SAVINGS PLANS, PENSION PLANS AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS

Substantially all of our employees are eligible to participate in 401(k) savings plans and are covered by noncontributory defined benefit pension plans. In 2012, 2011 and 2010, we made matching 401(k) contributions on behalf of employees of $1.6 million, $1.4 million and $1.2 million, respectively. Effective January 1, 2011, we closed our defined benefit pension plans to any new salaried and hourly non-represented entrants. In connection with these closures, additional company 401(k) contributions are made for employees hired after that date.

We also provide benefits under company-sponsored defined benefit retiree health care plans, which cover certain salaried and hourly employees. Most of the retiree health care plans require retiree contributions and contain other cost-sharing features.

We recognized the underfunded status of our defined benefit pension plans and other postretirement employee benefit obligations on our Consolidated Balance Sheets at December 31, 2012 and 2011. We recognized the changes in that funded status, in the year in which changes occurred, through our Consolidated Statements of Comprehensive Income.

We use a December 31 measurement date for our benefit plans and obligations. The change in benefit obligation, change in plan assets and funded status for company-sponsored benefit plans and obligations are as follows:

(Dollars in thousands)



	PENSION BENEFIT PLANS						OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012			2011			2012			2011
Benefit obligation at beginning of year	$	418,251		$	395,086		$	65,195		$	72,619
Service cost	5,238			4,456			284			446
Interest cost	19,986			21,325			2,478			3,486
Plan amendments	510			—			(6,045		)	(5,805		)
Actuarial loss (gain)	38,329			27,916			(4,878		)	(913		)
Medicare Part D subsidies received	—			—			—			741
Benefits paid	(36,779		)	(30,532		)	(5,001		)	(5,379		)
Benefit obligation at end of year	445,535			418,251			52,033			65,195
Fair value of plan assets at beginning of year	312,158			329,064			—			—
Actual return on plan assets	46,905			2,500			—			—
Employer contribution	23,349			11,126			—			—
Benefits paid	(36,779		)	(30,532		)	—			—
Fair value of plan assets at end of year	345,633			312,158			—			—
Funded status at end of year	$	(99,902	)	$	(106,093	)	$	(52,033	)	$	(65,195	)
Amounts recognized in the consolidated balance sheets:
Current liabilities	$	(1,775	)	$	(1,712	)	$	(5,113	)	$	(6,460	)
Noncurrent liabilities	(98,127		)	(104,381		)	(46,920		)	(58,735		)
Net amount recognized	$	(99,902	)	$	(106,093	)	$	(52,033	)	$	(65,195	)

Amounts recognized (pre-tax) in “Accumulated other comprehensive loss” on our Consolidated Balance Sheets consist of:

(Dollars in thousands)



	PENSION BENEFIT PLANS				OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012		2011		2012			2011
Net loss	$	261,359	$	256,536	$	37,788		$	45,793
Prior service cost (credit)	3,670		3,929		(66,983		)	(70,384		)
Net amount recognized	$	265,029	$	260,465	$	(29,195	)	$	(24,591	)

The accumulated benefit obligation for all defined benefit pension plans was $438.6 million and $412.3 million at December 31, 2012 and 2011, respectively.

Information as of December 31 for our pension plans, all of which had accumulated benefit obligations in excess of plan assets, was as follows:

(Dollars in thousands)



	2012		2011
Projected benefit obligation	$	445,535	$	418,251
Accumulated benefit obligation	438,597		412,322
Fair value of plan assets	345,633		312,158

Pre-tax components of net periodic cost (benefit) recognized in our Consolidated Statements of Income were as follows:

(Dollars in thousands)



	PENSION BENEFIT PLANS									OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012			2011			2010			2012			2011			2010
Service cost	$	5,238		$	4,456		$	4,633		$	284		$	446		$	415
Interest cost	19,986			21,325			21,649			2,478			3,486			3,972
Expected return on plan assets	(28,755		)	(31,804		)	(33,133		)	—			—			—
Amortization of prior service cost (credit)	770			684			875			(9,446		)	(8,536		)	(8,891		)
Amortization of actuarial loss	15,356			9,916			8,174			3,127			3,967			4,631
Net periodic cost (benefit)	$	12,595		$	4,577		$	2,198		$	(3,557	)	$	(637	)	$	127

