11. Pension and other post-retirement benefits
Net pension and postretirement benefit cost. In connection with the Merger, Express Scripts assumed sponsorship of Medco’s pension and other post-retirement benefit obligations, which were re-measured and recorded at fair value on the date of the Merger.
For the pension plans, Express Scripts has elected to determine the projected benefit obligation as the value of the benefits to which employees would be entitled if they separated from service immediately. Under this approach, the liability is equal to the employee’s account value as of the measurement date. After re-measurement upon the Merger consummation, the fair value of the projected benefit obligation was $291.3 million and the plan assets at fair value totaled $217.0 million, representing an underfunded status and resulting in a balance sheet liability of $74.3 million.
In January 2011, Medco amended its defined benefit pension plans, freezing the benefit for all participants effective in the first quarter of 2011. After the plan freeze, participants no longer accrue any benefits under the plans, and the plans have been closed to new entrants since February 28, 2011. However, account balances continue to be credited with interest until paid.
Medco’s unfunded postretirement healthcare benefit plan was discontinued for all active non-retirement eligible employees in January 2011.
For the years ended December 31, 2013 and 2012, the net benefit for the Company’s pension plan consisted of the following components:
|
| | | | | | | |
| Year Ended December 31, |
(in millions) | 2013 | | 2012 |
Interest cost | $ | 0.5 |
| | $ | 0.3 |
|
Actual return on plan assets | (15.3 | ) | | (7.0 | ) |
Net actuarial (gain)/loss | (0.4 | ) | | 0.1 |
|
Net benefit | $ | (15.2 | ) | | $ | (6.6 | ) |
For the years ended December 31, 2013 and 2012, the net (benefit) cost for the Company’s other postretirement benefit plan consisted of the following components:
|
| | | | | | | |
| Year Ended December 31, |
(in millions) | 2013 | | 2012 |
Interest cost | $ | 0.1 |
| | $ | 0.1 |
|
Net actuarial (gain)/loss | (0.2 | ) | | 0.1 |
|
Net (benefit) cost | $ | (0.1 | ) | | $ | 0.2 |
|
Net actuarial gains and losses reflect experience differentials relating to differences between expected and actual demographic changes, differences between expected and actual healthcare cost increases and the effects of changes in actuarial assumptions. Net actuarial gains and losses are recorded into net income in the period incurred.
Changes in plan assets, benefit obligation and funded status. Summarized information about the funded status and the changes in plan assets and projected benefit obligation for the years ended December 31, 2013 and 2012 are as follows:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
(in millions) | 2013 | | 2012 | | 2013 | | 2012 |
Fair value of plan assets at beginning of year | $ | 207.5 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Fair value of plan assets assumed in the Merger | — |
| | 217.0 |
| | — |
| | — |
|
Actual return on plan assets | 15.3 |
| | 7.0 |
| | — |
| | — |
|
Company contributions | — |
| | 6.1 |
| | 0.4 |
| | 0.5 |
|
Benefits paid | (43.4 | ) | | (22.6 | ) | | (0.4 | ) | | (0.5 | ) |
Fair value of plan assets at end of year | 179.4 |
| | 207.5 |
| | — |
| | — |
|
Projected benefit obligation at beginning of year | 269.1 |
| | — |
| | 2.6 |
| | — |
|
Benefit obligation assumed in the Merger | — |
| | 291.3 |
| | — |
| | 2.9 |
|
Interest cost | 0.5 |
| | 0.3 |
| | 0.1 |
| | 0.1 |
|
Actuarial (gains)/losses | (0.4 | ) | | 0.1 |
| | (0.2 | ) | | 0.1 |
|
Benefits paid | (43.4 | ) | | (22.6 | ) | | (0.4 | ) | | (0.5 | ) |
Projected benefit obligation at end of year | 225.8 |
| | 269.1 |
| | 2.1 |
| | 2.6 |
|
Underfunded status at end of year | $ | 46.4 |
| | $ | 61.6 |
| | $ | 2.1 |
| | $ | 2.6 |
|
As a result of the plan freeze, the accumulated benefit obligation and the projected benefit obligation amounts for the defined benefit pension plan are equal at December 31, 2013 and 2012.
