Notes to Consolidated Financial Statements
Note 4 – Employee and Retiree Benefits
The employee benefit plans and other liabilities described below cover eligible employees and retirees. The measurement date for all plans is December 31, 2004.
Pension Plans
The Company has noncontributory defined benefit pension plans covering substantially all U.S. non-union employees who meet certain minimum requirements. The Company also has other contributory and noncontributory defined benefit plans for eligible non-U.S. employees. Benefits under most of the plans are based on salary (including commissions, bonuses, overtime and premium pay) and years of service. The Company’s policy is to fund at least the minimum actuarially determined amounts required by applicable regulations.
The weighted average assumptions used in determining the net pension cost and benefit obligations for the Company’s pension plans were as follows:
| U.S. Plans | Non-U.S. Plans | ||||||
|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||
| Discount rate: | |||||||
| Pension cost | 6.25% | 6.75% | 7.25% | 5.55% | 5.86% | 6.51% | |
| Benefit obligation at year end | 5.75% | 6.25% | 6.75% | 5.32% | 5.55% | 5.86% | |
| Expected long-term rate of return on assets - | |||||||
| Pension cost | 8.75% | 8.75% | 10.00% | 6.37% | 6.74% | 7.78% | |
| Average rate of increase in salaries (a): | |||||||
| Pension cost | 5.03% | 5.04% | 5.04% | 3.09% | 3.40% | 3.61% | |
| Benefit obligation at year end | 5.03% | 5.03% | 5.04% | 3.21% | 3.09% | 3.40% | |
- (a)
- Salary scale assumptions are determined through historical experience and vary by age and industry.
The net pension cost for the Company’s pension plans is as follows:
| (In millions) | U.S. Plans | Non-U.S. Plans | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||
| Service cost | $ | 23.5 | 23.0 | 25.0 | $ | 8.7 | 7.6 | 5.5 | $ | 32.2 | 30.6 | 30.5 | ||
| Interest cost on PBO | 40.8 | 38.6 | 36.0 | 9.4 | 7.8 | 6.3 | 50.2 | 46.4 | 42.3 | |||||
| Return on assets - expected | (49.5) | (49.1) | (52.4) | (8.8) | (7.4) | (7.8) | (58.3) | (56.5) | (60.2) | |||||
| Amortization of losses | 14.4 | 7.4 | 0.9 | 3.1 | 3.1 | 0.5 | 17.5 | 10.5 | 1.4 | |||||
| Net pension cost | $ | 29.2 | 19.9 | 9.5 | $ | 12.4 | 11.1 | 4.5 | $ | 41.6 | 31.0 | 14.0 | ||
In June 2003, the Company amended the benefit formula for its U.S. pension plan which resulted in a $4.1 million reduction in service cost in 2003 from what it would have otherwise been. This change had no effect on benefits earned for service prior to June 2003.
Reconciliations of the PBO, plan assets, funded status and net pension assets at December 31, 2004 and 2003 for all of the Company’s pension plans are as follows:
| (In millions) | U.S. Plans | Non-U.S. Plans | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||
| PBO at beginning of year | $ | 672.9 | 589.1 | $ | 172.4 | 126.6 | $ | 845.3 | 715.7 | ||
| Service cost | 23.5 | 23.0 | 8.7 | 7.6 | 32.2 | 30.6 | |||||
| Interest cost | 40.8 | 38.6 | 9.4 | 7.8 | 50.2 | 46.4 | |||||
| Plan participants’ contributions | - | - | 2.7 | 2.2 | 2.7 | 2.2 | |||||
| Benefits paid | (25.3) | (23.4) | (5.9) | (4.2) | (31.2) | (27.6) | |||||
| Actuarial loss | 50.5 | 45.6 | 7.8 | 9.2 | 58.3 | 54.8 | |||||
| Foreign currency exchange rate changes | - | - | 15.6 | 23.2 | 15.6 | 23.2 | |||||
| PBO at end of year | $ | 762.4 | 672.9 | $ | 210.7 | 172.4 | $ | 973.1 | 845.3 | ||
| Fair value of plan assets at beginning of year | $ | 541.9 | 431.2 | $ | 135.5 | 98.7 | $ | 677.4 | 529.9 | ||
| Return on assets – actual | 67.1 | 113.7 | 7.4 | 14.8 | 74.5 | 128.5 | |||||
| Plan participants’ contributions | - | - | 2.7 | 2.2 | 2.7 | 2.2 | |||||
