9. Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering most U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law.

On December 21, 2011, the Company made a $5,000,000 discretionary payment into its salaried pension plan. The major reasons why the Company made this discretionary payment were to reduce current year tax payments, to reduce future years' pension expense, and to attempt to take advantage of the spread between borrowing rates and expected investment return.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

Components of the net periodic benefit cost of the Company's pension benefit plans were as follows:

	2012			2011			2010
Service cost	$	2,642,373		$	2,141,306		$	2,223,762
Interest cost		2,868,528			2,949,672			2,908,962
Expected return on plan assets		(3,930,988	)		(3,650,282	)		(3,345,102	)
Amortization of prior service cost		221,049			194,148			204,569
Amortization of the net loss		1,111,900			897,052			843,154
Net periodic benefit cost	$	2,912,862		$	2,531,896		$	2,835,345

Assumptions used to determine net periodic benefit cost for the Company's pension benefit plans for the fiscal year indicated were as follows:

	2012			2011			2010
Discount rate		3.90	%		5.35	%		5.85	%
Expected return on plan assets		8.0	%		8.5	%		8.5	%
Rate of compensation increase		3.25	%		4.25	%		4.25	%

Components of the net periodic benefit cost of the Company's postretirement benefit plan were as follows:

	2012			2011			2010
Service cost	$	173,613		$	126,464		$	110,786
Interest cost		143,388			136,752			134,977
Expected return on plan assets		(46,255	)		(52,920	)		(59,327	)
Amortization of prior service cost		(23,889	)		(23,888	)		(23,888	)
Amortization of the net loss		(50,784	)		(46,380	)		(52,650	)
Net periodic benefit cost	$	196,073		$	140,028		$	109,898

Assumptions used to determine net periodic benefit cost for the Company's postretirement plan for the fiscal year indicated were as follows:

	2012			2011			2010
Discount rate		3.90	%		5.35	%		5.85	%
Expected return on plan assets		8.0	%		8.5	%		8.5	%

As of December 29, 2012 and December 31, 2011, the status of the Company's pension benefit plans and postretirement benefit plan was as follows:

	Pension Benefit						Postretirement Benefit
	2012			2011			2012			2011
Benefit obligation at beginning of year	$	64,709,379		$	56,979,912		$	3,069,155		$	2,629,606
Change due to availability of final actual assets and census data		—			—			151,397			—
Plan amendment		831,201			—			—			—
Service cost		2,642,373			2,141,306			173,613			126,464
Interest cost		2,868,528			2,949,672			143,388			136,752
Actuarial loss		6,117,680			4,864,293			301,076			316,038
Benefits paid		(2,343,192	)		(2,225,804	)		(126,124	)		(139,705	)
Benefit obligation at end of year	$	74,825,969		$	64,709,379		$	3,712,505		$	3,069,155

	Pension Benefit						Postretirement Benefit
	2012			2011			2012			2011
Fair value of plan assets at beginning of year	$	48,897,760		$	42,966,643		$	1,215,998		$	1,168,235
Change due to availability of final actual assets and census data		—			—			(3,005	)		(5,157	)
Actual return on plan assets		4,311,348			700,623			46,255			52,920
Employer contributions		3,778,692			7,456,298			71,655			139,705
Benefits paid		(2,343,192	)		(2,225,804	)		(126,124	)		(139,705	)
Fair value of plan assets at end of year	$	54,644,608		$	48,897,760		$	1,204,779		$	1,215,998

	Pension Benefit						Postretirement Benefit
Funded Status	2012			2011			2012			2011
Net amount recognized in the balance sheet	$	(20,181,361	)	$	(15,811,622	)	$	(2,507,726	)	$	(1,853,157	)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefit								Postretirement Benefit
	2012				2011				2012				2011
Net loss		$	(28,346,776	)		$	(23,721,356	)		$	(621,467	)		$	(115,205	)
Prior service (cost) credit			(937,936	)			(327,784	)			135,396				159,285
		$	(29,284,712	)		$	(24,049,140	)		$	(486,071	)		$	44,080