Other amounts recognized in our Consolidated Statements of Comprehensive Income were as follows:

(Dollars in thousands)



	PENSION BENEFIT PLANS									OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012			2011			2010			2012			2011			2010
Net loss (gain)	$	20,180		$	57,220		$	(6,682	)	$	(4,878	)	$	(913	)	$	(6,477	)
Prior service cost (credit)	510			—			—			(5,942		)	(5,805		)	715
Amortization of prior service (cost) credit	(770		)	(684		)	(875		)	9,343			8,536			8,571
Amortization of actuarial loss	(15,356		)	(9,916		)	(8,174		)	(3,127		)	(3,967		)	(4,631		)
Total recognized in other comprehensive loss (income)	$	4,564		$	46,620		$	(15,731	)	$	(4,604	)	$	(2,149	)	$	(1,822	)
Total recognized in net periodic cost (benefit) and other comprehensive loss (income)	$	17,159		$	51,197		$	(13,533	)	$	(8,161	)	$	(2,786	)	$	(1,695	)
Pre-tax net periodic benefit cost (benefit)	$	12,595		$	4,577		$	2,198		$	(3,557	)	$	(637	)	$	127

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $19.8 million and $0.8 million, respectively. The estimated net loss and prior service credit for OPEB obligations that will be amortized from accumulated other comprehensive loss into net periodic benefit over the next fiscal year are $3.3 million and $9.7 million, respectively.

Weighted average assumptions used to determine the benefit obligation as of December 31 were:



	PENSION BENEFIT PLANS						OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012		2011		2010		2012		2011		2010
Discount rate	4.15	%	4.95	%	5.65	%	3.70	%	4.85	%	5.40	%
Rate of salaried compensation increase	3.50		3.50		4.00		—		—		—

Weighted average assumptions used to determine the net periodic benefit (cost) for the years ended December 31 were:



	PENSION BENEFIT PLANS						OTHER POSTRETIREMENT EMPLOYEE BENEFITS
	2012		2011		2010		2012		2011		2010
Discount rate	4.95	%	5.65	%	5.65	%	4.85	%	5.40	%	5.65	%
Expected return on plan assets	8.00		8.50		8.50		—		—		—
Rate of salaried compensation increase	3.50		4.00		4.00		—		—		—

The discount rate used in the determination of pension and OPEB benefit obligations in 2012 and 2011 was calculated using hypothetical bond portfolios consisting of “AA” or better rated securities that match the expected monthly benefit payments under our pension plans and OPEB obligations. The portfolios were well-diversified over corporate industrial, corporate financial, municipal, federal and foreign government issuers.

The expected return on plan assets assumption is based upon an analysis of historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return.

The assumed health care cost trend rate used to calculate OPEB obligations as of December 31, 2012 was 7.7% for a certain group of participants under age 65 in our hourly plan and our Arkansas participants covered by a collective bargaining agreement, grading ratably to an assumption of 5.0% in 2082. The level of subsidy is frozen for our salaried and non-represented plans and a certain group of participants over age 65 in our hourly plan, so that all future increments in health care costs are borne by the retirees.

A one percentage point change in the health care cost trend rates would have the following effects:

(Dollars in thousands)



	1% INCREASE		1% DECREASE
Effect on 2012 total service and interest cost components	$	49	$	(44	)
Effect on OPEB obligations as of December 31, 2012	569		(522		)

The weighted average asset allocations of the pension benefit plans’ assets at December 31 by asset category are as follows:



	PENSION BENEFIT PLANS				OTHER POSTRETIREMENT EMPLOYEE BENEFITS
ASSET CATEGORY	2012		2011		2012		2011
Domestic equity securities	22	%	21	%	—		—
Debt securities	36		41		—		—
Global/international equity securities	28		24		—		—
Other	14		14		—		—
Total	100	%	100	%	—	%	—	%

We utilize formal investment policy guidelines for our company-sponsored pension plans. These guidelines are periodically reviewed by the board of directors. The board of directors has delegated its authority to management to insure that the investment policy and guidelines are adhered to and the investment objectives are met.

