NOTE 17. PENSION BENEFITS

The Company sponsored two qualified defined benefit pension plans which merged on December 31, 2012 (the “Pension Plan”). The Pension Plan covers approximately 3,100 retired and 2,800 active employees. The Pension Plan is generally non-contributory, but participation requires or required some employees to contribute 3% of pay, as defined, per year. Benefits for participants who are or were required to contribute to the Pension Plan are based on compensation during plan participation and the number of years of participation. Benefits for the vast majority of participants who are not required to contribute to the Pension Plan are based on years of service and final average pay, as defined. Prior to the merger of the plans, participants in one of the plans were no longer accruing benefits and their benefits were frozen. The Company funds the Pension Plan in accordance with the requirements of ERISA.

NOTE 17. PENSION BENEFITS (Continued)

Changes in Fair Value of Plan Assets and Changes in Projected Benefit Obligation for the years ended December 31, 2012 and 2011 were:



DOLLARS IN MILLIONS
DOLLARS IN MILLIONS	2012			2011
Fair Value of Plan Assets at Beginning of Year	$	441.3		$	352.7
Actual Return on Plan Assets	38.0			25.6
Employer Contributions	—			83.7
Plan Participants’ Contributions	—			0.1
Benefits Paid	(21.5		)	(20.4		)
Settlement Benefits	(0.2		)	(0.4		)
Fair Value of Plan Assets at End of Year	457.6			441.3
Benefit Obligation at Beginning of Year	499.2			433.1
Service Cost	10.8			10.2
Interest Cost	22.4			22.9
Plan Participants’ Contributions	—			0.1
Benefits Paid	(21.5		)	(20.4		)
Settlement Benefits	(0.2		)	(0.4		)
Actuarial Losses	43.2			53.7
Benefit Obligations at End of Year	553.9			499.2
Funded Status—Benefit Obligation in Excess of Plan Assets	$	(96.3	)	$	(57.9	)
Amount Recognized in Accumulated Other Comprehensive Income:
Accumulated Actuarial Loss	$	(166.4	)	$	(150.4	)
Prior Service Cost	0.1			0.2
Amount Recognized in Accumulated Other Comprehensive Income	$	(166.3	)	$	(150.2	)

Accumulated Benefit Obligation	$	531.3		$	480.5

The measurement dates of the assets and liabilities at end of year presented in the preceding table under the headings, “2012” and “2011” were December 31, 2012 and December 31, 2011, respectively.

For one of the plans, the accumulated benefit obligation exceeded the value of plan assets at December 31, 2011. The Projected Benefit Obligation, Accumulated Benefit Obligation and Fair Value of Plan Assets was $496.8 million, $478.1 million and $438.7 million, respectively, at December 31, 2011 for such plan.

The actuarial assumptions used to develop the components of the Projected Benefit Obligation at December 31, 2012 and 2011 were:

Weighted-average asset allocations at December 31, 2012 and 2011 by asset category were:



ASSET CATEGORY	2012		2011
Cash and Short-term Investments	12	%	11	%
Corporate Bonds and Notes	33		31
Common and Preferred Stocks	31		36
Exchange Traded Funds	17		12
Other Assets	7		10
Total	100	%	100	%

NOTE 17. PENSION BENEFITS (Continued)

The investment objective of the Pension Plan is to produce current income and long-term capital growth through a combination of equity and fixed income investments which, together with appropriate employer contributions and any required employee contributions, is adequate to provide for the payment of the benefit obligations of the Pension Plan. The assets of the Pension Plan may be invested in both fixed income and equity investments. Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-cap, mid-cap and small-cap stocks, and may also include investments in investment companies and Kemper common stock (subject to Section 407 and other requirements of ERISA). The Pension Plan has not invested in Kemper common stock.

