Postretirement Benefits

12 Months Ended

Dec. 31, 2011

Postretirement Benefits

Postretirement Benefits

Note 16.   Postretirement Benefits

Pension and retiree health benefit plans

Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan (“SERP”) for certain members of executive and senior management of the Erie Insurance Group.  The pension plans provide benefits to covered individuals satisfying certain age and service requirements.  The defined benefit pension plan and SERP each provide benefits through a final average earnings formula.

We previously provided retiree health benefits in the form of medical and pharmacy health plans for eligible retired employees and eligible dependents.  In 2006, the retiree health benefit plan was curtailed by an amendment that restricted eligibility to those who attained age 60 and 15 years of service on or before July 1, 2010.

The liabilities for the plans described in this note are presented in total for all employees of the Erie Insurance Group.  The gross liability for postretirement benefits is presented in the Consolidated Statements of Financial Position as part of other liabilities.  Approximately 57% of postretirement benefit expenses are reimbursed to Indemnity from the Exchange and EFL.

Our affiliated entities are charged an allocated portion of net periodic benefit costs under the benefit plans.  For our funded pension plan, amounts are settled in cash throughout the year for affiliated entities’ share of net periodic benefit costs.  For our unfunded plans, we pay the obligations when due.  Amounts are settled in cash between affiliates when there is a payout under the unfunded plans.

The following tables set forth the assumptions used to determine benefit obligations and net periodic benefit cost at the periods ended December 31:

	Erie Insurance Group
Assumptions used to determine benefit obligations:	2011		2010		2009
Employee pension plan:
Discount rate	4.99	%	5.69	%	6.11	%
Expected return on plan assets	8.00		8.00		8.2	5
Rate of compensation increase (1)	4.15		4.15		4.1	5
SERP:
Discount rate (2)	4.99/4.	49	5.69/5.	19	6.11/5.	00
Rate of compensation increase	6.00		6.00		6.0	0
Assumptions used to determine net periodic benefit cost:
Employee pension plan:
Discount rate	5.69	%	6.11	%	6.06	%
Expected return on plan assets	8.00		8.00		8.2	5
Rate of compensation increase (1)	4.15		4.15		4.1	5
SERP:
Discount rate (2)	5.69/5.	19	6.11/5.	00	6.06/5.	00
Rate of compensation increase	6.00		6.00		6.0	0

(1)Rate of compensation increase is age-graded.  An equivalent single compensation increase rate of 4.15% in 2011, 2010 and 2009 would produce similar results.

(2) Pre-retirement/post-retirement.

The two economic assumptions that have the most impact on the postretirement benefit expense are the discount rate and the long-term rate of return on plan assets.  The discount rate assumption used to determine the benefit obligation for 2011 was 4.99% and was based upon a yield curve developed from corporate bond yield information.  The construction of these yield curves is based upon yields of corporate bonds rated Aa quality.  Target yields are developed from bonds at various maturity points and a curve is fitted to those targets.  Spot rates (zero coupon bond yields) are developed from the yield curve and used to discount benefit payment amounts associated with each future year.  The present value of plan benefits is calculated by applying the spot/discount rates to projected benefit cash flows.  A single discount rate is then developed to produce the same present value.  This represents the suggested discount rate.  The same methodology was employed to develop the 5.69% discount rate used to determine the benefit obligation for 2010.  For 2009, the discount rate assumption used to determine the benefit obligation was based upon a bond-matching study that compared projected pension plan benefit flows to the cash flows from a comparable portfolio of fixed maturity instruments rated AA- or better with a duration similar to plan liabilities.  The approach used to determine the long-term rate of return assumption is derived from expected future returns for each asset category based upon applicable indices and their historical relationships under various market conditions.  These expected future returns were then weighted based upon our target asset allocation percentages for each asset category to produce a best estimate of range of asset return results within which our long-term rate of return assumption falls.

