Postretirement Benefits

12 Months Ended

Dec. 31, 2012

Compensation and Retirement Disclosure [Abstract]

Postretirement Benefits

Note 16.   Postretirement Benefits

Pension 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.

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 58% of postretirement benefit expenses are reimbursed to Indemnity from the Exchange and EFL, which represents pension benefits for Indemnity employees performing claims and life insurance functions. For our funded pension plan, amounts are settled in cash for the portion of pension costs allocated to the Exchange and EFL, respectively.  For our unfunded plans, we pay the obligations when due and amounts are settled in cash between entities when there is a payout.

Cost of pension plans

(in millions)	Erie Insurance Group
	2012			2011			2010
Cost of pension plans:
Service cost for benefits earned	$	21		$	17		$	15
Interest cost on benefit obligation	24			23			21
Expected return on plan assets	(27		)	(27		)	(25		)
Prior service cost amortization	1			1			1
Net actuarial loss amortization	11			6			3
Pension plan cost (1)	$	30		$	20		$	15

(1) Pension plan costs represent the total cost for the Erie Insurance Group before reimbursements to Indemnity from the Exchange and EFL.

Actuarial assumptions

The following table describes the assumptions at December 31 used to measure the year-end benefit obligations and the net periodic benefit costs for the subsequent year:

(in millions)	Erie Insurance Group
	2012		2011		2010		2009
Actuarial assumptions:
Employee pension plan:
Discount rate	4.19	%	4.99	%	5.69	%	6.11	%
Expected return on assets	7.50		8.00		8.00		8.25
Compensation increases (1)	4.15		4.15		4.15		4.15
SERP:
Discount rate – pre-retirement/post-retirement	4.19/3.69		4.99/4.49		5.69/5.19		6.11/5.00
Rate of compensation increase	6.00		6.00		6.00		6.00

(1) The rate of compensation increase for the employee plan is age-graded.  An equivalent single compensation increase rate of 4.15% in 2012, 2011 and 2010 would produce similar results.

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 2012 was based upon a yield curve developed from corporate bond yield information.  The same methodology was employed to develop the discount rates used to determine the benefit obligation for 2011 and 2010, respectively.

The pension plan's expected long-term rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are paid.  To determine the expected long-term rate of return assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the financial markets based upon key factors such as historical returns for the asset class' applicable indices, the correlations of the asset classes under various market conditions and general market trends.  The expected future return for each asset class is then weighted based upon the plan's asset allocation to produce a reasonable range of asset return results within which our expected long-term rate of return assumption falls.

Funding policy/funded status

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 $17 million contribution was made to the plan in January 2013. The following table sets forth the funded status of the pension plans and the amounts recognized in the Consolidated Statements of Financial Position as of December 31:

(in millions)	Erie Insurance Group
	2012			2011
Funded status at end of period	$	(201	)	$	(140	)
Pension liability recorded in the Consolidated Statement of Financial Position:
Pension liabilities – due within one year	$	(2	)	$	(1	)
Pension liabilities – due after one year	(199		)	(139		)
Net amount recognized	$	(201	)	$	(140	)

Benefit obligations

Benefit obligations are described in the following tables. Accumulated and projected benefit obligations (“ABO” and “PBO”) represent the obligations of a pension plan for past service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current compensation levels. PBO is ABO increased to reflect expected future compensation. The following tables set forth:  the change in our projected benefit obligation, the accumulated benefit obligation, and 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
	2012			2011
Projected benefit obligation:
Balance at January 1	$	488		$	400
Service cost for benefits earned	21			17
Interest cost on benefit obligations	24			23
Plan amendments	0			1
Actuarial loss	87			54
Benefits paid	(8		)	(7		)
Balance at December 31	$	612		$	488
Accumulated benefit obligation, December 31,	$	453		$	363

(in millions)	Erie Insurance Group
	2012		2011
Plans with assets less than ABO, December 31:
Plan assets	$	411	$	348
Accumulated benefit obligations	453		363
Projected benefit obligations	612		488

At December 31, 2012 and 2011, the defined benefit pension plan and the SERP had an accumulated benefit obligation in excess of plan assets.

Pension assets

(in millions)	Erie Insurance Group
	2012			2011
Fair value of plan assets:
Balance at January 1	$	348		$	328
Actual gain on plan assets	55			12
Employer contributions	16			15
Benefits paid	(8		)	(7		)
Balance at December 31	$	411		$	348

Shareholders’ equity

(in millions)	Erie Insurance Group
	2012		2011
Amounts included in shareholders’ equity (unamortized):
Net actuarial loss	$	220	$	173
Prior service cost	6		6
Net amount not yet recognized	$	226	$	179

The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into pension cost during 2013 are $15 million and $1 million, respectively.

Other comprehensive income

(in millions)	Erie Insurance Group
	2012				2011
Amounts recognized in other comprehensive incomefor pension plans:
Amortization of net actuarial loss	$	(11	)		$	(6	)
Amortization of prior service cost	(1		)		(1		)
Net actuarial loss arising during the year	59				69
Amendments	0			(1)	1			(2)
Total recognized in other comprehensive income	$	47			$	63

(1) The charges recognized as amendments were the result of factoring in the prior service cost for one new plan participant in 2012.

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

Asset allocation

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.

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
Asset allocation:	2011-2012		2012		2011
Equity securities:
U.S. equity securities (1)	40	%	41	%	41	%
Non-U.S. equity securities (2)	20		21		19
Total equity securities	60		62		60
Debt securities (3)	39		37		39
Other (4)	1		1		1
Total	100	%	100	%	100	%

(1) For the U.S. equity securities 20% seek to achieve excess returns relative to the Russell 2000 Index while 39% seek to achieve excess returns relative to the S&P 500.  The remaining 41% of the allocation to U.S. equity securities are comprised of equity index funds that track the S&P 500.

(2) For the Non-U.S. equity securities, 11% are allocated to international small cap investments while another 11% are allocated to international emerging market investments.  The remaining 78% of the Non-U.S. equity securities are allocated to investments seeking to achieve excess returns relative to an international market index.

(3) For the debt securities, 50% are allocated to investment-grade fixed income securities while the remaining 50% are allocated to U.S. corporate bonds with an emphasis on long duration bonds rated A or better.

(4) Institutional money market fund.

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, 2012
	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
Equity securities:
U.S. equity securities	$	168	$	0	$	168	$	0
Non-U.S. equity securities	87		0		87		0
Total equity securities	255		0		255		0
Debt securities – U.S. fixed income	153		0		153		0
Other	3		3		0		0
Total	$	411	$	3	$	408	$	0

	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
Equity securities:
U.S. equity securities	$	140	$	0	$	140	$	0
Non-U.S. equity securities	68		0		68		0
Total equity securities	208		0		208		0
Debt securities – U.S. fixed income	138		0		138		0
Other	2		2		0		0
Total	$	348	$	2	$	346	$	0

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 2012 or 2011.

Estimated future benefit payments

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
2013	$	12
2014	11
2015	13
2016	15
2017	17
2018 - 2022	123

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, 2012 and 2011, the projected benefit obligation associated with these benefits was $5 million and $6 million, respectively.  This plan is funded only as claims are incurred.  Periodic benefit costs for the Erie Insurance Group were $0.1 million in 2012, $0.2 million in 2011 and $0.3 million in 2010.

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 $10 million in 2012, $9 million in 2011, and $9 million in 2010.  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 shares of our Class A common stock at December 31, 2012 and 2011.