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Retirement Benefits
 12 Months Ended
Sep. 30, 2012
Retirement Benefits [Abstract]  
Retirement Benefits

15.  RETIREMENT BENEFITS

 

The Company and certain of its subsidiaries sponsor defined benefit pension plans and defined contribution plans that cover a substantial portion of its worldwide employees. The principal defined benefit pension plans are the U.S. salaried pension plan and the U.K. pension plan. These plans were closed to new participants in 2005 and were replaced with defined contribution plans. The principal defined contribution plan is the Retirement Savings Plan, in which a substantial portion of the U.S. employees participate; a similar plan is offered to U.K. employees. We also provide other postretirement benefits consisting primarily of healthcare benefits to U.S. retirees who meet age and service requirements.

Defined Benefit Pension Plans

Pension benefits earned are generally based on years of service and compensation during active employment. The cost of our defined benefit pension plans included the following components:

  2012 2011 2010
   U.S. International  U.S. International  U.S. International
Service cost$ 45.1 $ 24.1 $ 43.6 $ 29.5 $ 42.5 $ 24.2
Interest cost  124.2   62.3   122.8   64.2   123.4   60.2
Expected return on plan assets  (178.2)   (66.7)   (179.4)   (68.1)   (164.3)   (64.3)
Amortization                 
 Prior service cost  2.7   .5   2.6   .6   2.7   .7
 Actuarial loss  78.6   17.4   63.9   30.9   46.9   19.9
Settlements and curtailments  -   1.4   -   1.0   10.7   .8
Special termination benefits  4.6   2.2   -   .3   (.9)   4.2
Other  -   2.2   -   2.2   -   2.3
Net Periodic Pension Cost$ 77.0 $ 43.4 $ 53.5 $ 60.6 $ 61.0 $ 48.0

We calculate net periodic pension cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The following table sets forth the weighted average assumptions used in the calculation of net periodic pension cost:

 2012 2011 2010
 U.S. International U.S. International U.S. International
Discount rate4.9% 5.5% 5.1% 4.9% 5.7% 5.5%
Expected return on plan assets8.8% 6.6% 8.8% 6.6% 8.8% 7.3%
Rate of compensation increase4.0% 3.8% 4.0% 3.8% 4.3% 3.7%

Our U.S. supplemental pension plan provides for a lump sum benefit payment option at the time of retirement, or for corporate officers, six months after the participant's retirement date. We recognize pension settlements when payments exceed the sum of the service and interest cost components of net periodic pension cost of the plan for the fiscal year. We recognized $11.5 of settlement charges in 2010. Special termination benefits for fiscal year 2012 are related to the cost reduction plan initiated in the second quarter.

The projected benefit obligation (PBO) is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future salary increases. The following table sets forth the weighted average assumptions used in the calculation of the PBO:

 2012 2011
 U.S. International U.S. International
Discount rate3.9% 4.3% 4.9% 5.5%
Rate of compensation increase4.0% 3.4% 4.0% 3.8%

The following table reflects the change in the PBO and the change in the fair value of plan assets based on the plan year
measurement date, as well as the amounts recognized in the consolidated balance sheets.
            
 2012 2011
  U.S. International  U.S. International
Change in Projected Benefit Obligation           
Obligation at beginning of year$ 2,605.9 $ 1,159.6 $ 2,446.2 $ 1,306.8
Service cost  45.1   24.1   43.6   29.5
Interest cost  124.2   62.3   122.8   64.2
Amendments  1.8   -   .6   -
Actuarial (gain) loss   400.7   182.6   93.3   (183.3)
Curtailments  -   -   -   (.4)
Settlements  -   (4.5)   -   (5.1)
Special termination benefits  4.6   2.2   -   .3
Participant contributions  -   3.5   -   3.7
Benefits paid  (104.4)   (42.2)   (100.6)   (43.0)
Currency translation/other  -   21.0   -   (13.1)
Obligation at End of Year$ 3,077.9 $ 1,408.6 $ 2,605.9 $ 1,159.6
            
Change in Plan Assets           
Fair value at beginning of year$ 1,844.3 $ 979.4 $ 1,727.2 $ 984.4
Actual return on plan assets  348.8   120.8   36.4   (7.0)
Company contributions  11.1   65.3   181.3   59.7
Participant contributions  -   3.5   -   3.7
Benefits paid  (104.4)   (42.2)   (100.6)   (43.0)
Settlements  -   (4.5)   -   (5.1)
Currency translation/other  -   17.0   -   (13.3)
Fair Value at End of Year$ 2,099.8 $ 1,139.3 $ 1,844.3 $ 979.4
Funded Status at End of Year$ (978.1) $ (269.3) $ (761.6) $ (180.2)
            