| Employer contributions | 11.4 | 20.4 | 6.7 | 6.0 | 18.1 | 26.4 | |||||
| Benefits paid | (25.3) | (23.4) | (5.9) | (4.2) | (31.2) | (27.6) | |||||
| Foreign currency exchange rate changes | - | - | 11.7 | 18.0 | 11.7 | 18.0 | |||||
| Fair value of plan assets at end of year | $ | 595.1 | 541.9 | $ | 158.1 | 135.5 | $ | 753.2 | 677.4 | ||
| Funded status | $ | (167.3) | (131.0) | $ | (52.6) | (36.9) | $ | (219.9) | (167.9) | ||
| Unrecognized experience loss | 253.3 | 234.7 | 57.3 | 49.0 | 310.6 | 283.7 | |||||
| Unrecognized prior service cost | 0.2 | 0.3 | 1.0 | 1.3 | 1.2 | 1.6 | |||||
| Net prepaid pension assets | $ | 86.2 | 104.0 | $ | 5.7 | 13.4 | $ | 91.9 | 117.4 | ||
| Included in: | |||||||||||
| Prepaid pension assets | $ | - | - | $ | 14.1 | 15.8 | $ | 14.1 | 15.8 | ||
| Accrued pension cost: | |||||||||||
| Current, included in accrued liabilities | (0.4) | (0.4) | (7.6) | (5.0) | (8.0) | (5.4) | |||||
| Noncurrent | (80.8) | (56.7) | (36.2) | (29.9) | (117.0) | (86.6) | |||||
| Accumulated other comprehensive loss | 167.4 | 161.1 | 35.4 | 32.5 | 202.8 | 193.6 | |||||
| Net prepaid pension assets | $ | 86.2 | 104.0 | $ | 5.7 | 13.4 | $ | 91.9 | 117.4 | ||
Information comparing plan assets to plan obligations as of December 31, 2004 and 2003 are aggregated below. The accumulated benefit obligation (“ABO”) differs from the PBO in that the ABO is the obligation actually earned through the date noted. The PBO includes assumptions about future compensation levels.
| (In millions) | ABO Greater Than Plan Assets |
Plan Assets Greater Than ABO |
Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||
| PBO | $ | 919.6 | 801.7 | $ | 53.4 | 43.6 | $ | 973.0 | 845.3 | ||
| ABO | 824.5 | 716.4 | 47.5 | 37.2 | 872.0 | 753.6 | |||||
| Fair value of plan assets | 703.5 | 632.2 | 49.7 | 45.2 | 753.2 | 677.4 | |||||
The Company’s unrecognized experience loss increased in 2004 primarily due to lower discount rate assumptions (which increased the ABO and PBO) partially offset by higher than expected returns on plan assets. The unrecognized experience loss at the end of 2003 was slightly lower than the prior year as actuarial losses related to lower discount rates were more than offset by better than expected returns on plan assets. These actuarial losses are largely deferred with a portion of these losses being amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans.
The Company’s weighted-average asset allocations at December 31, 2004 and 2003 by asset category is as follows:
| (In millions, except percentages) | U.S. Plans | Non-U.S. Plans | ||||
|---|---|---|---|---|---|---|
| December 31, | 2004 | 2003 | 2004 | 2003 | ||
| Equity securities | 72% | 73% | 54% | 52% | ||
| Debt securities | 27% | 26% | 43% | 44% | ||
| Other | 1% | 1% | 3% | 4% | ||
| Total | 100% | 100% | 100% | 100% | ||
| Plan assets at fair value | $ | 595.1 | 541.9 | 158.1 | 135.5 | |
| Actual return on assets during year | $ | 67.1 | 113.7 | 7.4 | 14.8 | |
Assets of U.S. pension plans are invested primarily using actively managed accounts with asset allocation targets of 70% equities, which include a broad array of market capitalization sizes and investment styles, and 30% fixed income securities. The Company’s policy does not permit certain investments, including investments in The Brink’s Company common stock, unless part of a commingled fund, or derivative instruments unless used for hedging purposes. Fixed-income investments must have an investment grade rating at the time of purchase. The plan rebalances its assets on a quarterly basis if actual allocations of assets are outside predetermined ranges. Among other factors, the performance of asset groups and investment managers will affect the long-term rate of return.
