Notes to financial statements
Note 10: Retirement Plans
Pension Plans - We maintain funded defined benefit pension plans for most of our employees. Benefits are based on years of service and the employee's compensation while employed by the company. Pension benefits generally vest after five years of service.
Our pension plans are noncontributory. This means that employees do not pay anything into the plans. Our funding policy is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act and any additional amounts that may be necessary. This may result in no contribution being made in a particular year.
The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended Dec. 31, 1998, and a statement of the funded status as of Dec. 31, for both years.
(In thousands)
December 31, 1998
Pension benefits
Other Benefits
1998
1997
1998
1997
Change in benefit obligations:
Benefit obligation at beginning of year
$845,784
$770,303
$192,434
$181,337
Service cost
30,929
27,897
5,627
5,602
Interest cost
58,410
56,422
13,181
13,152
Amendments
-
-
-
252
Acturial loss
113,403
55,928
14,855
9,605
Benefits paid
(42,933)
(56,128)
(12,032)
(13,568)
Curtailment gain
-
(8,008)
-
(3,946)
1,005,593
845,784
214,065
192,434
Benefit obligation at end of year
Change in plan assets:
Fair value of plan at beginning of year
$953,259
$793,660
$18,612
$17,107
Actual return on Plan assets
176,203
170,250
3,581
1,505
Employee contribution
48,407
45,477
12,032
13,568
Benefits paid
(42,933)
(56,128)
(12,032)
(13,568)
1,134,936
953,259
18,612
22,193
Fair value of plan at end of year
Funded status
129,343
107,475
(191,872)
(173,822)
Unrecognized transition asset
(4,941)
(6,756)
-
-
Unrecognized prior service cost
(12,918)
(16,681)
(3,592)
(3,935)
Unrecognized net actuarial loss (gain)
65,346
34,859
11,314
(1,705)
$175,830
118,897
$(184,150)
$(179,462)
Prepaid (accrued) benefit cost
Pension benefits
Other Benefits
1998
1997
1998
1997
Change in benefit obligations:
Benefit obligation at beginning of year
6.25%
7.00%
6.50%
7.00%
Benefits paid
10.00
9.25
8.00
9.00
Curtailment gain
4.00
4.5
4.00
3.75
Plan assets are invested primarily in equities and fixed maturities, and included 804,035 shares of our common stock with a market value of $28.0 million and $33.0 million at Dec. 31, 1998 and 1997, respectively.
We maintain non-contributory, unfunded pension plans to provide certain company employees with pension benefits in excess of limits imposed by federal tax law.
The following table provides the components of our net periodic benefit cost for the years 1998 and 1997:
(In thousands)
December 31, 1998
Pension benefits
Other Benefits
1998
1997
1998
1997
Components of net periodic benefit cost:
Service cost
$30,929
$27,897
$5,627
$5,602
Interest cost
58,410
56,422
13,181
13,152
Expected return on plan assets
(97,956)
(70,875)
(1,675)
(1,158)
Amortization of transition asset
(1,814)
(1,814)
-
-
Mortization of prior service cost
(3,763)
(3,765)
(343)
(346)
Recognized net actuarial loss (gain)
5,668
6,883
(69)
(74)
(8,526)
14,748
16,721
16,816
Net periodic pension cost (income)
-
(8,070)
-
(5,553)
Curtailment gain
$(8,526)
$6,678
$16,721
$11,263
Net periodic benefit cost (income) after curtailment
Postretirement Benefits Other Than Pension - We provide certain health care and life insurance benefits for retired employees and their eligible dependents. We currently anticipate that most of our employees will become eligible for these benefits if they retire while working for us. The cost of these benefits is shared with the retiree. The benefits are generally provided through our employee benefits trust, to which periodic contributions are made to cover benefits paid during the year. We accrue postretirement benefits expense during the period of the employee's service.
A health care inflation rate of 6.75% was assumed to change to 6.25% in 1999, decrease annually to 5% in 2002 and then remain at that level. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
(In thousands)
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on total of service and interest cost components
$3,740
$(3,112)
Effect on total of service and interest cost components
33,262
(27,724)
Employee Stock Ownership Plan
As of Jan. 1, 1998, the Preferred Stock Ownership Plan (PSOP) and the Employee Stock Ownership Plan (ESOP) were merged into The St. Paul Companies, Inc. Stock Ownership Plan (SOP). The plan allocates preferred shares semiannually to those employees participating in our Savings Plus Plan. Under the former PSOP, the match was 60% of employees' contributions up to a maximum of 6% of their salary. This match has been enhanced to 100% of employees' contributions up to a maximum of 4% of their salary plus shares equal to the value of dividends on previously allocated shares. Additionally, this plan will now provide an annual allocation to qualified U.S. employees based on company performance.
To finance the preferred stock purchase for future allocation to qualified employees, the SOP (formerly the PSOP) borrowed $150 million at 9.4% from our U.S. underwriting subsidiary. As the principal and interest of the trust's loan is paid, a pro rata amount of our preferred stock is released for allocation to participating employees. Each share pays a dividend of $11.72 annually and is currently convertible into eight shares of common stock. Preferred stock dividends on all shares held by the trust are used to pay this SOP obligation. In addition to dividends paid to the trust, we make additional cash contributions to the SOP as necessary in order to meet the SOP's debt obligation.
The SOP (formerly the ESOP) borrowed funds to finance the purchase of common stock for future allocation to qualified U.S. employees. The final principal payment on the trust's loan was made in the first quarter of 1998. As the principal of the trust loan was paid, a pro rata amount of our common stock was released for allocation to eligible participants. The final allocation was made as of Dec. 31, 1997. Common stock dividends on all shares held by the trust were used to pay this SOP obligation. In addition to dividends paid to the trust, we made additional cash contributions as necessary in order to meet the SOP's debt obligation. Starting in the second quarter of 1998, common stock dividends on shares allocated under the former ESOP were paid directly to participants.
All common shares and the common stock equivalent of all preferred shares held by the SOP are considered outstanding for diluted EPS computations and dividends paid on all shares are charged to retained earnings. Our SOP expense was reduced by the dividends we paid to the SOP trust that were used to pay the SOP debt obligations.
We follow the provisions of Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans," and related interpretations in accounting for this plan. We recorded expense of $7.8 million, $16.6 million and $14.0 million for the years 1998, 1997 and 1996, respectively.The following table details the shares held in the SOP:
(Shares)
December 31, 1998
1996
1998
Common
Preferred
Common
Preferred
Allcoated
7,250,535
324,938
7,128,891
306,624
Committed to be released
-
27,809
487,091
17,889
Unallocated
-
577,132
-
631,081
7,250,535
929,879
7,615,982
955,594
Total
The SOP allocated 53,949 preferred shares in 1998, 41,810 preferred shares in 1997 and 60,803 preferred shares in 1996. The remaining unallocated preferred shares at Dec. 31, 1998 will be released for allocation annually through Jan. 31, 2005. The SOP (formerly ESOP) made its final allocation in 1997 totaling 1,207,254 common shares and allocated 997,430 common shares in 1996.