The general policy states that plan assets will be invested to seek the greatest return consistent with the fiduciary character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The specific investment guidelines stipulate that management will maintain adequate liquidity for meeting expected benefit payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revise long-term and short-term asset allocations. Management takes reasonable and prudent steps to preserve the value of pension fund assets and to avoid the risk of large losses. Major steps taken to provide this protection include:


•	Assets are diversified among various asset classes, such as domestic equities, global equities, fixed income, convertible securities and liquid reserves. The long-term asset allocation ranges are as follows:



Domestic and global equities	15	%	-	48%
Fixed income and convertible securities	37	%	-	80%
Hedge funds	5	%	-	15%

The ranges are more heavily weighted toward equities since the liabilities of the pension plans are long-term in nature and equities historically have significantly outperformed other asset classes over long periods of time. Periodic reviews of allocations within these ranges are made to determine what adjustments should be made based on changing economic and market conditions and specific liquidity requirements.


•	Assets are managed by professional investment managers and may be invested in separately managed accounts or commingled funds. Assets are diversified by selecting different investment managers for each asset class and by limiting assets under each manager to no more than 25% of the total pension fund.


•	Assets are not invested in Potlatch stock.

The investment guidelines also provide that the individual investment managers are expected to achieve a reasonable rate of return over a market cycle. Emphasis will be placed on long-term performance versus short-term market aberrations. Factors to be considered in determining reasonable rates of return include performance achieved by a diverse cross section of other investment managers, performance of commonly used benchmarks (e.g., S&P 500 Index, Shearson Lehman Government/Corporate Intermediate Index, Morgan Stanley World Index, Merrill Lynch Investment Grade Convertibles Index, Russell Value Index), actuarial assumptions for return on plan investments and specific performance guidelines given to individual investment managers.

Fair Value Measurements at December 31, 2012:

(Dollars in thousands)



ASSET CATEGORY	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)			SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		TOTAL
Cash and equivalents	$	2,085		$	—	$	—	$	2,085
Equity securities:
U.S. large cap¹	35,099			—		—		35,099
U.S. small/mid cap²	21,516			—		—		21,516
International companies	9,400			—		—		9,400
Mutual funds³	124,453			—		—		124,453
Collective investments:
U.S. small/mid cap⁴	—			19,803		—		19,803
Developed markets⁵	—			47,916		—		47,916
Emerging markets⁶	—			40,983		—		40,983
Hedge funds⁷	—			—		45,693		45,693
Securities pledged to creditors:
Money market⁸	—			1,499		—		1,499
Mortgage-backed securities⁹	—			1,992		—		1,992
Subtotal	192,553			112,193		45,693		350,439
Payable held under securities lending agreements¹⁰	(4,806		)	—		—		(4,806		)
Total	$	187,747		$	112,193	$	45,693	$	345,633


¹	These are managed investments in US large cap equities that track Russell 1000 Value strategy.


²	These are managed investments in US small/mid cap equities that track Russell 2500 Growth strategy.


³	The mutual funds were 50% invested in high-quality intermediate and long-term investment grade securities and 50% invested in a diversified portfolio of fixed-income instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements and debt securities.


⁴	These are managed investments in US small/mid cap equities that track Russell 2500 Value strategy.


⁵	These collective investments are invested in equity funds of developed markets outside of the US & Canada, that track the MSCI EAFE.


⁶	These collective investments are invested in equity funds of emerging markets outside of the US & Canada, that track the MSCI Emerging Markets.


⁷	The hedge funds are 53% invested in long/short and event-driven equity, 11% invested in long and short credit, 14% in relative value, 5% invested in fixed income relative value, 4% invested in distressed debt, with the remaining 13% in other investments.


⁸	The money market holdings are invested in the Mount Vernon Securities Lending Trust Prime Portfolio.


⁹	The mortgage-backed securities are maintained in the U.S. Bank Illiquid Securities Liquidating Trust.


¹⁰	This category represents a payable under the securities lending agreements.

