Pensions and Other Postretirement Benefits

12 Months Ended

Aug. 31, 2012

Pensions and Other Postretirement Benefits

Note 12 — Pensions and Other Postretirement Benefits

Penford maintains two noncontributory defined benefit pension plans that cover approximately 57% of its employees. The defined benefit pension plans for salaried and bargaining unit hourly employees were closed to new participants effective January 1, 2005 and August 1, 2004, respectively. The Company also maintains a postretirement health care benefit plan covering its bargaining unit hourly retirees. Effective August 1, 2004, the Company’s postretirement health care benefit plan covering bargaining unit hourly employees was closed to new entrants and to any current employee who did not meet minimum requirements as to age plus years of service. For the plans described above, the Company determines the vested benefit obligation on the actuarial present value based on the employee’s expected date of retirement.

Obligations and Funded Status

The following represents information summarizing the Company's pension and other postretirement benefit plans. A measurement date of August 31, 2012 was used for all plans.

	Year Ended August 31,
	Pension Benefits						Other Benefits
	2012			2011			2012			2011
	(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at September 1	$	47,545		$	48,875		$	16,924		$	17,580
Service cost		1,521			1,617			229			272
Interest cost		2,729			2,696			972			972
Plan participants’ contributions		—			—			119			134
Amendments		212			—			—			—
Actuarial (gain) loss		619			(1,099	)		(170	)		333
Change in assumptions		12,359			(2,560	)		3,024			(1,736	)
Benefits paid		(1,996	)		(1,984	)		(641	)		(631	)
Benefit obligation at August 31	$	62,989		$	47,545		$	20,457		$	16,924
Change in plan assets:
Fair value of plan assets at September 1	$	36,328		$	28,278		$	—		$	—
Actual return on plan assets		3,688			3,618			—			—
Company contributions		4,052			6,416			522			497
Plan participants’ contributions		—			—			119			134
Benefits paid		(1,996	)		(1,984	)		(641	)		(631	)
Fair value of the plan assets at August 31	$	42,072		$	36,328		$	—		$	—
Funded status:
Net liability – Plan assets less than projected benefit obligation	$	(20,917	)	$	(11,217	)	$	(20,457	)	$	(16,924	)
Recognized as:
Current accrued benefit liability	$	—		$	—		$	(750	)	$	(731	)
Non-current accrued benefit liability		(20,917	)		(11,217	)		(19,707	)		(16,193	)
Net Amount Recognized	$	(20,917	)	$	(11,217	)	$	(20,457	)	$	(16,924	)

Accumulated other comprehensive loss consists of the following amounts that have not yet been recognized as components of net benefit cost (dollars in thousands):

	August 31, 2012					August 31, 2011
	Pension Benefits		Other Benefits			Pension Benefits		Other Benefits
Unrecognized prior service cost (credit)	$	1,529	$	(307	)	$	1,545	$	(459	)
Unrecognized net actuarial loss		22,976		3,594			11,545		740
Total	$	24,505	$	3,287		$	13,090	$	281

Selected information related to the Company’s defined benefit pension plans that have benefit obligations in excess of fair value of plan assets is presented below (dollars in thousands):

	August 31,
	2012		2011
Projected benefit obligation	$	62,989	$	47,545
Accumulated benefit obligation	$	59,853	$	46,113
Fair value of plan assets	$	42,072	$	36,328

Net Periodic Benefit Cost

	Year Ended August 31,
	Pension Benefits									Other Benefits
	2012			2011			2010			2012			2011			2010
	(Dollars in thousands)
Components of net periodic benefit cost
Service cost	$	1,521		$	1,617		$	1,608		$	229		$	272		$	353
Interest cost		2,729			2,696			2,633			972			972			1,077
Expected return on plan assets		(2,914	)		(2,234	)		(2,022	)		—			—			—
Amortization of prior service cost		228			228			244			(152	)		(152	)		(152	)
Amortization of actuarial loss		773			1,441			1,312			—			65			294
Benefit cost	$	2,337		$	3,748		$	3,775		$	1,049		$	1,157		$	1,572

Assumptions

The Company assesses its benefit plan assumptions on a regular basis. Assumptions used in determining plan information are as follows:

	August 31,
	Pension Benefits									Other Benefits
	2012			2011			2010			2012			2011			2010
Weighted-average assumptions used to calculate net periodic expense:
Discount rate		5.87	%		5.64	%		5.98	%		5.87	%		5.64	%		5.98	%
Expected return on plan assets		8.00	%		8.00	%		8.00	%
Rate of compensation increase		3.00	%		4.00	%		4.00	%
Weighted-average assumptions used to calculate benefit obligations at August 31:
Discount rate		4.28	%		5.87	%		5.64	%		4.28	%		5.87	%		5.64	%
Expected return on plan assets		7.00	%		8.00	%		8.00	%
Rate of compensation increase		3.00	%		3.00	%		4.00	%

The expected long-term return on assets assumption for the pension plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, the Company considers long-term historical market rates of return as well as actual returns on the Company’s plan assets, and adjusts this information to reflect expected capital market trends. Penford also considers forward looking return expectations by asset class, the contribution of active management and management fees paid by the plans. The plan assets are held in qualified trusts and anticipated rates of return are not reduced for income taxes. The expected long-term return on assets assumption used to calculate net periodic pension expense was 8.0% for fiscal 2012. A decrease (increase) of 50 basis points in the expected return on assets assumptions would increase (decrease) pension expense by approximately $0.2 million based on the assets of the plans at August 31, 2012. The expected return on plan assets to be used in calculating fiscal 2013 pension expense is 7.0%.

