LabCorp 2013 Annual Report Download - page 21

17
LABORATORY CORPORATION OF AMERICA
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (in millions)
Pension Expense
In October 2009, the Company received approval from its Board of
Directors to freeze any additional service-based credits for any years
of service after December 31, 2009 on the Company Plan and the
PEP. Both plans have been closed to new participants. Employees
participating in the Company Plan and the PEP no longer earn
service-based credits, but continue to earn interest credits. In addi-
tion, effective January 1, 2010, all employees eligible for the defined
contribution retirement plan (the “401K Plan”) receive a minimum
3% non-elective contribution (“NEC”) concurrent with each payroll
period. The 401K Plan also permits discretionary contributions
by the Company of 1% to 3% of pay for eligible employees based
on service.
The Company Plan covers substantially all employees hired prior
to December 31, 2009. The benefits to be paid under the Company
Plan are based on years of credited service through December 31,
2009, interest credits and average compensation. The Company
also has the PEP which covers its senior management group. Prior
to 2010, the PEP provided for the payment of the difference, if any,
between the amount of any maximum limitation on annual benefit
payments under the Employee Retirement Income Security Act
of 1974 and the annual benefit that would be payable under the
Company Plan but for such limitation.
The Company’s net pension cost is developed from actuarial
valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets, which
are updated on an annual basis at the beginning of each year.
The Company is required to consider current market conditions,
including changes in interest rates, in making these assumptions.
Changes in pension costs may occur in the future due to changes
in these assumptions. The key assumptions used in accounting for
the defined benefit retirement plans were a 4.80% discount rate
and a 7.0% expected long-term rate of return on plan assets as of
December 31, 2013.
Discount Rate
The Company evaluates several approaches toward setting the
discount rate assumption that is used to value the benefit obliga-
tions of its retirement plans. At year-end, priority was given to use of
the Towers Watson Bond:Link model, which simulates the purchase
of investment-grade corporate bonds at current market yields
with principal amounts and maturity dates closely matching the
Company’s projected cash disbursements from its plans. This
completed model represents the yields to maturity that the
Company could theoretically settle its plan obligations at year end.
The weighted-average yield on the modeled bond portfolio is then
used to form the discount rate assumption used for each retirement
plan. A one percentage point decrease or increase in the discount
rate would have resulted in a respective increase or decrease in
2013 retirement plan expense of $2.7.
Return on Plan Assets
In establishing its expected return on plan assets assumption,
the Company reviews its asset allocation and develops return
assumptions based on different asset classes adjusting for plan
operating expenses. Actual asset over/under performance com-
pared to expected returns will respectively decrease/increase
unrecognized loss. The change in the unrecognized loss will
change amortization cost in upcoming periods. A one percentage
point increase or decrease in the expected return on plan assets
would have resulted in a corresponding change in 2013 pension
expense of $2.5.
Net pension cost for 2013 was $11.0 as compared with $12.1 in
2012 and $8.6 in 2011. The decrease in pension expense was due to
decreases in the amount of net amortization and deferral as a result
of higher discount rates. The increase in pension expense in 2012
was due to increases in the amount of net amortization and deferral
as a result of lower discount rates and a 25 basis point decrease in
the expected return on assets as a result of declines in asset market
values in 2011. Projected pension expense for the Company Plan
and the PEP is expected to decrease to $7.8 in 2014.
Further information on the Company’s defined benefit
retirement plan is provided in Note 16 to the consolidated
financial statements.