Change in the components of accumulated other comprehensive income consist of:

	Pension Benefit						Postretirement Benefit
	2012			2011			2012			2011
Balance at beginning of period	$	(24,049,140	)	$	(17,326,388	)	$	44,080		$	435,543
Change due to availability of final actual assets and census data		—			—			(154,402	)		(5,157	)
Charged to net periodic benefit cost
Prior service cost		221,049			194,148			(23,889	)		(23,888	)
Net loss (gain)		1,111,900			897,052			(50,784	)		(46,380	)
Other changes
Liability gains		(6,568,521	)		(7,813,952	)		(301,076	)		(316,038	)
Balance at end of period	$	(29,284,712	)	$	(24,049,140	)	$	(486,071	)	$	44,080

In 2013, the net periodic pension benefit cost will include $1,423,431 of net loss and $245,427 of prior service cost and the net periodic postretirement benefit cost will include $19,858 of net gain and $23,888 of prior service credit.

Assumptions used to determine the projected benefit obligations for the Company's pension benefit plans and postretirement benefit plan for the fiscal year indicated were as follows:

	2012			2011
Discount rate		3.90	%		4.55	%
Expected return on plan assets		8.0	%		8.0	%
Rate of compensation increase		3.25	%		3.25	%

In 2012 and 2011, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $65,809,208 and $56,588,593, respectively.

Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:

	2012			2011
Number of plans		6			6
Projected benefit obligation	$	74,825,969		$	64,709,379
Accumulated benefit obligation		66,735,124			56,588,593
Fair value of plan assets		54,644,608			48,897,760
Net amount recognized in accrued benefit liability		(20,181,361	)		(15,811,622	)

Estimated future benefit payments to participants of the Company's pension plans are $2.8 million in 2013, $2.8 million in 2014, $2.9 million in 2015, $3.1 million in 2016, $3.2 million in 2017 and a total of $19.0 million from 2018 through 2022.

Estimated future benefit payments to participants of the Company's postretirement plan are $155,000 in 2013, $170,000 in 2014, $177,000 in 2015, $189,000 in 2016, $197,000 in 2017 and a total of $1,140,000 from 2018 through 2022.

The Company expects to make cash contributions to its pension plans of approximately $1.9 million and to its postretirement plan of approximately $155,000 in 2013.

We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes and consider the expected positive impact of active investment management. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities and fixed income securities.

We consider a variety of factors in determining and selecting our assumptions for the discount rate at the end of the year. We develop a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the Citigroup Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds.

The fair values of the company's pension plans assets at December 29, 2012 and December 31, 2011, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 29, 2012
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	193,497	$	—	$	193,497
Equities:
The Eastern Company Common Stock		3,063,132		—		—		3,063,132
Common/collective trust funds
U.S. Large Cap (a)		—		5,826,726		—		5,826,726
U.S. Small Cap (b)		—		3,964,072		—		3,964,072
Concentrated Equity (c)		—		4,899,023		—		4,899,023
International Large Cap with Active Currency (d)		—		6,999,997		—		6,999,997
Emerging Market (e)		—		3,017,350		—		3,017,350
Fixed Income:
Common/collective trust funds
Intermediate Bond (f)		—		14,368,745		—		14,368,745
Target Duration LDI Fixed Income Funds (g)
· 6 Year LDI Fund		—		215,604		—		215,604
· 8 Year LDI Fund		—		214,968		—		214,968
· 10 Year LDI Fund		—		306,535		—		306,535
· 12 Year LDI Fund		—		824,342		—		824,342
· 14 Year LDI Fund		—		1,087,074		—		1,087,074
· 16 Year LDI Fund		—		426,544		—		426,544
Long Duration Fixed Credit (h)		—		6,684,999		—		6,684,999
Insurance contracts		—		2,552,000		—		2,552,000
Total	$	3,063,132	$	51,581,476	$	—	$	54,644,608

