Western Union 2011 Annual Report Download - page 78

Pension Plan
Our defined benefit pension plan had recorded unfunded pension obligations of $112.7 million and $112.8
million as of December 31, 2011 and 2010, respectively. In both the years ended December 31, 2011 and 2010,
we made contributions of approximately $25 million to the Plan, including discretionary contributions of
$3 million and $10 million, respectively. Due to the closure of one of our facilities in Missouri and an agreement
with the Pension Benefit Guaranty Corporation, we funded $4.1 million during 2009. We will be required to fund
approximately $20 million to the Plan in 2012 and may make a discretionary contribution of up to approximately
$5 million.
Our most recent measurement date for our pension plan was December 31, 2011. The calculation of the funded
status and net periodic benefit income is dependent upon two primary assumptions: 1) expected long-term return
on plan assets; and 2) discount rate.
We employ a building block approach in determining the long-term rate of return for plan assets. Historical
markets are studied and long-term historical risk, return, and co-variance relationships between equities, fixed
income securities, and alternative investments are considered 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.
Consideration is given to diversification, re-balancing and yields anticipated on fixed income securities held.
Historical returns are reviewed within the context of current economic conditions to check for reasonableness
and appropriateness. We then apply this rate against a calculated value for our plan assets. The calculated value
recognizes changes in the fair value of plan assets over a five-year period. Our expected long-term return on plan
assets was 7.00% for 2011 and 6.50% for 2010. The expected long-term return on plan assets is 7.00% for 2012.
As of December 31, 2011, pension plan target allocations were approximately 15% in equity investments, 60% in
debt securities and 25% in alternative investment strategies (e.g. hedge funds, royalty rights and private equity
funds). Hedge fund strategy types include, but are not limited to: commodities/currencies, equity long-short,
relative value, multi-strategy, event driven, and global-macro. The Plan holds derivative contracts directly which
consist of standardized obligations to buy or sell United States treasury bonds or notes at predetermined future
dates and prices which are transacted on regulated exchanges. Additionally, derivatives are held indirectly
through funds in which the Plan is invested. Derivatives are used by the Plan to help reduce the Plan’s exposure
to interest rate volatility and to provide an additional source of return. Cash held by the Plan is used to satisfy
margin requirements on the derivatives. Investment risk is measured and monitored on an ongoing basis through
quarterly investment portfolio reviews, annual liability measurements, and periodic asset and liability studies.
The discount rate assumption is set based on the rate at which the pension benefits could be settled effectively.
The discount rate is determined by matching the timing and amount of anticipated payouts under the Plan to the
rates from an AA spot rate yield curve. The curve is derived from AA bonds of varying maturities. The discount
rate assumption for our benefit obligation was 3.72% and 4.69% at December 31, 2011 and 2010, respectively. A
100 basis point change to both the discount rate and long-term rate of return on plan assets would not have a
material impact to our annual pension expense.
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