The trust investment committee for the Pension Plan, along with its third party fiduciary advisor, periodically reviews the performance of the Pension Plan’s investments and asset allocation. Several external investment managers, one of which is Fayez Sarofim & Co. (“FS&C”), manage the equity investments of the trust for the Pension Plan. One of Kemper’s directors, Mr. Fayez Sarofim, is Chairman of the Board, Chief Executive Officer and the majority shareholder of FS&C, a registered investment advisory firm (see Note 24, “Related Parties,” to the Consolidated Financial Statements). Each manager is allowed to exercise investment discretion, subject to limitations, if any, established by the trust investment committee for the Pension Plan. An independent fiduciary had sole investment discretion with respect to shares of Intermec common stock contributed by the Company to one of the pension plans in 2011 until such shares were fully disposed of in 2012. All other investment decisions are made by the Company, subject to general guidelines as set by the trust investment committee for the Pension Plan.

The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Company’s expectations of future returns for the Pension Plan’s investments, based on target allocations of the Pension Plan’s investments. Additionally, the Company considers historical returns on comparable fixed income investments and equity investments and adjusts its estimate as deemed appropriate.

Fair value measurements for the Pension Plans’ assets at December 31, 2012 are summarized below:



DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Dec. 31, 2012
Fixed Maturities:
U.S. Government and Government Agencies and Authorities	$	6.1	$	—	$	—	$	6.1
States and Political Subdivisions	—		3.3		—		3.3
Corporate Bonds and Notes	—		142.7		—		142.7
Equity Securities:
Preferred Stocks:
Finance, Insurance and Real Estate	—		3.4		—		3.4
Common Stocks:
Manufacturing	82.2		5.6		—		87.8
Other Industries	48.2		0.7		—		48.9
Other Equity Interests:
Exchange Traded Funds	79.6		—		—		79.6
Limited Liability Companies and Limited Partnerships	—		—		26.9		26.9
Short-term Investments	55.8		—		—		55.8
Receivables and Other	2.5		—		0.6		3.1
Total	$	274.4	$	155.7	$	27.5	$	457.6

NOTE 17. PENSION BENEFITS (Continued)

Additional information pertaining to the changes in the fair value of the Pension Plans’ assets classified as Level 3 for the year ended December 31, 2012 is presented below:



DOLLARS IN MILLIONS	Corporate Bonds			Other Equity Interests			Receivables and Other			Total
Balance at Beginning of Year	$	1.0		$	37.2		$	3.2		$	41.4
Return on Plan Assets Held	—			1.7			0.1			1.8
Purchases, Sales and Settlements, Net	—			(12.0		)	(2.7		)	(14.7		)
Transfer out of Level 3	(1.0		)	—			—			(1.0		)
Balance at December 31, 2012	$	—		$	26.9		$	0.6		$	27.5

Fair value measurements for the Pension Plans’ assets at December 31, 2011 are summarized below:



DOLLARS IN MILLIONS	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value Dec. 31, 2011
Fixed Maturities:
States and Political Subdivisions	$	—	$	3.1	$	—	$	3.1
Corporate Bonds and Notes	—		135.4		1.0		136.4
Equity Securities:
Common Stocks:
Intermec	40.2		—		—		40.2
Manufacturing	74.4		4.2		—		78.6
Other Industries	38.4		—		—		38.4
Other Equity Interests:
Exchange Traded Funds	53.6		—		—		53.6
Limited Liability Companies and Limited Partnerships	—		—		37.2		37.2
Short-term Investments	47.7		—		—		47.7
Receivables and Other	2.9		—		3.2		6.1
Total	$	257.2	$	142.7	$	41.4	$	441.3

Additional information pertaining to the changes in the fair value of the Pension Plans’ assets classified as Level 3 for the year ended December 31, 2011 is presented below:



DOLLARS IN MILLIONS	Corporate Bonds		Other Equity Interests			Receivables and Other			Total
Balance at Beginning of Year	$	—	$	41.5		$	3.7		$	45.2
Return on Plan Assets Held	—		1.7			—			1.7
Purchases, Sales and Settlements, Net	—		(6.0		)	(0.5		)	(6.5		)
Transfers into Level 3	1.0		—			—			1.0
Balance at December 31, 2011	$	1.0	$	37.2		$	3.2		$	41.4

NOTE 17. PENSION BENEFITS (Continued)

The components of Comprehensive Pension Expense for the years ended December 31, 2012, 2011 and 2010 were:



