15.

EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined benefit pension plans (the “pension plans”) and, in the U.S., a partially funded contributory post-retirement plan covering qualifying U.S. employees (the “medical plan” and together with the pension plans, the “post-retirement plans”). The Company also offers defined contribution plans. The post-retirement plans generally provide benefits to participants based on average levels of compensation. Expenses related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the consolidated statements of operations.

Employer Contributions to Pension Plans—The Company’s funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans’ Trustees. Management also evaluates from time to time whether to make voluntary contributions to the plans. The Company made a contribution to the U.S. pension plans during the year ended December 31, 2012 of approximately $1,095. The Company does not expect to make a contribution to the U.S. pension plans during the year ending December 31, 2013.

On April 30, 2012, the Company and the Trustees of the U.K. pension plans concluded the December 31, 2010 triennial valuations of the plans. In connection with such valuations and a previously negotiated agreement with the Trustees, the Company and the Trustees agreed upon pension funding terms (the “agreement”) (which superseded the terms of an agreement reached in June 2009 with respect to the previous triennial valuation as of December 31, 2007) whereby the Company: (i) made a contribution in December 2011 to the plans of 2.3 million British pounds ($3,687 at December 31, 2011 exchange rates) from a previously established escrow account, (ii) will make contributions of 1 million British pounds during each year from 2012 through 2020 inclusive and (iii) amended the previous escrow arrangement into an account security arrangement covering 10.2 million British pounds, committing to make annual contributions of 1 million British pounds into such account security arrangement during each year from 2014 through 2020. It was further agreed that, to the extent that the value of the plans’ assets falls short of the funding target for June 1, 2020 that has been agreed upon with the Trustees, the assets from the account security arrangement would be released into the plans at that date. Additionally, the Company agreed to fund the expenses of administering the plans, including certain regulator levies and the cost of other professional advisors to the plans. The terms of the agreement are subject to adjustment based on the results of subsequent triennial valuations. The aggregate amounts in the account security arrangement at December 31, 2012 and 2011 of approximately $16,500 and $15,800 have been recorded in “cash deposited with clearing organizations and other segregated cash” on the accompanying consolidated statements of financial condition. Income on the account security arrangement accretes to the Company and is recorded in interest income.

During the year ended December 31, 2012, the Company contributed 1.7 million British pounds to these U.K. pension plans and expects to contribute a similar amount during the year ending December 31, 2013. Additionally, during the year ended December 31, 2012, contributions were made to other non-U.S. pension plans of approximately $4,500. The Company expects to contribute a similar amount to these other non-U.S. pension plans during the year ending December 31, 2013.

The following table summarizes the changes in the benefit obligations, the fair value of the assets, the funded status and amounts recognized in the consolidated statements of financial condition for the post-retirement plans. The Company uses December 31 as the measurement date for its post-retirement plans.


	Pension Plans						Medical Plan
	2012			2011			2012			2011
Change in benefit obligation
Benefit obligation at beginning of year	$	575,031		$	519,779		$	5,362		$	5,799
Service cost		670			651			60			69
Interest cost		27,636			28,266			211			278
Actuarial (gain) loss		57,057			51,401			310			(437	)
Benefits paid		(26,420	)		(21,718	)		(275	)		(347	)
Foreign currency translation and other adjustments		22,051			(3,348	)

Benefit obligation at end of year		656,025			575,031			5,668			5,362

Change in plan assets
Fair value of plan assets at beginning of year		568,911			554,988
Actual return on plan assets		33,882			29,870
Employer contributions		8,221			8,689			275			347
Benefits paid		(26,420	)		(21,718	)		(275	)		(347	)
Foreign currency translation and other adjustments		23,111			(2,918	)

Fair value of plan assets at end of year		607,705			568,911			–			–

Funded (deficit) at end of year	$	(48,320	)	$	(6,120	)	$	(5,668	)	$	(5,362	)

Amounts recognized in the consolidated statements of financial condition at December 31, 2012 and 2011 consist of:
Prepaid pension asset (included in “other assets”)	$	2,659		$	31,457
Accrued benefit liability (included in “other liabilities”)		(50,979	)		(37,577	)	$	(5,668	)	$	(5,362	)

Net amount recognized	$	(48,320	)	$	(6,120	)	$	(5,668	)	$	(5,362	)

Amounts recognized in AOCI (excluding tax benefits of $25,989 and $14,183 at December 31, 2012 and 2011, respectively) consist of:
Actuarial net loss (gain)	$	143,133		$	93,186		$	50		$	(261	)
Prior service cost		11,342			13,896

