PENSION AND OTHER POST-RETIREMENT BENEFITS

12 Months Ended

Oct. 30, 2011

PENSION AND OTHER POST-RETIREMENT BENEFITS

PENSION AND OTHER POST-RETIREMENT BENEFITS

Note I

PENSION AND OTHER POST-RETIREMENT BENEFITS

The Company has several defined benefit plans and defined contribution plans covering most employees. Total costs associated with the Company’s defined contribution benefit plans in 2011, 2010, and 2009 were $27.1 million, $26.6 million, and $25.8 million, respectively. Benefits for defined benefit pension plans covering hourly employees are provided based on stated amounts for each year of service, while plan benefits covering salaried employees are based on final average compensation. The Company’s funding policy is to make annual contributions of not less than the minimum required by applicable regulations. Actuarial gains and losses and any adjustments resulting from plan amendments are deferred and amortized to expense over periods ranging from 8-22 years.

Certain groups of employees are eligible for post-retirement health or welfare benefits. Benefits for retired employees vary for each group depending on respective retirement dates and applicable plan coverage in effect. Contribution requirements for retired employees are governed by the Retiree Health Care Payment Program and may change each year as the cost to provide coverage is determined. Eligible employees hired after January 1, 1990, may receive post-retirement medical coverage but must pay the full cost of the coverage. Actuarial gains and losses and any adjustments resulting from plan amendments are deferred and amortized to expense over periods ranging from 7-19 years.

In 2011, several changes were enacted that affected the Company’s defined benefit pension plans at the measurement date. The defined benefit pension plan covering collectively bargained employees was amended as a result of labor negotiations, causing an increase in the benefit obligation. The benefit obligation for the other defined benefit plans was reduced as a result of a change in the pension formula effective January 1, 2017. The amended formula remains a defined benefit formula, but will base the accrued benefit credit on age and service and define the benefit as a lump sum. Effective October 31, 2016, the 401k match for these participants will be increased.

Net periodic cost of defined benefit plans included the following:

	Pension Benefits						Post-retirement Benefits
(in thousands)	2011		2010		2009		2011		2010	2009
Service cost	$  24,206		$ 21,998		$ 18,004		$  2,219		$  2,477	$  2,262
Interest cost	50,282		48,305		47,251		18,891		20,703	22,464
Expected return on plan assets	(62,989	)	(55,128	)	(52,296	)	–		–	–
Amortization of prior service cost	(607	)	(607	)	(607	)	4,341		4,341	5,505
Recognized actuarial loss (gain)	16,633		16,133		5,142		(4	)	2,377	(841	)
Settlement charges	–		1,192		6,788		–		–	–
Curtailment charge	–		131		–		–		–	–
Special termination cost	–		386		–		–		109	–
Net periodic cost	$  27,525		$ 32,410		$ 24,282		$25,447		$30,007	$29,390

Included in accumulated other comprehensive loss for pension benefits at October 30, 2011, and October 31, 2010, are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service credit of $52.5 million and unrecognized actuarial losses of $334.0 million, and unrecognized prior service credit of $1.8 million and unrecognized actuarial losses of $289.4 million, respectively. The prior service credit and actuarial loss included in accumulated other comprehensive loss and expected to be recognized in net periodic pension cost during the fiscal year ending October 28, 2012, are $5.1 million and $20.1 million, respectively.

Included in accumulated other comprehensive loss for post-retirement benefits at October 30, 2011, and October 31, 2010, are the following amounts that have not yet been recognized in net periodic post-retirement benefit cost: unrecognized prior service costs of $19.0 million and unrecognized actuarial losses of $25.2 million, and unrecognized prior service costs of $25.5 million and unrecognized actuarial losses of $17.9 million, respectively. The prior service cost and actuarial loss included in accumulated other comprehensive loss and expected to be recognized in net periodic post-retirement benefit cost during the fiscal year ending October 28, 2012, are $3.6 million and $0.0 million, respectively.

