EMPLOYEE BENEFIT PLANS

Expenses (income) for retirement and savings-related benefit plans were as follows:



in thousands	2011		2010		2009

Profit sharing	$	—	$	839	$	734
Pension plan expense	1,610		1,202		203
Supplemental retirement plan expense (income)	24		1		(67		)

Total expense, net	$	1,634	$	2,042	$	870

Profit Sharing

Under the Company’s profit-sharing plan, as amended and restated, eligible employees may elect to invest from 1% to 50% of their base compensation, subject to annual limitations, in a trust fund, the assets of which are invested in securities other than Company stock. The Company has discretion to match 50% of the employees’ investment contributions, up to a maximum of 8% of the employees’ compensation. The Company's matching contributions are made in shares of its common stock, which vest incrementally at 1/3 per year of service or 100% once an employee has completed three years of service with the Company. Expenses related to the profit-sharing plan are accrued in the year to which the awards relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. The Company elected not to make a matching contribution for the fiscal year ended February 4, 2012.

Defined Benefit Plans

The Company maintains a qualified, noncontributory pension plan that covers all full-time U.S. employees meeting certain age and service requirements. The plan provides pension benefits based on an employee's length of service and the average compensation earned from the later of the hire date or January 1, 1998, to the retirement date. On February 3, 2004, the Company amended its pension plan to implement a freeze of future benefit accruals under the plan, except for those employees with ten years of service and who had attained age 50 at April 1, 2004, who were grandfathered and whose benefits continued to accrue. Effective February 20, 2009, the Company amended its pension plan to implement a freeze of future benefit accruals for the remaining grandfathered participants.

The Company also maintains a noncontributory defined benefit plan providing supplemental retirement benefits for certain current and former key executives. The cost of providing these benefits is accrued over the remaining expected service lives of the active plan participants. Net supplemental retirement benefit costs (income) for 2011, 2010 and 2009 were $24,000, $1,000 and ($67,000), respectively. The supplemental retirement plan is unfunded and as such does not have a specific investment policy or long-term rate of return assumption. Certain assets previously used to finance these future obligations consisted of investments in a Rabbi Trust. On July 12, 2011, the Company liquidated the investments held in the Rabbi Trust for $760,000. Remaining obligations related to current and former key executives will be funded through the Company's normal operating cash flows. In 2012, the Company expects to pay approximately $68,000 of scheduled supplemental retirement plan benefit payments.

The following benefit payments are expected to be paid as follows:



			Supplemental
	Pension Plan		Retirement Plan
in thousands	Benefits		Plan Benefits

2012	$	2,500	$	68
2013	$	2,600	$	109
2014	$	2,700	$	123
2015	$	2,900	$	122
2016	$	3,000	$	122
2017 - 2022	$	17,000	$	603

The Company’s funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible. The Company contributed $2.3 million in 2011 and $1.6 million in both 2010 and 2009 to its pension plan. The Company estimates a 2012 contribution of approximately $3.4 million. Future contributions to the pension plan will be dependent upon legislation, future changes in discount rates and amortization assumptions and the earnings performance of plan assets.

The following table summarizes benefit obligation and plan asset activity for the retirement plans:



	Defined Benefit Plans
	Pension Plan						Supplemental Retirement Plan
in thousands	2011			2010			2011			2010

Projected benefit obligation
Benefit obligation at beginning of year	$	55,643		$	52,632		$	1,398		$	1,351
Interest cost	3,088			3,066			77			79
Actuarial loss	7,550			2,099			71			44
Benefit payments	(2,264		)	(2,154		)	(5		)	(76		)

Benefit obligation at end of year	$	64,017		$	55,643		$	1,541		$	1,398

Fair value of plan assets
Fair value at beginning of year	$	40,781		$	34,909		$	—		$	—
Actual return on plan assets	122			6,406			—			—
Employer contributions (1)	2,335			1,620			5			76
Benefit payments	(2,264		)	(2,154		)	(5		)	(76		)

Fair value at end of year	$	40,974		$	40,781		$	—		$	—

Funded status
Funded status at end of year	$	(23,043	)	$	(14,862	)	$	(1,541	)	$	(1,398	)


(1)	For the supplemental retirement plan, for the fiscal year ended February 5, 2011 and for the period February 6, 2011 through July 12, 2011, employer contributions were financed through the liquidation of investments in the Company’s Rabbi Trust. Subsequent to July 12, 2011, employer contributions were funded through the Company's normal operating cash flows.

