PENSION, PROFIT SHARING AND OTHER POST-RETIREMENT BENEFITS

Nortek and its subsidiaries have various pension plans, supplemental retirement plans for certain officers, profit sharing, and other post-retirement benefit plans requiring contributions to qualified trusts and union administered funds.

The Company's pension plans offer subsidized early retirement and lump sum payments. The Company's actuaries use assumptions to capture the value of these forms of payments within the liability calculation.

The Company's policy is to generally fund currently at least the minimum required annual contribution of its various qualified defined benefit plans. At December 31, 2013, the Company expects to contribute approximately $7.0 million to its defined benefit pension plans in 2014.

Impact on Financial Statements

Pension, profit sharing and other post-retirement health benefit expense charged to operations aggregated approximately $7.7 million, $7.1 million and $4.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in pension, profit sharing and other post-retirement health benefit expense for 2013 as compared to 2012 is primarily attributable to a net increase in profit sharing expense, partially offset by a reduction in interest cost resulting from lower discount rates for the companies' defined benefit plans tempered by a reduction in the plan’s expected return on assets and a slightly higher required recognition of the cumulative loss.

The increase in pension, profit sharing and other post-retirement health benefit expense for 2012 as compared to 2011 is primarily attributable to a reduction in the expected return assumption for the pension plans. In addition, the Company's defined benefit plans were required to recognize a significant amount of other comprehensive loss in 2011 as a result of a decrease in discount rates and unfavorable investment return, a portion of which was amortized as pension expense in 2012.

The Company’s net periodic benefit cost (income) for its defined benefit and post-retirement health benefit plans for the years ended December 31, 2013, 2012 and 2011 consists of the following components:



	For the year ended December 31,
	2013						2012						2011
	Defined Benefit			Post- Retirement Health Benefits			Defined Benefit			Post- Retirement Health Benefits			Defined Benefit			Post- Retirement Health Benefits
	(Dollar amounts in millions)
Service cost	$	0.5		$	—		$	0.4		$	—		$	0.5		$	—
Interest cost	6.8			0.1			7.5			0.1			8.6			0.2
Expected return on plan assets	(6.8		)	—			(7.0		)	—			(9.3		)	—
Net amortization of actuarial loss (gain)	0.8			(0.1		)	0.8			(0.2		)	—			(0.1		)
Settlement gain	—			—			—			(0.2		)	—			(0.1		)
Net periodic benefit cost (income)	$	1.3		$	—		$	1.7		$	(0.3	)	$	(0.2	)	$	—

The Company's net periodic benefit cost for its post-retirement health benefit plans reflects settlement accounting resulting from the final payouts of the remaining participants in this plan during 2012, and the retirement of the Company's former Chief Executive Officer in the second quarter of 2011 (see Note 14, "Retirement of Former Chief Executive Officer").

The following table outlines the rollforward of the benefit obligation and plan assets for the defined benefit and post-retirement health benefit plans for the years ended December 31, 2013 and 2012:



	December 31,
	2013						2012
	Defined Benefit			Post- Retirement Health Benefits			Defined Benefit			Post- Retirement Health Benefits
	(Dollar amounts in millions)
Change in benefit obligation:
Benefit obligation at January 1,	$	193.0		$	2.2		$	186.0		$	5.3
Service cost	0.5			—			0.4			—
Interest cost	6.8			0.1			7.5			0.1
Loss due to foreign exchange	0.8			—			1.7			—
Actuarial (gain) loss, excluding assumption changes	(2.2		)	(0.1		)	0.1			(0.1		)
Actuarial (gain) loss due to assumption changes	(9.1		)	(0.2		)	9.5			—
Benefits and expenses paid	(12.0		)	(0.1		)	(12.2		)	(3.1		)
Benefit obligation at December 31,	$	177.8		$	1.9		$	193.0		$	2.2
Change in plan assets:
Fair value of plan assets at January 1,	$	131.7		$	—		$	119.1		$	—
Actual gain on plan assets	9.8			—			13.6			—
Gain due to foreign exchange	0.6			—			1.2			—
Employer contribution	3.9			0.1			10.0			3.1
Benefits and expenses paid	(12.0		)	(0.1		)	(12.2		)	(3.1		)
Fair value of plan assets at December 31,	$	134.0		$	—		$	131.7		$	—
Funded status at end of year	$	(43.8	)	$	(1.9	)	$	(61.3	)	$	(2.2	)
Accumulated benefit obligation at end of year	$	177.6		N/A			$	192.8		N/A

