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Retirement Benefit Plans
 9 Months Ended
Sep. 30, 2014
Defined Benefit Plan Disclosure [Line Items]  
Retirement Benefit Plans
Note 14 - Retirement Benefit Plans

The following tables set forth the net periodic benefit cost for the Company’s defined benefit pension plans. The amounts for the three months and nine months ended September 30, 2014 are based on calculations prepared by the Company's actuaries during the second quarter of 2014. The net periodic benefit cost recorded for the three months and nine months ended September 30, 2014 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ending December 31, 2014.

 
US Plans
International Plans
 
Total
 
Three Months Ended
September 30,
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
2014
2013
2014
2013
 
2014
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
3.6

$
8.9

$
0.6

$
0.7

 
$
4.2

$
9.6

Interest cost
18.1

29.1

4.2

4.5

 
22.3

33.6

Expected return on plan assets
(28.7
)
(51.9
)
(5.4
)
(5.9
)
 
(34.1
)
(57.8
)
Amortization of prior service cost (credit)
0.8

1.1

—

—

 
0.8

1.1

Amortization of net actuarial loss
11.3

27.3

1.3

1.9

 
12.6

29.2

Pension curtailments and settlements
—

—

—

1.5

 
—

1.5

Less: discontinued operations
—

(6.1
)
—

0.1

 
—

(6.0
)
Net periodic benefit cost
$
5.1

$
8.4

$
0.7

$
2.8

 
$
5.8

$
11.2

 
US Plans
International Plans
 
Total
 
Nine Months Ended
September 30,
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
2013
2014
2013
 
2014
2013
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
17.9

$
26.7

$
1.8

$
2.2

 
$
19.7

$
28.9

Interest cost
80.1

87.2

14.2

13.7

 
94.3

100.9

Expected return on plan assets
(123.1
)
(155.7
)
(18.5
)
(18.3
)
 
(141.6
)
(174.0
)
Amortization of prior service cost (credit)
2.7

3.4

—

—

 
2.7

3.4

Amortization of net actuarial loss
44.3

81.9

4.4

5.6

 
48.7

87.5

Pension curtailments and settlements
—

—

0.7

6.7

 
0.7

6.7

Less: discontinued operations
(8.0
)
(18.2
)
0.4

0.3

 
(7.6
)
(17.9
)
Net periodic benefit cost
$
13.9

$
25.3

$
3.0

$
10.2

 
$
16.9

$
35.5



The following table summarizes the assumptions used to measure the net periodic cost for the defined benefit pension plans for the nine months of 2014:

Assumptions
 
U.S. Plans:
 
Discount rate
5.02
%
Future compensation assumption
3.00
%
Expected long-term return on plan assets
7.25
%
International Plans:
 
Discount rate
3.25% to 9.75%

Future compensation assumption
2.30% to 8.00%

Expected long-term return on plan assets
3.00% to 8.50%

The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same period that benefit payments will be required to be made. The expected rate of return on plan assets assumption is based on the weighted-average expected return on the various asset classes in the plans’ portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
As a result of the spinoff of TimkenSteel, the Company remeasured its defined benefit pension plans in the U.S. and the United Kingdom prior to the spinoff. The discount rate used to measure net periodic benefit cost represents a blend between the discount rate used to measure the benefit obligation at December 31, 2013 and the discount rate used to remeasure the benefit obligation prior to the spinoff.

The following tables set forth the change in benefit obligation, change in plan assets, funded status and amounts recognized on the Consolidated Balance Sheets for the defined benefit pension plans as of September 30, 2014:
 
US Plans
International Plans
 
Total
Change in benefit obligation:
 
 
 
 
Benefit obligation at beginning of year
$
2,642.4

$
491.1

 
$
3,133.5

Service cost
17.9

1.8

 
19.7

Interest cost
80.1

14.2

 
94.3

Actuarial losses
86.7

(12.3
)
 
74.4

Employee contributions
—

0.2

 
0.2

International plan exchange rate change
—

(10.8
)
 
(10.8
)
Benefits paid
(162.5
)
(16.8
)
 
(179.3
)
Spinoff of TimkenSteel
(1,063.3
)
(81.8
)
 
(1,145.1
)
Benefit obligation at end of period
$
1,601.3

$
385.6

 
$
1,986.9


 
US Plans
International Plans
 
Total
Change in plan assets:
 
 
 