The Company selects the expected long-term rate of return assumption for its U.S. pension plan using advice from its investment advisor and its actuary considering the plan’s asset allocation targets and expected overall investment manager performance and a review of its most recent ten-year historical average compounded rate of return.
Based on December 31, 2004 data, assumptions and funding regulations, the Company does not currently plan to make a contribution to the primary U.S. plan in 2005. There are limits to the amount of benefits which can be paid to participants from a U.S. qualified pension plan. The Company maintains a nonqualified U.S. plan to pay benefits for those eligible current and former employees in the U.S. whose benefits exceed the regulatory limits.
Assets of non-U.S. plans are invested primarily using actively managed accounts with weighted-average asset allocation targets of 53% equities, 46% fixed income securities and 1% other, primarily cash. The Company selects the expected long-term rates of return for its non-U.S. pension plans using advice from its investment advisors and its actuary considering plan asset allocation targets and expected overall investment manager performance.
The Company expects to contribute approximately $7.5 million to its non-U.S. pension plans in 2005.
The Company’s projected benefit payments at December 31, 2004 for each of the next five years and the aggregate five years thereafter are as follows:
| (In millions) | U.S. Plans | Non-U.S. Plans | Total | |
| 2005 | $ | 26.8 | 4.4 | 31.2 |
| 2006 | 28.2 | 4.9 | 33.1 | |
| 2007 | 30.0 | 5.6 | 35.6 | |
| 2008 | 31.9 | 6.6 | 38.5 | |
| 2009 | 33.9 | 7.5 | 41.4 | |
| 2010 through 2014 | 209.0 | 48.0 | 257.0 | |
| Total | $ | 359.8 | 77.0 | 436.8 |
Multi-employer Pension Plans
The Company participates in the United Mine Workers of America (“UMWA”) 1950 and 1974 pension plans. The Company believes that it is likely that it will withdraw from the plans prior to June 30, 2005, the plan’s year end. A withdrawal from the plans occurs when there is a significant reduction in or elimination of the hours worked by employees working under UMWA labor agreements. Upon withdrawal from these coal-related plans, the Company will become obligated to pay the plans a portion of the underfunded status of the plans as of the beginning of the plan year in which a withdrawal occurs, as determined by the plan agreements and by law. The Company expects to become obligated to pay a $36.6 million withdrawal liability during 2005 based on the funded status of the plans at June 2004. The obligation could change materially if the Company does not withdraw prior to June 30, 2005.
Expense included in continuing operations for multi-employer pension plans (excluding coal-related plans) was $3.7 million in 2004, $2.8 million in 2003 and $1.8 million in 2002.
Savings Plans
The Company sponsors various defined contribution plans to assist eligible employees in providing for retirement. Employee contributions to the primary U.S. 401(k) plan in 2002 and the first half of 2003 were matched at rates of between 50% to 100% on up to 5% of compensation (subject to certain limitations). In June 2003, the Company modified the match provision of the primary U.S. 401(k) plan and employee contributions were matched at 75% over the last half of 2003 and all of 2004. Contribution expense in continuing operations for the primary U.S. 401(k) plan aggregated $10.9 million in 2004, $11.5 million in 2003 and $10.9 million in 2002. Contribution expense for the primary U.S. 401(k) plan included in discontinued operations was $0.1 in 2003 and $0.6 million in 2002.
Contribution expense related to other plans aggregated $5.8 million in 2004, $5.0 million in 2003 and $3.6 million in 2002.
Postretirement Benefits Other Than Pensions
Summary
The Company has various postretirement benefits other than pensions. The related amounts recorded on the balance sheets for the last two years are detailed below.