The following table outlines the funded status amounts recognized in the consolidated balance sheet at December 31, 2013 and 2012:



	December 31,
	2013				2012
	Defined Benefit		Post- Retirement Health Benefits		Defined Benefit		Post- Retirement Health Benefits
	(Dollar amounts in millions)
Current liabilities	$	0.8	$	0.3	$	0.8	$	0.3
Non-current liabilities	43.0		1.6		60.5		1.9
	$	43.8	$	1.9	$	61.3	$	2.2

Other changes in assets and obligations recognized in accumulated other comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 were as follows:



	For the year ended December 31,
	2013						2012						2011
	Defined Benefit			Post- Retirement Health Benefits			Defined Benefit			Post- Retirement Health Benefits			Defined Benefit			Post- Retirement Health Benefits
	(Dollar amounts in millions)
Actuarial gain (loss) arising during the period	$	14.1		$	0.2		$	(3.4	)	$	0.1		$	(30.9	)	$	1.0
Amortization to net (loss) earnings of net actuarial (gain) loss	0.7			—			0.8			(0.4		)	—			(0.2		)
Deferred income taxes on pension liability	(5.9		)	(0.1		)	(0.1		)	0.1			10.4			(0.3		)
Other comprehensive (loss) income	$	8.9		$	0.1		$	(2.7	)	$	(0.2	)	$	(20.5	)	$	0.5

The adjustment to accumulated other comprehensive income represents the net unrecognized actuarial gains and losses. At December 31, 2013, 2012 and 2011, the net actuarial loss recognized within accumulated other comprehensive loss that has not yet been recognized as a component of net periodic pension cost, net of tax, was approximately $15.4 million, $24.4 million and $21.5 million, respectively, which includes the defined benefit and post-retirement health benefit plans. The Company expects to recognize approximately $0.4 million in accumulated other comprehensive income as components of net periodic benefit cost in the year ended December 31, 2014 for its defined benefit plans and an immaterial amount for its post-retirement health benefit plans.

Information for the Company's defined benefit plans with accumulated benefit obligations in excess of plan assets as of December 31, 2013 and 2012 is as follows:



	December 31,
	2013		2012
	(Dollar amounts in millions)
Projected benefit obligation	$	177.8	$	193.0
Accumulated benefit obligation	$	177.6	$	192.8
Plan assets	$	134.0	$	131.7

Pension Assets and Investment Policies

The Company’s pension plan assets by asset category and by investment objective for equity securities, investment funds and investments in limited partnerships are shown in the tables below. Pension plan assets for the foreign plan relate to the Company’s pension plan in the United Kingdom. The investment objective for equity securities represents the principal criteria by which investment manager performance is evaluated. Individual investments included within these groupings may include foreign or other equity investments that are reflective of the overall investment objective for the investment manager.



	December 31, 2013				December 31, 2012
	Investment		% of Total		Investment		% of Total
	(Dollar amounts in millions)
Asset Category
Interest bearing cash:
Domestic plans	$	3.3	2.5	%	$	4.5	3.5	%
Fixed income securities:
Domestic plans	50.7		37.8		8.3		6.3
Equity securities:
Domestic plans	—		—		20.2		15.3
Investment funds:
Domestic plans	44.7		33.4		54.4		41.3
Investments in limited partnerships:
Domestic plans	2.8		2.1		14.4		10.9
Investments in pooled pension funds:
Foreign plan	31.8		23.7		29.9		22.7
Other investments:
Domestic plans	0.7		0.5		—		—
Total plan assets	$	134.0	100.0	%	$	131.7	100.0	%