The following table summarizes the net actuarial loss (gain) recorded as “Accumulated Other Comprehensive Loss” and recognized in earnings in fiscal year 2011 and 2010.



in thousands	Pension Plan			Supplemental Retirement Plan			Total

Actuarial loss (gain), net of tax:
Unrealized losses (gains) on net actuarial (gain) loss at February 6, 2010	$	14,207		$	(237	)	$	13,970

Net actuarial (gains) losses recorded in accumulated other comprehensive loss	(750		)	28			(722		)
Recognition of net actuarial (losses) gains in earnings	(765		)	48			(717		)
Unrealized losses (gains) on net actuarial (gain) loss at February 5, 2011	$	12,692		$	(161	)	$	12,531

Net actuarial losses (gains) recorded in accumulated other comprehensive loss	10,583			71			10,654
Recognition of net actuarial (losses) gains in earnings	(1,065		)	33			(1,032		)
Unrealized losses (gains) on net actuarial loss at February 4, 2012	$	22,210		$	(57	)	$	22,153

The amounts of net actuarial loss for the pension plan and the supplemental retirement plan expected to be recognized in earnings during fiscal year 2012 are $635,000 and $0, respectively. Beginning in fiscal 2012, net unrecognized actuarial loss for the pension plan will be recognized in earnings over the estimated remaining life of inactive participants under the plan, which now comprises the vast majority of plan participants as a result of retirements and workforce reductions that have occurred through fiscal 2011 in the normal course.

The following table sets forth the components of net periodic benefit cost for the retirement plans:



in thousands	Pension Plan									Supplemental Retirement Plan
	2011			2010			2009			2011			2010			2009

Components of net periodic benefit cost
Interest cost	$	3,088		$	3,066		$	3,090		$	77		$	79		$	85
Expected return on plan assets	(3,196		)	(3,098		)	(3,143		)	—			—			—
Amortization of net loss (gain)	1,718			1,234			256			(53		)	(78		)	(152		)

Net periodic benefit cost	$	1,610		$	1,202		$	203		$	24		$	1		$	(67	)

The following table sets forth the weighted-average plan assumptions and other data:



	Pension Plan						Supplemental Retirement Plan
	2011		2010		2009		2011		2010		2009

Weighted-average assumptions used to determine benefit obligations at fiscal year end:
Discount rate	4.98	%	5.65	%	6.01	%	4.98	%	5.65	%	6.01	%
Rate of increase in future compensation	N/A		N/A		N/A		N/A		N/A		N/A

Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate	5.65	%	6.01	%	7.25	%	5.65	%	6.01	%	7.25	%
Expected long-term return on plan assets	7.75	%	7.75	%	7.75	%	N/A		N/A		N/A
Rate of increase in future compensation	N/A		N/A		N/A		N/A		N/A		N/A

For the discount rates, the Company uses a methodology under which a yield curve is developed from various yields on a large universe of Aa-rated bonds. The plans’ projected cash flows were matched to this yield curve and a present value developed accordingly.

The following table provides the required information for the pension plan and supplemental retirement plan as in both cases benefit obligations are in excess of plan assets:



in thousands	Pension Plan				Supplemental Retirement Plan
	2011		2010		2011		2010

Projected and accumulated benefit obligation	$	64,017	$	55,643	$	1,541	$	1,398
Fair value of plan assets	$	40,974	$	40,781	$	—	$	—

Pension Plan Assets

The Company has an established investment policy for the assets associated with its pension plan. The overall objective of our pension plan assets is to earn a rate of return over time to satisfy the benefit obligations of the pension plan and to maintain sufficient liquidity to pay benefits as required. Specific investment objectives for our long-term investment strategy include maximizing long-term return at acceptable risk levels, achieving diversification between and within asset classes and among investment managers, establishing relevant risk parameters within each asset class and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified.

Asset allocation targets are based on periodic asset/liability studies which help determine the appropriate investment strategies for acceptable risk levels. These studies consider plan liability and liquidity characteristics, funding and regulatory requirements, actual and expected rates of return, the estimated risk of asset classes, the correlation between the rates of return of the asset classes, the investment objectives and risk constraints for the fund, the distribution of returns and other assumptions as considered necessary. The investment policy permits variances from the target allocations within certain parameters. Actual allocations to each asset class may vary from target allocations due to periodic investment strategy changes, market value fluctuations and the timing of benefit payments and contributions. The asset allocation is formally reviewed by the Company on an annual basis; however, it is monitored by an external source on an ongoing basis and is revised and/or rebalanced as considered necessary.

Permissible investments under the Company’s investment policy include the following: money market instruments; common and preferred stocks; convertible bonds and preferred stocks; American depository receipts; U.S. treasury and agency notes and bonds; municipal bonds; corporate debt securities; bank loans; mortgage-backed securities and asset-backed securities. The above assets may be held in mutual funds, commingled funds and/or privately managed separate accounts. Investment may not be made in any investment that is prohibited by the Internal Revenue Code, ERISA or other statutory restrictions. Investment managers may not engage in securities lending due to certain restrictions imposed.

The Company uses a variety of outside sources to determine the overall expected long-term rate of return on pension plan assets. Factors such as asset allocation targets, expected long-term rates of return of each asset class, and results of periodic asset/liability studies are considered when constructing the long-term rate of return assumption for our pension plan. Historical rates of return for each asset class are a primary driver in this analysis.

