Note 6: Retirement and Savings Plans

As of February 28, 2013, the Company had one defined contribution retirement plan qualifying under the Internal Revenue Code Section 401(k): Material Sciences Corporation Savings & Investment Plan (the “SIP”). All employees of MSC are automatically enrolled in the SIP for a basic contribution, unless they elect not to participate. Employees may also elect to contribute more or less than the basic contribution level. Mercer Trust Company is the custodial trustee of all SIP assets and participant loans.

Under the SIP, participants may contribute up to 85% of their annual compensation, as defined in the SIP, subject to certain Internal Revenue Code limitations. The Company may, at its discretion, make matching contributions to the SIP at varying rates by location on the first 6% of base compensation. MSC also makes an annual contribution into the SIP at varying rates by location for employees who are active participants in the SIP. The cost of the SIP was $0.6 million in fiscal 2013 and $0.5 million in both fiscal 2012 and fiscal 2011.

MSC has non-contributory defined benefit pension plans that cover some of its employees. The Company provides amounts required to meet ERISA funding requirements for these defined benefit plans. All the defined benefit plans are frozen, so no additional benefits accrue under them and there are no new participants. In addition to the benefits previously described, some former MSC officers participated in a non-contributory supplemental pension plan that is still outstanding.

The Company provides some of its retired employees with certain postretirement health care benefits, which MSC may periodically amend or modify. Certain employees may be eligible for these benefits if they reach normal retirement age while employed by the Company.

During the third quarter of fiscal 2011, the Company identified an error in computing benefit costs for certain of its postretirement benefit plans. Benefit costs in fiscal 2008, 2009, 2010 and the first two quarters of fiscal 2011 were overstated because a reduction in benefits implemented in fiscal 2008 was not reflected in the computation of benefit costs for those periods. The cumulative effect of the error at November 30, 2010, was a $0.4 million reduction in expense, of which $0.2 million related to prior fiscal years, and a reduction of the accrued liability at November 30, 2010, of $0.6 million. MSC recorded the cumulative effect in the third quarter of fiscal 2011.

Additionally, in November 2010 the Company notified beneficiaries of its postretirement benefit plans that the plans would be amended and the benefits available under the plans would be reduced effective January 1, 2011. The effect of the amendments was a reduction of the accrued liability at November 30, 2010, of $1.5 million. Actuarial adjustments, changes in employee participation, and normal benefit payments accounted for an additional reduction of the accrued liability at November 30, 2010, of $0.3 million. In total, the liability for postretirement benefits was reduced by $2.4 million at November 30, 2010.

The following tables present a reconciliation of the change in benefit obligation, a reconciliation of the change in plan assets, a statement of the funded status of the plans, the components of net periodic benefit cost and the assumptions used in determining the plans’ funded status and periodic cost. The assumptions do not consider salary increases as the majority of plans are either frozen or do not account for salary increases in determining future benefits.


	Pension Benefits						Postretirement Benefits
(in thousands except %)	2013			2012			2013			2012
Change in Benefit Obligation:
Obligation, March 1	$	15,964		$	14,475		$	1,958		$	1,842
Service Cost Benefits Earned During the Period		—			—			23			20
Interest Cost on Benefit Obligation		574			678			78			86
Plan Amendments		—			—			—			—
Actuarial (Gain) Loss		269			2,080			164			94
Benefit Payments		(1,256	)		(1,269	)		(237	)		(84	)
Curtailments		—			—			—			—
Other Plan Changes		—			—			—			—
Obligation, February 29 & February 28	$	15,551		$	15,964		$	1,986		$	1,958
Change in Plan Assets:
Plan Assets at Fair Value, March 1	$	8,517		$	8,305			—		$	—
Actual Return on Plan Assets		831			324			—			—
Company Contributions		1,356			1,157			237			84
Benefit Payments		(1,256	)		(1,269	)		(237	)		(84	)
Plan Assets at Fair Value, February 29 & February 28	$	9,448		$	8,517		$	—		$	—
Funded Status:
Funded Status	$	(6,103	)	$	(7,447	)	$	(1,986	)	$	(1,958	)



	Pension Benefits
	2013		2012
Plans with Accumulated Benefit Obligation in excess of Plan Assets
Accumulated Benefit Obligation	$	15,551	$	15,964


	Pension Benefits									Postretirement Benefits
	2013			2012			2011			2013			2012			2011
Components of Net Periodic Benefit Cost:
Service Cost Benefits Earned During the Period	$	—		$	—		$	—		$	23		$	20		$	63
Interest Cost on Benefit Obligation		574			677			674			78			86			205
Expected Return on Assets		(566	)		(577	)		(534	)		—			—			—
Amortization of Prior Service Cost		—			—			—			(276	)		(276	)		(64	)
Amortization of Net (Gain) Loss		630			431			389			196			188			218
Settlements and Curtailment		—			—			—			—			—			—
Net Periodic Benefit Cost	$	638		$	531		$	529		$	21		$	18		$	422


	Pension Benefits						Postretirement Benefits
	2013			2012			2013			2012
Amounts Recognized in the Consolidated Balance Sheets
Prepaid Benefit Cost	$	—		$	—		$	—		$	—
Current Liability		(650	)		(780	)		(94	)		(126	)
Non-Current Liability		(5,453	)		(6,667	)		(1,891	)		(1,833	)
Net Amount Recognized	$	(6,103	)	$	(7,447	)	$	(1,985	)	$	(1,959	)


	Pension Benefits				Postretirement Benefits
	2013		2012		2013			2012
Amounts Recognized in Accumulated Other Comprehensive Loss
Prior Service Cost (Credit)	$	—	$	—	$	(1,341	)	$	(1,617	)
Net (Gain) or Loss		6,494		7,119		1,842			1,875
Net Amount Recognized	$	6,494	$	7,119	$	501		$	258