| December 31, | |||
|---|---|---|---|
| (In millions) | 2004 | 2003 | |
| Company-sponsored plans | $ | 157.1 | 311.9 |
| Health Benefit Act | 185.5 | 197.5 | |
| Black Lung | 41.5 | 43.7 | |
| 384.1 | 553.1 | ||
| Current, included in accrued liabilities | (52.9) | (48.9) | |
| Noncurrent | $ | 331.2 | 504.2 |
Company-Sponsored Plans
The Company provides certain postretirement health care benefits (the “Company-sponsored plans”) for eligible active and retired employees in the U.S. and Canada of the Company’s current and former businesses, including eligible participants of the former coal operations (the “coal-related” plans). The components of net periodic postretirement costs related to Company-sponsored plans were as follows:
| (In millions) | Coal-related plans | Other plans | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||
| Service cost | $ | - | - | 0.4 | $ | 1.0 | 0.9 | 0.8 | $ | 1.0 | 0.9 | 1.2 | ||
| Interest cost on accumulated | ||||||||||||||
| postretirement benefit obligations (“APBO”) | 32.2 | 34.7 | 31.7 | 1.6 | 1.5 | 1.4 | 33.8 | 36.2 | 33.1 | |||||
| Return on assets – expected | (9.2) | - | - | - | - | - | (9.2) | - | - | |||||
| Amortization of losses | 13.5 | 14.3 | 9.7 | 0.3 | 0.1 | - | 13.8 | 14.4 | 9.7 | |||||
| Net periodic postretirement | ||||||||||||||
| costs | $ | 36.5 | 49.0 | 41.8 | $ | 2.9 | 2.5 | 2.2 | $ | 39.4 | 51.5 | 44.0 | ||
Reconciliations of the APBO and funded status to the accrued other postretirement benefit cost (the amount recorded on the balance sheet) for Company-sponsored plans at December 31, 2004 and 2003 are as follows:
| (In millions) | Coal-related plans | Other plans | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||
| APBO at beginning of year | $ | 526.2 | 518.3 | $ | 26.8 | 23.1 | $ | 553.0 | 541.4 | ||
| Service cost | - | - | 1.0 | 0.9 | 1.0 | 0.9 | |||||
| Interest cost | 32.2 | 34.7 | 1.6 | 1.5 | 33.8 | 36.2 | |||||
| Benefits paid | (35.0) | (30.4) | (2.3) | (2.0) | (37.3) | (32.4) | |||||
| Actuarial loss, net | 96.3 | 3.6 | 3.1 | 3.3 | 99.4 | 6.9 | |||||
| Other | (2.0) | - | - | - | (2.0) | - | |||||
| APBO at end of year | $ | 617.7 | 526.2 | $ | 30.2 | 26.8 | $ | 647.9 | 553.0 | ||
| Fair value of plan assets at beginning of year | $ | - | - | $ | - | - | $ | - | - | ||
| Employer contributions: | |||||||||||
| Restriction of VEBA at January 1, 2004 (see note 5) | 105.2 | - | - | - | 105.2 | - | |||||
| Payments to beneficiaries | 35.0 | 30.4 | 2.3 | 2.0 | 37.3 | 32.4 | |||||
| Payments to VEBA | 50.0 | - | - | - | 50.0 | - | |||||
| Return on assets – actual | 17.2 | - | - | - | 17.2 | - | |||||
| Benefits paid | (35.0) | (30.4) | (2.3) | (2.0) | (37.3) | (32.4) | |||||
| Fair value of plan assets at end of year | $ | 172.4 | - | $ | - | - | $ | 172.4 | - | ||
| Funded status | $ | (445.3) | (526.2) | $ | (30.2) | (26.8) | $ | (475.5) | (553.0) | ||
| Unrecognized experience loss | 314.6 | 239.8 | 3.1 | 0.4 | 317.7 | 240.2 | |||||
| Unrecognized prior service cost | - | - | 0.7 | 0.9 | 0.7 | 0.9 | |||||
| Accrued other postretirement benefit cost at end of year | $ | (130.7) | (286.4) | $ | (26.4) | (25.5) | $ | (157.1) | (311.9) | ||
The APBO for each of the plans was determined using the unit credit method and an assumed discount rate as follows:
| Company-sponsored plans | 2004 | 2003 | 2002 |
| Weighted-average discount rate: | |||
| Postretirement cost | 6.25% | 6.75% | 7.25% |
| Benefit obligation at year end | 5.75% | 6.25% | 6.75% |
| Expected long-term rate of return on assets – postretirement cost | 8.75% | N/A | N/A |
For Company-sponsored coal-related plans, the assumed health care cost trend rate used to compute the 2004 APBO was 10% for 2005, declining ratably to 5% in 2010 and thereafter (in 2003: 9% for 2004 declining ratably to 5% in 2009 and thereafter). The other plans provide for fixed-dollar value coverage for eligible participants and, accordingly, are not adjusted for inflation.
