NOTE 12—PENSION, PROFIT SHARING AND OTHER BENEFIT PLANS

Deferred Compensation Plans

We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan totaled $9.9 million and $9.5 million at September 30, 2015 and 2014, respectively.

In the first quarter of fiscal 2015, we began making contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities as of September 30, 2015 was $2.9 million, which included life insurance contracts with a carrying value of $1.9 million and marketable securities with a carrying value of $1.0 million. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. The marketable securities in the rabbi trust are carried at fair value, which is based upon quoted market prices for identical securities. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the assets held in the rabbi trust are reflected in our Consolidated Statements of Income.

Defined Contribution Plans

We have profit sharing and other defined contribution retirement plans that provide benefits for most U.S. employees. Certain of these plans require the company to match a portion of eligible employee contributions up to specified limits. These plans also allow for additional company contributions at the discretion of the Board of Directors. In 2015, 2014 and 2013, more than half of our contributions to these plans were discretionary contributions. We also have a defined contribution plan for European employees that were formerly eligible for the European defined benefit plan described below. Under this plan, the company matches a portion of the eligible employee contributions up to limits specified in the plan. Company contributions to defined contribution plans aggregated $14.2 million, $19.6 million and $19.7 million in 2015, 2014 and 2013, respectively.

Defined Benefit Pension Plans

Certain employees in the U.S. are covered by a noncontributory defined benefit pension plan for which benefits were frozen as of December 31, 2006 (curtailment). The effect of the U.S. plan curtailment is that no new benefits have been accrued after that date. Approximately one-half of our European employees are covered by a contributory defined benefit pension plan for which benefits were frozen as of September 30, 2010. Although the effect of the European plan curtailment is that no new benefits will accrue after September 30, 2010, the plan is a final pay plan, which means that benefits will be adjusted for increases in the salaries of participants until their retirement or departure from the company. The European plan was amended in 2014 to reduce the amount of participant compensation used in computing the pension liability for certain participants. We recognized a decrease in our benefit obligation as a result of these plan amendments of $1.7 million in 2014. U.S. and European employees hired subsequent to the dates of the curtailment of the respective plans are not eligible for participation in the defined benefit plans.

Our funding policy for the defined benefit pension plans provides that contributions will be at least equal to the minimum amounts mandated by statutory requirements. Based on our known requirements for the U.S. and U.K. plans, as of September 30, 2015, we expect to make contributions of approximately $5.1 million in 2016. September 30 is used as the measurement date for these plans.

The unrecognized amounts recorded in accumulated other comprehensive income (loss) will be subsequently recognized as net periodic pension cost, consistent with our historical accounting policy for amortizing those amounts. We will recognize actuarial gains and losses that arise in future periods and are not recognized as net periodic pension cost in those periods as increases or decreases in other comprehensive income (loss), net of tax, in the period they arise. We adjust actuarial gains and losses recognized in other comprehensive income (loss) as they are subsequently recognized as a component of net periodic pension cost. The unrecognized actuarial gain or loss included in accumulated other comprehensive income (loss) at September 30, 2015 and expected to be recognized in net pension cost during fiscal 2016 is a loss of $2.0 million ($1.5 million net of income tax). No plan assets are expected to be returned to us in 2016.

The projected benefit obligation, accumulated benefit obligation (ABO) and fair value of plan assets for the defined benefit pension plans were as follows (in thousands):

September 30,	2015		2014

Projected benefit obligation	$	227,527	$	224,201
Accumulated benefit obligation	227,527		224,201
Fair value of plan assets	201,502		206,982

The following table sets forth changes in the projected benefit obligation and fair value of plan assets and the funded status for these defined benefit plans (in thousands):

September 30,	2015			2014
Change in benefit obligations:
Net benefit obligation at the beginning of the year	$	224,201		$	209,118
Service cost	670			636
Interest cost	9,073			9,967
Actuarial loss (gain)	8,203			10,730
Plan amendments	—			(1,044		)
Gross benefits paid	(7,047		)	(6,229		)
Foreign currency exchange rate changes	(7,573		)	1,023

Net benefit obligation at the end of the year	227,527			224,201


Change in plan assets:
Fair value of plan assets at the beginning of the year	206,982			188,337
Actual return on plan assets	2,815			21,127
Employer contributions	6,206			3,728
Gross benefits paid	(7,047		)	(6,229		)
Administrative expenses	(682		)	(730		)
Foreign currency exchange rate changes	(6,772		)	749

Fair value of plan assets at the end of the year	201,502			206,982


Unfunded status of the plans	(26,025		)	(17,219		)
Unrecognized net actuarial loss	51,087			33,376