Amounts Recognized           
Noncurrent assets$ - $ .9 $ - $ 6.5
Accrued liabilities  (13.5)   -   (10.3)   (23.5)
Noncurrent liabilities  (964.6)   (270.2)   (751.3)   (163.2)
Net Amount Recognized$ (978.1) $ (269.3) $ (761.6) $ (180.2)

The changes in plan assets and benefit obligation that have been recognized in other comprehensive income on a pretax basis
during 2012 and 2011 consist of the following:
            
 2012 2011
  U.S. International  U.S. International
Net actuarial (gain) loss arising during the period$ 230.0 $ 128.6 $ 236.5 $ (108.8)
Amortization of net actuarial loss  (78.6)   (18.8)   (63.9)   (31.9)
Prior service cost arising during the period  1.8   -   .6   -
Amortization of prior service cost  (2.7)   (.5)   (2.6)   (.6)
Total$ 150.5 $ 109.3 $ 170.6 $ (141.3)

The net actuarial (gain) loss represents the actual changes in the estimated obligation and plan assets that have not yet been recognized in the consolidated income statement and are included in accumulated other comprehensive loss. Actuarial losses arising during 2012 are primarily attributable to lower discount rates, partially offset by higher than expected actual returns on plan assets. Actuarial gains and losses are not recognized immediately, but instead are accumulated as a part of the unrecognized net loss balance and amortized into net periodic pension cost. Asset gains and losses are primarily amortized on a straight-line basis over a five-year period. Liability gains and losses are amortized over the average remaining service period of participating employees as certain thresholds are met.

The components recognized in accumulated other comprehensive loss on a pretax basis at 30 September consisted of:
            
 2012 2011
  U.S. International  U.S. International
Net actuarial loss$ 1,434.9 $ 502.5 $ 1,283.5 $ 392.7
Prior service cost  14.0   6.0   14.9   6.5
Net transition liability  -   .4   -   .4
Total$ 1,448.9 $ 508.9 $ 1,298.4 $ 399.6

The amount of accumulated other comprehensive loss at 30 September 2012 that is expected to be recognized as a component of
net periodic pension cost during fiscal year 2013 is as follows:
      
  U.S. International
Net actuarial loss$ 116.1 $ 27.7
Prior service cost  2.6   .4

Our pension plan investment strategy is to invest in diversified portfolios to earn a long-term return consistent with acceptable risk in order to pay retirement benefits and meet regulatory funding requirements while minimizing company cash contributions over time. The plans invest primarily in passive and actively managed equity and debt securities. Equity investments are diversified geographically and by investment style and market capitalization. Company stock is not permitted as a plan asset except as a component of index funds. Fixed income investments include sovereign, corporate and asset-backed securities generally denominated in the currency of the plan.

 

Asset allocation targets are established based on the long-term return, volatility and correlation characteristics of the asset classes, the profiles of the plans' liabilities, and acceptable levels of risk. Actual allocations vary from target due to market changes and are reviewed regularly. Assets are rebalanced through contributions and benefit payments as deemed appropriate. The actual and target allocations at the measurement date are as follows:

 2012 Target Allocation 2012 Actual Allocation 2011 Actual Allocation
Asset CategoryU.S. InternationalU.S. InternationalU.S. International
Equity securities60–80% 54–65% 70% 57% 66% 53%
Debt securities20–30% 34–44% 24% 39% 28% 43%
Real estate/other0–10% 0–2% 5% 1% 5% 2%
Cash0 0 1% 3% 1% 2%
Total    100% 100% 100% 100%

The expected return on plan assets assumption is based on a weighted average of estimated long-term returns of major asset classes and the historical performance of plan assets. In determining asset class returns, we take into account historical long-term returns and the value of active management, as well as the interest rate environment.

The following table summarizes pension plan assets measured at fair value by asset class (see Note 13, Fair Value Measurements,
for definition of the levels):
                          