The table below shows the estimated effects of a one percentage point change in the assumed health care cost trend rates for each future year.
| Effect of Change in Health Care Trend Rates |
|||
|---|---|---|---|
| (In millions) | Increase 1% | Decrease 1% | |
| Higher (lower): | |||
| Service and interest cost in 2004 | $ | 4.0 | (3.3) |
| APBO at December 31, 2004 | 79.0 | (65.9) | |
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare prescription drug benefits. Because of the broadness of coverage provided under the Company’s plan, the Company believes that the plan benefits are at least actuarially equivalent to the Medicare benefits. The Company reflected the estimated effect of the new legislation in 2003 as a $45.7 million reduction to the actuarial loss, as permitted by FASB Staff Position No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The estimated value of the projected federal subsidy assumes no changes in participation rates and assumes that the subsidy is received in the year after claims are paid. The estimated reduction in per capita claim costs for participants over 65 years old was 12%.
The Act had no effect on 2003 expense. In 2004, the Company’s net periodic postretirement costs were approximately $5.8 million lower due to the Act as a result of lower amortization of losses. The estimated net present value of the subsidy, reflected as a reduction to the APBO, was approximately $59 million at December 31, 2004.
The plans had an actuarial loss in 2004 due to a combination of the increase in expected medical inflation and the reduction in the discount rate. In 2003, the plans had an actuarial gain from the Medicare subsidy. This was more than offset by an actuarial loss primarily related to the reduction in the discount rate.
In 2004, the Company restricted the use of the VEBA so that it will be used to only pay benefits related to the Company’s coal-related postretirement medical plan. Accordingly, under SFAS No. 106, estimated returns on the VEBA assets were included in the determination of net periodic postretirement costs for 2004.
The Company’s asset allocations at December 31, 2004 by asset category are as follows:
| (In millions, except percentages) | December 31, 2004 | Equity securities | 73% |
| Debt securities | 26% | |
| Other | 1% | |
| Total | 100% | |
| Plan assets at fair value | $ | 172.4 |
| Actual return on assets during year | $ | 17.2 |
Plan assets of the Company-sponsored postretirement medical plan held by the VEBA are invested primarily using actively managed accounts with asset allocation targets of 70% equities, which include a broad array of market capitalization sizes and investment styles, and 30% fixed income securities. The Company’s policy does not permit certain investments, including investments in The Brink’s Company common stock, unless part of a commingled fund, or derivative instruments unless used for hedging purposes. Fixed-income investments must have an investment grade rating at the time of purchase. The plan rebalances its assets on a quarterly basis if actual allocations of assets are outside predetermined ranges. Among other factors, the performance of asset groups and investment managers will affect the long-term rate of return.
The Company selects the expected long-term rate of return assumption using advice from its investment advisor and its actuary considering the plan’s asset allocation targets and expected overall investment manager performance and a review of its most recent ten-year historical average compounded rate of return for the primary U.S. pension plan which is invested similarly.
Although the Company intends to further fund the VEBA over time, there is no requirement to do so. The Company determines whether it will make a contribution on an annual basis.
The Company’s projected benefit payments at December 31, 2004 for each of the next five years and the aggregate five years thereafter are as follows:
| Before Medicare Subsidy | ||||||
|---|---|---|---|---|---|---|
| (In millions) | Coal-related Plans | Other Plans | Subtotal | Medicare Subsidy (a) | Net projected payments | |
| 2005 | $ | 38.3 | 1.7 | 40.0 | - | 40.0 |
| 2006 | 41.0 | 1.8 | 42.8 | - | 42.8 | |
| 2007 | 43.6 | 2.1 | 45.7 | (2.8) | 42.9 | |
| 2008 | 45.5 | 2.1 | 47.6 | (3.0) | 44.6 | |
| 2009 | 47.5 | 1.9 | 49.4 | (3.2) | 46.2 | |
| 2010 through 2014 | 242.4 | 10.4 | 252.8 | (18.8) | 234.0 | |
| Total | $ | 458.3 | 20.0 | 478.3 | (27.8) | 450.5 |
- (a)
- Only the coal-related plans are expected to meet the requirements to receive the Medicare subsidy.
Health Benefit Act Liabilities
Background
In October 1992, The Coal Industry Retiree Health Benefit Act of 1992 (the “Health Benefit Act”) was enacted as part of the Energy Policy Act of 1992. The Health Benefit Act established rules for the payment of future health care benefits for thousands of retired union mine workers and their dependents.