The pension and other postretirement benefits liabilities recognized at December 31, 2013 and 2012 are as follows:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
(in millions) | 2013 | | 2012 | | 2013 | | 2012 |
Accrued expenses | $ | — |
| | $ | — |
| | $ | 0.3 |
| | $ | 0.5 |
|
Other liabilities | 46.4 |
| | 61.6 |
| | 1.8 |
| | 2.1 |
|
Total pension and other postretirement liabilities | $ | 46.4 |
| | $ | 61.6 |
| | $ | 2.1 |
| | $ | 2.6 |
|
Actuarial assumptions. The Company has elected an accounting policy that measures the pension plan’s benefit obligation as if participants were to separate immediately. As a result, a discount rate is not used to value the pension benefit obligation. Also, since both the pension and other postretirement benefit plans are frozen, a rate of compensation increase is not applicable.
|
| | | | | |
| Other Postretirement Benefits |
| 2013 | | 2012 |
Weighted-average assumptions used to determine benefit obligations at fiscal year-end: | | | |
Discount rate | 3.39 | % | | 2.48 | % |
Weighted-average assumptions used to determine net cost for the fiscal year ended: | | | |
Discount rate | 2.52 | % | | 3.30 | % |
Our return on plan assets is calculated based on the actual fair value of plan assets. We recognize actual gains and losses on pension plan assets immediately in our operating results. Amounts are recorded each period based on estimates, and adjusted annually when actual results of the plan are measured at December 31st.
For the other postretirement benefit plan, the discount rate is determined annually and is evaluated and modified to reflect, at the end of our fiscal year, the prevailing market rate of a portfolio of high-quality corporate bond investments that would provide the future cash flows needed to settle benefit obligations as they come due.
Future costs of the amended postretirement benefit healthcare plan are being capped based on 2004 costs. As a result, employer liability is not affected by healthcare cost trend. Additionally, the salary growth rate assumption is not applicable for determination of the benefit obligation at December 31, 2013 and 2012 as a result of the plan freeze.
Pension plan assets. The Company believes the oversight of the investments held under its pension plans is rigorous and the investment strategies are prudent. Beginning in 2013, we have adopted a dynamic asset allocation policy. The intent of this policy is to allocate funds to investments with lower expected risk profiles as the funded ratio of the pension plan improves. The investment objectives of the Company’s qualified pension plan are designed to provide liquidity to meet benefit payments and expenses payable from the plan to offer a reasonable probability of achieving asset growth to reduce the underfunded status of the plan and to manage the plan’s assets in a liability framework. The precise amount for which the benefit obligations will be settled depends on future events, including interest rates and the life expectancy of the plan’s members. The obligations are estimated using actuarial assumptions based on the current economic environment.