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Cash and Equivalents:
Common/collective trust funds	$	—	$	5,202,216	$	—	$	5,202,216
Equities:
The Eastern Company Common Stock		3,891,842		—		—		3,891,842
Common/collective trust funds
U.S. Large Cap		—		5,339,876		—		5,339,876
U.S. Small Cap		—		3,090,711		—		3,090,711
Concentrated Equity		—		3,803,417		—		3,803,417
International Large Cap with Active Currency		—		6,292,803		—		6,292,803
Emerging Market		—		2,175,968		—		2,175,968
Fixed Income:
Common/collective trust funds
Intermediate Bond		—		13,103,043		—		13,103,043
Long Duration Fixed Income (i)		—		2,658,161		—		2,658,161
Long Duration Fixed Credit		—		1,120,643		—		1,120,643
Insurance contracts		—		2,219,080		—		2,219,080
Total	$	3,891,842	$	45,005,918	$	—	$	48,897,760

Equity common funds primarily hold publicly traded common stock of both U.S and international companies selected for purposes of total return and to maintain equity exposure consistent with policy allocations. Investments include commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities.

(a)	The investment objective of the large cap fund is to outperform the Russell 1000® Index. The fund is designed to provide for long-term growth of capital by utilizing a diversified group of quantitative investment strategies that seek to identify securities that have exposure to factors that the underlying advisors' research has found to be predictive of future excess returns. The advisors' portfolios are quantitatively structured to gain exposure to these predictive characteristics while minimizing unintended risk exposures.
(b)	The small cap fund has an objective to outperform the Russell 2500® Index The fund is designed to achieve consistency by combining advisors whose complementary disciplined processes employ distinct methods for identifying small capitalization U.S. stocks with strong return potential. Advisors in the fund use a wide range of criteria and disciplines in their stock selection, focusing on factors such as: undervalued or under-researched companies, special situations, emerging growth, asset plays or turnarounds.
(c)	The investment objective of the concentrated equity fund is to outperform the Russell 1000® Index. The fund is designed to achieve this by combining strategies with different payoffs over different phases of an economic and stock market cycle. To help achieve this objective, multiple advisors and strategies are employed to reduce "scenario risk." These multiple strategies are in the form of multiple investment styles (e.g., growth, market oriented, and value), multiple sub-styles, and different ways of identifying undervalued securities.

(d)

The international fund with active currency has an investment objective of outperforming the Russell Development ex-U.S. Large Cap Index Net. The fund is designed to provide the potential for long-term growth of capital by utilizing a diversified group of investment advisors that the Trustee's manager research indicates will outperform over a full market cycle. The investment advisors' portfolios are combined to form a fund that emphasizes their strengths while minimizing unintended risk exposures

(e)

The emerging market fund seeks to outperform the Russell Emerging Markets Index Net. The fund is designed to provide the potential for long-term growth of capital by utilizing a diversified market group of investment advisors that the Trustee's manager research indicates will outperform over a full market cycle. The investment advisors' portfolios are combined to form a fund that emphasizes their strengths while minimizing unintended risk exposures.

All equity funds have an objective to beat their respective indices with above-average consistency while maintaining volatility and diversification similar to the index they are being compared to over a full market cycle.

Fixed income common funds primarily hold government and corporate debt securities selected for purposes of total return and managing fixed income exposure to policy allocations. Investments include fixed commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities.

