Retirement Benefit Plans

12 Months Ended

Dec. 31, 2011

Retirement Benefit Plans [Abstract]

Retirement Benefit Plans

14. RETIREMENT BENEFIT PLANS

We have defined benefit pension plans covering certain U.S. and Puerto Rico employees. The employees who are not participating in the defined benefit plans receive additional benefits under our defined contribution plans. Plan benefits are primarily based on years of credited service and the participant’s average eligible compensation. In addition to the U.S. and Puerto Rico defined benefit pension plans, we sponsor various non-U.S. pension arrangements, including retirement and termination benefit plans required by local law or coordinated with government sponsored plans.

We use a December 31 measurement date for our benefit plans.

Defined Benefit Plans

The components of net pension expense for our defined benefit retirement plans are as follows (in millions):

	U.S. and Puerto Rico									Non-U.S.
For the Years Ended December 31,	2011			2010			2009			2011			2010			2009
Service cost	$	11.4		$	10.9		$	12.3		$	16.8		$	14.6		$	13.7
Interest cost		13.0			11.5			10.6			7.3			6.7			6.8
Expected return on plan assets		(21.9	)		(18.1	)		(16.4	)		(9.6	)		(8.0	)		(8.2	)
Curtailment		–			–			0.4			–			–			–
Amortization of prior service cost		–			(0.1	)		0.1			(0.8	)		(0.7	)		(0.7	)
Amortization of unrecognized actuarial loss		6.2			2.4			4.1			1.2			1.2			1.9
Net periodic benefit cost	$	8.7		$	6.6		$	11.1		$	14.9		$	13.8		$	13.5

The weighted average actuarial assumptions used to determine net pension expense for our defined benefit retirement plans were as follows:

	U.S. and Puerto Rico									Non-U.S.
For the Years Ended December 31,	2011			2010			2009			2011			2010			2009
Discount rate		5.82	%		6.26	%		5.79	%		2.82	%		3.19	%		3.40	%
Rate of compensation increase		3.81	%		3.80	%		3.84	%		2.64	%		2.63	%		2.39	%
Expected long-term rate of return on plan assets		7.75	%		7.50	%		7.75	%		4.01	%		4.12	%		4.16	%

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

The expected long-term rate of return on plan assets is based on the historical and estimated future rates of return on the different asset classes held in the plans. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. We believe that historical asset results approximate expected market returns applicable to the funding of a long-term benefit obligation.

Discount rates were determined for each of our defined benefit retirement plans at their measurement date to reflect the yield of a portfolio of high quality bonds matched against the timing and amounts of projected future benefit payments.

Changes in projected benefit obligations and plan assets were (in millions):

	U.S. and Puerto Rico						Non-U.S.
For the Years Ended December 31,	2011			2010			2011			2010
Projected benefit obligation – beginning of year	$	227.1		$	187.6		$	226.5		$	197.3
Service cost		11.4			10.9			16.8			14.6
Interest cost		13.0			11.5			7.3			6.7
Employee contributions		–			–			15.9			12.6
Benefits paid		(4.5	)		(3.6	)		(36.7	)		(18.1	)
Actuarial loss		43.0			20.7			0.4			0.2
Prior service cost		–			–			(1.6	)		–
Expenses paid		–			–			(0.1	)		–
Translation loss		–			–			6.6			13.2
Projected benefit obligation – end of year	$	290.0		$	227.1		$	235.1		$	226.5
Plan assets at fair market value – beginning of year	$	244.9		$	202.1		$	206.0		$	179.0
Actual return on plan assets		(2.1	)		23.2			(2.5	)		6.8
Employer contributions		36.8			23.2			16.0			14.0
Employee contributions		–			–			15.9			12.6
Benefits paid		(4.5	)		(3.6	)		(36.7	)		(18.1	)
Expenses paid		–			–			(0.1	)		–
Translation gain		–			–			6.5			11.7
Plan assets at fair market value – end of year	$	275.1		$	244.9		$	205.1		$	206.0
Funded status	$	(14.9	)	$	17.8		$	(30.0	)	$	(20.5	)
Amounts recognized in consolidated balance sheet:
Prepaid pension	$	–		$	27.0		$	4.3		$	3.0
Short-term accrued benefit liability		(1.0	)		(0.7	)		–			–
Long-term accrued benefit liability		(13.9	)		(8.5	)		(34.3	)		(23.5	)
Net amount recognized	$	(14.9	)	$	17.8		$	(30.0	)	$	(20.5	)
Amounts recognized in accumulated other comprehensive income:
Unrecognized prior service cost	$	0.6		$	0.6		$	(6.7	)	$	(5.7	)
Unrecognized actuarial loss		140.4			79.5			45.5			33.5
Total amount recognized	$	141.0		$	80.1		$	38.8		$	27.8

