Pension Plans

We maintain several international defined benefit pension plans primarily covering certain employees of Computervision, which we acquired in 1998, CoCreate, which we acquired in 2008 and covering employees in Japan. Benefits are based upon length of service and average compensation with vesting after one to five years of service. The pension cost was actuarially computed using assumptions applicable to each subsidiary plan and economic environment. We adjust our pension liability related to our plans due to changes in actuarial assumptions and performance of plan investments, as shown below. Effective in 1998, benefits under one of the international plans were frozen indefinitely.

We maintain a U.S. defined benefit pension plan (the Plan) that covers certain persons who were employees of Computervision Corporation (acquired by us in 1998). Benefits under the Plan were frozen in 1990. In the second quarter of 2014, we began the process of terminating the Plan, which will include settling Plan liabilities by offering lump sum distributions to plan participants and purchasing annuity contracts to cover vested benefits. While we expect to complete the termination process by September 30, 2015, the timing is subject to regulatory approvals. As part of the planned termination, in 2014 we re-balanced assets to a target asset allocation of 100% fixed income investments (up from 40%), which will provide a better matching of Plan assets to the characteristics of the liabilities. In the third quarter of 2014, we provided notice to plan participants of our intent to terminate the plan effective August 1, 2014 and we applied for a determination with the Internal Revenue Service with regards to the termination. We will take further actions to minimize the volatility of the value of our pension assets relative to pension liabilities and to settle remaining Plan liabilities, including making such contributions to the Plan as may be necessary to make the Plan sufficient to settle all Plan liabilities.

As of September 30, 2014, we have valued the projected benefit obligations of the Plan based on the present value of estimated costs to settle the liabilities through a combination of lump sum payments to participants and purchasing annuities from an insurance company. This reflects an estimate of how many participants we expect will accept a lump sum offering, and an estimate of lump sum payouts for those participants based on the current lump sum rates approved by the IRS. Liabilities expected to be settled through annuity contracts have been estimated based on future benefit payments, discounted based on current interest rates that correspond to the liability payouts, adjusted to reflect a premium that would be assessed by the insurer.

We expect to settle the liabilities by the end of fiscal 2015. As the liabilities are settled, unamortized losses in accumulated other comprehensive income, $68 million at September 30, 2014, will be recognized based on the projected benefit obligations and assets measured as of the dates the settlements occur. Prior to settling the liabilities, we will contribute such additional amounts (currently estimated to be approximately $25 million) as may be necessary to fully fund the Plan. Such contributions are expected to be made concurrent with settling the liabilities but may be made earlier at our discretion.

The following table presents the actuarial assumptions used in accounting for the pension plans:



	U.S. Plan						International Plans
	2014		2013		2012		2014		2013		2012
Weighted average assumptions used to determine benefit obligations at September 30 measurement date:
Discount rate	3.80	%	4.90	%	4.00	%	2.4	%	3.3	%	3.4	%
Rate of increase in future compensation (1)	—	%	—	%	—	%	3.0	%	3.0	%	3.0	%
Weighted average assumptions used to determine net periodic pension cost for fiscal years ended September 30:
Discount rate	4.90	%	4.00	%	4.50	%	3.3	%	3.4	%	4.8	%
Rate of increase in future compensation	—	%	—	%	—	%	3.0	%	3.0	%	3.0	%
Rate of return on plan assets	7.25	%	7.25	%	7.25	%	5.7	%	5.4	%	5.4	%


(1)	The rate of increase in future compensation is weighted for all plans, ongoing and frozen (with a 0% increase for frozen plans). The weighted rate of increase for ongoing non-U.S. plans was 3% at September 30, 2014 and 2013.

In selecting the expected long-term rate of return on assets, we considered the current investment portfolio and the investment return goals in the plans’ investment policy statements. We, with input from the plans’ professional investment managers and actuaries, also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits. This process included determining expected returns for the various asset classes that comprise the plans’ target asset allocation. This basis for selecting the long-term asset return assumptions is consistent with the prior year. Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the plans’ long-term liabilities to employees. Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary.

