |
95,786 |
|
$ |
(40,024 |
) |
$ |
(38,704 |
) |
|
| Amounts recognized in
consolidated balance sheets consist of: |
|
|
|
|
|
|
|
| Prepaid benefit cost |
$ |
– |
|
$ |
95,786 |
|
$ |
– |
|
$ |
– |
|
| Accrued benefit liability |
|
(15,909 |
) |
|
– |
|
|
(41,716 |
) |
|
(38,704 |
) |
| Intangible asset |
|
4,652 |
|
|
– |
|
|
– |
|
|
– |
|
Accumulated other comprehensive
income
before tax |
|
96,905 |
|
|
– |
|
|
1,692 |
|
|
– |
|
|
| Net amount recognized |
$ |
85,648 |
|
$ |
95,786 |
|
$ |
(40,024 |
) |
$ |
(38,704 |
) |
|
|
Other Postretirement Benefits |
|
|
|
|
2003 |
|
2002 |
|
| Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at
beginning
of year |
|
|
|
|
|
|
$ |
60,923 |
|
$ |
59,295 |
|
| Service cost |
|
|
|
|
|
|
|
803 |
|
|
802 |
|
| Interest cost |
|
|
|
|
|
|
|
4,353 |
|
|
4,048 |
|
| Plan participants’ contributions |
|
|
|
|
|
|
|
1,586 |
|
|
1,214 |
|
| Plan amendments |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Transfer to other plans |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Business combinations |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Actuarial loss |
|
|
|
|
|
|
|
8,149 |
|
|
2,828 |
|
| Benefits paid |
|
|
|
|
|
|
|
(7,891 |
) |
|
(7,264 |
) |
|
| Benefit obligation at end of year |
|
|
|
|
|
|
$ |
67,923 |
|
$ |
60,923 |
|
|
| Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning
of year |
|
|
|
|
|
|
$ |
– |
|
$ |
– |
|
| Actual gain (loss) on plan assets |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Company contributions |
|
|
|
|
|
|
|
6,305 |
|
|
6,050 |
|
| Transfer to other plans |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Business combinations |
|
|
|
|
|
|
|
– |
|
|
– |
|
| Plan participants’ contributions |
|
|
|
|
|
|
|
1,586 |
|
|
1,214 |
|
| Benefits paid |
|
|
|
|
|
|
|
(7,891 |
) |
|
(7,264 |
) |
|
Fair value of plan assets
at end
of year |
|
|
|
|
|
|
$ |
– |
|
$ |
– |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Funded status |
|
|
|
|
|
|
$ |
(67,923 |
) |
$ |
(60,923 |
) |
| Unrecognized net actuarial loss |
|
|
|
|
|
|
|
34,927 |
|
|
28,946 |
|
| Unrecognized prior service cost |
|
|
|
|
|
|
|
2,660 |
|
|
2,926 |
|
| Unrecognized transition obligation |
|
|
|
|
|
|
|
5,785 |
|
|
6,429 |
|
|
| Accrued benefit liability |
|
|
|
|
|
|
$ |
(24,551 |
) |
$ |
(22,622 |
) |
|
| Amounts recognized in consolidated
balance sheets consist of: |
|
|
|
|
|
|
|
| Prepaid benefit cost |
|
|
|
|
|
|
$ |
– |
|
$ |
– |
|
| Accrued benefit liability |
|
|
|
|
|
|
|
(24,551 |
) |
|
(22,622 |
) |
| Intangible asset |
|
|
|
|
|
|
|
– |
|
|
– |
|
Accumulated other comprehensive
income
before tax |
|
|
|
|
|
|
|
– |
|
|
– |
|
|
| Net amount recognized |
|
|
|
|
|
|
$ |
(24,551 |
) |
$ |
(22,622 |
) |
|
The accumulated benefit obligation for the Company’s qualified,
defined benefit pension plan was $377.2 million and $330.5 million
at December 31, 2003 and 2002, respectively. The accumulated benefit
obligation for the Company’s non-qualified defined benefit
pension plans was $42.2 million and $38.7 million at December 31,
2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation
in excess of plan assets:
|
Pension Benefits |
| |
|
|
Qualified Plan |
Non-qualified Plans |
| |
|
| |
2003 |
2002 |
2003 |
2002 |
|
|
| Projected Benefit obligation |
$ |
415,398 |
|
|
N/A |
|
$ |
47,732 |
|
$ |
42,068 |
|
| Accumulated benefit obligation |
|
377,175 |
|
|
N/A |
|
|
42,235 |
|
|
38,736 |
|
| Fair value of plan assets |
|
361,265 |
|
|
N/A |
|
|
– |
|
|
– |
|
|
| Components of net periodic benefit cost are as
follows: |
|
|
Other Postretirement |
|
Pension Benefits |
Benefits |
| |
|
|
2003 |
2002 |
2001 |
2003 |
2002 |
2001 |
|
|
| Service cost |
$ |
16,586 |
|
$ |
11,903 |
|
$ |
9,678 |
|
$ |
803 |
|
$ |
802 |
|
$ |
818 |
|
| Interest cost |
|
27,169 |
|
|
26,347 |
|
|
22,001 |
|
|
4,353 |
|
|
4,048 |
|
|
3,917 |
|
| Expected return on assets |
|
(32,806 |
) |
|
(30,301 |
) |
|
(28,428 |
) |
|
– |
|
|
– |
|
|
– |
|
| Amortization of actuarial loss |
|
1,771 |
|
|
905 |
|
|
– |
|
|
2,169 |
|
|
1,615 |
|
|
1,327 |
|
| Amortization of prior service cost |
|
844 |
|
|
848 |
|
|
877 |
|
|
266 |
|
|
266 |
|
|
266 |
|
| Amortization of transition obligation |
|
– |
|
|
– |
|
|
– |
|
|
643 |
|
|
643 |
|
|
643 |
|
|
| Net periodic benefit cost |
$ |
13,564 |
|
$ |
9,702 |
|
$ |
4,128 |
|
$ |
8,234 |
|
$ |
7,374 |
|
$ |
6,971 |
|
|
| Additional Information |
|
|
Pension Benefits |
|
|
|
Qualified Plan |