We estimate the following amounts recorded as part of accumulated other comprehensive income will be recognized as part of our net pension expense during 2012 (in millions):

	U.S. and Puerto Rico		Non-U.S.
Unrecognized prior service cost	$	–	$	(0.9	)
Unrecognized actuarial loss		13.0		2.0
	$	13.0	$	1.1

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

The weighted average actuarial assumptions used to determine the projected benefit obligation for our defined benefit retirement plans were as follows:

	U.S. and Puerto Rico									Non-U.S.
For the Years Ended December 31,	2011			2010			2009			2011			2010			2009
Discount rate		5.05	%		5.82	%		6.26	%		2.49	%		2.82	%		3.25	%
Rate of compensation increase		3.81	%		3.80	%		3.80	%		2.76	%		2.61	%		2.46	%

Plans with projected benefit obligations in excess of plan assets were as follows (in millions):

	U.S. and Puerto Rico				Non-U.S.
As of December 31,	2011		2010		2011		2010
Projected benefit obligation	$	290.0	$	9.2	$	211.5	$	200.7
Plan assets at fair market value		275.1		–		177.3		177.3

Plans with accumulated benefit obligations in excess of plan assets were as follows (in millions):

	U.S. and Puerto Rico				Non-U.S.
As of December 31,	2011		2010		2011		2010
Accumulated benefit obligation	$	22.4	$	6.1	$	190.4	$	167.2
Plan assets at fair market value		13.0		–		168.7		154.1

The accumulated benefit obligation for U.S. and Puerto Rico defined benefit retirement pension plans was $241.3 million and $182.1 million as of December 31, 2011 and 2010, respectively. The accumulated benefit obligation for non-U.S. defined benefit retirement plans was $219.9 million and $212.9 million as of December 31, 2011 and 2010, respectively.

The benefits expected to be paid out in each of the next five years and for the five years combined thereafter are as follows (in millions):

For the Years Ending December 31,	U.S. and Puerto Rico		Non-U.S.
2012	$	6.9	$	16.1
2013		6.9		16.2
2014		8.4		15.8
2015		9.6		16.5
2016		11.1		15.7
2017-2021		81.1		103.0

The U.S. and Puerto Rico defined benefit retirement plans’ overall investment strategy is to maximize total returns by emphasizing long-term growth of capital while avoiding risk. We have established target ranges of assets held by the plans of 45 to 50 percent for equity securities, 35 to 40 percent for debt securities and 5 to 10 percent in non-traditional investments. The plans strive to have sufficiently diversified assets so that adverse or unexpected results from one asset class will not have an unduly detrimental impact on the entire portfolio. The investments in the plans may be rebalanced quarterly based upon the target asset allocation of the plans.

In the U.S. and Puerto Rico, we maintain an investment policy statement that guides the investment allocation in the plans. The investment policy statement describes the target asset allocation positions described above. We have a benefits committee to monitor compliance with the investment policy statement and manage the general investment strategy and objectives of the plans. The benefits committee meets quarterly to review performance and to ensure that the current investment allocation is within the guidelines set forth in the investment policy statement.

The investment strategies of non-U.S. based plans vary according to the plan provisions and local laws. The majority of the assets in non-U.S. based plans are located in Switzerland-based plans. These assets are held in trusts and are commingled with the assets of other Swiss companies with representatives of all the companies making the investment decisions. The overall strategy is to maximize total returns while avoiding risk. The trustees of the assets have established target ranges of assets held by the plans of 30 to 50 percent in debt securities, 20 to 37 percent in equity securities, 15 to 24 percent in real estate, 3 to 15 percent in cash funds and 0 to 12 percent in other funds.

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

The fair value of our U.S. and Puerto Rico pension plan assets by asset category were as follows (in millions):

	As of December 31, 2011
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	1.4	$	1.4	$	–	$	–
Equity securities:
U.S. large-cap		52.9		–		52.9		–
U.S. small-cap		17.4		–		17.4		–
International		50.0		–		50.0		–
Real estate		18.7		–		18.7		–
Commodity-linked mutual funds		25.0		–		25.0		–
Intermediate fixed income securities		109.7		–		109.7		–
Total	$	275.1	$	1.4	$	273.7	$	–

	As of December 31, 2010
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	0.8	$	0.8	$	–	$	–
Equity securities:
U.S. large-cap		34.1		–		34.1		–
U.S. small-cap		12.3		–		12.3		–
International		43.8		–		43.8		–
Real estate		14.8		–		14.8		–
Commodity-linked mutual funds		25.7		–		25.7		–
Intermediate fixed income securities		113.4		–		113.4		–
Total	$	244.9	$	0.8	$	244.1	$	–

The fair value of our non-U.S. pension plan assets were as follows (in millions):