Net amount recognized	$	25,062		$	16,157


Amounts recognized in Accumulated OCI
Liability adjustment to OCI	$	(51,087	)	$	(33,376	)
Deferred tax asset	15,260			9,925
Valuation allowance on deferred tax asset	(3,415		)	—

Accumulated other comprehensive loss	$	(39,242	)	$	(23,451	)

The components of net periodic pension cost (benefit) were as follows (in thousands):

Years ended September 30,	2015			2014			2013
Service cost	$	670		$	636		$	532
Interest cost	9,073			9,967			8,867
Expected return on plan assets	(13,835		)	(13,183		)	(11,605		)
Amortization of actuarial loss	705			802			1,798
Administrative expenses	163			152			76

Net pension benefit	$	(3,224	)	$	(1,626	)	$	(332	)

Years ended September 30,	2015		2014		2013
Weighted-average assumptions used to determine benefit obligation at September 30:
Discount rate	4.1	%	4.2	%	4.8	%
Rate of compensation increase	3.1	%	3.2	%	4.4	%
Weighted-average assumptions used to determine net periodic benefit cost for the years ended September 30:
Discount rate	4.2	%	4.8	%	4.3	%
Expected return on plan assets	6.9	%	7.0	%	7.0	%
Rate of compensation increase	3.2	%	4.4	%	3.8	%

The long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligations. That assumption is determined based on a number of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, historical plan return data, plan expenses, and the potential to outperform market index returns.

We have the responsibility to formulate the investment policies and strategies for the plans’ assets. Our overall policies and strategies include: maintain the highest possible return commensurate with the level of assumed risk, and preserve benefit security for the plans’ participants.

We do not direct the day-to-day operations and selection process of individual securities and investments and, accordingly, we have retained the professional services of investment management organizations to fulfill those tasks. The investment management organizations have investment discretion over the assets placed under their management. We provide each investment manager with specific investment guidelines by asset class.

The target ranges for each major category of the plans’ assets at September 30, 2015 are as follows:

Asset Category		Allocation Range
Equity securities		20% to 55%
Debt securities		25% to 75%
Cash		0% to 55%
Real estate		0% to 10%

Our defined benefit pension plans invest in cash and cash equivalents, equity securities, fixed income securities, pooled separate accounts and common collective trusts. The following tables present the fair value of the assets of our defined benefit pension plans by asset category and their level within the fair value hierarchy (in thousands). See Note 3 for a description of each level within the fair value hierarchy. During 2015 our plans invested in a diversified growth fund that holds underlying investments in equities, fixed- income securities, commodities, and real estate.

All assets classified as Level 2 or Level 3 in the table below are invested in pooled separate accounts or common collective trusts which do not have publicly quoted prices. The fair value of the pooled separate accounts and common collective trusts are determined based on the net asset value of the underlying investments. The fair value of the underlying investments held by the pooled separate accounts and common collective trusts, other than real estate investments, is generally based upon quoted prices in active markets. The fair value of the underlying investments comprised of real estate properties is determined through an appraisal process which uses valuation methodologies including comparisons to similar real estate and discounting of income streams. For investments in the pooled separate accounts and common collective trusts categorized as Level 2 below, there are no restrictions on the ability of our benefit plans to sell these investments.

	September 30, 2015								September 30, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents	$	766	$	988	$	—	$	1,754	$	1,863	$	407	$	—	$	2,270
Equity:
U.S. equity securities	—		38,912		—		38,912		—		43,351		—		43,351
Foreign equity securities	—		45,120		—		45,120		—		47,110		—		47,110

Fixed Income:
U.S. fixed-income funds	—		49,744		—		49,744		—		49,479		—		49,479
U.K. fixed-income funds	—		24,707		—		24,707		—		25,813		—		25,813

Diversified growth fund	—		33,099				33,099		—		31,863				31,863
Real Estate	—		—		8,166		8,166		—		—		7,096		7,096

Total	$	766	$	192,570	$	8,166	$	201,502	$	1,863	$	198,023	$	7,096	$	206,982

The following table presents the changes in the fair value of plan assets categorized as Level 3 in the preceding table (in thousands):

	Real Estate
Balance as of October 1, 2013	$	6,263
Realized and unrealized gains, net	898
Purchases, sales and settlements, net	(65		)

Balance as of September 30, 2014	7,096
Realized and unrealized gains, net	1,142
Purchases, sales and settlements, net	(72		)

Balance as of September 30, 2015	$	8,166

The pension plans held no direct positions in Cubic Corporation common stock as of September 30, 2015 and 2014.

We expect to pay the following pension benefit payments, which reflect expected future service, as appropriate, (in thousands):

2016	$	8,173
2017	8,431
2018	8,925
2019	9,575
2020	9,931
2021-2025	53,898