The discount rate used by the Company in determining pension expense and pension obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash flows are expected to match the timing and amounts of projected future benefit payments. The discount rates to determine net periodic expense used in fiscal 2010 (5.98%), fiscal 2011 (5.64%) and fiscal 2012 (5.87%) reflect the change in bond yields over the last several years. During fiscal 2012, bond yields declined and Penford has decreased the discount rate for calculating its benefit obligations at August 31, 2012, as well as net periodic expense for fiscal 2013, to 4.28%. Lowering the discount rate by 25 basis points would increase pension expense by approximately $0.26 million and other postretirement benefit expense by $0.1 million.

Unrecognized net loss amounts reflect the difference between expected and actual returns on pension plan assets as well as the effects of changes in actuarial assumptions. Unrecognized net losses in excess of certain thresholds are amortized into net periodic pension and postretirement benefit expense over the average remaining service life of active employees. Amortization of unrecognized net loss amounts is expected to increase net pension expense by approximately $1.93 million in fiscal 2013. Amortization of unrecognized net losses is expected to increase net postretirement health care expense by $0.27 million in fiscal 2013.

	2012			2011			2010
Assumed health care cost trend rates:
Current health care trend assumption		8.00	%		8.00	%		8.00	%
Ultimate health care trend rate		4.50	%		4.50	%		4.50	%
Year ultimate health care trend is reached		2030			2029			2028

The assumed health care cost trend rate could have a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:

	1-Percentage- Point Increase		1-Percentage- Point Decrease
	(Dollars in thousands)
Effect on total of service and interest cost components in fiscal 2012	$	180	$	(149	)
Effect on postretirement accumulated benefit obligation as of August 31, 2012	$	3,115	$	(2,558	)

Plan Assets

The weighted average asset allocations of the investment portfolio for the pension plans at August 31 are as follows:

	Target Allocation			August 31,
				2012			2011
U.S. equities		55	%		56	%		56	%
International equities		15	%		15	%		16	%
Fixed income investments		25	%		24	%		26	%
Real estate		5	%		5	%		2	%

The assets of the pension plans are invested in units of common trust funds actively managed by Russell Trust Company, a professional fund investment manager. The investment strategy for the defined benefit pension assets is to maintain a diversified asset allocation in order to minimize the risk of large losses and maximize the long-term risk-adjusted rate of return. No plan assets are invested in Penford shares. There are no plan assets for the Company’s postretirement health care plans.

See Note 14, “Fair Value Measurements and Derivative Instruments,” for a description of the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company’s employee pension plan assets are principally comprised of the following types of investments:

Common collective trust funds:    The fair value of these funds is based on the cumulative net asset value of their underlying investments. The investments in common collective trust funds are comprised of equity funds, fixed income funds and international equity funds. The funds are valued at net asset value based on the closing market value of the units bought or sold as of the valuation date and are classified in Level 2 of the fair value hierarchy.

Real estate equity funds:    The real estate equity funds are composed of underlying investments in primarily nine established income-producing real estate funds and short-term investment funds. The underlying fund net asset values are based on the values of the real estate assets as determined by appraisal. The appraisals are conducted in accordance with Appraisal Institute guidelines including consideration of projected income and expenses of the property as well as recent sales of similar properties. The underlying funds value all real estate investments quarterly and all real estate investments are independently appraised at least once per year as required by the Global Investment Performance Standards. Redemption requests are considered quarterly and are subject to notice of 110 days. The real estate fund is included in Level 3 of the fair value hierarchy.

The following table presents the fair value of the pension plan’s assets by major asset category as of August 31, 2012.

	Quoted Prices In Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Common collective trust funds	$		$	39,970	$	—	$	39,970
Real estate equity funds		—		—		2,102		2,102
Fair value of plan assets	$	—	$	39,970	$	2,102	$	42,072

The following table summarizes the changes in fair value of the pension plan’s real estate equity fund (Level 3) for fiscal year ended August 31, 2012.

	Real Estate
	Equity Fund
	(in thousands)
Balance, August 31, 2011	$	677
Actual return on plan assets:
Relating to assets still held at the reporting date		75
Relating to assets sold during the period		—
Purchases and sales		1,350
Transfers in (out) of Level 3		—
Balance, August 31, 2012	$	2,102

Contributions and Benefit Payments

The Company’s funding policy for the defined benefit pension plans is to contribute amounts sufficient to meet the statutory funding requirements of the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. The Company contributed $4.1 million, $6.4 million and $3.4 million in fiscal 2012, 2011 and 2010, respectively. The Company estimates that the minimum pension plan funding contribution during fiscal 2013 will be approximately $1.1 million.

Penford funds the benefit payments of its postretirement health care plans on a cash basis; therefore, the Company’s contributions to these plans in fiscal 2013 will approximate the benefit payments below.

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include benefits attributable to estimate future employee service.

	Pension		Other Postretirement
	(Dollars in millions)
2013	$	2.3	$	0.9
2014		2.4		1.0
2015		2.5		1.0
2016		2.6		1.1
2017		2.8		1.2
2018-2022	$	17.3	$	7.8