Equity Securities by Investment Objective:
Domestic mid cap growth	$	—	—	%	$	6.0	4.6	%
Domestic mid cap value	—		—		8.3		6.2
Domestic small cap value	—		—		5.9		4.5
	$	—	—	%	$	20.2	15.3	%



	December 31, 2013				December 31, 2012
	Investment		% of Total		Investment		% of Total
	(Dollar amounts in millions)
Investment Funds by investment objective:
Domestic large blend	$	18.1	13.5	%	$	—	—	%
Foreign large blend	9.1		6.8		—		—
Domestic mid cap blend	6.7		5.0		—		—
Domestic small blend	5.4		4.0		—		—
Diversified emerging markets	3.0		2.3		—		—
Real estate	2.4		1.8		—		—
Domestic large cap value	—		—		4.0		3.0
International value	—		—		7.8		5.9
International core	—		—		6.1		4.6
Domestic mid cap value	—		—		6.8		5.2
Domestic small cap value	—		—		6.0		4.6
Domestic small cap core	—		—		3.4		2.6
International macro hedge	—		—		1.6		1.2
Fixed income	—		—		18.7		14.2
	$	44.7	33.4	%	$	54.4	41.3	%

Investments in Limited Partnerships by investment objective:
Domestic large cap core	$	2.8	2.1	%	$	2.7	2.0	%
International core	—		—		2.8		2.1
Domestic mid cap value	—		—		0.1		0.1
Fixed income	—		—		8.8		6.7
	$	2.8	2.1	%	$	14.4	10.9	%

Investments in pooled pension funds by investment objective:
Fixed income	$	12.5	9.3	%	$	12.2	9.3	%
International hedge	19.3		14.4		17.7		13.4
	$	31.8	23.7	%	$	29.9	22.7	%

The Company’s overall weighted-average asset allocations for its domestic and foreign plans at December 31, 2013 and 2012 were as follows:



	December 31,
Asset Category	2013		2012
Cash and cash equivalents	2.5	%	3.5	%
Equity based	49.9		60.1
Fixed income based	47.6		36.4
	100.0	%	100.0	%

The Company’s domestic qualified defined benefit plans’ and foreign pension plan’s assets are invested to maximize returns without undue exposure to risk. The domestic plans' investment objectives are to produce a total return exceeding the median of a universe of portfolios with similar average asset allocation and investment style objectives, and to earn a return, net of fees, greater or equal to the long-term rate of return used by the Company in determining pension expense. The foreign plan investment objectives for the fixed income pooled pension fund are to provide capital growth and income primarily through investment in non-government debt securities. The foreign plan investment objectives for the international hedge pooled pension fund are to provide positive investment returns in all market conditions over the medium to long-term and the investment strategies include the use of advanced derivative techniques that result in a highly diversified portfolio. As indicated in the tables above, investment risk for both the domestic and foreign plans are controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes and investment styles in order to minimize exposure with respect to the size of individual securities and industry concentration. The domestic plans use a variety of investment managers who are evaluated on a quarterly basis while the foreign plan uses two investment funds to manage its assets. The asset allocation policies of the plans are consistent with the established investment objectives and risk tolerances. The asset allocation policies are developed by examining the historical relationships of risk and return among asset classes, and are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk.