Assigned Beneficiaries. The Health Benefit Act established a trust fund, The United Mine Workers of America Combined Benefit Fund (the “Combined Fund”), to which “signatory operators” and “related persons,” including The Brink’s Company and certain of its subsidiaries (collectively, the “Brink’s Companies”), are jointly and severally liable to pay annual premiums for those beneficiaries directly assigned to a signatory operator and its related persons, on the basis set forth in the Health Benefit Act.
In October 1993 and on an annual basis in subsequent years, the Brink’s Companies have received notices from the Social Security Administration (the “SSA”) with regard to the current number of assigned beneficiaries for which the Brink’s Companies are deemed responsible under the Health Benefit Act.
Unassigned Beneficiaries. In addition, the Health Benefit Act provides that assigned companies, including the Brink’s Companies, are required to fund, pro rata according to the total number of assigned beneficiaries, a portion of the health benefits for unassigned beneficiaries if these benefits are not funded from other designated sources. To date, almost all of the funding for unassigned beneficiaries has been provided from transfers from the Abandoned Mine Land Reclamation Fund (the “AML Fund”) or other government sources.
Information and Assumptions Used to Estimate Obligation
The Company’s liability for Health Benefit Act obligations is equal to the undiscounted estimated amount of future annual premiums the Company expects to pay to the Combined Fund. The Company’s estimated annual premium is equal to the total number of beneficiaries (including assigned beneficiaries and an allocated percentage of the total unassigned beneficiaries) at October 1, the beginning of the plan year, multiplied by the premium per beneficiary for that year. The Company expects to pay annual premiums over the next 60 to 70 years, but it expects these annual premiums to gradually decline over time as the number of beneficiaries decreases.
The estimated liability at December 31, 2004 assumes that almost all of the costs for unassigned beneficiaries for the plan year ending September 30, 2005 will continue to be paid with transfers of cash from the AML Fund and other government sources. Transfers to the Combined Fund from the AML Fund beyond this date are not sufficiently assured and the Company’s current estimate of its obligations assumes that no future transfers will be made by the AML Fund. The Company’s estimate of its probable contingent liability for premiums for unassigned beneficiaries could materially decrease in future periods depending on the availability of future funding by the AML Fund or other sources. Moreover, the Company’s estimate of its contingent liability for unassigned beneficiaries could increase materially in the future if other responsible coal operators become insolvent. This liability could also change materially if the percentage of unassigned beneficiaries that are allocated to the Company changes due to relative mortality rates of the Company’s assigned beneficiaries compared to the total assigned beneficiaries.
Information provided by the Combined Fund and assumptions made by the Company are as follows:
| At the beginning of the plan year | 2004 | 2003 | |
| Number of assigned beneficiaries for the Brink’s Companies | 2,343 | 2,581 | |
| Total unassigned pool of beneficiaries | 16,502 | 17,394 | |
| Percent of total unassigned pool allocated to the Brink’s Companies | 9.7% | 9.2% | |
| Health benefit premium per beneficiary | $ | 3,099 | 2,965 |
According to the Health Benefit Act, the rate of inflation for per-beneficiary health care premiums is equal to the medical care component of the Consumer Price Index. At December 31, 2003 and 2004, annual inflation rates for per-beneficiary health care premiums were assumed to be 4.5% for all future years. The U.S. Life 79-81 mortality table has been used to estimate a gradual decline in the number of beneficiaries. The Company’s estimate assumes that there will be no additions to the Combined Fund unassigned beneficiary group as a result of future coal operator insolvencies.
Undiscounted Obligation for Health Benefit Act Liabilities
| December 31, | |||
|---|---|---|---|
| (In millions) | 2004 | 2003 | |
| Combined Fund: | |||
| Assigned beneficiaries | $ | 112.4 | 124.5 |
| Unassigned beneficiaries | 66.1 | 65.7 | |
| Other | 7.0 | 7.3 | |
| $ | 185.5 | 197.5 | |
Reconciliation of Health Benefit Act Liabilities
| Years Ended December 31, | ||||
|---|---|---|---|---|
| (In millions) | 2004 | 2003 | 2002 | |
| Beginning of the year | $ | 197.5 | 174.1 | 159.9 |
| Actuarial (gain) loss (a) | (3.2) | 31.3 | 24.0 | |
| Payments | (8.8) | (7.9) | (9.8) | |
| End of the year | $ | 185.5 | 197.5 | 174.1 |
- (a)
- Included in income (loss) from discontinued operations.
