Pension Arrangements

Retirement Savings Plan—Sotheby’s sponsors a qualified defined contribution plan for its U.S. employees (the “Retirement Savings Plan”). Participants in the Retirement Savings Plan may elect to contribute between 2% and 50% of their eligible compensation, on a pre-tax or after-tax Roth basis. Participant savings are matched by a contribution from Sotheby’s of up to 3% of eligible compensation. Sotheby’s may also contribute an annual discretionary amount to the Retirement Savings Plan, which varies as a percentage of each participant’s eligible compensation depending on Company profitability. In 2014, 2013, and 2012, Sotheby’s accrued discretionary contributions of $1.3 million, $1.2 million, and $1.2 million, respectively, to the Retirement Savings Plan, which is equal to 2%, 2%, and 3%, respectively, of eligible compensation paid during those years. In 2014, 2013, and 2012, total pension expense related to matching and discretionary contributions to the Retirement Savings Plan, net of forfeitures, was $2.4 million, $2.3 million, and $2 million, respectively. Both participant and Company contributions to the Retirement Savings Plan are subject to limitations under Internal Revenue Service ("IRS") regulations.

Deferred Compensation Plan—Sotheby’s sponsors the non-qualified Deferred Compensation Plan (the “DCP”) which is available to certain U.S. officers for whom contributions to the Retirement Savings Plan are limited by IRS regulations. The DCP provides participants with a menu of investment crediting options which track a portfolio of various deemed investment funds. Sotheby’s credits participant accounts on the same basis as matching and discretionary contributions to the Retirement Savings Plan, as discussed above. In 2014, 2013, and 2012, Sotheby’s accrued discretionary contributions of $0.4 million, $0.4 million, and $0.5 million, respectively, to the DCP, which is equal to 2%, 2%, and 3%, respectively, of eligible compensation paid during those years. In 2014, 2013, and 2012, total pension expense related to Sotheby's matching and discretionary DCP accruals was $0.9 million, $0.9 million, and $1 million, respectively.

Employee deferrals and Sotheby’s contributions to the DCP are informally funded into a rabbi trust which provides benefit security by sheltering assets in the event of a change-in-control of Sotheby's and certain other situations. DCP liabilities are financed through the trust almost entirely by using company-owned variable life insurance (“COLI”), and, to a much lesser extent, investments in money market mutual funds. As of December 31, 2014 and 2013, the DCP liability was $49.6 million and $51.8 million, respectively, and the assets held in the rabbi trust consisted of the following (in thousands of dollars):



December 31	2014		2013
Company-owned variable life insurance	$	45,895	$	45,581
Money market mutual fund investments	4,595		7,650
Total	$	50,490	$	53,231

The COLI and money market mutual fund investments are aggregated and recorded on the Consolidated Balance Sheets within Trust Assets Related to Deferred Compensation Liability. The COLI is reflected at its cash surrender value. The money market mutual fund investments are classified as trading securities and reflected at their fair value.

Changes in the fair value of the DCP liability, which result from gains and losses in deemed participant investments, are recognized in earnings within Salaries and Related costs in the period in which they occur. Gains in deemed participant investments increase the DCP liability, as well as Salaries and Related costs. Losses in deemed participant investments decrease the DCP liability, as well as Salaries and Related costs. In 2014, 2013, and 2012, net gains in deemed participant investments totaled $1.9 million, $5.1 million, and $3.2 million, respectively.

Gains and losses resulting from changes in the fair value of the cash surrender value of the COLI and the money market mutual fund investments and related insurance expenses are recognized in earnings below Operating Income within Other Income in the period in which they occur. In 2014, 2013, and 2012, net gains related to the COLI and the money market mutual fund investments were $0.3 million, $3.7 million, and $2.4 million, respectively.

U.K. Defined Contribution Plan—Beginning on April 1, 2004, a defined contribution plan was made available to employees in the U.K. (the "U.K. Defined Contribution Plan"). In 2014, 2013, and 2012, pension expense related to the U.K. Defined Contribution Plan was $2.2 million, $1.3 million, and $1 million, respectively.

U.K. Defined Benefit Plan—Sotheby’s sponsors a defined benefit pension plan in the U.K. (the “U.K. Pension Plan”). Effective April 1, 2004, the U.K. Pension Plan was closed to new employees. Accordingly, a large majority of members in the U.K. Pension Plan are former Sotheby's employees and approximately 12% are active employees as of December 31, 2014. The tables below present detailed information related to the U.K. Pension Plan.