The following table sets forth the target allocation for 2014 by asset class and the plan assets at fair value at December 31, 2013 and 2012 by level within the fair value hierarchy:
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| | | | | | | | | | | | | | | | | | | | | |
($ in millions) Asset Class | Target Allocation 2014(1) | | Percent of Plan Assets at December 31, 2013 | | December 31, 2013 | | Level 1(2)(3) | | Level 2(2)(4) | | Level 3(2)(5) |
Cash equivalents | 2 | % | | 2 | % | | $ | 3.3 |
| | $ | — |
| | $ | 3.3 |
| | $ | — |
|
U.S. equity securities | 11 | % | | 9 | % | | | | | | | | |
U.S. large-cap | | | | | 11.0 |
| | — |
| | 11.0 |
| (6) | — |
|
U.S. small/mid-cap | | | | | 4.7 |
| | — |
| | 4.7 |
| (7) | — |
|
International equity securities | 12 | % | | 15 | % | | 27.9 |
| | — |
| | 27.9 |
| | — |
|
Fixed income | 47 | % | | 45 | % | | 80.6 |
| | — |
| | 80.6 |
| (8) | — |
|
Hedge funds(9) | 23 | % | | 24 | % | | 42.9 |
| | — |
| | — |
| | 42.9 |
|
Global real estate | 5 | % | | 5 | % | | 9.0 |
| | — |
| | 9.0 |
| | — |
|
Total |
| | 100 | % | | $ | 179.4 |
| | $ | — |
| | $ | 136.5 |
| | $ | 42.9 |
|
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) Asset Class | | | Percent of Plan Assets at December 31, 2012 | | December 31, 2012 | | Level 1(2)(3) | | Level 2(2)(4) | | Level 3(2) |
U.S. equity securities | | | 54 | % | | | | | | | | |
U.S. large-cap | | | | | $ | 60.3 |
| | $ | — |
| | $ | 60.3 |
| (6) | $ | — |
|
U.S. small/mid-cap | | | | | 51.1 |
| | 27.9 |
| | 23.2 |
| (7) | — |
|
International equity securities | | | 15 | % | | 31.1 |
| | 31.1 |
| | — |
| | — |
|
Fixed income | | | 31 | % | | 65.0 |
| | 30.8 |
| | 34.2 |
| (8) | — |
|
Total | | | 100 | % | | $ | 207.5 |
| | $ | 89.8 |
| | $ | 117.7 |
| | $ | — |
|
| |
(1) | The amounts disclosed reflect our target allocation based on the funded ratio of the plan at December 31, 2013 and are subject to change based on the funded ratio of the plan during the year. |
| |
(2) | See Note 2 - Fair value measurements for a description of the fair value hierarchy. |
| |
(3) | Investments classified as Level 1 are valued at the readily available quoted price from an active market where there is significant transparency in the executed quoted price. These investments consist of mutual funds valued at the net asset value of shares held by the pension plan at year-end. |
| |
(4) | Assets classified as Level 2 include units held in common collective trust funds and mutual funds, which are valued based on the net asset values reported by the funds’ investment managers, and a short-term fixed income investment fund which is valued using other significant observable inputs such as quoted prices for comparable securities. |
| |
(5) | The plan holds units of the a hedge fund offered through a private placement. The units are valued monthly using a net asset value (“NAV”). The hedge fund’s NAV is based on the fair value (reported NAVs) of each fund’s underlying fund investments and includes cash equivalents, and any accrued payables or receivables. Both the hedge fund and its underlying investments are priced using fair value pricing sources and techniques. The plan may redeem its shares quarterly at the stated NAV after a one year lock-up. |
| |
(6) | Consists of common collective trusts that invest in common stock of S&P 500 companies and US large-cap common stock. |
| |
(7) | Consists of a common collective trust that invests in US mid-cap common stock. |
| |
(8) | Primarily consists of a common collective trust that invests in passive bond market index lending funds and a short-term investment fund. |
| |
(9) | The inclusion of hedge funds serves to further diversify the fund and the volatility of the hedge fund portfolio returns are expected to be less than that of global equities. |
For measurements using significant unobservable inputs (Level 3) during 2013, a reconciliation of the beginning and ending balances is as follows: |
| | | |
(in millions) | Hedge Funds |
Balance at beginning of year | $ | — |
|
Purchases | 42.0 |
|
Unrealized gains | 0.9 |
|
Balance at end of year | $ | 42.9 |
|
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Cash flows.
Employer Contributions. Under the current actuarial assumptions, there is no minimum contribution required for the 2013 plan year. The Company does not expect to contribute any cash payments during 2014.
Estimated Future Benefit Payments. As of December 31, 2013, the following benefit payments are expected to be made (in millions): |
| | | | | | | | |
Year Ended December 31, | | Pension Benefits | | Other Postretirement Benefits |
2014 | | $ | 15.5 |
| | $ | 0.3 |
|
2015 | | 14.1 |
| | 0.3 |
|
2016 | | 13.7 |
| | 0.3 |
|
2017 | | 13.3 |
| | 0.2 |
|
2018 | | 13.1 |
| | 0.2 |
|
2019-2023 | | 63.8 |
| | 0.7 |
|