As of September 30, 2014, for the U.S. plan and the international plans, the weighted long-term rate of return assumption is 1.35% and 5.75%, respectively. These rates of return, together with the assumptions used to determine the benefit obligations as of September 30, 2014 in the table above, will be used to determine our 2015 net periodic pension cost, which we expect to be approximately $8 million.

The actuarially computed components of net periodic pension cost recognized in our consolidated statements of operations for each year are shown below:



	U.S. Plan									International Plans
	2014			2013			2012			2014			2013			2012
	(in thousands)
Interest cost of projected benefit obligation	$	5,461		$	4,989		$	5,490		$	2,442		$	2,384		$	2,554
Service cost	—			—			—			1,659			2,017			1,882
Expected return on plan assets	(7,151		)	(6,128		)	(5,412		)	(2,506		)	(2,126		)	(1,929		)
Amortization of prior service cost	—			—			—			(5		)	(6		)	(7		)
Recognized actuarial loss	2,213			3,152			2,967			1,181			1,248			341
Net periodic pension cost	$	523		$	2,013		$	3,045		$	2,771		$	3,517		$	2,841

The following tables display the change in benefit obligation and the change in the plan assets and funded status of the plans as well as the amounts recognized in our consolidated balance sheets:



	U.S. Plan						International Plans						Total
	Year ended September 30,
	2014			2013			2014			2013			2014			2013
	(in thousands)
Change in benefit obligation:
Projected benefit obligation—beginning of year	$	113,378		$	129,701		$	74,956		$	71,408		$	188,334		$	201,109
Service cost	—			—			1,659			2,017			1,659			2,017
Interest cost	5,461			4,989			2,442			2,384			7,903			7,373
Actuarial (gain) loss	20,563			(12,728		)	12,732			1,426			33,295			(11,302		)
Foreign exchange impact	—			—			(6,480		)	629			(6,480		)	629
Participant contributions	—			—			325			432			325			432
Benefits paid	(4,949		)	(8,584		)	(1,528		)	(1,732		)	(6,477		)	(10,316		)
Plan curtailments	—			—			—			(1,608		)	—			(1,608		)
Projected benefit obligation—end of year	$	134,453		$	113,378		$	84,106		$	74,956		$	218,559		$	188,334
Change in plan assets and funded status:
Plan assets at fair value—beginning of year	$	94,831		$	86,016		$	43,362		$	38,817		$	138,193		$	124,833
Actual return on plan assets	12,425			10,438			3,489			3,172			15,914			13,610
Employer contributions	10,552			6,961			2,353			3,008			12,905			9,969
Participant contributions	—			—			325			432			325			432
Foreign exchange impact	—			—			(3,510		)	(335		)	(3,510		)	(335		)
Benefits paid	(4,949		)	(8,584		)	(1,528		)	(1,732		)	(6,477		)	(10,316		)
Plan assets at fair value—end of year	112,859			94,831			44,491			43,362			157,350			138,193
Projected benefit obligation—end of year	134,453			113,378			84,106			74,956			218,559			188,334
Underfunded status	$	(21,594	)	$	(18,547	)	$	(39,615	)	$	(31,594	)	$	(61,209	)	$	(50,141	)
Accumulated benefit obligation—end of year	$	134,453		$	113,378		$	80,364		$	71,513		$	214,817		$	184,891
Amounts recognized in the balance sheet:
Non-current liability	$	—		$	(18,547	)	$	(39,615	)	$	(31,594	)	$	(39,615	)	$	(50,141	)
Current liability	$	(21,594	)	$	—		$	—		$	—		$	(21,594	)	$	—
Amounts in accumulated other comprehensive loss:
Unrecognized actuarial loss	$	68,256		$	55,180		$	27,669		$	19,177		$	95,925		$	74,357

In 2013, we terminated employees in Germany resulting in plan curtailments and a reduction in projected benefit obligations totaling $1.6 million.

