Note 12: Postretirement Plans

Snap-on provides certain health care benefits for certain retired U.S. employees. The majority of Snap-on’s U.S. employees become eligible for those benefits if they reach early retirement age while working for Snap-on; however, the age and service requirements for eligibility under the plans have been increased for certain employees hired on and after specified dates since 1992. Generally, most plans pay stated percentages of covered expenses after a deductible is met. There are several plan designs, with more recent retirees being covered under a comprehensive major medical plan. In determining benefits, the plans take into consideration payments by Medicare and other insurance coverage.

For employees retiring under the comprehensive major medical plans, retiree contributions are required, and these plans contain provisions allowing for benefit and coverage changes. The plans require retirees to contribute either the full cost of the coverage or amounts estimated to exceed a capped per-retiree annual cost commitment by Snap-on. Most employees hired since 1994 are required to pay the full cost.

In 2007, Snap-on contributed $14.5 million to a Voluntary Employees Beneficiary Association (“VEBA”) trust for the funding of existing postretirement health care benefits for certain non-salaried retirees in the United States; all other retiree health care plans are unfunded.

The status of Snap-on’s U.S. postretirement health care plans is as follows:


(Amounts in millions)	2012		2011
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year	$	72.8	$	81.3
Service cost		0.2		0.2
Interest cost		2.6		3.3
Plan participants’ contributions		1.4		1.9
Benefits paid		(6.8)		(7.9)
Actuarial gain		(1.2)		(6.0)

Benefit obligation at end of year	$	69.0	$	72.8


Change in plan assets:
Fair value of plan assets at beginning of year	$	13.5	$	13.9
Plan participants’ contributions		1.4		1.9
Employer contributions		5.3		5.8
Actual return (loss) on VEBA plan assets		1.7		(0.2)
Benefits paid		(6.8)		(7.9)

Fair value of plan assets at end of year	$	15.1	$	13.5

Unfunded status at end of year	$	(53.9)	$	(59.3)

Amounts recognized in the Consolidated Balance Sheets as of 2012 and 2011 year end are as follows:


(Amounts in millions)	2012		2011
Accrued benefits	$	(5.5)	$	(6.5)
Retiree health care benefits		(48.4)		(52.8)

Net liability	$	(53.9)	$	(59.3)


Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2012 and 2011 year end are as follows:

(Amounts in millions)	2012		2011
Net gain (loss), net of tax of $0.5 million and $0.3 million, respectively	$	0.8	$	(0.4)

The components of net periodic benefit cost and changes recognized in OCI are as follows:

(Amounts in millions)	2012		2011		2010
Net periodic benefit cost:
Service cost	$	0.2	$	0.2	$	0.2
Interest cost		2.6		3.3		3.9
Expected return on plan assets		(1.0)		(1.0)		(0.9)
Amortization of prior service credit		–		–		(0.4)

Net periodic benefit cost	$	1.8	$	2.5	$	2.8

Changes in benefit obligations recognized in OCI, net of tax:
Prior service cost	$	–	$	–	$	0.2
Net (gain) loss		(1.2)		(3.0)		1.5

Total recognized in OCI	$	(1.2)	$	(3.0)	$	1.7


Snap-on does not expect to recognize any prior service costs or prior net gains included in Accumulated OCI on the accompanying 2012 Consolidated Balance Sheet in net periodic benefit cost in 2013. The weighted-average discount rates used to determine Snap-on’s postretirement health care expense are as follows:

	2012		2011		2010
Discount rate		3.8%		4.3%		5.0%

The weighted-average discount rates used to determine Snap-on’s accumulated benefit obligation are as follows:

	2012		2011
Discount rate		3.2%		3.8%

The methodology for selecting the weighted-average 3.2% discount rate as of 2012 year end for the company’s domestic postretirement plans was to match the plans’ yearly projected benefit cash flows to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. Previously the company’s discount rate assumption used a theoretical bond portfolio yield curve that provided the equivalent yields on zero-coupon bonds with an AA rating or better for each maturity. Had the company continued using this methodology, the weighted-average discount rate for Snap-on’s domestic postretirement plans as of 2012 year end would have been 2.7% and its accumulated postretirement benefit obligation would have increased by $2.3 million.

The actuarial calculation assumes a health care cost trend rate of 7.4% in 2013, decreasing gradually to 4.5% in 2028 and thereafter. As of 2012 year end, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by approximately $1.3 million and the aggregate of the service cost and interest cost components by $0.1 million. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $1.1 million and the aggregate of the service cost and interest rate components by $0.1 million.

The following benefit payments, which reflect expected future service, are expected to be paid as follows:


(Amounts in millions)	Amount
Year:
2013	$	7.1
2014		7.2
2015		7.4
2016		7.4
2017		7.4
2018 – 2022		27.1

The objective of the VEBA trust is to achieve net of expense returns that meet or exceed the 7.8% long-term, rate-of-return-on-assets assumption used for reporting purposes. Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow.

The basis for determining the overall expected long-term, rate-of-return-on-assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums are then adjusted based on current relative valuation levels and macro-economic conditions.

Snap-on’s VEBA plan target allocation and actual weighted-average asset allocation as of 2012 and 2011 year end, by asset category and fair value of plan assets, are as follows:


	Target		2012		2011
Asset category:
Equity securities		56%		56%		55%
Private equity partnerships		22%		21%		22%
Debt securities and cash		14%		15%		16%
Real estate and other real assets		8%		8%		7%

Total		100%		100%		100%


Fair value of plan assets (Amounts in millions)			$	15.1	$	13.5

The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority.

Shares of equity and debt securities and real estate and other real assets valued at quoted market prices for which an official close or last trade pricing on an active exchange is available are categorized as Level 1 in the fair value hierarchy. Private equity partnership funds are stated at estimated fair value as reported by the fund manager based on the fair market value of the underlying investments and are classified as Level 3 in the fair value hierarchy. Management regularly reviews fund performance for Level 3 plan assets and performs qualitative analysis to corroborate the reasonableness of the reported fair market values.

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA assets as of 2012 year end:


(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Unobservable Inputs (Level 3)		Total
(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Unobservable Inputs (Level 3)		Total
Asset category:
Cash and cash equivalents	$	0.1	$	–	$	0.1
Equity securities		8.5		–		8.5
Private equity partnerships		–		3.2		3.2
Debt securities		2.1		–		2.1
Real estate and other real assets		1.2		–		1.2

Total	$	11.9	$	3.2	$	15.1

The following is a summary of the fiscal 2012 changes in fair value of the VEBA plan assets with Level 3 inputs:
(Amounts in millions)	Private Equity Partnership Interests
Balance as of 2011 year end	$	3.0
Unrealized gains attributable to assets held		0.2

Balance as of 2012 year end	$	3.2

The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA assets as of 2011 year end:
(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Unobservable Inputs (Level 3)
(Amounts in millions)	Quoted Prices for Identical Assets (Level 1)		Significant Unobservable Inputs (Level 3)		Total
Asset category:
Cash and cash equivalents	$	0.1	$	–	$	0.1
Equity securities		7.4		–		7.4
Private equity partnerships		–		3.0		3.0
Debt securities		2.1		–		2.1
Real estate and other real assets		0.9		–		0.9

Total	$	10.5	$	3.0	$	13.5

The following is a summary of the fiscal 2011 changes in fair value of the VEBA plan assets with Level 3 inputs:
(Amounts in millions)	Private Equity Partnership Interests
Balance as of 2010 year end	$	2.8
Unrealized gains attributable to assets held		0.2

Balance as of 2011 year end	$	3.0