Net amount recognized	$	154,475		$	107,082		$	50		$	(261	)

The following table summarizes the fair value of plan assets, the accumulated benefit obligation and the projected benefit obligation at December 31, 2012 and 2011:


	U.S. Pension Plans As Of December 31,				Non-U.S. Pension Plans As Of December 31,				Total As Of December 31,
	2012		2011		2012		2011		2012		2011
Fair value of plan assets	$	25,231	$	24,295	$	582,474	$	544,616	$	607,705	$	568,911
Accumulated benefit obligation	$	35,276	$	33,493	$	620,749	$	541,538	$	656,025	$	575,031
Projected benefit obligation	$	35,276	$	33,493	$	620,749	$	541,538	$	656,025	$	575,031

The following table summarizes the components of benefit cost (credit), the return on plan assets, benefits paid, contributions and other amounts recognized in AOCI for the years ended December 31, 2012, 2011 and 2010:


	Pension Plans For The Years Ended December 31,									Medical Plan For The Years Ended December 31,
	2012			2011			2010			2012		2011			2010
Components of Net Periodic Benefit Cost (Credit):
Service cost	$	670		$	651		$	598		$	60	$	69		$	81
Interest cost		27,636			28,266			27,734			211		278			292
Expected return on plan assets		(26,657	)		(30,490	)		(29,347	)
Amortization of:
Prior service cost (credit)		2,751			2,979			2,835								(1,023	)
Net actuarial loss		1,658			258			806
Settlement loss (a)		1,135

Net periodic benefit cost (credit)	$	7,193		$	1,664		$	2,626		$	271	$	347		$	(650	)


Actual return on plan assets	$	33,882		$	29,870		$	61,452
Employer contributions	$	8,221		$	8,689		$	13,284		$	275	$	347		$	542
Benefits paid	$	26,420		$	21,718		$	21,826		$	275	$	347		$	542
Other changes in plan assets and benefit obligations recognized in AOCI (excluding tax charge (benefit) of $(11,805), $(11,495) and $7,530 during the years ended December 31, 2012, 2011 and 2010, respectively):
Net actuarial (gain) loss	$	50,209		$	51,703		$	(21,026	)	$	310	$	(438	)	$	610
Reclassification of prior service (cost) credit to earnings		(2,751	)		(2,979	)		(2,835	)							1,023
Reclassification of actuarial loss to earnings		(2,793	)		(258	)		(806	)
Currency translation and other adjustments		2,729			(491	)		(3,980	)

Total recognized in AOCI	$	47,394		$	47,975		$	(28,647	)	$	310	$	(438	)	$	1,633

Net amount recognized in total periodic benefit cost and AOCI	$	54,587		$	49,639		$	(26,021	)	$	581	$	(91	)	$	983

(a)

During the year ended December 31, 2012, the Company’s pension plans in the U.S. made lump sum benefit payments in excess of the plans’ annual service and interest costs, which, under U.S. GAAP, requires that the plans’ obligations and assets be remeasured. The remeasurement of the plans resulted in the recognition of actuarial losses totaling $2,167 recorded in “other comprehensive income (loss), net of tax” (“OCI”), which, after recording a settlement loss of $1,135 recognized in “compensation and benefits” expense, resulted in a net charge to OCI of $1,032.

The amounts in AOCI on the consolidated statement of financial condition as of December 31, 2012 that are expected to be recognized as components of net periodic benefit cost (credit) for the year ending December 31, 2013 are as follows:


	Pension Plans		Medical Plan		Total
Prior service cost	$	2,826	$	–	$	2,826
Net actuarial loss	$	2,455	$	–	$	2,455

The assumptions used to develop actuarial present value of the projected benefit obligation and net periodic pension cost as of or for the years ended December 31, 2012, 2011 and 2010 are set forth below:


	Pension Plans December 31,									Medical Plan December 31,
	2012			2011			2010			2012		2011		2010
Weighted average assumptions used to determine benefit obligations:
Discount rate		4.6	%		4.8	%		5.4	%		3.4%		4.1%		5.0%
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		3.2	%		4.7	%		5.0	%		4.1%		5.0%		5.6%
Expected long-term rate of return on plan assets		4.7	%		5.4	%		5.9	%		–		–		–
Healthcare cost trend rates used to determine net periodic benefit cost:
Initial											8.0%		8.0%		8.5%
Ultimate											6.0%		6.0%		6.0%
Year ultimate trend rate achieved											2016		2015		2015

Generally, the Company determined the discount rates for its defined benefit plans by utilizing indices for long-term, high-quality bonds and ensuring that the discount rate does not exceed the yield reported for those indices after adjustment for the duration of the plans’ liabilities.

