PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company provides defined-benefit pension, health care and life insurance benefits upon retirement for certain full-time employees. Pension benefits are provided under the Rowan Pension Plan and the Restoration Plan of Rowan Companies, Inc. (the “Rowan SERP”), and health care and life insurance benefits are provided under the Retiree Life & Medical Supplemental Plan of Rowan Companies, Inc.

The following table presents the changes in benefit obligations and plan assets for the years ended December 31 and the funded status and weighted-average assumptions used to determine the benefit obligation at each year end (dollars in thousands):



	2014									2013
	Pension benefits			Other benefits			Total			Pension benefits			Other benefits			Total
Projected benefit obligations:
Balance, January 1	$	679,880		$	66,832		$	746,712		$	733,355		$	76,639		$	809,994
Interest cost	32,680			3,025			35,705			29,984			3,006			32,990
Service cost	14,573			1,067			15,640			12,309			1,445			13,754
Actuarial (gain) loss	114,030			6,779			120,809			(58,907		)	(10,788		)	(69,695		)
Plan amendments	259			—			259			3,585			—			3,585
Plan settlements	—			—			—			—			—			—
Exchange rate changes	(1,215		)	—			(1,215		)	—			—			—
Benefits paid	(32,254		)	(4,125		)	(36,379		)	(40,446		)	(3,470		)	(43,916		)
Balance, December 31	807,953			73,578			881,531			679,880			66,832			746,712

Plan assets:
Fair value, January 1	542,449			—			542,449			494,432			—			494,432
Actual return	27,596			—			27,596			69,603			—			69,603
Employer contributions	54,834			—			54,834			18,860			—			18,860
Plan settlements	—			—			—			—			—			—
Exchange rate changes	(665		)	—			(665		)	—			—			—
Benefits paid	(32,254		)	—			(32,254		)	(40,446		)	—			(40,446		)
Fair value, December 31	591,960			—			591,960			542,449			—			542,449
Net benefit liabilities	$	(215,993	)	$	(73,578	)	$	(289,571	)	$	(137,431	)	$	(66,832	)	$	(204,263	)

Amounts recognized in Consolidated Balance Sheet:
Accrued liabilities	$	(21,839	)	$	(4,380	)	$	(26,219	)	$	(45,599	)	$	(4,060	)	$	(49,659	)
Other liabilities (long-term)	(194,154		)	(69,198		)	(263,352		)	(91,832		)	(62,772		)	(154,604		)
Net benefit liabilities	$	(215,993	)	$	(73,578	)	$	(289,571	)	$	(137,431	)	$	(66,832	)	$	(204,263	)

Accumulated contributions in excess of (less than) net periodic benefit cost	$	124,248		$	(75,522	)	$	48,726		$	90,708		$	(75,825	)	$	14,883

Amounts not yet reflected in net periodic benefit cost:
Actuarial (loss) gain	(360,753		)	1,944			(358,809		)	(252,794		)	8,961			(243,833		)
Prior service credit	20,512			—			20,512			24,655			32			24,687
Total accumulated other comprehensive loss	(340,241		)	1,944			(338,297		)	(228,139		)	8,993			(219,146		)
Net benefit liabilities	$	(215,993	)	$	(73,578	)	$	(289,571	)	$	(137,431	)	$	(66,832	)	$	(204,263	)

Weighted-average assumptions:
Discount rate	4.12		%	3.95		%				4.58		%	4.74		%
Rate of compensation increase	4.15		%							4.15		%

The projected benefit obligations for pension benefits in the preceding table reflect the actuarial present value of benefits accrued based on services rendered to date and include the estimated effect of future salary increases. The accumulated benefit obligations, which are presented below for all plans in the aggregate at December 31, are based on services rendered to date, but exclude the effect of future salary increases (in thousands):



	2014		2013
Accumulated benefit obligation	$	801,749	$	676,320

Each of the Company’s pension plans has a benefit obligation that exceeds the fair value of plan assets.