	As of December 31, 2011
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	10.8	$	10.8	$	–	$	–
Equity securities:
Energy		1.9		1.9		–		–
Materials		2.0		2.0		–		–
Industrials		3.7		3.7		–		–
Consumer discretionary		2.1		2.1		–		–
Consumer staples		4.0		4.0		–		–
Healthcare		6.0		6.0		–		–
Financials		5.8		5.8		–		–
Information technology		2.3		2.3		–		–
Telecommunication services		1.0		1.0		–		–
Utilities		1.6		1.6		–		–
Other		28.9		26.6		2.3		–
Fixed income securities:
Government bonds		42.5		–		42.5		–
Corporate bonds		35.5		–		35.5		–
Asset-backed securities		8.4		–		8.4		–
Other debt		1.1		–		1.1		–
Other types of investments:
Mortgage loans		5.2		–		5.2		–
Insurance contracts		5.5		–		5.5		–
Other investments		5.0		–		5.0		–
Real estate		31.8		–		–		31.8
Total	$	205.1	$	67.8	$	105.5	$	31.8

	As of December 31, 2010
			Fair Value Measurements at Reporting Date Using:
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	14.3	$	14.3	$	–	$	–
Equity securities:
Energy		2.0		2.0		–		–
Materials		1.6		1.6		–		–
Industrials		3.4		3.4		–		–
Consumer discretionary		2.5		2.5		–		–
Consumer staples		3.7		3.7		–		–
Healthcare		6.7		6.7		–		–
Financials		7.0		7.0		–		–
Information technology		2.8		2.8		–		–
Telecommunication services		1.0		1.0		–		–
Utilities		2.2		2.2		–		–
Other		27.1		24.2		2.9		–
Fixed income securities:
Government bonds		33.0		–		33.0		–
Corporate bonds		41.0		–		41.0		–
Asset-backed securities		7.4		–		7.4		–
Other debt		1.1		–		1.1		–
Other types of investments:
Mortgage loans		5.6		–		5.6		–
Insurance contracts		5.0		–		5.0		–
Other investments		7.1		–		7.1		–
Real estate		31.5		–		–		31.5
Total	$	206.0	$	71.4	$	103.1	$	31.5

ZIMMER HOLDINGS, INC. 2011 FORM 10-K ANNUAL REPORT

Notes to Consolidated Financial Statements (Continued)

As of December 31, 2011 and 2010, our defined benefit pension plans’ assets did not hold any direct investment in Zimmer Holdings common stock.

Equity securities are valued using a market approach, based on quoted prices for the specific security from transactions in active exchange markets (Level 1), or in some cases where we are invested in mutual or collective funds, based upon the net asset value per unit of the fund which is determined from quoted market prices of the underlying securities in the fund’s portfolio (Level 2). Fixed income securities are valued using a market approach, based upon quoted prices for the specific security or from institutional bid evaluations. Some fixed income securities are in funds with a net asset value per unit which is determined using similar techniques for the underlying securities in the fund’s portfolio. Real estate is valued by discounting to present value the cash flows expected to be generated by the specific properties.

The following table provides a reconciliation of the beginning and ending balances of our non-U.S. pension plan assets measured at fair value that used significant unobservable inputs (Level 3):

	December 31, 2011
Beginning Balance		31.5
Gains on assets sold		0.2
Change in fair value of assets		0.7
Net purchases and sales		(1.5	)
Translation gain		0.9
Ending Balance	$	31.8

We expect that we will have no legally required minimum funding requirements in 2012 for the qualified U.S. and Puerto Rico defined benefit retirement plans. We expect to voluntarily contribute approximately $54 million to these plans during 2012. Contributions to non-U.S. defined benefit plans are estimated to be approximately $14 million in 2012. We do not expect the plan assets in any of our plans to be returned to us in the next year.

Defined Contribution Plans

We also sponsor defined contribution plans for substantially all of the U.S. and Puerto Rico employees and certain employees in other countries. The benefits offered under these plans are reflective of local customs and practices in the countries concerned. We expensed $25.7 million, $24.4 million and $21.6 million related to these plans for the years ended December 31, 2011, 2010 and 2009, respectively.

Postretirement Benefit Plans

During 2009, we amended the postretirement healthcare benefit plans for certain U.S. and Puerto Rico employees. Participants in the plans between the ages of 55 and 65 who were previously receiving benefits will continue to receive benefits until reaching the age of 65. For all other participants in the plans, no benefits will be paid after January 1, 2010. Additionally, we contributed approximately $7 million to a Voluntary Employees’ Beneficiary Association (VEBA) trust to settle any future obligations. We recognized a curtailment gain and settlement loss that netted to a gain of $32.1 million related to these actions.

We have not provided further disclosures related to these postretirement benefit plans as other than the curtailment gain and settlement loss in 2009 discussed above, these plans were not significant to our results of operations or financial position.