(f)	Fixed income common fund investments have an investment objective of outperforming the Barclays Capital U.S. Aggregate Bond Index over a full market cycle. The fund is designed to provide current income, and as a secondary objective, capital appreciation through a variety of diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. To help achieve the objective, the fund is actively managed by multiple advisors who use a variety of investment strategies to create a broad market exposure. The fund's advisors have distinct but complementary investment styles. These advisors generally have similar universes of investable securities but have different areas of specialization and expertise within intermediate duration securities.
(g)	The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds seek to provide current income, and as a secondary objective, capital appreciation through diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The Funds will generally be used in combination with other bond funds to enable the plans to gain additional credit exposure within their asset portfolio, with the goal of reducing the mismatch between a plan's assets and liabilities.
(h)	The long duration fixed credit fund seeks to outperform the Barclays Capital Long Credit Index over a full market cycle. The fund seeks to provide current income, and as a secondary objective, capital appreciation through diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The fund will generally be used in combination with other bond funds, with the goal of reducing the mismatch between a plan's assets and liabilities.
(i)	The long duration fixed income fund seeks to outperform the Barclays Capital U.S. Long Government/Credit Index over a full market cycle. This fund is designed to provide current income, and as a secondary objective, capital appreciation through diversified strategies including sector rotation, modest interest rate timing, security selection and tactical use of high yield and emerging market bonds. The fund will generally be used in combination with other bond funds, with the goal of reducing the mismatch between a plan's assets and liabilities. In 2012, this fund was replaced by the Target Duration LDI Fixed Income Funds. See (g) above.

The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents, and other investments, which may reflect varying rates of return. The investments are further diversified within each asset classification. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. The Company has elected to change its investment strategy to better match the assets with the underlying plan liabilities. Currently, the long-term target allocations for plan assets are 50% in equities and 50% in fixed income, with 20% of the fixed income investments being in long-duration instruments, although the actual plan asset allocations may be within a range around these targets. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations. It is expected that, as the funded status of the plans improves, more assets will be invested in long-duration fixed income instruments.

The plans' assets include 193,624 shares of the common stock of the Company having a market value of $3,063,132 and $3,891,842 at December 29, 2012 and December 31, 2011, respectively. No shares were purchased or sold in 2012 or 2011. Dividends received during 2012 and 2011 on the common stock of the Company were $96,812 and $69,705 respectively.

The fair values of the Company's postretirement plan assets at December 29, 2012 and December 31, 2011, utilizing the fair value hierarchy discussed in Note 2, follow:

	December 29, 2012
	Level 1			Level 2			Level 3			Total
Fixed Income:
Insurance contracts		$	—		$	—		$	1,204,779		$	1,204,779
Total		$	—		$	—		$	1,204,779		$	1,204,779

	December 31, 2011
	Level 1			Level 2			Level 3			Total
Fixed Income:
Insurance contracts		$	—		$	—		$	1,215,998		$	1,215,998
Total		$	—		$	—		$	1,215,998		$	1,215,998

An analysis of the Level 3 assets of the Company's postretirement plan is as follows:

	2012			2011
Fair value of Level 3 assets at beginning of year	$	1,215,998		$	1,168,235
Change due to availability of final actual assets and census data		(3,005	)		(5,157	)
Actual return on plan assets		46,255			52,920
Employer contributions		71,655			139,705
Benefits paid		(126,124	)		(139,705	)
Fair value of Level 3 assets at end of year	$	1,204,779		$	1,215,998

The Level 3 assets described above are the only assets of the postretirement plan, and thus have no impact on any Level 1 or Level 2 assets.

For measurement purposes relating to the postretirement benefit plan, the life insurance cost trend rate is 1%. The health care cost trend rate for participants retiring after January 1, 1991 is nil; no increase in that rate is expected because of caps placed on benefits. The health care cost trend rate is expected to remain at 4.5% for participants after the year 2000.

A one-percentage-point change in assumed health care cost trend rates would have the following effects on the postretirement benefit plan:

	1-Percentage Point
	Increase			Decrease
Effect on total of service and interest cost components		$	56,711		$	(45,651	)

Effect on postretirement benefit obligation		$	598,791		$	(487,508	)

U.S. salaried employees and most employees of the Company's Canadian subsidiaries are covered by defined contribution plans.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. The plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion. The Company made contributions of $187,531 in 2012, $179,400 in 2011, and in 2010, $171,326.