Defined benefit pension plan and SERP

The following tables set forth:  the change in our projected benefit obligation, the change in plan assets, the funded status of the pension plans, the amounts recognized in the Consolidated Statements of Financial Position, the accumulated benefit obligation, the amounts included in accumulated other comprehensive income, before tax, that are not yet recognized as components of net periodic benefit cost and the components of net periodic benefit cost for the years ended December 31:

(in millions)	Erie Insurance Group
	2011		2010		2009
Change in projected benefit obligation:
Benefit obligation at beginning of period	$ 400		$344		$326
Service cost	17		15		15
Interest cost	23		21		19
Amendments	1		1		3
Actuarial loss (gain)	54		25		(12	)
Benefits paid	(7	)	(6	)	(4	)
Impact due to settlement	0		0		(3	)(1)
Benefit obligation at end of period	$ 488		$400		$344
Change in plan assets:
Fair value of plan assets at beginning of period	$ 328		$279		$218
Actual return (loss) on plan assets	12		41		51
Employer contributions	15		13		14
Benefits paid	(7	)	(5	)	(4	)
Fair value of plan assets at end of period	$ 348		$328		$279
Funded status at end of period	$(140	)	$ (72	)	$ (65	)
Amounts recognized in the Consolidated Statement of Financial Position
Current liabilities	$    (1	)	$    0		$    0
Noncurrent liabilities	(139	)	(72	)	(65	)
Amounts recognized	$(140	)	$ (72	)	$ (65	)
Accumulated benefit obligation, December 31,	$  363		$297		$252
Amounts included in accumulated other comprehensive income, before tax, not yet recognized as components of net periodic benefit cost:
Net actuarial loss	$  173		$110		$104
Prior service cost	6		5		5
Net amount not yet recognized	$  179		$115		$109
Components of net periodic benefit cost:
Service cost	$    17		$  15		$  15
Interest cost	23		21		19
Expected return on plan assets (2)	(27	)	(25	)	(24	)
Amortization of prior service cost	1		1		0
Recognized net actuarial loss	6		3		3
Settlement gain	0		0		(1	) (1)
Net periodic benefit expense before allocation to affiliates	$    20		$  15		$  12

(1)

In December 2007, employment agreements for certain members of executive management were signed which incorporated a payment in full of accrued SERP benefits as of December 2008 in a lump sum payment, after which time no additional SERP benefits would accrue. This resulted in a settlement gain in 2009.

(2)

The market-related value of plan assets is used to determine the expected return component of pension benefit cost. We use a four year averaging method to determine the market-related value, under which asset gains or losses that result from returns that differ from our long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a four year period. Once factored into the market-related asset value, these experience losses will be amortized over a period of 15 years, which is the average remaining service period of the employee group in the plan.

The 2011 net actuarial loss was primarily due to the change in the discount rate assumption used to measure the future benefit obligations to 4.99% in 2011 from 5.69% in 2010.  The 2010 net actuarial loss was primarily due to the change in the discount rate assumption used to measure the future benefit obligations to 5.69% in 2010 from 6.11% in 2009.  The cumulative net actuarial loss was offset in 2009 by an actuarial gain resulting from actual investment returns that were greater than expected.  Also contributing to this gain were assumption changes made based upon actual experience, such as the decrease in the assumed rate of compensation increase.  Recognition of this loss is being deferred over the subsequent four year period.

Amounts recognized in other comprehensive income for our pension plans were as follows for the years ended December 31:

(in millions)
	Erie Insurance Group
Amounts recognized in other comprehensive income for pension plans:	2011		2010
Amortization of net actuarial loss	$ (6	)	$(4	)
Amortization of prior service cost	(1	)	0
Net actuarial loss arising during the year	69		9
Amendments	1	(1)	1	(2)
Total recognized in other comprehensive income	$63		$ 6

(1)     The charges recognized as amendments were the result of factoring in the prior service cost for seven new plan participants in 2011.

(2)     The charges recognized as amendments were the result of factoring in the prior service cost for four new plan participants in 2010.

The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2012 are $11 million and $1 million, respectively.

The following table sets forth amounts of benefits expected to be paid over the next 10 years from our pension and other postretirement plans as of December 31:

(in millions)
	Erie Insurance Group
Year ending December 31,	Expected future cash flows
2012	$   9
2013	10
2014	11
2015	13
2016	15
2017 - 2021	110

The following table provides information for the defined benefit pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:

(in millions)
	Erie Insurance Group
Information for pension plans with an accumulated benefit obligation in excess of plan assets:	2011	2010
Projected benefit obligation	$488	$10
Accumulated benefit obligation	363	5
Fair value of plan assets	348	0

At December 31, 2011 the defined benefit pension plan and the SERP had an accumulated benefit obligation in excess of plan assets.  At December 31, 2010 only the SERP had an accumulated benefit obligation in excess of plan assets.

