Western Union 2013 Annual Report Download - page 188

2013 FORM 10-K
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Pension Plan
We have one frozen defined benefit pension plan ("Plan"), for which we had a recorded unfunded pension obligation of $70.4
million and $102.1 million as of December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012,
we made contributions of approximately $16 million and $25 million, respectively, to the Plan, including discretionary contributions
of $5 million for the year ended December 31, 2012. We will be required to fund approximately $13 million to the Plan in 2014.
Our most recent measurement date for our pension plan was December 31, 2013. The calculation of the funded status and net
periodic benefit cost 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 both 2013 and
2012. The expected long-term return on plan assets is 7.00% for 2014. As of December 31, 2013, 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: relative value, equity
long-short, commodities/currencies, 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, primarily 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
3.91% and 3.03% as of December 31, 2013 and 2012, 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.