Pension

We have pension plans covering the majority of our employees. Benefits generally are based on compensation and service for salaried employees and job grade and length of service for hourly employees. Our policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. In addition, we have an unfunded supplemental employee retirement plan (SERP) that covers salaried U.S.-based employees of Libbey hired before January 1, 2006. The U.S. pension plans cover the salaried U.S.-based employees of Libbey hired before January 1, 2006 and most hourly U.S.-based employees (excluding employees hired at Shreveport after 2008 and at Toledo after September 30, 2010). The non-U.S. pension plans cover the employees of our wholly owned subsidiaries in the Netherlands and Mexico. The plan in Mexico is not funded.

Effect on Operations

The components of our net pension expense, including the SERP, are as follows:



Year ended December 31, (dollars in thousands)	U.S. Plans									Non-U.S. Plans									Total
Year ended December 31, (dollars in thousands)	2011			2010			2009			2011			2010			2009			2011			2010			2009
Service cost (benefits earned during the period)	$	5,491		$	5,341		$	5,050		$	1,553		$	1,603		$	1,354		$	7,044		$	6,944		$	6,404
Interest cost on projected benefit obligation	16,057			15,896			15,623			4,981			4,557			4,147			21,038			20,453			19,770
Expected return on plan assets	(17,173		)	(16,683		)	(17,573		)	(2,299		)	(2,463		)	(2,530		)	(19,472		)	(19,146		)	(20,103		)
Amortization of unrecognized:
Prior service cost (credit)	2,163			2,328			2,242			172			2			(207		)	2,335			2,330			2,035
Acturial loss	4,661			3,621			960			493			417			375			5,154			4,038			1,335
Transition obligations	—			—			—			125			122			113			125			122			113
Settlement charge	—			—			3,661			58			47			—			58			47			3,661
Pension expense	$	11,199		$	10,503		$	9,963		$	5,083		$	4,285		$	3,252		$	16,282		$	14,788		$	13,215

In 2009, we incurred pension settlement charges of $3.7 million. The pension settlement charges were triggered by excess lump sum distributions taken by employees, which required us to record unrecognized gains and losses in our pension plan accounts.

Actuarial Assumptions

The assumptions used to determine the benefit obligations were as follows:

U.S. Plans

Non-U.S. Plans

2011

2010

2011

2010

Discount rate

5.00% to 5.22%

5.50% to 5.76%

5.80% to 8.25%

5.40% to 8.25%

Rate of compensation increase

2.25% to 4.50%

2.00% to 4.30%

The assumptions used to determine net periodic pension costs were as follows:



	U.S. Plans			Non-U.S. Plans
	2011	2010	2009	2011	2010	2009
Discount rate	5.50% to 5.76%	5.62% to 5.96%	6.41% to 6.48%	5.40% to 8.25%	5.50% to 8.50%	5.70% to 8.50%
Expected long-term rate of return on plan assets	8.00%	8.00%	8.25%	4.80%	5.75%	6.00%
Rate of compensation increase	2.25% to 4.50%	2.25% to 4.50%	2.63% to 5.25%	2.00% to 4.30%	2.00% to 4.30%	2.00% to 4.30%

The discount rate enables us to estimate the present value of expected future cash flows on the measurement date. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments at our December 31 measurement date. The discount rate at December 31 is used to measure the year-end benefit obligations and the earnings effects for the subsequent year. A higher discount rate decreases the present value of benefit obligations and decreases pension expense.

To determine the expected long-term rate of return on plan assets for our funded plans, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. The expected long-term rate of return on plan assets at December 31^st is used to measure the earnings effects for the subsequent year. The assumed long-term rate of return on assets is applied to a calculated value of plan assets that recognizes gains and losses in the fair value of plan assets compared to expected returns over the next five years. This produces the expected return on plan assets that is included in pension expense. The difference between the expected return and the actual return on plan assets is deferred and amortized over five years. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension expense (income).

Future benefits are assumed to increase in a manner consistent with past experience of the plans, which, to the extent benefits are based on compensation, includes assumed compensation increases as presented above. Amortization included in net pension expense is based on the average remaining service of employees.

We account for our defined benefit pension plans on an expense basis that reflects actuarial funding methods. The actuarial valuations require significant estimates and assumptions to be made by management, primarily with respect to the discount rate and expected long-term return on plan assets. These assumptions are all susceptible to changes in market conditions. The discount rate is based on a selected settlement portfolio from a universe of high quality bonds. In determining the expected long-term rate of return on plan assets, we consider historical market and portfolio rates of return, asset allocations and expectations of future rates of return. We evaluate these critical assumptions on our annual measurement date of December 31st. Other assumptions involving demographic factors such as retirement age, mortality and turnover are evaluated periodically and are updated to reflect our experience. Actual results in any given year often will differ from actuarial assumptions because of demographic, economic and other factors.