DOLLARS IN MILLIONS	2012			2011			2010
Service Cost Earned During the Year	$	10.8		$	10.2		$	9.0
Interest Cost on Projected Benefit Obligation	22.4			22.9			22.4
Expected Return on Plan Assets	(29.8		)	(24.4		)	(23.7		)
Net Amortization and Deferral	18.8			9.4			2.3
Settlements	0.3			—			—
Pension Expense Recognized	22.5			18.1			10.0
Unrecognized Pension Loss Arising During the Year	34.8			52.4			23.6
Amortization of Accumulated Unrecognized Pension Loss	(18.8		)	(9.4		)	(2.3		)
Comprehensive Pension Expense	$	38.5		$	61.1		$	31.3

The Company estimates that Pension Expense for the year ended December 31, 2013 will include expense of $23.9 million resulting from the amortization of the related accumulated actuarial loss included in Accumulated Other Comprehensive Income at December 31, 2012.

Total Pension Expense Recognized as presented in the preceding table includes service cost benefits earned and reported in discontinued operations of $0.5 million, $0.6 million and $0.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The actuarial assumptions used to develop the components of the Pension Expense for the years ended December 31, 2012, 2011 and 2010 were:



	2012		2011		2010
Discount Rate	4.60	%	5.35	%	6.00	%
Rate of Increase in Future Compensation Levels	3.27		2.47		2.88
Expected Long Term Rate of Return on Plan Assets	7.00		7.00		7.00

On September 14, 2011, the Company made a voluntary contribution of $83.7 million to its defined benefit pension plan. The contribution consisted of $32.2 million in cash and 7,309,764 shares of Intermec common stock with a fair value of $51.5 million on the date of contribution. On May 23, 2011, the Company requested a waiver from the U.S. Department of Labor (“DOL”) related to the prohibited transaction rules under ERISA and the Internal Revenue Code for the one-time in-kind contribution of the shares of Intermec common stock. On January 19, 2012, the DOL granted relief, from the prohibited transaction rules retroactive to September 1, 2011.

The Company does not expect that it will be required to contribute to its Pension Plan in 2013, but could make a voluntary contribution pursuant to the maximum funding limits under ERISA.

The following benefit payments (net of participant contributions), which consider expected future service, as appropriate, are expected to be paid:



DOLLARS IN MILLIONS	Years Ending December 31,
DOLLARS IN MILLIONS	2013		2014		2015		2016		2017		2018-2022
Pension Benefits	$	22.7	$	23.9	$	25.0	$	26.2	$	27.4	$	155.3

The Company also sponsors a non-qualified supplemental defined benefit pension plan (the “Supplemental Plan”). The unfunded liability related to the Supplemental Plan was $24.0 million and $21.7 million at December 31, 2012 and 2011, respectively. Pension expense for the Supplemental Plan was $1.8 million, $3.3 million and $3.1 million in 2012, 2011 and 2010, respectively. An actuarial loss of $1.3 million before tax and an actuarial gain of $2.9 million before tax is included Other Comprehensive Income for the years ended December 31, 2012 and 2011, respectively.

NOTE 17. PENSION BENEFITS (Continued)

The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $7.8 million, $7.3 million and $6.8 million in 2012, 2011 and 2010, respectively. Under these plans, the participants have several investment alternatives, including Kemper’s common stock held through the Kemper Employee Stock Ownership Plan (“ESOP”) Fund and the Dreyfus Appreciation Fund. FS&C is a sub-investment advisor of the Dreyfus Appreciation Fund. One of Kemper’s directors, Mr. Fayez Sarofim, is the Chairman of the Board, Chief Executive Officer and majority shareholder of FS&C (see Note 24, “Related Parties,” to the Consolidated Financial Statements). The fair value of participants’ investments in Kemper’s ESOP Fund was $15.0 million, or 5.0% of the total investments in the defined contribution benefit plans at December 31, 2012. The fair value of participants’ investments in the Dreyfus Appreciation Fund was $20.1 million, or 6.7% of the total investments in the defined contribution benefit plans at December 31, 2012.

Discount Rate

Rate of Increase in Future Compensation Levels