The following is a reconciliation of the beginning and ending balances of the benefit obligation, the fair value of plan assets, and the funded status of the plans as of the October 30, 2011 and the October 31, 2010 measurement dates:

	Pension Benefits				Post-retirement Benefits
(in thousands)	2011		2010		2011		2010
Change in benefit obligation:
Benefit obligation at beginning of year	$878,630		$785,560		$346,707		$346,106
Service cost	24,206		21,998		2,219		2,477
Interest cost	50,282		48,305		18,891		20,703
Plan amendments	(51,283	)	–		(2,082	)	–
Special termination cost	–		386		–		109
Actuarial loss	84,958		64,231		7,276		2,446
Benefits paid	(44,167	)	(41,850	)	(21,877	)	(25,134	)
Benefit obligation at end of year	$942,626		$878,630		$351,134		$346,707

The post-retirement benefits paid are net of Medicare Part D subsidy receipts of $2.8 million and $4.2 million for fiscal 2011 and 2010, respectively.

	Pension Benefits				Post-retirement Benefits
(in thousands)	2011		2010		2011		2010
Change in plan assets:
Fair value of plan assets at beginning of year	$802,449		$689,759		$           –		$           –
Actual return on plan assets	86,748		81,993		–		–
Employee contributions	–		–		2,749		2,362
Employer contributions	25,893		72,547		26,120		29,304
Benefits paid	(44,167	)	(41,850	)	(28,869	)	(31,666	)
Fair value of plan assets at end of year	$870,923		$802,449		$           –		$           –
Funded status at end of year	$(71,703	)	$(76,181	)	$(351,134	)	$(346,707	)

Amounts recognized in the Consolidated Statements of Financial Position as of October 30, 2011, and October 31, 2010, are as follows:

	Pension Benefits				Post-retirement Benefits
(in thousands)	2011		2010		2011		2010
Pension assets	$   80,208		$   61,272		$           –		$           –
Accrued expenses	(2,924	)	(3,273	)	(26,433	)	(25,889	)
Pension and post-retirement benefits	(148,987	)	(134,180	)	(324,701	)	(320,818	)
Net amount recognized	$  (71,703	)	$  (76,181	)	$(351,134	)	$(346,707	)

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $151.9 million, $133.2 million, and $0.0 million, respectively, as of October 30, 2011, and $139.4 million, $113.1 million, and $2.0 million, respectively, as of October 31, 2010.

Weighted-average assumptions used to determine benefit obligations are as follows:

	2011	2010
Discount rate	5.33%	5.82%
Rate of future compensation increase (for plans that base benefits on final compensation level)	3.93%	4.03%

Weighted-average assumptions used to determine net periodic benefit costs are as follows:

	2011	2010	2009
Discount rate	5.82%	6.28%	7.30%
Rate of future compensation increase (for plans that base benefits on final compensation level)	4.03%	4.08%	4.09%
Expected long-term return on plan assets	8.00%	8.25%	8.25%

The expected long-term rate of return on plan assets is developed in consultation with outside advisors. A range is determined based on the composition of the asset portfolio, historical long-term rates of return, and estimates of future performance.

For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits for pre-Medicare and post-Medicare retirees’ coverage is assumed for 2012. The pre-Medicare and post-Medicare rate is assumed to decrease to 5.0% for 2017, and remain at that level thereafter.

The assumed discount rate, expected long-term rate of return on plan assets, rate of future compensation increase, and health care cost trend rate have a significant impact on the amounts reported for the benefit plans. A one-percentage-point change in these rates would have the following effects:

	1-Percentage-Point
	Expense				Benefit Obligation
(in thousands)	Increase		Decrease		Increase		Decrease
Pension Benefits:
Discount rate	$(10,652	)	$13,153		$(111,456	)	$138,020
Expected long-term rate of return on plan assets	$   3,664		$ (3,664	)	-		-
Rate of future compensation increase	$   2,196		$ (2,108	)	$   11,060		$ (10,660	)
Post-retirement Benefits:
Discount rate	$936		$  2,564		$  (33,208	)	$  39,679
Health care cost trend rate	$   1,774		$ (1,478	)	$   32,101		$ (27,631	)

The actual and target weighted-average asset allocations for the Company’s pension plan assets as of the plan measurement date are as follows:

