10. RETIREMENT PLANS

The Company sponsors the Varian Medical Systems, Inc. Retirement Plan (the “Retirement Plan”) — a defined contribution plan that is available to substantially all of its employees in the United States. Under Section 401(k) of the Internal Revenue Code, the Retirement Plan allows for tax-deferred salary contributions by eligible employees.

Participants can contribute from 1% to 25% of their eligible base compensation to the Retirement Plan on a pre-tax basis (plus up to an additional 15% on an after-tax basis if they have more than one year of service with the Company) and all or a portion of their bonuses under the Employee Incentive Plan. However, participant contributions are limited to a maximum annual amount as determined periodically by the Internal Revenue Service. The Company matches eligible participant contributions dollar for dollar for the first 6% of eligible base compensation or bonus (for those employees with one or more years of service with the Company). All matching contributions vest immediately. The Retirement Plan allows participants to invest up to 25% of their contributions in shares of VMS common stock as an investment option. This feature will be eliminated as of January 1, 2015. The Company also has a defined contribution plan that is available to regular full-time employees in the United Kingdom (the “U.K. Savings Plan”). Participants can contribute from 4% to 100% of their eligible base compensation to the U.K. Savings Plan. The Company matches participant contributions up to 6% of participants’ eligible base compensation, based on the participants’ level of contributions under this U.K. Savings Plan. All matching contributions vest immediately.

The Company also sponsors five defined benefit pension plans for regular full time employees in Germany, Japan, Switzerland and the United Kingdom. The Company also sponsors a post-retirement benefit plan that provides healthcare benefits to certain eligible retirees in the United States.

The Company recognizes the funded status of its defined benefit pension and post-retirement benefit plans on its Consolidated Balance Sheets. Each overfunded plan is recognized as an asset, and each underfunded plan is recognized as a liability. Unrecognized prior service costs or credits and net actuarial gains or losses, as well as subsequent changes in the funded status are recognized as a component of accumulated other comprehensive loss within Stockholders’ equity.

Total retirement, post-retirement benefit plan and defined benefit plan expense for all retirement plans amounted to $28.6 million, $29.0 million and $27.9 million for fiscal years 2014, 2013 and 2012, respectively.

Obligations and Funded Status

The following table presents the funded status of the defined benefit pension and post-retirement benefit plans:

	Defined Benefit Plans						Post-Retirement Benefit Plan
(In millions)	September 26, 2014			September 27, 2013			September 26, 2014			September 27, 2013
Change in benefit obligation:
Benefit obligation - beginning of fiscal year	$	195.7		$	181.1		$	4.8		$	5.6
Service cost		4.1			4.8			-		-
Interest cost		6.1			5.2			0.2			0.2
Plan participants’ contributions		7.8			10.9			-		-
Plan amendment		-			0.5			(3.3	)	-
Plan settlement		(7.8	)		(4.7	)		-		-
Actuarial (gain) loss		14.2			(0.7	)		0.2			(0.5	)
Foreign currency changes		(7.7	)		3.2			-		-
Benefit and expense payments		(4.8	)		(4.6	)		(0.5	)		(0.5	)
Benefit obligation - end of fiscal year	$	207.6		$	195.7		$	1.4		$	4.8
Change in plan assets:
Plan assets - beginning of fiscal year	$	180.8		$	142.6		$	-		$	-
Employer contributions		7.2			22.2			0.5			0.5
Actual return on plan assets		11.8			11.6			-		-
Plan participants’ contributions		7.8			10.9			-		-
Plan settlement		(7.8	)		(4.7	)		-		-
Foreign currency changes		(6.4	)		2.8			-		-
Benefit and expense payments		(4.8	)		(4.6	)		(0.5	)		(0.5	)
Plan assets - end of fiscal year	$	188.6		$	180.8		$	-		$	-
Funded status	$	(19.0	)	$	(14.9	)	$	(1.4	)	$	(4.8	)
Amounts recognized within the consolidated balance sheet:
Long-term assets	$	5.3		$	3.1		$	-		$	-
Current liabilities		-		-				(0.3	)		(0.5	)
Long-term liabilities		(24.3	)		(18.0	)		(1.1	)		(4.3	)
Net amount recognized	$	(19.0	)	$	(14.9	)	$	(1.4	)	$	(4.8	)

The following table presents the amounts recognized in accumulated other comprehensive loss (before tax):

	Defined Benefit Plans						Post-Retirement Benefit Plan
(In millions)	September 26, 2014			September 27, 2013			September 26, 2014			September 27, 2013
Prior service credit (cost)	$	(0.6	)	$	(0.7	)	$	3.3		$	-
Net gain (loss)		(55.7	)		(49.4	)		(0.2	)	0.1
Accumulated other comprehensive gain (loss)	$	(56.3	)	$	(50.1	)	$	3.1		$	0.1

The following table presents the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those defined benefit pension plans where accumulated benefit obligation exceeded the fair value of plan assets:

	Defined Benefit Plans
(In millions)	September 26, 2014		September 27, 2013
Projected benefit obligation	$	16.9	$	-
Accumulated benefit obligation	$	15.8	$	-
Fair value of plan assets	$	14.7	$	-

The accumulated benefit obligation for all defined benefit pension plans was $172.7 million and $167.3 million at September 26, 2014 and September 27, 2013, respectively.