Considering 2011 results, the disclosure below provides a sensitivity analysis of the impact that changes in the significant assumptions would have on 2011 and 2012 pension expense:



Assumption (dollars in thousands)		Estimated Effect on Annual Expense
Assumption (dollars in thousands)	Percentage Point Change	2011		2012
Discount rate	1.0 percent change	$	4,000	$	4,000
Long-term rate of return on assets	1.0 percent change	$	2,400	$	2,400

Projected Benefit Obligation (PBO) and Fair Value of Assets

The changes in the projected benefit obligations and fair value of plan assets are as follows:



Year ended December 31, (dollars in thousands)	U.S. Plans						Non-U.S. Plans						Total
Year ended December 31, (dollars in thousands)	2011			2010			2011			2010			2011			2010
Change in projected benefit obligation:
Projected benefit obligation, beginning of year	$	289,725		$	278,801		$	73,328		$	69,201		$	363,053		$	348,002
Service Cost	5,491			5,341			1,553			1,603			7,044			6,944
Interest cost	16,057			15,896			4,981			4,557			21,038			20,453
Exchange rate fluctuations	—			—			(5,044		)	(1,334		)	(5,044		)	(1,334		)
Actuarial loss (gain)	18,499			4,238			(2,499		)	816			16,000			5,054
Plan participants' contributions	—			—			1,184			1,281			1,184			1,281
Plan amendments	—			—			(499		)	—			(499		)	—
Benefits paid	(14,083		)	(14,551		)	(4,014		)	(2,796		)	(18,097		)	(17,347		)
Projected benefit obligation, end of year	$	315,689		$	289,725		$	68,990		$	73,328		$	384,679		$	363,053
Change in fair value of plan assets:
Fair value of plan assets, beginning of year	$	206,087		$	185,930		$	51,882		$	49,815		$	257,969		$	235,745
Actual return on plan assets	7,041			25,590			358			3,667			7,399			29,257
Exchange rate fluctuations	—			—			(1,361		)	(3,764		)	(1,361		)	(3,764		)
Employer contributions	21,980			9,118			4,955			3,679			26,935			12,797
Plan participants' contributions	—			—			1,184			1,281			1,184			1,281
Benefits paid	(14,083		)	(14,551		)	(4,014		)	(2,796		)	(18,097		)	(17,347		)
Fair value of plan assets, end of year	$	221,025		$	206,087		$	53,004		$	51,882		$	274,029		$	257,969

Funded ratio	70.0		%	71.1		%	76.8		%	70.8		%	71.2		%	71.1		%
Funded status and net accrued pension benefit cost	$	(94,664	)	$	(83,638	)	$	(15,986	)	$	(21,446	)	$	(110,650	)	$	(105,084	)

The current portion of the pension liability reflects the amount of expected benefit payments that are greater than the plan assets on a plan-by-plan basis. The net accrued pension benefit liability at December 31 of the respective year-ends were included in the Consolidated Balance Sheets as follows:



December 31, (dollars in thousands)	2011			2010
Non-current asset	$	17,485		$	12,767
Current liability	(5,990		)	(2,330		)
Long-term liability	(122,145		)	(115,521		)
Net accrued pension liability	$	(110,650	)	$	(105,084	)

The pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2011 and 2010, are as follows:



Year ended December 31, (dollars in thousands)	U.S. Plans				Non-U.S. Plans				Total
Year ended December 31, (dollars in thousands)	2011		2010		2011		2010		2011		2010
Net actuarial loss	$	111,328	$	87,357	$	6,721	$	9,097	$	118,049	$	96,454
Prior service cost	5,572		7,736		1,325		2,005		6,897		9,741
Transition obligation	—		—		229		384		229		384
Total cost	$	116,900	$	95,093	$	8,275	$	11,486	$	125,175	$	106,579

The pre-tax amounts in accumulated other comprehensive loss as of December 31, 2011, that are expected to be recognized as components of net periodic benefit cost during 2012 are as follows:



(dollars in thousands)	U.S. Plans		Non-U.S. Plans		Total
Net actuarial loss	$	7,207	$	501	$	7,708
Prior service cost	2,086		159		2,245
Transition obligation	—		95		95
Total cost	$	9,293	$	755	$	10,048

We contributed $22.0 million to the U.S. pension plans in 2011, compared to $9.1 million in 2010. We contributed $5.0 million in 2011 to the non-U.S. pension plans compared to $3.7 million in 2010. It is difficult to estimate future cash contributions, as such amounts are a function of actual investment returns, withdrawals from the plans, changes in interest rates and other factors uncertain at this time. We currently anticipate making cash contributions of approximately $27.6 million into the U.S. pension plans and approximately $3.9 million into the non-U.S. pension plans in 2012. However, it is possible that greater cash contributions may be required in 2012. Although a decline in market conditions, changes in current pension law and uncertainties regarding significant assumptions used in the actuarial valuations may have a material impact in future required contributions to our pension plans, we currently do not expect funding requirements to have a material adverse impact on current or future liquidity.