   30 September 2012 30 September 2011
    Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3
U.S. Qualified Pension                       
  Plans                       
Cash and cash equivalents$9.9 $9.9 $0.0 $0.0 $9.2 $9.2 $0.0 $0.0
Equity securities 645.3  645.3  0.0  0.0  537.2  537.2  0.0  0.0
Equity mutual funds 446.0  446.0  0.0  0.0  138.3  138.3  0.0  0.0
Equity pooled funds 370.9  0.0  370.9  0.0  543.9  0.0  543.9  0.0
Fixed income:                       
 Bonds (government and                       
  corporate) 13.8  0.0  13.8  0.0  18.7  0.0  18.7  0.0
 Mortgage and asset-                       
  backed securities 12.7  0.0  12.7  0.0  23.5  0.0  23.5  0.0
 Mutual funds 23.6  23.6  0.0  0.0  37.8  37.8  0.0  0.0
 Pooled funds 462.6  0.0  462.6  0.0  434.4  0.0  434.4  0.0
Real estate pooled funds 115.0  0.0  0.0  115.0  101.3  0.0  0.0  101.3
Total U.S. Qualified                       
  Pension Plans$2,099.8 $1,124.8 $860.0 $115.0 $1,844.3 $722.5 $1,020.5 $101.3
International Pension                       
  Plans                       
Cash and cash equivalents$37.8 $37.8 $0.0 $0.0 $18.0 $18.0 $0.0 $0.0
Equity pooled funds 642.6  0.0  642.6  0.0  524.0  0.0  524.0  0.0
Fixed income pooled funds 375.9  0.0  375.9  0.0  340.8  0.0  340.8  0.0
Other pooled funds 19.5  0.0  10.8  8.7  25.0  0.0  8.3  16.7
Insurance contracts 63.5  0.0  0.0  63.5  71.6  0.0  0.0  71.6
Total International                        
 Pension Plans$1,139.3 $37.8 $1,029.3 $72.2 $979.4 $18.0 $873.1 $88.3

The following table summarizes changes in fair value of the pension plan assets classified as Level 3, by asset class:
             
  Real Estate Other Pooled Insurance   
  Pooled Funds Funds Contracts Total
30 September 2010$ 77.0 $ 17.9 $ 76.1 $ 171.0
Actual return on plan assets:           
 Assets held at end of year  15.3   (.5)   .3   15.1
 Assets sold during the period  -   .4   -   .4
Purchases, sales, and settlements, net  9.0   (1.1)   (4.8)   3.1
30 September 2011$ 101.3 $ 16.7 $ 71.6 $ 189.6
Actual return on plan assets:           
 Assets held at end of year  13.7   (1.1)   (1.0)   11.6
 Assets sold during the period  -   .3   -   .3
Purchases, sales, and settlements, net  -   (7.2)   (7.1)   (14.3)
30 September 2012$ 115.0 $ 8.7 $ 63.5 $ 187.2

The descriptions and fair value methodologies for the U.S. and international pension plan assets are as follows:

 

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair value due to the short-term maturity.

 

Equity Securities

Equity securities are valued at the closing market price reported on a U.S. exchange where the security is actively traded and are therefore classified as Level 1 assets.

 

Mutual Funds

Shares of mutual funds are valued at their published closing net asset value (NAV) and are classified as Level 1 assets.

 

Pooled Funds

Securities are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments, and are classified as Level 2 assets.

 

Corporate and Government Bonds

Corporate and government bonds are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields and credit ratings.

 

Mortgage and Asset-Backed Securities

Securities are classified as Level 2 assets, as they are either valued at quoted market prices from observable pricing sources at the reporting date or valued based upon comparable securities with similar yields, credit ratings, and purpose of the underlying loan.

 

Real Estate Pooled Funds

Funds are classified as Level 3 assets, as they are carried at the estimated fair value of the underlying properties. Estimated fair value is calculated utilizing a combination of key inputs, such as revenue and expense growth rates, terminal capitalization rates, and discount rates. These key inputs are consistent with practices prevailing within the real estate investment management industry.

 

Other Pooled Funds

Securities classified as Level 2 assets are valued at the NAV of the shares held at year end, which is based on the fair value of the underlying investments. Securities and interests classified as Level 3 are carried at the estimated fair value of the underlying investments. The underlying investments are valued based on bids from brokers or other third-party vendor sources that utilize expected cash flow streams and other uncorroborated data, including counterparty credit quality, default risk, discount rates, and the overall capital market liquidity.

 

Insurance Contracts

Insurance contracts are classified as Level 3 assets, as they are carried at contract value, which approximates the estimated fair value. The estimated fair value is based on the fair value of the underlying investment of the insurance company.

 

We anticipate contributing approximately $275 to the defined benefit pension plans in 2013.

Projected benefit payments, which reflect expected future service, are as follows:      
      
 U.S. International
2013$112.8 $45.9
2014 118.3  46.3
2015 125.4  50.4
2016 133.4  51.2
2017 142.7  53.3
2018–2022 836.7  362.2

These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

 

The accumulated benefit obligation (ABO) is the actuarial present value of benefits attributed to employee service rendered to a particular date, based on current salaries. The ABO for all defined benefit pension plans was $4,012.6 and $3,379.5 at the end of 2012 and 2011, respectively.