In managing the plan assets, the Company reviews and manages risk associated with funded status risk, interest rate risk, market risk, counterparty risk, liquidity risk and operational risk. Liability management and asset class diversification are central to our risk management approach and are integral to the overall investment strategy. Further, asset classes are constructed to achieve diversification by investment strategy, by investment manager, by industry or sector and by holding. Individual investment manager guidelines are set forth in the Company’s investment policy and address topics such as permissible investments; style adherence; diversification; portfolio quality requirements; performance objectives/benchmarks reflecting the investment manager’s style or strategic role in the investment portfolio and other investment manager-specific issues. The Company reviews and evaluates investment results in the context of predetermined performance standards and implements corrective action as needed.

CPI Corp. common stock (“CPI Stock”) is a permitted investment for a portion of the plan assets. To manage the risk associated with this investment, certain guidelines have been established by the Company and are included in the Company’s investment policy. Under these guidelines, CPI Stock may not exceed 5% of the fair market value of plan assets at the time of purchase and the plan may not hold greater than 4.5% of the outstanding shares of CPI Stock. In addition, the guidelines include specific actions required by the plan when certain thresholds are met related to the appreciation, closing price, trailing 30-day average closing price and per share values of CPI Stock.

The actual allocations for the pension plan assets at February 4, 2012, and February 5, 2011, and target allocations by asset class, are as follows:



			Percentage of Plan Assets at
Asset Class	Target Allocation		February 4, 2012		February 5, 2011

Equity securities	50	%	52	%	55	%
Fixed income securities	45	%	46	%	43	%
Cash and cash equivalents	5	%	2	%	2	%

Total	100	%	100	%	100	%

Equity securities are comprised primarily of exchange traded funds and common stock. Fixed income securities primarily include U.S. government and agency securities, corporate bonds and notes and mortgage-backed securities. Cash and cash equivalents consist primarily of money market funds.

The following table presents our pension plan assets using the fair value hierarchy as of February 4, 2012 and February 5, 2011. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs.



	2011
in thousands, except for share data	Total		Level 1		Level 2		Level 3

Equity securities (1):
U.S. large cap	$	14,326	$	14,326	$	—	$	—
U.S. small cap (2)	2,955		2,955		—		—
Non-U.S.	4,177		4,177		—		—
Fixed income securities (3):
U.S. government and agency securities	5,319		—		5,319		—
Corporate bonds and notes (4)	11,516		4,775		6,741		—
Mortgage-backed securities	2,050		—		2,050		—
Cash and cash equivalents (5)	631		631		—		—

Total	$	40,974	$	26,864	$	14,110	$	—



	2010
in thousands, except for share data	Total		Level 1		Level 2		Level 3

Equity securities (1):
U.S. large cap	$	13,961	$	13,961	$	—	$	—
U.S. small cap (2)	4,016		4,016		—		—
Non-U.S.	4,471		4,471		—		—
Fixed income securities (3):
U.S. government and agency securities	6,135		—		6,135		—
Corporate bonds and notes (4)	10,556		3,672		6,884		—
Mortgage-backed securities	992		—		992		—
Cash and cash equivalents (5)	650		650		—		—

Total	$	40,781	$	26,770	$	14,011	$	—


(1)	Investments in exchange traded funds and common stock are valued based on quoted market prices multiplied by the number of shares owned as of the measurement date.


(2)	U.S. small cap equity securities include 69,864 and 67,605 shares of CPI Corp. common stock as of February 4, 2012, and February 5, 2011, respectively.


(3)	Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, reported trades and other observable inputs.


(4)	The Level 1 corporate bonds and notes class represents an investment in a mutual fund which consists primarily of investment grade debt securities, but may invest a certain percentage of total assets in high-yield securities. The Level 2 corporate bonds and notes class represents investment grade securities of U.S. issuers from diverse industries.


(5)	Cash and cash equivalents are primarily held in registered money market funds which are valued using a market approach based on the quoted market prices of identical instruments.

The Company also maintains a noncontributory pension plan that covers all SPS brand Canadian employees meeting certain service requirements. The plan provides pension benefits based on an employee’s length of service and annual compensation earned. As of February 28, 2005, the Company amended its plan to implement a freeze of future benefit accruals under the plan, except for those employees with 10 or more years of service and who had attained age 50 on that date (the “Grandfathered Members”), who were grandfathered and whose benefits continued to accrue. On June 10, 2009, the Company amended the plan to implement a freeze of future benefit accruals for the remaining Grandfathered Members, effective July 31, 2009. The freeze of future benefit accruals for the remaining Grandfathered Members did not have a material effect on the Company’s financial statements. The Company contributed approximately $93,000 and $162,000 to this retirement plan for the fiscal years ended February 4, 2012, and February 5, 2011, respectively. Plan assets were $2.2 million and $2.3 million as of February 4, 2012, and February 5, 2011, respectively, and consisted of several Canadian equity and fixed income funds and one international equity fund. No net liability is reflected in the Company’s consolidated financial statements as it is considered immaterial.