	2011		2010
Asset Category	Actual	Target Range	Actual	Target Range
Large Capitalization Equity	22.1%	20-35%	24.1%	22-32%
Hormel Foods Corporation Stock	5.7%	0-10%	9.0%	-
Small Capitalization Equity	11.9%	5-15%	14.0%	3-13%
International Equity	18.1%	15-25%	17.8%	15-25%
Private Equity	2.5%	0-15%	1.2%	0-15%
Total Equity Securities	60.3%	55-75%	66.1%	55-75%
Fixed Income	38.3%	25-45%	31.8%	25-45%
Cash and Cash Equivalents	1.4%	-	2.1%	-

Target allocations are established in consultation with outside advisors through the use of asset-liability modeling to attempt to match the duration of the plan assets with the duration of the Company’s projected benefit liability. The asset allocation strategy attempts to minimize the long-term cost of pension benefits, reduce the volatility of pension expense, and achieve a healthy funded status for the plans. The target range for ownership of the Company’s common stock was included within the Large Capitalization Equity target range in the prior year.

As of the 2011 measurement date, plan assets included 1.7 million shares of common stock of the Company having a market value of $49.7 million or 6% of total plan assets. Dividends paid during the year on shares held by the plan were $1.1 million. In 2011, the Company issued 1.1 million shares to the plan pursuant to the stock split, and the plan sold 1.1 million shares. In 2010, plan assets included a pre-split 1.7 million shares of common stock of the Company having a market value of $76.1 million or 9% of total plan assets.

The Company made discretionary contributions of $23.6 million and $70.3 million to the Company’s defined benefit plans in 2011 and 2010, respectively. Based on the October 30, 2011 measurement date, the Company anticipates making required contributions of $21.2 million to fund the pension plans during fiscal year 2012. The Company also expects to make contributions of $29.4 million during 2012 that represent benefit payments for unfunded plans.

Benefits expected to be paid over the next ten fiscal years are as follows:

		Post-
	Pension	retirement
(in thousands)	Benefits	Benefits
2012	$  44,334	$  23,826
2013	45,309	22,359
2014	47,464	22,534
2015	49,769	22,646
2016	52,449	22,680
2017 - 2021	308,135	108,761

Post-retirement benefits are net of expected federal subsidy receipts related to prescription drug benefits granted under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which are estimated to be $2.8 million per year through 2021.

The fair values of the defined benefit pension plan investments as of October 30, 2011, by asset category and fair value hierarchy level, are as follows:

	Fair Value Measurements at October 30, 2011
		Quoted Prices
		in Active	Significant Other	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
(in thousands)	Total Fair Value	(Level 1)	(Level 2)	(Level 3)
Investments at Fair Value:
Cash equivalents(1)	$  11,732	$  11,732	$            -	$          -
Large Capitalization Equity(2)
Domestic	$215,924	$191,158	$  24,766	$          -
Foreign	26,103	26,103	-	-
Total Large Capitalization Equity	$242,027	$217,261	$  24,766	$          -
Small Capitalization Equity(3)
Domestic	$  92,083	$  92,083	$            -	$          -
Foreign	11,585	11,585	-	-
Total Small Capitalization Equity	$103,668	$103,668	$            -	$          -
International Equity(4)
Mutual fund	$  38,757	$            -	$  38,757	$          -
Collective trust	119,239	-	119,239	-
Total International Equity	$157,996	$            -	$157,996	$          -
Private Equity(5)
Domestic	$  18,794	$            -	$            -	$18,794
International	3,053	-	-	3,053
Total Private Equity	$  21,847	$            -	$            -	$21,847
Total Equity	$525,538	$320,929	$182,762	$21,847
Fixed Income(6)
US government issues	$118,863	$118,863	$            -	$          -
Municipal issues	18,463	18,463	-	-
Corporate issues – domestic	165,778	112,767	53,011	-
Corporate issues – foreign	30,549	30,549	-	-
Total Fixed Income	$333,653	$280,642	$  53,011	$          -
Total Investments at Fair Value	$870,923	$613,303	$235,773	$21,847