In selecting the expected long-term rate of return on plan assets, the Company considered the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of the plan, giving consideration to expected returns on different asset classes held by the plans in light of prevailing economic conditions as well as historic returns. This basis is consistent for all years presented.

The assumed cost of healthcare has an effect on the amounts reported for the Company’s medical plan. A 1% change in the assumed healthcare cost trend rate would increase (decrease) our cost and obligation as follows:


	1% Increase				1% Decrease
	2012		2011		2012			2011
Cost	$	44	$	66	$	(31	)	$	(49	)
Obligation	$	880	$	929	$	(610	)	$	(649	)

Expected Benefit Payments—The following table summarizes the expected benefit payments for the Company’s post-retirement plans for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter:


	Pension Plans		Medical Plan
2013	$	22,312	$	383
2014		23,287		401
2015		24,447		392
2016		25,729		382
2017		25,925		382
2018-2022		150,681		1,900

Plan Assets—The following tables present the categorization of our pension plans’ assets as of December 31, 2012 and 2011, measured at fair value, into a fair value hierarchy in accordance with fair value measurement disclosure requirements:


	As of December 31, 2012
	Level 1		Level 2		Level 3		Total
Asset Category
Cash	$	10,714	$	–	$	–	$	10,714
Debt		47,298		–		–		47,298
Equities		29,337		–		–		29,337
Funds:
Alternative investments		–		39,930		404		40,334
Debt		12,430		307,695		2,024		322,149
Equity		157,873		–		–		157,873

Total	$	257,652	$	347,625	$	2,428	$	607,705


	As of December 31, 2011
	Level 1		Level 2		Level 3		Total
Asset Category
Cash	$	6,836	$	–	$	–	$	6,836
Debt		48,369		–		–		48,369
Equities		25,186		–		–		25,186
Funds:
Alternative investments		–		34,753		–		34,753
Debt		13,141		302,384		1,777		317,302
Equity		134,393		2,072		–		136,465

Total	$	227,925	$	339,209	$	1,777	$	568,911

Activity in the fair value of the pension plans’ Level 3 debt and alternative investment funds for the years ended December 31, 2012 and 2011 consisted of purchases of $131 and $1,837 and net unrealized/realized gains of $443, and $3, respectively, partially offset by favorable (unfavorable) foreign currency translation adjustments of $77 and ($63), respectively.

Included in Level 1 equity funds are $106,873 and $95,658 as of December 31, 2012 and 2011, respectively, that are invested in funds managed by LAM.

Consistent with the plans’ investment strategies, at December 31, 2012 and 2011, the Company’s U.S. pension plan had 51% and 46%, respectively, of the plans’ assets invested in Level 1 equity funds and 49% and 54%, respectively, invested in Level 1 debt funds. The Company’s non-U.S. pension plans at December 31, 2012 and 2011, had 30% and 27%, respectively, of the plans’ assets invested in equities and equity funds that are primarily Level 1 assets; 61% and 65%, respectively of the plans’ assets invested in debt and debt funds that are primarily Level 2 assets, and 9% and 8%, respectively, of the plans’ assets invested in cash, which is a Level 1 asset or in alternative investment funds that are primarily Level 2 assets.

Investment Policies and Strategies—The primary investment goal is to ensure that the plans remain well funded, taking account of the likely future risks to investment returns and contributions. As a result, a portfolio of assets is maintained with appropriate liquidity and diversification that can be expected to generate long-term future returns that minimize the long-term costs of the pension plans without exposing the trust to an unacceptable risk of under-funding. The Company’s likely future ability to pay such contributions as are required to maintain the funded status of the plans over a reasonable time period is considered when determining the level of risk that is appropriate. The fair value of plan investments classified as Level 1 assets are based on market quotes. The fair value of plan assets classified as Level 2 assets are primarily valued based on inputs other than quoted prices that are directly observable or derived principally from, or corroborated by market data. The fair value of plan investments classified as Level 3 assets are primarily based on NAV determined based on information provided by external fund administrators.

Defined Contribution Plans—Pursuant to certain matching contributions, the Company contributes to employer sponsored defined contribution plans. Such contributions amounted to $13,070, $10,944 and $9,684 for the years ended December 31, 2012, 2011 and 2010, respectively, which are included in “compensation and benefits” expense on the consolidated statements of operations.