Pension Plans and Other Postretirement Benefit Plans

3 Months Ended

Mar. 31, 2012

Pension Plans and Other Postretirement Benefit Plans

Pension Plans and Other Postretirement Benefit Plans

8. Pension Plans and Other Postretirement Benefit Plans

        Pension Plans    The following table presents the funded status of Grace's fully-funded, underfunded, and unfunded pension plans:

(In millions)	March 31, 2012			December 31, 2011
Overfunded defined benefit pension plans	$	33.3		$	37.1
Underfunded defined benefit pension plans		(90.3	)		(228.0	)
Unfunded defined benefit pension plans		(203.2	)		(179.4	)
Total underfunded and unfunded defined benefit pension plans		(293.5	)		(407.4	)
Unfunded defined benefit pension plans included in liabilities subject to compromise		(123.7	)		(123.3	)
Pension liabilities included in other current liabilities		(13.7	)		(13.2	)
Net funded status	$	(397.6	)	$	(506.8	)

        Fully-funded plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation ("PBO"). This group of plans was overfunded by $33.3 million as of March 31, 2012, and the overfunded status is reflected as "overfunded defined benefit pension plans" in the Consolidated Balance Sheets. Underfunded plans include a group of advance-funded plans that are underfunded on a PBO basis. Unfunded plans include several plans that are funded on a pay-as-you-go basis, and therefore, the entire PBO is unfunded. The combined balance of the underfunded and unfunded plans was $430.9 million as of March 31, 2012 and is presented as a liability on the Consolidated Balance Sheets as follows: $13.7 million in "other current liabilities"; $293.5 million included in "underfunded and unfunded defined benefit pension plans", of which $90.3 million relates to underfunded plans and $203.2 million relates to unfunded plans; and $123.7 million in "liabilities subject to compromise."

        Grace maintains defined benefit pension plans covering current and former employees of certain business units and divested business units who meet age and service requirements. Benefits are generally based on final average salary and years of service. Grace funds its U.S. qualified pension plans ("U.S. qualified pension plans") in accordance with U.S. federal laws and regulations. Non-U.S. pension plans ("non-U.S. pension plans") are funded under a variety of methods, as required under local laws and customs.

        Grace also provides, through nonqualified plans, supplemental pension benefits in excess of U.S. qualified pension plan limits imposed by federal tax law. These plans cover officers and higher-level employees and serve to increase the combined pension amount to the level that they otherwise would have received under the U.S. qualified pension plans in the absence of such limits. The nonqualified plans are unfunded and Grace pays the costs of benefits as they are due to the participants.

        At the December 31, 2011 measurement date for Grace's defined benefit pension plans, the PBO was approximately $1,757 million as measured under U.S. GAAP. The PBO basis reflects the present value (using a 4.50% discount rate for U.S. plans and a 4.83% weighted average discount rate for non-U.S. plans as of December 31, 2011) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay increases for active employees.

        On a quarterly basis, Grace analyzes pension assets and pension liabilities along with the resulting funded status and updates its estimate of these measures. Funded status is adjusted for contributions, benefit payments, actual return on assets, current discount rates, and other identifiable and material actuarial changes. A full remeasurement is performed annually.

        The assumed discount rate for pension plans reflects the market rates for high quality corporate bonds currently available and is subject to change based on changes in the overall market interest rates. For the U.S. qualified pension plans, the assumed discount rate of 4.50% as of December 31, 2011 was selected by Grace, in consultation with its independent actuaries, based on a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. Based on review of an updated yield curve analysis as of March 31, 2012, Grace did not change the discount rate for the U.S. qualified pension plans from the 4.50% rate in effect at December 31, 2011. Grace also evaluated the current discount rates for the pension plans in the United Kingdom, Germany and Canada, which combined represented approximately 90% of the benefit obligation of the non-U.S. pension plans as of December 31, 2011. Based on review of the yield curve analyses for these plans as of March 31, 2012, Grace changed the discount rate for Germany from 4.50% at December 31, 2011 to 3.75% at March 31, 2012, and for Canada from 5.25% at December 31, 2011 to 4.75% at March 31, 2012. Grace did not change the discount rate for the United Kingdom from the 4.75% rate in effect at December 31, 2011. The funded status as of March 31, 2012 reflects an increase in total liabilities of approximately $22 million as compared to December 31, 2011, resulting from the change in discount rates.

        Postretirement Benefits Other Than Pensions    Grace provides postretirement health care and life insurance benefits for retired employees of certain U.S. business units and certain divested business units. The postretirement medical plan provides various levels of benefits to employees hired before 1993 who retire from Grace after age 55 with at least 10 years of service. These plans are unfunded and Grace pays a portion of the costs of benefits under these plans as they are incurred. Grace applies ASC 715 to these plans, which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees' years of service.

        Retirees and beneficiaries covered by the postretirement medical plan are required to contribute a minimum of 40% of the calculated premium for that coverage. During 2002, per capita costs under the retiree medical plans exceeded caps on the amount Grace was required to contribute under a 1993 amendment to the plan. As a result, for 2003 and future years, retirees will bear 100% of any increase in premium costs.

        For 2012 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 9.50%. The rate of increase is assumed to decrease gradually to 5% through 2020 and remain at that level thereafter. A one percentage point increase or decrease in assumed health care medical cost trend rates would not materially change Grace's postretirement benefit obligations (impact of less than $1 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.

Components of Net Periodic Benefit Cost

	Three Months Ended March 31,
	2012								2011
	Pension								Pension
							Other Post Retirement								Other Post Retirement
(In millions)	U.S.			Non-U.S.					U.S.			Non-U.S.
Service cost	$	5.5		$	2.3		$	0.1	$	4.7		$	2.2		$	0.1
Interest cost		14.2			5.5			0.6		15.3			5.6			0.8
Expected return on plan assets		(15.0	)		(3.7	)		—		(16.5	)		(4.0	)		—
Amortization of prior service cost		0.2			—			—		0.3			—			—
Amortization of net deferred actuarial loss		8.6			1.2			0.2		7.8			1.1			0.1
Net periodic benefit cost	$	13.5		$	5.3		$	0.9	$	11.6		$	4.9		$	1.0

        Plan Contributions and Funding    Subject to any required approval of the Bankruptcy Court, Grace intends to satisfy its funding obligations under the U.S. qualified pension plans and to comply with all of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). For ERISA purposes, funded status is calculated on a different basis than under U.S. GAAP. On February 21, 2012, Grace obtained Bankruptcy Court approval to fund minimum required payments under the U.S. qualified pension plans of approximately $26 million and an accelerated contribution of up to $83 million in 2012. In that regard, Grace contributed approximately $109 million in the first quarter of 2012 to the trusts that hold assets of the U.S. qualified pension plans. While Grace intends to continue to fund all minimum required payments under the U.S. qualified pension plans, there can be no assurance that the Bankruptcy Court will continue to approve these payments.

        Contributions to non-U.S. pension plans are not subject to Bankruptcy Court approval and Grace intends to fund such plans based on applicable legal requirements and actuarial and trustee recommendations.

        Grace plans to pay benefits as they become due under virtually all pay-as-you-go plans and to maintain compliance with federal funding laws for its U.S. qualified pension plans.

        Defined Contribution Retirement Plan    Grace sponsors a defined contribution retirement plan for its employees in the United States. This plan is qualified under section 401(k) of the U.S. tax code. Currently, Grace contributes an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Grace's cost related to this benefit plan for the three months ended March 31, 2012 was $3.4 million compared with $3.1 million for the prior-year period.