The following table provides information on pension plans where the benefit liability exceeds the value of plan assets:
            
 30 September 2012 30 September 2011
 U.S. International U.S. International
Pension Plans with PBO in Excess of Plan Assets:           
PBO$3,077.9 $1,383.3 $2,605.9 $1,015.9
Fair value of plan assets 2,099.8  1,113.2  1,844.3  828.9
Pension Plans with ABO in Excess of Plan Assets:           
ABO$2,738.6 $1,249.1 $2,316.5 $923.2
Fair value of plan assets 2,099.8  1,113.2  1,844.3  816.9

Included in the tables above are several pension arrangements that are not funded because of jurisdictional practice. The ABO and PBO related to these plans for 2012 were $166.5 and $190.5, respectively.

 

 

Defined Contribution Plans

We maintain a nonleveraged employee stock ownership plan (ESOP) which forms part of the Air Products and Chemicals, Inc. Retirement Savings Plan (RSP). The ESOP was established in May of 2002. The balance of the RSP is a qualified defined contribution plan including a 401(k) elective deferral component. A substantial portion of U.S. employees are eligible and participate.

We treat dividends paid on ESOP shares as ordinary dividends. Under existing tax law, we may deduct dividends which are paid with respect to shares held by the plan. Shares of the Company's common stock in the ESOP totaled 4,715,741 as of 30 September 2012.

We match a portion of the participants' contributions to the RSP and other various worldwide defined contribution plans. Our contributions to the RSP include a Company core contribution for certain eligible employees who do not receive their primary retirement benefit from the defined benefit pension plans, with the core contribution based on a percentage of pay that is dependent on years of service. For the RSP, we also make matching contributions on overall employee contributions as a percentage of the employee contribution and include an enhanced contribution for certain eligible employees that do not participate in the defined benefit pension plans. Worldwide contributions expensed to income in 2012, 2011, and 2010 were $33.9, $31.3, and $30.8, respectively.

 

Other Postretirement Benefits

We provide other postretirement benefits consisting primarily of healthcare benefits to certain U.S. retirees who meet age and service requirements. The healthcare benefit is a continued medical benefit until the retiree reaches age 65. Healthcare benefits are contributory, with contribution percentages adjusted periodically. The retiree medical costs are capped at a specified dollar amount, with the retiree contributing the remainder.

The cost of our other postretirement benefit plans includes the following components:
          
   2012  2011  2010
Service cost$ 4.5 $ 5.7 $ 4.7
Interest cost  3.9   3.3   4.6
Amortization        
 Prior service credit  -   -   (.1)
 Actuarial loss  2.9   3.8   2.9
Net Periodic Postretirement Cost$ 11.3 $ 12.8 $ 12.1

We calculate net periodic postretirement cost for a given fiscal year based on assumptions developed at the end of the previous fiscal year. The discount rate assumption used in the calculation of net periodic postretirement cost for 2012, 2011, and 2010 was 3.7%, 2.8%, and 4.2%, respectively.

 

We measure the other postretirement benefits as of 30 September. The discount rate assumption used in the calculation of the accumulated postretirement benefit obligation was 1.9% and 3.7% for 2012 and 2011, respectively.

The following table reflects the change in the accumulated postretirement benefit obligation and the amounts recognized in the
consolidated balance sheets:
      
  2012  2011
Obligation at beginning of year$ 113.8 $ 120.9
Service cost  4.5   5.7
Interest cost  3.9   3.3
Actuarial (gain) loss  10.2   (2.5)
Benefits paid  (12.5)   (13.6)
Obligation at End of Year$ 119.9 $ 113.8
      
Amounts Recognized     
Accrued liabilities$ 12.6 $ 12.8
Noncurrent liabilities  107.3   101.0

The changes in benefit obligation that have been recognized in other comprehensive income on a pretax basis during 2012 and 2011
for our other postretirement benefit plans consist of the following:
      
  2012  2011
Net actuarial (gain) loss arising during the period$ 10.2 $ (2.5)
Amortization of net actuarial loss  (2.9)   (3.8)
Total$ 7.3 $ (6.3)

The net actuarial loss recognized in accumulated other comprehensive loss on a pretax basis was $36.5 at 30 September 2012 and $29.2 at 30 September 2011. Of the 30 September 2012 actuarial loss, it is estimated that $4.2 will be amortized into net periodic postretirement cost over fiscal year 2013.

The assumed healthcare trend rates are as follows:
    
 2012 2011
Healthcare trend rate8.0% 8.0%
Ultimate trend rate5.0% 5.0%
Year the ultimate trend rate is reached2019 2015

The effect of a change in the healthcare trend rate is slightly tempered by a cap on the average retiree medical cost. The impact of a one percentage point change in the assumed healthcare cost trend rate on net periodic postretirement cost and the obligation is not material.

Projected benefit payments are as follows:
   
2013$12.8
2014 12.7
2015 12.6
2016 12.7
2017 12.4
2018–2022 53.6

These estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.