Benefit Obligation, Plan Assets, and Funded Status

The table below details the changes in the projected benefit obligation, plan assets and funded status of the U.K. Pension Plan, as well as the net pension asset recognized on the Consolidated Balance Sheets, as of December 31, 2014 and 2013 (in thousands of dollars):



December 31	2014			2013
Reconciliation of benefit obligation
Benefit obligation at beginning of year	$	360,185		$	318,155
Service cost	4,499			3,682
Interest cost	15,633			13,359
Contributions by plan participants	1,164			1,251
Actuarial loss	33,568			23,410
Benefits paid	(11,128		)	(8,168		)
Foreign currency exchange rate changes	(21,986		)	8,496
Projected benefit obligation at end of year	381,935			360,185
Reconciliation of plan assets
Fair value of plan assets at beginning of year	397,469			336,189
Actual return on plan assets	44,343			38,097
Employer contributions	2,740			20,268
Contributions by plan participants	1,164			1,251
Benefits paid	(11,128		)	(8,168		)
Foreign currency exchange rate changes	(23,660		)	9,832
Fair value of plan assets at end of year	410,928			397,469
Funded Status
Net pension asset	$	28,993		$	37,284

As of December 31, 2014 and 2013 the accumulated benefit obligation for the U.K. Pension Plan was $367.2 million and $344 million.

Components of Net Pension Benefit

In 2014, 2013, and 2012, the components of the net pension benefit related to the U.K. Pension Plan were (in thousands of dollars):



	2014			2013			2012
Service cost	$	4,499		$	3,682		$	3,662
Interest cost	15,633			13,359			13,143
Expected return on plan assets	(23,166		)	(19,659		)	(19,609		)
Amortization of actuarial loss	2,346			1,458			—
Net pension benefit	$	(688	)	$	(1,160	)	$	(2,804	)

Net Loss Recognized in Other Comprehensive Income

The net loss related to the U.K. Pension Plan, which is recognized net of tax in Other Comprehensive Income (Loss), is generally the result of: (i) actual results being different from previous actuarial assumptions (for example, the expected return on plan assets) and/or (ii) changes in actuarial assumptions between balance sheet dates (for example, the discount rate). In 2014 and 2013, the net loss related to the U.K. Pension Plan was ($9.8) million and ($4.1) million, respectively.

Net Loss Included in Accumulated Other Comprehensive Loss

Net gains and (losses) related to the U.K. Pension Plan recognized in Other Comprehensive Income are recorded net of tax in the Shareholders' Equity section of the Consolidated Balance Sheets within Accumulated Other Comprehensive Loss. If the amount recorded in Accumulated Other Comprehensive Loss exceeds 10% of the greater of (i) the market-related value of plan assets or (ii) the benefit obligation, that excess amount is amortized as a component of future net pension expense or benefit over the average expected remaining service period of active plan participants, which is approximately 11.7 years. The market-related value of plan assets adjusts the market value of plan assets by recognizing changes in fair value over a period of five years. As of December 31, 2014 and 2013, the net loss related to the U.K. Pension Plan recorded in Accumulated Other Comprehensive Loss was ($44) million and ($38.6) million, respectively. It is expected that approximately $4 million ($3.2 million, pre-tax) of the ($44) million net loss will be recognized as a component of the net pension expense for the year ended December 31, 2015.

Assumptions

In 2014, 2013, and 2012, the following assumptions were used in determining the benefit obligation and net pension benefit related to the U.K. Pension Plan:



Benefit Obligation	2014	2013
Weighted average discount rate	3.50%	4.40%
Weighted average rate of compensation increase	4.10%	4.60%



Net Pension Benefit	2014	2013	2012
Weighted average discount rate	4.40%	4.40%	4.80%
Weighted average rate of compensation increase	4.60%	4.00%	5.00%
Weighted average expected long-term rate of return on plan assets	6.10%	6.20%	6.30%

The discount rate represents the approximate weighted average rate at which the obligations of the U.K. Pension Plan could be effectively settled and is based on a yield curve for a selection of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual benefit payment dates.

The assumption for future annual compensation increases is determined after considering historical salary data for Sotheby's U.K. employees and management's expectations for future salary growth, as well as current economic data for inflation.

The expected long-term rate of return is weighted according to the composition of invested assets and is based on expected future appreciation, as well as dividend and interest yields currently available in the equity and bond markets. In particular, the expected rate of return for growth assets represents management's estimate of median annualized returns by asset class. The expected rate of return on debt securities is based on interest yields currently available on long-dated U.K. government bonds and highly-rated corporate bonds. No allowance is made in the expected rate of return for potential market out-performance by fund managers.