 
Fair value of plan assets at beginning of year
$
2,870.0

$
420.6

 
$
3,290.6

Actual return on plan assets
163.2

19.2

 
182.4

Employee contributions
—

0.2

 
0.2

Company contributions / payments
3.4

14.3

 
17.7

International plan exchange rate change
—

(6.8
)
 
(6.8
)
Benefits paid
(162.5
)
(16.8
)
 
(179.3
)
Spinoff of TimkenSteel
(1,111.7
)
(85.7
)
 
(1,197.4
)
Fair value of plan assets at end of period
1,762.4

345.0

 
2,107.4

Funded status at end of period
$
161.1

$
(40.6
)
 
$
120.5

Amounts recognized on the Consolidated Balance Sheets:
 
 
 
 
Non-current assets
$
255.1

$
4.6

 
$
259.7

Current liabilities
(4.1
)
(1.5
)
 
(5.6
)
Non-current liabilities
(89.9
)
(43.7
)
 
(133.6
)
 
$
161.1

$
(40.6
)
 
$
120.5

 
US Plans
International Plans
 
Total
Amounts recognized in accumulated other comprehensive loss:
 
 
 
 
Net actuarial loss
$
509.8

$
106.9

 
$
616.7

Net prior service cost
12.7

0.5

 
13.2

Accumulated other comprehensive loss (AOCL)
$
522.5

$
107.4

 
$
629.9

Changes in plan assets and benefit obligations recognized in AOCL:
US Plans
International Plans
 
Total
AOCL at beginning of year
$
865.4

$
142.7

 
$
1,008.1

Net actuarial loss
46.6

(13.0
)
 
33.6

Recognized net actuarial loss
(44.3
)
(4.4
)
 
(48.7
)
Recognized prior service cost
(2.7
)
—

 
(2.7
)
Loss recognized due to settlement
—

(0.7
)
 
(0.7
)
Foreign currency impact
—

(3.0
)
 
(3.0
)
Spinoff of TimkenSteel
(342.5
)
(14.2
)
 
(356.7
)
Total recognized in accumulated other comprehensive loss at September 30, 2014
$
522.5

$
107.4

 
$
629.9

The presentation in the above tables for amounts recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets is before the effect of income taxes.
The actual return on plan assets in the table on the prior page represents the expected rate of return on plans that were not remeasured in 2014 and actual returns on plans that were remeasured in 2014 up to the date of the remeasurement and expected rate of returns subsequent to the remeasurement.
The following table summarizes assumptions used to measure the benefit obligation for the defined benefit pension plans at September 30, 2014:
Assumptions
 
U.S. Plans:
 
Discount rate
4.68
%
Future compensation assumption
3.00
%
International Plans:
 
Discount rate
3.25% to 9.75%

Future compensation assumption
2.30% to 8.00%

The discount rate used to remeasure the benefit obligation represents the rate used at the latest period that the defined benefit pension plans were remeasured, which could be the rate at December 31, 2013 for plans that were not remeasured during 2014 or the date at which they were remeasured in 2014.
Defined benefit pension plans in the United States represent 81% of the benefit obligation and 84% of the fair value of plan assets as of September 30, 2014.
Certain of the Company’s defined benefit pension plans were overfunded as of September 30, 2014. As a result, $259.7 million at September 30, 2014 was included in non-current pension assets on the Consolidated Balance Sheets. The current portion of accrued pension cost, which is included in salaries, wages and benefits on the Consolidated Balance Sheets, was $5.6 million at September 30, 2014. In 2014, the current portion of accrued pension cost relates to unfunded plans and represents the actuarial present value of expected payments related to the plans to be made over the next 12 months.

The accumulated benefit obligation at September 30, 2014 exceeded the market value of plan assets for several of the Company’s pension plans. For these plans, the projected benefit obligation was $172.4 million, the accumulated benefit obligation was $161.3 million and the fair value of plan assets was $33.2 million at September 30, 2014.
The total pension accumulated benefit obligation for all plans was approximately $2.0 billion at September 30, 2014.