Pension benefit payment amounts are anticipated to be paid from the plans (including the SERP) as follows:



Year (dollars in thousands)	U.S. Plans		Non-U.S. Plans		Total
2012	$	22,053	$	2,854	$	24,907
2013	$	18,733	$	2,777	$	21,510
2014	$	19,249	$	3,166	$	22,415
2015	$	19,843	$	3,436	$	23,279
2016	$	20,180	$	4,279	$	24,459
2017-2021	$	107,565	$	27,267	$	134,832

Accumulated Benefit Obligation in Excess of Plan Assets

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2011 and 2010 were as follows:



December 31, (dollars in thousands)	U.S. Plans				Non-U.S. Plans				Total
December 31, (dollars in thousands)	2011		2010		2011		2010		2011		2010
Projected benefit obligation	$	315,689	$	289,725	$	33,471	$	34,213	$	349,160	$	323,938
Accumulated benefit obligation	$	310,920	$	285,551	$	29,424	$	29,632	$	340,344	$	315,183
Fair value of plan assets	$	221,025	$	206,087	$	—	$	—	$	221,025	$	206,087

Plan Asset Allocation

The asset allocation for our U.S. pension plans at the end of 2011 and 2010 and the target allocation for 2012, by asset category, are as follows:



	Target Allocation		Percent of Plan Assets at Year End
U.S. Plans Asset Category	2012		2011		2010
Equity securities	45	%	47	%	49	%
Debt securities	35	%	33	%	31	%
Real estate	5	%	5	%	5	%
Other	15	%	15	%	15	%
Total	100	%	100	%	100	%

The asset allocation for our Libbey Holland pension plans at the end of 2011 and 2010 and the target allocation for 2012, by asset category, are as follows:



	Target Allocation		Percent of Plan Assets at Year End
Non-U.S. Plan Asset Category	2012		2011		2010
Equity securities	21	%	19	%	23	%
Debt securities	63	%	64	%	61	%
Real estate	11	%	11	%	10	%
Other	5	%	6	%	6	%
Total	100	%	100	%	100	%

Our investment strategy is to control and manage investment risk through diversification across asset classes and investment styles, within established target asset allocation ranges. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. Assets will be diversified among a mix of traditional investments in equity and fixed income instruments, as well as alternative investments including real estate and hedge funds. It would be anticipated that a modest allocation to cash would exist within the plans, since each investment manager is likely to hold some cash in the portfolio with the goal of ensuring that sufficient liquidity will be available to meet expected cash flow requirements.

Our investment valuation policy is to value the investments at fair value. All investments are valued at their respective net asset values as calculated by the Trustee. Underlying equity securities, for which market quotations are readily available, are valued at the last reported readily available sales price on their principal exchange on the valuation date or official close for certain markets. Fixed income investments are valued on a basis of valuations furnished by a trustee-approved pricing service, which determines valuations for normal institutional-size trading units of such securities which are generally recognized at fair value as determined in good faith by the Trustee. Short-term investments, if any, are stated at amortized cost, which approximates fair value. The fair value of investments in real estate funds is based on valuation of the fund as determined by periodic appraisals of the underlying investments owned by the respective fund. The fair value of hedge funds is based on the net asset values provided by the fund manager. Investments in registered investment companies or collective pooled funds, if any, are valued at their respective net asset value.

The following table sets forth by level, within the fair value hierarchy established by FASB ASC Topic 820, our pension plan assets at fair value (see note 15 for further discussion of the fair value hierarchy) as of December 31, 2011 and 2010:



December 31, 2011
(dollars in thousands)	Level One		Level Two		Level Three		Total
Cash & cash equivalents	$	—	$	3,550	$	—	$	3,550
Real estate	—		11,163		5,982		17,145
Equity securities	—		113,400		—		113,400
Debt securities	—		106,955		—		106,955
Hedge funds	—		—		32,979		32,979
Total	$	—	$	235,068	$	38,961	$	274,029



December 31, 2010
(dollars in thousands)	Level One		Level Two		Level Three		Total
Cash & cash equivalents	$	—	$	3,442	$	—	$	3,442
Real estate	—		11,088		5,385		16,473
Equity securities	—		111,369		—		111,369
Debt securities	—		96,081		—		96,081
Hedge funds	—		—		30,604		30,604
Total	$	—	$	221,980	$	35,989	$	257,969

The change in fair value of Level 3 pension plan assets due to actual return on those assets was immaterial in 2011. The following is a reconciliation for which Level three inputs were used in determining fair value:



Year ended December 31, (dollars in thousands)	2011			2010
Assets classified as Level 3 at the beginning of the year	$	35,989		$	31,087
Change in unrealized (depreciation) appreciation	(1,621		)	2,912
Net purchases	4,593			1,990
Assets classified as Level 3 at the end of the year	$	38,961		$	35,989