The $3.2 million actuarial gain in 2004 is primarily related to a slight decrease in the number of beneficiaries assigned to the Company at October 1, 2004 compared to the amount estimated at the end of 2003. As a result, the estimate of assigned beneficiaries in future periods was also lower.
The $31.3 million charge in 2003 is primarily related to the assumed increase in the number of unassigned beneficiaries allocated to the Company. The increased allocation was due to two factors. First, the Company increased its allocation percentage because of a change in the way the Company interprets the statute governing the allocation, based on findings of court cases that year. Second, other coal operations became insolvent during the period and their assigned beneficiaries were transferred to the unassigned pool. These actions reduced the denominator (the total assigned pool) in the computation of the allocation percentage, increasing the Company’s allocation assumption, and increased the unassigned pool.
The $24.0 million actuarial loss in 2002 primarily resulted from the Company’s ability to obtain and use Company-specific information regarding the age of the beneficiaries covered by the Health Benefit Act rather than using averages relating to the entire population of beneficiaries covered, slightly higher per-beneficiary health care premiums, and slightly lower mortality than was estimated at the end of 2001 for the plan year ended September 30, 2002.
The Company currently estimates that its annual cash funding under the Health Benefit Act will be slightly higher in 2005, increase in 2006 to approximately $12 million as a result of the assumption that premiums for unassigned beneficiaries will not be paid for through transfers from the AML Fund. In subsequent years, payments are expected to decline as the number of beneficiaries decreases. The Company’s projected benefit payments at December 31, 2004 for each of the next five years and the aggregate five years thereafter are as follows:
| (In millions) | Projected Payments | |
| 2005 | $ | 8.9 |
| 2006 | 12.0 | |
| 2007 | 11.3 | |
| 2008 | 10.7 | |
| 2009 | 10.0 | |
| 2010 through 2014 | 41.1 | |
| Total | $ | 94.0 |
Pneumoconiosis (Black Lung) Obligations
The Company acts as self-insurer with respect to almost all black lung obligations. Provision is made for estimated benefits based on annual reports prepared by independent actuaries. Unrecognized losses, representing the excess of the present value of expected future benefits over existing accrued liabilities, are amortized over the average remaining life expectancy of participants (approximately 10 years). The components of net periodic postretirement benefit costs related to black lung obligations were as follows:
| Years Ended December 31, | ||||
|---|---|---|---|---|
| (In millions) | 2004 | 2003 | 2002 | |
| Interest cost on APBO and other | $ | 3.6 | 4.5 | 5.4 |
| Amortization of losses | 1.2 | 1.5 | 1.9 | |
| Net periodic postretirement costs | $ | 4.8 | 6.0 | 7.3 |
Reconciliations of the APBO and funded status to the accrued other postretirement benefit costs for black lung obligations at December 31, 2004 and 2003 are as follows:
| Years Ended December 31, | |||
|---|---|---|---|
| (In millions) | 2004 | 2003 | |
| APBO at beginning of year | $ | 63.0 | 60.0 |
| Interest costs and other | 3.6 | 4.5 | |
| Benefits paid | (7.0) | (7.7) | |
| Actuarial (gain) loss, net | (4.4) | 6.2 | |
| APBO at end of year | $ | 55.2 | 63.0 |
| Funded status | $ | (55.2) | (63.0) |
| Unrecognized experience loss | 13.7 | 19.3 | |
| Accrued other postretirement benefit cost at end of year | $ | (41.5) | (43.7) |
The 1983 Group Annuity Mortality table is used. The following are the other key actuarial assumptions for the black lung obligations:
| December 31, | |||
|---|---|---|---|
| Black Lung Benefits | 2004 | 2003 | |
| Discount rate: | |||
| Postretirement cost | 6.25% | 6.75% | |
| Benefit obligation at year end | 5.75% | 6.25% | |
| Medical cost inflation | 8.00% | 8.00% | |
The Company’s projected benefit payments at December 31, 2004 for each of the next five years and the aggregate five years thereafter are as follows:
| (In millions) | Projected | |
| 2005 | $ | 5.2 |
| 2006 | 5.0 | |
| 2007 | 4.8 | |
| 2008 | 4.6 | |
| 2009 | 4.5 | |
| 2010 through 2014 | 21.0 | |
| Total | $ | 45.1 |