The Company estimates the following amounts, which are classified in accumulated other comprehensive loss, a component of shareholders’ equity, will be recognized as net periodic benefit cost in 2015 (in thousands):



	Pension benefits			Other retirement benefits		Total
Actuarial (loss) gain	$	(25,587	)	$	—	$	(25,587	)
Prior service credit	4,519			—		4,519
Total amortization	$	(21,068	)	$	—	$	(21,068	)

In 2012 a pension plan that was assumed by the Company in connection with the sale of its former manufacturing operations made lump sum payments totaling $19.0 million, which exceeded the threshold that required the recognition of a settlement loss in the amount of $8.7 million. Such amount is classified within material charges and other operating expenses on the Consolidated Statements of Income.

The components of net periodic pension cost and the weighted-average assumptions used to determine net cost were as follows (dollars in thousands):



	2014			2013			2012
Service cost	$	14,573		$	12,309		$	10,742
Interest cost	32,680			29,984			30,613
Expected return on plan assets	(41,592		)	(38,305		)	(36,958		)
Recognized actuarial loss	19,861			28,454			25,504
Amortization of prior service cost	(4,507		)	(4,736		)	(4,647		)
Settlement loss recognized	—			—			8,742
Net periodic pension cost	$	21,015		$	27,706		$	33,996
Less: Discontinued operations	—			—			(402		)
Continuing operations	$	21,015		$	27,706		$	33,594

Discount rate	4.83		%	4.16		%	4.58		%
Expected return on plan assets	8.00		%	8.00		%	8.00		%
Rate of compensation increase	4.15		%	4.15		%	4.15		%

The components of net periodic cost of other postretirement benefits and the weighted average discount rate used to determine net cost were as follows (dollars in thousands):



	2014			2013			2012
Service cost	$	1,067		$	1,445		$	1,660
Interest cost	3,025			3,006			3,501
Amortization of transition obligation	—			—			475
Amortization of prior service cost	(32		)	(147		)	(147		)
Amortization of net (gain) loss	(237		)	—			—
Net periodic cost of other postretirement benefits	$	3,823		$	4,304		$	5,489

Discount rate	4.74		%	3.89		%	4.46		%

The assumed health care cost trend rates used to measure the expected cost of retirement health benefits was 7.0% for 2015, gradually decreasing to 4.5% for 2026 and thereafter. A one-percentage-point change in the assumed health care cost trend rates would change the reported amounts as follows (in thousands):



	One-percentage-point change
	Increase		Decrease
Effect on total service and interest cost components for the year	$	269	$	(229	)
Effect on postretirement benefit obligation at year-end	3,570		(3,097		)

The pension plans’ investment objectives for fund assets are: to achieve over the life of the plans a return equal the plans’ expected investment return or the inflation rate plus 3%, whichever is greater; to invest assets in a manner such that contributions are minimized and future assets are available to fund liabilities; to maintain liquidity sufficient to pay benefits when due; and to diversify among asset classes so that assets earn a reasonable return with an acceptable level of risk. The plans employ several active managers with proven long-term records in their specific investment discipline.

Target allocations among asset categories and the fair values of each category of plan assets as of December 31, 2014 and 2013, classified by level within the US GAAP fair value hierarchy is presented below. The plans will periodically reallocate assets in accordance with the allocation targets, after giving consideration to the expected level of cash required to pay current benefits and plan expenses (dollars in thousands):



	Target range	Total		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)
December 31, 2014:
Equities:	53% to 69%
U.S. large cap	22% to 28%	$	159,541	$	—	$	159,541	$	—
U.S. small cap	4% to 10%	38,106		—		38,106		—
International all cap	21% to 29%	135,947		—		135,947		—
International small cap	2% to 8%	29,736		—		29,736		—
Real estate equities	0% to 13%	45,758		—		45,758		—
Fixed income:	25% to 35%
Cash and equivalents	0% to 10%	8,416		1		8,415		—
Aggregate	9% to 19%	85,412		—		85,412		—
Core plus	9% to 19%	86,325		86,325		—		—
Group annuity contracts		2,719		—		2,719		—
Total		$	591,960	$	86,326	$	505,634	$	—