Plan Assets

The investment policy for the U.K. Pension Plan is established by the Trustees in consultation with the management of Sotheby’s. The Trustees’ investment objective is to maximize the return on assets while controlling the level of risk so as to ensure that sufficient assets are available to pay participants’ benefits as and when they arise. In order to avoid an undue concentration of risk, a diverse spread of assets is held within the portfolio. The diversification is both within and across asset categories. Target allocation percentages are established for different categories within each asset class; actual allocation percentages are permitted to fall within a reasonable range of these targets. In setting specific asset allocation targets, the Trustees take advice as required from professional investment advisors and require that the majority of the assets be realizable at short notice.

In the first quarter of 2014, the Trustees notified management that they are altering the asset allocation so that approximately 60% is allocated to growth assets and approximately 40% is allocated to debt securities and cash. A small holding in real estate was retained, which is not subject to this allocation methodology. This change in asset allocation, which takes into account the funded status of the plan and the age profile of participants, is intended to reduce the level of risk and volatility associated with the U.K. Pension Plan while minimizing the necessity for significant future deficit contributions from the Company. Accordingly, the investment strategy through December 31, 2014 included a target allocation of approximately 60% growth assets and approximately 40% debt securities and cash.

The investment managers for the U.K. Pension Plan have full discretion in making investment decisions, subject to broad guidelines established by the Trustees. It is the Trustees’ policy not to invest in shares of Sotheby’s or any of its subsidiaries. The performance of the investment managers is benchmarked against suitable indices.

The table below presents the fair value of U.K. Pension Plan assets, by investment category, as of December 31, 2014 and 2013 (in thousands of dollars):



December 31	2014		% of Total		2013		% of Total
Growth assets	$	247,393	60.2	%	$	280,019	70.5	%
Debt securities:
Corporate	37,929		9.2	%	30,774		7.7	%
Index-linked	120,507		29.3	%	82,619		20.8	%
Total debt securities	158,436		38.6	%	113,393		28.5	%
Real estate mutual funds	2,976		0.7	%	2,746		0.7	%
Cash and cash equivalents	2,123		0.5	%	1,311		0.3	%
Total fair value of plan assets	$	410,928			$	397,469

The assets of the U.K. Pension Plan, which are measured at fair value, are classified and disclosed according to one of the following categories:


•	Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 1 inputs generally provide the most reliable evidence of fair value.


•	Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value may be determined through the use of models or other valuation methodologies.


•	Level 3—Pricing inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.

The table below provides fair value measurement information for the U.K. Pension Plan assets as of December 31, 2014 (in thousands of dollars):



			Fair Value Measurements Using:
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Growth assets	$	247,393	$	176,219	$	71,174	$	—
Debt securities:
Corporate	37,929		12,705		25,224		—
Index-linked	120,507		120,507		—		—
Total debt securities	158,436		133,212		25,224		—
Real estate mutual funds	2,976		—		2,976		—
Cash and cash equivalents	2,123		2,123		—		—
Total fair value of plan assets	$	410,928	$	311,554	$	99,374	$	—

As of December 31, 2014, the following U.K. Pension Plan assets are classified as Level 1 fair value measurements:

Growth Assets—Includes investments in publicly-traded mutual funds and other publicly-traded stocks, the fair values of which are based on exchange quoted prices in active markets.

Debt Securities—Includes investments in publicly-traded bond mutual funds and other publicly-traded bonds, the fair values of which are based on exchange quoted prices in active markets.

Cash and Cash Equivalents—Includes investments in cash and money market instruments that are highly liquid and for which book value approximates fair value.

As of December 31, 2014, the following U.K. Pension Plan assets are classified as Level 2 fair value measurements:

Growth Assets—Includes investments in pooled funds which do not have directly observable quoted market prices, but for which the underlying value is determined by publicly-traded stocks that have directly observable exchange quoted prices in active markets.

Debt Securities—Includes investments in pooled funds which do not have directly observable quoted market prices, but for which the underlying value is determined by publicly-traded bonds that have directly observable exchange quoted prices in active markets.

Real Estate Mutual Funds—Includes investments in real estate mutual funds, the fair value of which are based on directly and indirectly observable real estate prices, including comparable prices.

Estimated Future Benefit Payments

Estimated future benefit payments related to the U.K. Pension Plan, which reflect expected future service, as appropriate, are as follows (in thousands of dollars):



Year	Benefit Payments
2015	$	9,288
2016	$	11,854
2017	$	11,022
2018	$	11,962
2019	$	11,664
2020 to 2024	$	70,386

Contributions

In 2014, Sotheby’s contributed $2.7 million to the U.K. Pension Plan. Sotheby's currently expects to contribute approximately $2.2 million to the U.K. Pension Plan in 2015.