Our current policy is generally to contribute an amount equal to the greater of the IRS minimum required contribution or the target normal cost for the year plus interest to the date the contribution is made.  A $16 million contribution was made to the plan in January of 2012.

The employee pension plan utilizes a return seeking and a liability asset matching allocation strategy.  It is based upon the understanding that 1) equity investments are expected to outperform debt investments over the long-term, 2) the potential volatility of short-term returns from equities is acceptable in exchange for the larger expected long-term returns, and 3) a portfolio structured across investment styles and markets (both domestic and foreign) reduces volatility.  As a result, the employee pension plan’s investment portfolio utilizes a broadly diversified asset allocation across domestic and foreign equity and debt markets.  The investment portfolio is composed of commingled pools that are dedicated exclusively to the management of employee benefit plan assets.

Our target asset allocation percentage was 60% equity securities and 40% fixed income securities for 2011, 2010 and 2009.

The target and actual asset allocation for the portfolio is as follows for the years ended December 31:

	Erie Insurance Group
	Target asset allocation		Actual asset allocation		Actual asset allocation
	2010-2011		2011		2010
Return seeking assets:
U.S. equity index(1)	17	%	17	%	17	%
U.S. large capitalization core equity(2)	16		16		16
International risk-controlled equity(3)	15		15		15
U.S. small capitalization core equity(4)	8		8		8
International small capitalization risk-controlled equity(5)	2		2		2
Emerging markets equity(6)	2		2		2
Total return seeking assets	60	%	60	%	60	%
Liability matching assets:
Long duration fixed income(7)	16	%	16	%	16	%
Broad market fixed income(8)	15		15		15
Long duration corporate fixed income(9)	8		8		8
Institutional money market fund	1		1		1
Total liability matching assets	40	%	40	%	40	%
Total plan assets	100	%	100	%	100	%

(1)	Comprises equity index funds not actively managed that track the S&P 500.
(2)	Includes equity securities that seek to achieve excess returns relative to the S&P 500 while maintaining portfolio risk characteristics similar to the index.
(3)	Seeks long-term capital growth with an emphasis on controlling return volatility relative to an international market index.
(4)	Includes equity securities that seek to achieve excess returns relative to the Russell 2000 Index while maintaining portfolio risk characteristics similar to the index.
(5)	Seeks to provide excess returns relative to an international small cap index, while maintaining regional weights similar to the index.
(6)	Seeks long-term capital growth in securities of companies that have their principal business activities in countries in the Morgan Stanley Capital International Emerging Markets Free Index.
(7)	Seeks to generate returns that exceed the Barclays Capital U.S. Long Government/Credit Bond Index through investment-grade fixed income securities.
(8)	Seeks to generate returns that exceed the Barclays Capital U.S. Aggregate Bond Index through investment-grade fixed income securities.
(9)	Seeks to generate returns that exceed the Barclays Capital U.S. Long Corporate A or Better Index investing in U.S. corporate bonds with an emphasis on long duration bonds rated A or better.

The following tables represent the fair value measurements for the pension plan assets by major category and level of input:

	Erie Insurance Group
	At December 31, 2011
	Fair value measurements of plan assets using:
(in millions)	Total	Quoted prices in active markets for identical assets Level 1	Significant observable inputs Level 2	Significant unobservable inputs Level 3
Return seeking assets:
U.S. equity index (1)	$  58	$0	$  58	$0
U.S. large capitalization core equity (2)	54	0	54	0
International risk-controlled equity (3)	53	0	53	0
U.S. small capitalization core equity (4)	28	0	28	0
International small capitalization risk-controlled equity (5)	8	0	8	0
Emerging markets equity (6)	7	0	7	0
Liability matching assets:
Long duration fixed income (7)	55	0	55	0
Broad market fixed income (8)	53	0	53	0
Long duration corporate fixed income (9)	30	0	30	0
Institutional money market fund	2	2	0	0
Total	$348	$2	$346	$0