Fair Value Measurements at December 31, 2011:

(Dollars in thousands)



ASSET CATEGORY	QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)			SIGNIFICANT OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)		TOTAL
Cash and equivalents	$	4,102		$	—	$	—	$	4,102
Equity securities:
U.S. large cap¹	30,173			—		—		30,173
U.S. small/mid cap²	18,343			—		—		18,343
International companies	6,925			—		—		6,925
Mutual funds³	127,657			—		—		127,657
Collective investments:
U.S. small/mid cap⁴	—			15,788		—		15,788
Developed markets⁵	—			34,166		—		34,166
Emerging markets⁶	—			33,863		—		33,863
Hedge funds⁷	—			—		42,940		42,940
Securities pledged to creditors:
Money market⁸	—			4,728		—		4,728
Mortgage-backed securities⁹	—			1,941		—		1,941
Subtotal	187,200			90,486		42,940		320,626
Payable held under securities lending agreements¹⁰	(8,468		)	—		—		(8,468		)
Total	$	178,732		$	90,486	$	42,940	$	312,158


¹	These are managed investments in US large cap equities that track Russell 1000 Value strategy.


²	These are managed investments in US small/mid cap equities that track Russell 2500 Growth strategy.


³	The mutual funds were 50% invested in high-quality intermediate and long-term investment grade securities and 50% invested in a diversified portfolio of fixed-income instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements and debt securities.


⁴	These are managed investments in US small/mid cap equities that track Russell 2500 Value strategy.


⁵	These collective investments are invested in equity funds of developed markets outside of the US & Canada, that track the MSCI EAFE.


⁶	These collective investments are invested in equity funds of emerging markets outside of the US & Canada, that track the MSCI Emerging Markets.


⁷	The hedge funds are 52% invested in long/short and event-driven equity, 13% invested in long and short credit, 11% in relative value, 6% invested in distressed debt, with the remaining 18% in other investments.


⁸	The money market holdings are invested in the Mount Vernon Securities Lending Trust Prime Portfolio.


⁹	The mortgage-backed securities are maintained in the U.S. Bank Illiquid Securities Liquidating Trust.


¹⁰	This category represents a payable under the securities lending agreements.

The following table sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the years ended December 31:

(Dollars in thousands)



	Hedge Funds
	2012		2011
Balance, beginning of year	$	42,940	$	44,201
Purchases, sales, issuances and settlements, net	—		—
Unrealized gains (losses) relating to assets still held at the reporting date	2,753		(1,261		)
Balance, end of year	$	45,693	$	42,940

Refer to Note 12 for discussion of the framework for measuring fair value.

Following is a description of the valuation methodologies used for assets measured at fair value:

•

Corporate common and preferred stocks are valued at quoted market prices reported on the major securities markets, and are classified in Level 1. Investments in registered investment company funds for which market quotations are generally readily available are valued at the last reported sale price, official closing price or publicly available net asset value, or NAV, (or its equivalent) on the primary market or exchange on which they are traded, and are classified in Level 1.

•

Investments in common and collective trust funds, hedge funds and liquidating trusts that maintain investments in mortgage-backed securities, are generally valued based on their respective NAV (or its equivalent), as a practical expedient to estimate fair value due to the absence of readily available market prices. Investments that may be fully redeemed at NAV in the near-term are generally classified in Level 2. Investments in funds that may not be fully redeemed at NAV in the near-term are generally classified in Level 3.

At December 31, 2012, ten active investment managers managed substantially all of the pension funds, each of whom had responsibility for managing a specific portion of these assets. Plan assets were diversified among the various asset classes within the allocation ranges established by our investment policy.

Our company-sponsored pension plans were underfunded at December 31, 2012 and 2011. In 2011, we made contributions of $5.0 million to our qualified salaried pension plan and $4.4 million to our qualified non-represented pension plan, with $5.8 million being discretionary funding. In 2012, we borrowed against our COLI plan, based on the cash surrender value that had accumulated over the years, to make a $21.6 million pension contribution. We contributed $9.3 million to our qualified salaried pension plan, $6.8 million to our qualified hourly plan and $5.5 million to our qualified non-represented pension plan, with $11.9 million being discretionary funding. We are not required to make contributions during 2013 to our qualified defined benefit plans. We estimate payments of approximately $1.8 million to our non-qualified pension plan. Payments made for OPEB obligations represent benefit costs incurred during the year by eligible participants.

Estimated future benefit payments, which reflect expected future service are as follows for the years indicated:

(Dollars in thousands)



	PENSION BENEFIT PLANS		OTHER POSTRETIREMENT EMPLOYEE BENEFITS
2013	$	29,802	$	5,113
2014		29,595		4,929
2015		29,442		4,835
2016		29,284		4,699
2017		29,086		4,490
2018 – 2022		144,389		18,865