	Pension Benefits						Postretirement Benefits
	2013			2012			2013			2012
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
Net (Gain) or Loss	$	5		$	2,333		$	163		$	95
Amortization of Prior Service Cost (Credit)		—			—			276			276
Prior Service Cost (Credit)		—			—			—			—
Adjustment for 2007 Plan Amendment		—			—			—			—
Amortization of Net (Gain) or Loss		(630	)		(431	)		(196	)		(188	)
Net Amount Recognized	$	(625	)	$	1,902		$	243		$	183


	2013			2012			2011
Assumptions Used in Determining the Plans’ Funded Status:
Discount Rate		3.79%-4.04	%		4.00%-4.23	%		5.22%-5.50	%
Rate of Increase in Compensation Levels		N/A			N/A			N/A


	2013		2012			2011
Assumptions Used in Determining Net Periodic Benefit Cost:
Discount Rate		4.00%-4.23%		5.22%-5.50	%		5.64%-5.94	%
Expected Long-Term Rate of Return on Assets		6.60%		7.00	%		7.50	%

Plan obligations and the annual pension expense are determined by using a number of assumptions including the discount rate and the estimated future return on plan assets. To the extent actual amounts differ from these assumptions and estimated amounts, results could be adversely affected. A one percentage point increase in the estimated discount rate would decrease the net pension expense by less than $0.1 million and decrease the estimated pension liability by $1.5 million. A one percentage point decrease in the discount rate would increase the net pension expense by $0.1 million and increase the estimated pension liability by $1.8 million. A one percentage point increase or decrease in the estimated future return on plan assets would have a $0.1 million relative effect on fiscal 2013 net pension expense. The estimated future return on plan assets for the fiscal 2013 pension benefit income calculation was 6.6%.

MSC continues to review its postretirement benefits, incorporating actual and anticipated benefit changes. In determining the present value of the accumulated postretirement benefit obligation and net cost, MSC assumed health care cost annual increases would decline from 7% to 5% per year over the life of the obligation. However, for some benefits no trend rate is applicable.

A 1% increase in assumed health care cost trend rates will raise the total of the service and interest cost components of net periodic postretirement benefit cost by less than $0.1 million, and the health care component of the accumulated postretirement benefit obligation by $0.1 million as of February 28, 2013. A 1% decrease in assumed health care cost trend rates will lower the total of the service and interest cost components of net periodic postretirement benefit cost by less than $0.1 million, and the health care component of the accumulated postretirement benefit obligation by $0.1 million as of February 28, 2013.

Plan Assets. The Company’s pension plan weighted-average asset allocations at February 28, 2013, and February 29, 2012, by asset category, were as follows:


	2013			2012
Equity Securities		63	%		65	%
Debt Securities		37	%		35	%
Total		100	%		100	%

The investment objective of MSC’s pension plans is to meet the current and future defined benefit payments of participants and beneficiaries of its retirement plans. The plans will invest in funds with appropriate long-term goals and objectives. Individual funds included will seek to provide a long-term competitive rate of return, net of expenses, at appropriate risk levels—which over the long run is equal to or exceeds outlined benchmarks. To maximize diversification, the plans will invest in portfolios within four broad asset classes: bonds, large company stocks, small company domestic stocks and foreign stocks. To provide additional diversification and further reduce the volatility of the portfolio, the Plans will divide the large and small stock domestic portions between value and growth managers.

The approach used to determine the expected long-term rate of return on plan assets assumption is based on weighting historical market index returns for various asset classes in proportion to the assets held in the Material Sciences Corporation Master Trust (“Trust”). The Trust targets an asset allocation of approximately 61% in equity securities and 39% in fixed income securities.

The Company determines the fair value of plan assets using observable market data obtained from independent sources when available. The Company classifies its plan assets according to the fair value hierarchy:

•

Level 1—Quoted prices for identical instruments in active markets.

•

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

•

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The table below summarizes the fair value measurements of the Trust’s assets at February 28, 2013, and February 29, 2012, by asset class (in thousands).


(in thousands)	Balance as of February 28, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and Cash Equivalents	$	75	$	75	$	—	$	—
Mutual Funds—Equity Securities		5,886		5,886		—		—
Mutual Funds—Bonds		3,487		3,487		—		—
Total	$	9,448	$	9,448	$	—	$	—


(in thousands)	Balance as of February 29, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and Cash Equivalents	$	52	$	52	$	—	$	—
Mutual Funds—Equity Securities		5,528		5,528		—		—
Mutual Funds—Bonds		2,937		2,937		—		—
Total	$	8,517	$	8,517	$	—	$	—

The Company expects to contribute approximately $3.1 million, which includes $1.1 of required minimum contributions and $2.0 million of additional contributions to its qualified and non-qualified defined benefit pension plans in fiscal 2014. The additional contributions are being made after management considered the advantages of making the contributions—higher earnings in the pension funds compared to the low interest currently being earned on cash and the reduction of tax payments due to the deductibility of the contributions. Benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years after that, are shown in the table below (in thousands).


Expected Benefit Payments:
2014	$	1,196
2015		1,130
2016		939
2017		803
2018		741
2019 through 2023		4,152
Total	$	8,961

MSC expects to contribute approximately $0.1 million to its postretirement benefit plans other than pensions in fiscal 2014. Benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five following fiscal years, are shown in the table below (in thousands).


Expected Benefit Payments:
2014	$	94
2015		85
2016		91
2017		95
2018		106
2019 through 2023		575
Total	$	1,046