Defined Benefit Pension Plan Assets:
The Company’s target allocation for US pension plan assets, as well as the actual pension plan asset allocations as of September 30, 2014, was as follows: 
 
Current Target
Allocation
Percentage of Pension Plan
Assets at September 30,
Asset Category
 
 
 
2014
Equity securities
15%
to
25%
23%
Debt securities
55%
to
65%
59%
Other
8%
to
25%
18%
Total
 
 
 
100%
The Company recognizes its overall responsibility to ensure that the assets of its various defined benefit pension plans are managed effectively and prudently and in compliance with its policy guidelines and all applicable laws. Preservation of capital is important; however, the Company also recognizes that appropriate levels of risk are necessary to allow its investment managers to achieve satisfactory long-term results consistent with the objectives and the fiduciary character of the pension funds. Asset allocations are established in a manner consistent with projected plan liabilities, benefit payments and expected rates of return for various asset classes. The expected rate of return for the investment portfolio is based on expected rates of return for various asset classes, as well as historical asset class and fund performance.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -
Unobservable inputs for the asset or liability.
The following table presents the fair value hierarchy for those investments of the Company’s pension assets measured at fair value on a recurring basis as of September 30, 2014:
 
US Pension Plans
International Pension Plans
 
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
225.6

$
35.8

189.8

$
—

$
24.6

$
—

24.6

$
—

Government and agency securities
420.3

412.6

7.7

—

—

—

—

—

Corporate bonds - investment grade
190.0

—

190.0

—

0.4

—

0.4

—

Equity securities - U.S. companies
68.8

68.8

—

—

13.9

13.9

—

—

Equity securities - international companies
43.3

43.3

—

—

44.5

44.5

—

—

Asset backed securities
0.4

—

0.4

—

3.4

—

3.4

—

Common collective funds - domestic equities
68.3

—

68.3

—

2.0

—

2.0

—

Common collective funds - international equities
110.5

—

110.5

—

81.6

—

81.6

—

Common collective funds - fixed income
311.1

—

311.1

—

103.7

—

103.7

—

Common collective funds - other
—

—

—

—

70.9

—

70.9

—

Limited partnerships
71.8

—

—

71.8

—

—

—

—

Real estate partnerships
111.2

—

81.0

30.2

—

—

—

—

Mutual funds
28.2

28.2

—

—

—

—

—

—

Mutual funds - real estate
23.8

23.8

—

—

—

—

—

—

Risk Parity
89.1

—

89.1

—

—

—

—

—

Total Assets
$
1,762.4

$
612.5

$
1,047.9

$
102.0

$
345.0

$
58.4

$
286.6

$
—


The table below sets forth a summary of changes in the fair value of the level 3 assets by fund for the period ended September 30, 2014:
 
Limited Partnerships
Real Estate
Total
Beginning balance, January 1
$
78.8

$
21.1

$
99.9

Purchases
1.7

10.5

12.2

Sales
(11.6
)
(4.0
)
(15.6
)
Realized losses
(9.8
)
(2.6
)
(12.4
)
Unrealized gains
12.7

5.2

17.9

Ending balance, September 30
$
71.8

$
30.2

$
102.0

Cash and cash equivalents are valued at redemption value. Government and agency securities are valued at the closing price reported in the active market in which the individual securities are traded. Certain corporate bonds are valued at the closing price reported in the active market in which the bond is traded. Equity securities (both common and preferred stock) are valued at the closing price reported in the active market in which the individual security is traded. Common collective funds are valued based on a net asset value per share. Asset-backed securities are valued based on quoted prices for similar assets in active markets. When such prices are unavailable, the plan trustee determines a valuation from the market maker dealing in the particular security.









Limited partnerships include investments in funds that invest primarily in private equity, venture capital and distressed debt. Limited partnerships are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value, per the underlying investment fund, which is based upon the general partner's own assumptions about the assumptions a market participant would use in pricing the assets and liabilities of the partnership. Real estate investments include funds that invest in companies that primarily invest in commercial and residential properties, commercial mortgage-backed securities, debt and equity securities of real estate operating companies, and real estate investment trusts. Mutual funds – real estate are valued based on the closing price reported in the active market in which the individual security is traded. Other real estate investments are valued based on the ownership interest in the net asset value of the investment, which is used as a practical expedient to fair value per the underlying investment fund, which is based on appraised values and current transaction prices.
Defined Benefit Pension Plan Cash Flows:
Employer Contributions to Defined Benefit Plans
 
2014 (planned)
$
20.0

Future benefit payments are expected to be as follows:
Benefit Payments
 
2014
$
257.6

2015
170.2

2016
146.8

2017
142.3

2018
144.3

2019-2023
718.6


The amounts presented for pension assets in continuing operations and discontinued operations, respectively, for the three months and nine months ended September 30, 2014 are based on the Company’s historical allocation between the bearings and power transmission business (continuing operations) and the steel business that was spunoff as TimkenSteel (discontinued operations).