	Erie Insurance Group
	At December 31, 2010
	Fair value measurements of plan assets using:
(in millions)	Total	Quoted prices in active markets for identical assets Level 1	Significant observable inputs Level 2	Significant unobservable inputs Level 3
Return seeking assets:
U.S. equity index (1)	$  55	$0	$  55	$0
U.S. large capitalization core equity (2)	51	0	51	0
International risk-controlled equity (3)	50	0	50	0
U.S. small capitalization core equity (4)	26	0	26	0
International small capitalization risk-controlled equity (5)	8	0	8	0
Emerging markets equity (6)	7	0	7	0
Liability matching assets:
Long duration fixed income (7)	51	0	51	0
Broad market fixed income (8)	49	0	49	0
Long duration corporate fixed income (9)	28	0	28	0
Institutional money market fund	3	3	0	0
Total	$328	$3	$325	$0

(1)   Comprises equity index funds not actively managed that track the S&P 500.

(2)   Includes equity securities that seek to achieve excess returns relative to the S&P 500 while maintaining portfolio risk characteristics similar to the index.

(3)   Seeks long-term capital growth with an emphasis on controlling return volatility relative to an international market index.

(4)   Includes equity securities that seek to achieve excess returns relative to the Russell 2000 Index while maintaining portfolio risk characteristics similar to the index.

(5)   Seeks to provide excess returns relative to an international small cap index, while maintaining regional weights similar to the index.

(6)   Seeks long-term capital growth in securities of companies that have their principal business activities in countries in the Morgan Stanley Capital International Emerging Markets Free Index.

(7)   Seeks to generate returns that exceed the Barclays Capital U.S. Long Government/Credit Bond Index through investment-grade fixed income securities.

(8)   Seeks to generate returns that exceed the Barclays Capital U.S. Aggregate Bond Index through investment-grade fixed income securities.

(9)   Seeks to generate returns that exceed the Barclays Capital U.S. Long Corporate A or Better Index investing in U.S. corporate bonds with an emphasis on long duration bonds rated A or better.

Estimates of fair values of the pension plan assets are obtained primarily from our trustee and custodian of our pension plan.  Our Level 1 category includes a money market fund that is a mutual fund for which the fair value is determined using an exchange traded price provided by the trustee and custodian.  Our Level 2 category includes commingled pools.  Estimates of fair values for securities held by our commingled pools are obtained primarily from the trustee and custodian.  The methodologies used by the trustee and custodian that support a financial instrument Level 2 classification include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuers spreads, two-sided markets, benchmark securities, bids, offers and reference data.  There were no Level 3 investments during 2011 or 2010.

Retiree health benefit plan

The retiree health benefit plan was terminated in 2006.  We continue to provide retiree health benefits only to employees who met certain age and service requirements on or before July 1, 2010.  The accumulated benefit obligation and net periodic benefit cost of this plan were not material to our consolidated financial statements.  At December 31, 2011 and 2010, the projected benefit obligation associated with these benefits was $6 million and $7 million, respectively.  This plan is funded only as claims are incurred.  Periodic benefit costs for the Erie Insurance Group were $0.2 million in 2011 and $0.3 million in both 2010 and 2009.

Employee savings plan

All full-time and regular part-time employees are eligible to participate in a traditional qualified 401(k) or a Roth 401(k) savings plan.  We match 100% of the participant contributions up to 3% of compensation and 50% of participant contributions over 3% and up to 5% of compensation.  Matching contributions paid to the plan were $9 million in 2011 and 2010, and $8 million in 2009.  Employees are permitted to invest the employer-matching contributions in our Class A common stock.  Employees, other than executive and senior officers, may sell the shares at any time without restriction; sales by executive and senior officers are subject to restrictions imposed by our insider trading policies and the federal securities laws.  The plan acquires shares in the open market necessary to meet the obligations of the plan.  Plan participants held 0.2 million of our Class A shares at December 31, 2011 and 2010.  Liabilities for the 401(k) plan are presented in the Consolidated Statements of Financial Position with other liabilities.