	Fair Value Measurements at October 31, 2010
		Quoted Prices
		in Active	Significant Other	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
(in thousands)	Total Fair Value	(Level 1)	(Level 2)	(Level 3)
Investments at Fair Value:
Cash equivalents(1)	$  16,642	$  16,642	$            -	$        -
Large Capitalization Equity(2)
Domestic	$247,748	$215,152	$  32,596	$        -
Foreign	18,023	18,023	-	-
Total Large Capitalization Equity	$265,771	$233,175	$  32,596	$        -
Small Capitalization Equity(3)
Domestic	$101,953	$101,953	$            -	$        -
Foreign	10,206	10,206	-	-
Total Small Capitalization Equity	$112,159	$112,159	$            -	$        -
International Equity(4)
Mutual fund	$  40,301	$            -	$  40,301	$        -
Collective trust	102,566	-	102,566	-
Total International Equity	$142,867	$            -	$142,867	$        -
Private Equity(5)
Domestic	$    6,951	$            -	$            -	$6,951
International	2,377	-	-	2,377
Total Private Equity	$    9,328	$            -	$            -	$9,328
Total Equity	$530,125	$345,334	$175,463	$9,328
Fixed Income(6)
US government issues	$106,987	$106,987	$            -	$        -
Municipal issues	1,931	1,931	-	-
Corporate issues – domestic	124,802	87,181	37,621	-
Corporate issues – foreign	21,878	21,878	-	-
Total Fixed Income	$255,598	$217,977	$  37,621	$        -
Other
Real Estate - mineral interest	$           3	$            -	$            -	$       3
Total Other	$           3	$            -	$            -	$       3
Total Investments at Fair Value	$802,368	$579,953	$213,084	$9,331

The following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy:

(1)	Cash Equivalents: These Level 1 investments consist primarily of money market mutual funds that are highly liquid and traded in active markets.
(2)	Large Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks which are valued at the closing price reported on the active market in which the individual securities are traded. The Level 2 investment includes a mutual fund consisting of a mix of U.S. common stocks that is valued at the publicly available net asset value (NAV) of shares held by the pension plans at year end.
(3)	Small Capitalization Equity: The Level 1 investments include a mix of predominately U.S. common stocks and foreign common stocks, which are valued at the closing price reported on the active market in which the individual securities are traded.
(4)	International Equity: These Level 2 investments include a mix of collective investment funds and mutual funds. The mutual funds are valued at the publicly available NAV of shares held by the pension plans at year end. The value of the collective investment funds is based on the fair value of the underlying investments and the NAV can be calculated for these funds.
(5)	Private Equity: These Level 3 investments consist of various collective investment funds, which are managed by a third party, that invest in a well diversified portfolio of equity investments from top performing, high quality firms that focus on U.S. and foreign small to mid markets; and venture capitalists and entrepreneurs with a concentration in areas of innovation. Investment strategies include buyouts, growth capital, build-ups, and distressed; and early stages of company development mainly in the U.S. The fair value of the units for these investments is based on the fair value of the underlying investments, and the NAV can be calculated for these funds.
(6)	Fixed Income: The Level 1 investments include a mix of U.S. government and municipal securities, and domestic and foreign securities, which are valued at the closing price reported on the active market in which the individual securities are traded. The Level 2 investments consist primarily of mutual funds invested in long duration corporate bonds that are valued at the publicly available NAV of shares held by the pension plans at year end.

A reconciliation of the beginning and ending balance of the investments measured at fair value using significant unobservable inputs (Level 3) is as follows:

(in thousands)	2011		2010
Beginning Balance, October 31, 2010	$ 9,331		$ 3,108
Purchases, issuances, and settlements (net)	9,886		5,373
Unrealized gains	2,633		717
Realized (losses) gains	(3	)	124
Interest and dividend income	-		9
Ending Balance, October 30, 2011	$ 21,847		$ 9,331

The Company has commitments totaling $85.0 million for the private equity investments within the pension plans, of which $66.0 million and $77.0 million remain unfunded at fiscal year end 2011 and 2010, respectively. These commitments include $43.2 million and $22.8 million for domestic and foreign equity investments, respectively, for fiscal year end 2011 compared to the $53.3 million and $23.7 million for domestic and foreign equity investments, respectively, for fiscal year end 2010. Funding for future private equity capital calls will come from existing pension plan asset investments and not from additional cash contributions into the Company’s pension plans.