Effective in 2013, the Company adopted a liability-driven investment approach for its U.S. pension assets as part of its defined benefit plan terminal funding strategy in order to minimize the volatility of the plans' funded status. The allocation to equity investments as a percentage of plan assets has been reduced and the equity investments are now diversified across low-cost index funds to capture higher expected long-term returns while minimizing cost. The increased fixed income allocation is invested in a manner such that any changes to the corporate bond yield curve will result in proportional changes to both the fixed income portfolio value and the plans' terminal funding liability. As the funded status of the plans improves (as measured on a termination basis), the Company will reduce the plans' equity exposure and increase the amount of fixed income investment that is aligned with the plans' expected benefit obligations. This process represents an ongoing reduction in equity return volatility risk that simultaneously reduces interest rate risk associated with both the plans' fixed income portfolio value and terminal funding liability. This approach is expected to significantly reduce the variability of total plan funding costs without increasing the Company's cumulative contributions. The foreign plan target allocation for 2014 is to split the pension assets broadly into 60.0% growth investments and 40.0% bond investments consistent with the portfolio benchmark for 2012.

The following tables set forth by level, within the fair value hierarchy (see Note 15, “Fair Value”), the pension plan assets carried at fair value as of December 31, 2013 and 2012:



	Assets at Fair Value as of December 31, 2013
	Level 1		Level 2		Level 3		Total
	(Dollar amounts in millions)
Interest-bearing cash	$	3.3	$	—	$	—	$	3.3
Corporate debt	50.7		—		—		50.7
Investments in Registered Investment Companies	44.7		—		—		44.7
Investments in limited partnerships	—		—		2.8		2.8
Investments in pooled pension funds	31.8		—		—		31.8
Other long-term investments	0.7		—		—		0.7
Total investments at fair value	$	131.2	$	—	$	2.8	$	134.0



	Assets at Fair Value as of December 31, 2012
	Level 1		Level 2		Level 3		Total
	(Dollar amounts in millions)
Interest-bearing cash	$	4.5	$	—	$	—	$	4.5
Corporate debt	8.3		—		—		8.3
Equity securities	20.2		—		—		20.2
Investments in Registered Investment Companies	54.4		—		—		54.4
Investments in limited partnerships	—		—		14.4		14.4
Investments in pooled pension funds	29.9		—		—		29.9
Total investments at fair value	$	117.3	$	—	$	14.4	$	131.7

The fair value of investments in limited partnerships is determined based upon information received from the partnerships with respect to the underlying investments held by the respective partnership.

The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the year ended December 31, 2013:



	Investments in Limited Partnerships
	(Dollar amounts in millions)
Balance, beginning of year	$	14.4
Net realized and unrealized gains on investments	0.1
Sales of investments	(11.7		)
Balance, end of year	$	2.8

Assumptions

The assumptions used in determining pension, supplemental retirement plans and post-retirement costs and the projected benefit obligation are as follows:



	For the Year Ended December 31,
	2013			2012			2011
Discount rate for projected benefit obligation	3.00%	-	4.50%	2.00%	-	4.40%	3.00%	-	4.70%
Discount rate for pension costs	2.00%	-	4.40%	3.00%	-	4.70%	4.00%	-	5.40%
Expected long-term average return on plan assets	5.36%	-	5.50%	5.81%	-	5.92%	6.72%	-	7.75%
Rate of compensation increase	2.00%	-	3.00%	2.00%	-	3.00%	2.00%	-	3.00%

The Company utilizes long-term investment-grade bond yields as the basis for selecting a discount rate by which plan obligations are measured. An analysis of projected cash flows for each plan is performed in order to determine plan-specific duration. Discount rates are selected based on high quality corporate bond yields of similar durations.

For purposes of calculating the post-retirement health benefit cost, a medical inflation rate of 6.75% was assumed for both 2013 and 2012. For both 2013 and 2012, the rate was assumed to decrease gradually to an ultimate rate of 5.0% by 2014. A one percentage point change in assumed health care cost trends does not have a significant effect on the amount of liabilities recorded in the consolidated balance sheet at December 31, 2013.

At December 31, 2013, the expected future benefit payments for the defined benefit and post-retirement health benefit plans were as follows:



Year Ended December 31,	Defined Benefit		Post-Retirement Health Benefits
	(Dollar amounts in millions)
2014	$	11.8	$	0.4
2015	11.8		0.3
2016	11.9		0.3
2017	12.0		0.3
2018	12.0		0.2
2019-2023	56.3		0.8