December 31, 2013:
Equities:	53% to 69%
U.S. large cap	22% to 28%	$	125,061	$	—	$	125,061	$	—
U.S. small cap	4% to 10%	36,330		—		36,330		—
International all cap	21% to 29%	118,530		—		118,530		—
International small cap	2% to 8%	31,270		—		31,270		—
Real estate equities	0% to 13%	40,055		—		40,055		—
Fixed income:	25% to 35%
Cash and equivalents	0% to 10%	59,301		—		59,301		—
Aggregate	9% to 19%	66,074		—		66,074		—
Core plus	9% to 19%	65,828		65,828		—		—
Total		$	542,449	$	65,828	$	476,621	$	—

Assets in the U.S. equities category include investments in common and preferred stocks (and equivalents such as American Depository Receipts and convertible bonds) and may be held through separate accounts, commingled funds or an institutional mutual fund. Assets in the international equities category include investments in a broad range of international equity securities, including both developed and emerging markets, and may be held through a commingled or institutional mutual fund. The real estate category includes investments in pooled and commingled funds whose objectives are diversified equity investments in income-producing properties. Each real estate fund is intended to provide broad exposure to the real estate market by property type, geographic location and size and may invest internationally. Securities in both the aggregate and core plus fixed income categories include U.S. government, corporate, mortgage- and asset-backed securities and Yankee bonds, and both categories target an average credit rating of “A” or better at all times. Individual securities in the aggregate fixed income category must be investment grade or above at the time of purchase, whereas securities in the core plus category may have a rating of “B” or above. Additionally, the core plus category may invest in non-U.S. securities. Assets in the aggregate and core plus fixed income categories are held primarily through a commingled fund and an institutional mutual fund, respectively. Group annuity contracts are invested in a combination of equity, real estate, bond and other investments in connection with a pension plan in Norway.

The following is a description of the valuation methodologies used for the pension plan assets at December 31, 2014 and 2013:


•	Fair values of all U.S. equity securities, the international all cap equity securities and aggregate fixed income securities categorized as Level 2 were held in commingled funds which were valued daily based on a net asset value.


•	Fair value of international small cap equity securities categorized as Level 2 were held in a limited partnership fund which was valued monthly based on a net asset value.


•	The real estate categorized as Level 2 was held in two accounts (a commingled fund and a limited partnership). The assets in the commingled fund were valued monthly based on a net asset value and the assets in the limited partnership were valued quarterly based on a net asset value.


•	Cash and equivalents categorized as Level 2 were valued at cost, which approximates fair value.


•	Fair value of mutual fund investments in core plus fixed income securities categorized as Level 1 were based on quoted market prices which represent the net asset value of shares held.

To develop the expected long-term rate of return on assets assumption, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plans, which was reduced at 7.45% at December 31, 2014, from 8% at December 31, 2013.

The Company currently expects to contribute approximately $22 million to its pension plans in 2015 and to directly pay other postretirement benefits of approximately $4 million, net of estimated Medicare subsidy receipts.

Estimated future annual benefit payments from plan assets are presented below. Such amounts are based on existing benefit formulas and include the effect of future service (in thousands):



	Pension benefits		Other postretirement benefits
Year ended December 31,
2015	$	66,000	$	4,690
2016	40,420		4,940
2017	40,950		5,130
2018	42,520		5,370
2019	43,730		5,640
2020 through 2023	236,460		25,220

The Company sponsors defined contribution plans covering substantially all employees. Employer contributions to such plans are expensed as incurred and totaled $19.0 million in 2014, $14.3 million in 2013 and $9.6 million in 2012.