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive (Income) Loss

The following table shows the components of the Company’s net periodic benefit costs and the other amounts recognized in other comprehensive (income) loss, before tax, related to the Company’s defined benefit pension plans and the Company’s post-retirement benefit plan:

	Defined Benefit Plans									Post-Retirement Benefit Plan
	Fiscal Years									Fiscal Years
(In millions)	2014			2013			2012			2014			2013			2012
Net Periodic Benefit Costs:
Service cost	$	4.1		$	4.8		$	4.3		$	-		$	-		$	-
Interest cost		6.1			5.2			5.3			0.2			0.2			0.2
Loss due to settlement or curtailment		1.8			1.0			0.9			-			-			-
Expected return on assets		(7.8	)		(5.7	)		(5.3	)		-			-			-
Amortization of prior service cost		0.2			0.2			0.2			-			-			-
Recognized actuarial loss		2.1			2.7			2.5			-			-			0.1
Net periodic benefit cost		6.5			8.2			7.9			0.2			0.2			0.3
Other Amounts Recognized in Other Comprehensive (Income) Loss:
New prior service (credit) cost		-			0.5			-			(3.3	)		-			-
Net (gain) loss arising during the year		10.3			(6.6	)		9.9			0.2			(0.4	)		(0.1	)
Amortization of prior service cost		(0.2	)		(0.2	)		(0.2	)		-			-			-
Amortization, settlement and curtailment of net actuarial loss		(3.9	)		(3.7	)		(3.5	)		-			(0.1	)		(0.1	)
Total recognized in other comprehensive (income) loss		6.2			(10.0	)		6.2			(3.1	)		(0.5	)		(0.2	)
Total recognized in net periodic benefit cost and other comprehensive (income) loss	$	12.7		$	(1.8	)	$	14.1		$	(2.9	)	$	(0.3	)	$	0.1

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during fiscal year 2015 are as follows:

(In millions)	Defined Benefit Plans			Post-Retirement Benefit Plan		Total
Prior service credit (cost)	$	(0.2	)	$	0.5	$	0.3
Net gain (loss)		(2.4	)		-		(2.4	)
Total	$	(2.6	)	$	0.5	$	(2.1	)

Assumptions

The assumptions used to determine net periodic benefit cost and to compute the expected long-term return on assets for the Company’s defined benefit pension and post-retirement benefit plans were as follows:

	Fiscal Years
Net Periodic Benefit Cost	2014			2013			2012
Defined benefit plans:
Discount rate		3.11	%		2.94	%		3.38	%
Rate of compensation increase		2.51	%		2.37	%		2.48	%
Expected long-term return on assets		4.21	%		3.82	%		4.02	%

Post-retirement benefit plan:
Discount rate		3.80	%		3.00	%		3.90	%

The assumptions used to measure the benefit obligations for the Company’s defined benefit pension and post-retirement benefit plans were as follows:


Benefit Obligation	September 26, 2014			September 27, 2013
Defined benefit plans:
Discount rate		2.77	%		3.11	%
Rate of compensation increase		2.45	%		2.51	%

Post-retirement benefit plan:
Discount rate		3.10	%		3.80	%

The benefit obligations of defined benefit pension plans and post-retirement benefit plans were measured as of September 26, 2014. For defined benefit pension plans, the discount rate was adjusted as of September 26, 2014 to a range of 1.30% to 4.00%, primarily based on the current effective yield of long-term corporate bonds that are of high quality with satisfactory liquidity and credit rating with durations corresponding to the expected duration of the benefit obligations. Additionally, the rate of projected compensation increase was adjusted as of September 26, 2014 to a range of 1.75% to 3.70% reflecting expected inflation levels and the Company’s future outlook. For the post-retirement benefit plan, the discount rate as of September 26, 2014 decreased to 3.10%. This discount rate was determined based on the yields of high quality zero-coupon corporate bonds with maturities that match the expected durations of the benefit obligations.

During the fourth quarter of fiscal year 2014, the Company reviewed the expected long-term rate of return on defined benefit pension plan assets. This review consisted of forward-looking projections for a risk-free rate of return, inflation rate and implied equity risk premiums for particular asset classes. Historical returns were not used. The results of this review were applied to the target asset allocation in accordance with the Company’s planned investment strategies, which are implemented by outside investment managers. The expected long-term rate of return on plan assets was determined based on the weighted average of projected returns on each asset class.