Non-qualified Plans |
| |
|
| |
2003 |
2002 |
2003 |
2002 |
|
|
| Increase in intangible asset |
$ |
4,652 |
|
$ |
– |
|
$ |
– |
|
$ |
– |
|
| Increase in additional minimum liability |
|
101,557 |
|
|
– |
|
|
1,692 |
|
|
– |
|
Decrease in other comprehensive
income, before tax |
$ |
96,905 |
|
$ |
– |
|
$ |
1,692 |
|
$ |
– |
|
|
| Weighted-average assumptions used to determine
benefit obligations at December 31: |
|
|
|
Other Postretirement |
|
Pension Benefits |
Benefits |
| |
|
| |
2003 |
2002 |
2003 |
2002 |
|
|
| Discount rate |
|
6.25 |
% |
|
7.00 |
% |
|
6.25 |
% |
|
7.00 |
% |
| Rate of compensation increase |
|
4.25 |
% |
|
4.25 |
% |
|
N/A |
|
|
N/A |
|
|
| Weighted-average assumptions used to determine
net periodic benefit cost for years ended December 31: |
|
|
Other Postretirement |
|
Pension Benefits |
Benefits |
| |
|
|
2003 |
2002 |
2001 |
2003 |
2002 |
2001 |
|
|
| Discount rate |
|
7.00 |
% |
|
7.25 |
% |
|
7.50 |
% |
|
7.00 |
% |
|
7.25 |
% |
|
7.50 |
% |
Rate of long-term
return on plan assets |
|
8.50 |
% |
|
9.50 |
% |
|
9.50 |
% |
|
N/A |
|
|
N/A |
|
|
N/A |
|
| Rate of compensation increase |
|
4.25 |
% |
|
4.75 |
% |
|
4.75 |
% |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
The Company employs a building block approach in determining the
long-term rate of return for the assets in the qualified, defined
benefit pension plan. Historical markets are studied and long-term
historical relationships between equities and fixed income are preserved
consistent with the widely-accepted capital market principle that
assets with higher volatility generate a greater return over the
long run. Current market factors, such as inflation and interest
rates, are evaluated before long-term capital market assumptions
are determined. Diversification and rebalancing of the plan assets
are properly considered as part of establishing the long-term portfolio
return. Peer data and historical returns are reviewed to check for
reasonability and appropriateness.
| Assumed health care cost trend rates at December
31: |
2003 |
|
2002 |
|
|
| Health care cost trend rate assumed for next
year |
9.00 |
% |
|
10.0 |
% |
| Rate of which the cost trend is assumed to decline
(ultimate trend rate) |
5.50 |
% |
5.50 |
% |
| Year that rate reaches ultimate trend rate |
2008 |
|
|
2008 |
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend
rate at December 31, 2003 would have the following effects:
1-Percentage
point
increase |
|
1-Percentage
point
decrease |
|
|
| Effect on total of service and interest cost
|
$ |
256 |
|
$ |
(241 |
) |
| Effect on postretirement benefit obligation |
|
4,088 |
|
|
(3,856 |
) |
|
Plan Assets
The Company’s qualified, defined benefit pension plan weighted-average
asset allocations at December 31, 2003 and December 31, 2002, by
asset category, are as follows:
| Asset category |
2003 |
|
2002 |
|
Target |
|
|
| U.S. equity securities |
60 |
% |
54 |
% |
55 |
% |
| International equity securities |
10 |
% |
9 |
% |
10 |
% |
| Fixed income securities and bonds |
30 |
% |
37 |
% |
|
35 |
% |
|
| Total |
100 |
% |
100 |
% |
|
100 |
% |
|
The Company has a Statement of Pension Investment Policies and
Objectives (the “Statement”) that guides the retirement
plan committee in its mission to effectively monitor and supervise
the pension plan assets. Two general investment goals are reflected
in the Statement: 1) the investment program for the pension plan
should provide returns which improve the funded status of the plan
over time and reduce the Company’s pension costs; and 2) the
Company expects to receive above-average performance from the pension
portfolio’s managers in exchange for the fees paid to them.
As a result, the total fund’s annualized return before fees
should, over a five year horizon, exceed the annualized, weighted
total rate of return of the following customized index by one percentage
point: S&P 500 (weighted 55%), EAFE Index (weighted 10%), and
Lehman Brothers Aggregate Bond Index (weighted 35%) and rank in
the top 35 percent on the Hewitt Associates’ pension fund
universe.
Cash Flow
The Company expects to contribute approximately $12 million to its
defined benefit pension plans and $7 million to its other postretirement
benefits plans in 2004.
Other Benefit Plans
Certain eligible employees are covered by defined contribution plans.
The expense for these plans was $12.7 million, $14.6 million and
$11.0 million for 2003, 2002 and 2001, respectively.
|