We expect to recognize approximately $5 million of the unrecognized actuarial loss as of September 30, 2014 as a component of net periodic pension cost in 2015.

The following table shows the percentage of total plan assets for each major category of plan assets:



	U.S. Plan				International Plans
	September 30,
	2014		2013		2014		2013
Asset category:
Equity securities	—	%	62	%	51	%	51	%
Fixed income securities	100	%	38	%	28	%	27	%
Insurance company	—	%	—	%	19	%	19	%
Cash	—	%	—	%	2	%	3	%
	100	%	100	%	100	%	100	%

We periodically review the pension plans’ investments in the various asset classes. The current asset allocation target is 100% fixed income securities for the U.S. plan and 60% equity securities and 40% fixed income securities for the CoCreate plan in Germany, and 100% fixed income securities for the other international plans. The fixed income securities for the other international plans primarily include investments held with insurance companies with fixed returns. The plans’ investment managers are provided specific guidelines under which they are to invest the assets assigned to them. In general, investment managers are expected to remain fully invested in their asset class with further limitations on risk as related to investments in a single security, portfolio turnover and credit quality.

The U.S. plan and the German CoCreate plan investment policies prohibit the use of derivatives associated with leverage and speculation or investments in securities issued by PTC, except through index-related strategies and/or commingled funds. An investment committee oversees management of the pension plans’ assets. Plan assets consist primarily of investments in mutual funds invested in equity and fixed income securities.

In 2014, 2013 and 2012 our actual return on plan assets was $15.9 million, $13.6 million and $16.5 million, respectively.

Based on actuarial valuations and additional voluntary contributions, we contributed $12.9 million, $10.0 million, and $7.7 million in 2014, 2013 and 2012, respectively, to the plans. We expect to make contributions totaling approximately $45 million in 2015, including an estimated amount required to settle the U.S pension obligations and expected voluntary contributions to a non-U.S. plan.

As of September 30, 2014, benefit payments expected to be paid over the next ten years are outlined in the following table:



	U.S. Plan		International Plans		Total
	(in thousands)
Year ending September 30,
2015	$	134,453	$	2,033	$	136,486
2016	—		2,040		2,040
2017	—		2,139		2,139
2018	—		2,558		2,558
2019	—		2,837		2,837
2020 to 2024	—		21,557		21,557

Fair Value of Plan Assets

The U.S. Plan assets are comprised primarily of investments in common/collective trusts. Common/collective trusts are valued at the net asset value of shares held as reported by the trustee. The underlying investments in the common/collective trusts are publicly traded U.S. treasury securities and other fixed-income securities. Although the net asset values of the common/collective funds are determined by observable prices of the underlying securities, they are classified as Level 2 because the units of the common/collective trusts do not trade in open public markets. The fair value of the underlying investments in common/collective fixed income securities are based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.



	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
U.S. plan assets-common/collective trusts:
Cash	$	—	$	270	$	—	$	270
Fixed income securities:
U.S. Treasury, agency and other local government and non-corporate	—		25,025		—		25,025
Corporate investment grade	—		87,538		—		87,538
Corporate high yield	—		26		—		26
	$	—	$	112,859	$	—	$	112,859

The International Plan assets are comprised primarily of investments in a trust and an insurance company. The underlying investments in the trust are primarily publicly traded European DJ EuroStoxx50 equities and European governmental fixed income securities. They are classified as Level 1 because the underlying units of the trust are traded in open public markets. The fair value of the underlying investments in equity securities and fixed income are based upon publicly-traded exchange prices.



	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
International plan assets:
Fixed income securities:
Government	$	4,910	$	—	$	—	$	4,910
Europe corporate investment grade	7,769		—		—		7,769
Europe large capitalization stocks	22,746		—		—		22,746
Insurance company funds (1)	—		8,235		—		8,235
Cash	831		—		—		831
	$	36,256	$	8,235	$	—	$	44,491

(1) These investments are comprised primarily of funds invested with an insurance company in Japan with a guaranteed rate of return. The insurance company invests these assets primarily in government and corporate bonds.