The assumed healthcare cost trend rates for the post-retirement benefit plan are as follows:

	Fiscal Years
Assumed Health Care Trend Rates	2014			2013			2012
Post-retirement benefit plan:
Current medical cost trend rate		8.20	%		8.20	%		9.90	%
Ultimate medical cost trend rate		4.50	%		4.50	%		4.50	%

Current medical cost trend rates represent expected increases in healthcare costs in the short term and are based on assessments and surveys from health plan providers. While the current medical cost trend rate is based on market conditions, the ultimate trend rate, which is expected to be achieved in fiscal year 2031, reflects a long-term view of expected increases in healthcare costs in the U.S., which is assumed to be consistent with the long-term expected nominal gross domestic product growth rates. Assumed healthcare cost trend rates could have an effect on the amounts reported for healthcare plans. A 1.0 percentage point increase or decrease in the assumed healthcare cost trend rates would have an immaterial impact on the total service cost and interest cost components and post-retirement benefit obligation reported in fiscal year 2014.

Plan Assets

The Company contributes to post-retirement benefit plans on a cash basis as benefits are paid. No assets have been segregated and restricted to provide post-retirement benefits.

For the defined benefit pension plans, the investment objectives of the Company are to generate returns that will enable the defined benefit pension plans to meet their future obligations. The precise amount of these obligations depends on future events, including the life expectancies of the pension plans’ members and the level of salary increases. The obligations are estimated using actuarial assumptions, based on the current economic environment. The investment strategy depends on the country in which the defined benefit pension plan applies. The investment objectives of some defined benefit pension plans are more conservative than others. In general, the investment strategy of the defined benefit pension plans is to balance the requirement to generate return using higher-returning assets such as equity securities, with the need to control risk with less volatile assets, such as fixed-income securities. Risks include, among others, the likelihood of the defined benefit pension plans becoming underfunded, thereby increasing their dependence on contributions from the Company. Within each asset class, investment managers give consideration to balancing the portfolio among industry sectors, geographies, interest rate sensitivity, dependence on economic growth, currency and other factors that affect investment returns. The target allocation as of the end of fiscal year 2014 was 33% equities, 56% debt and fixed income assets and 11% other.

The following table presents the Company’s defined benefit pension plans’ major asset categories, their associated fair values, as well as the actual allocation of equity, debt and fixed income, real estate and all other types of investments:




(In millions)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
As of September 26, 2014:
Investment funds:
Mutual funds - equities	$	-	$	51.7	$	-	$	51.7
Mutual funds - debt		-		32.5		-		32.5
Mutual funds - real estate		-		3.6		-		3.6
Assets held by insurance company:
Insurance contracts		-		99.1		-		99.1
Cash and cash equivalents		1.7		-		-		1.7
Total	$	1.7	$	186.9	$	-	$	188.6

As of September 27, 2013:
Investment funds:
Mutual funds - equities	$	-	$	49.9	$	-	$	49.9
Mutual funds - debt		-	26.1			-	26.1
Mutual funds - real estate		-	3.6			-	3.6
Assets held by insurance company:
Insurance contracts		-	86.3			-	86.3
Cash and cash equivalents	14.9		-			-	14.9
Total	$	14.9	$	165.9	$	-	$	180.8

Valuation Techniques

Debt securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. Mutual funds held in trust or similar entities include investments in publicly traded mutual funds and are typically valued using the net asset value provided by the administrator of the fund. Insurance contracts are valued by the insurer using the cash surrender value, which is the amount a plan would receive if a contract was terminated. Cash includes deposits and money market accounts, which are valued at their cost plus interest on a daily basis, which approximates fair value. There were no significant changes in valuation techniques during fiscal years 2014 and 2013.

Medicare Prescription Drug Act

The Medicare Prescription Drug, Improvement and Modernization Act (the “Prescription Drug Act”) provides a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Since it sponsors post-retirement benefit plans that provide prescription drug benefits, the Company enrolled all Medicare eligible retirees in fiscal years 2014, 2013 and 2012 in either Medicare Advantage plans which are at least equivalent to Medicare Part D or in health plans where the prescription drug benefit is, on average, expected to pay out as much as the standard Medicare prescription drug coverage.

Estimated Contributions and Future Benefit Payments

The Company made contributions of $7.2 million to the defined benefit pension plans during fiscal year 2014, compared to $22.2 million in fiscal year 2013 The Company made contributions of $0.5 million to the post-retirement benefit plan for fiscal year 2014. The Company expects total contributions to the defined benefit pension plans and the post-retirement benefit plan for fiscal year 2015 will be approximately $7.3 million and approximately $0.3 million, respectively.

Estimated future benefit payments at September 26, 2014 were as follows:

(In millions)	Defined Benefit Plans		Post-Retirement Benefit Plan		Total
Fiscal Years:
2015	$	5.3	$	0.3	$	5.6
2016		4.9		0.2		5.1
2017		7.2		0.2		7.4
2018		7.3		0.1		7.4
2019		7.9		0.1		8.0
2020-2024		38.0		0.4		38.4
Total	$	70.6	$	1.3	$	71.9