Western Union 2012 Annual Report Download - page 75

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Pension Plan
We have one frozen defined benefit pension plan, for which we had recorded unfunded pension obligations of $102.1 million
and $112.7 million as of December 31, 2012 and 2011, respectively. In both years ended December 31, 2012 and 2011, we made
contributions of approximately $25 million to the Plan, including discretionary contributions of $5 million and $3 million,
respectively. We will be required to fund approximately $23 million to the Plan in 2013.
Our most recent measurement date for our pension plan was December 31, 2012. 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 2012 and 2011.
The expected long-term return on plan assets is 7.00% for 2013. As of December 31, 2012, 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 interest rate swap agreements, under which the Plan is committed to pay a short-term LIBOR-based variable interest rate in
exchange for a fixed interest rate based on five and ten-year maturities. 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
3.03% and 3.72% as of December 31, 2012 and 2011, 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.