Employee Benefits
State Street Bank and certain of its U.S. subsidiaries participate in a non-contributory, tax-qualified defined benefit pension plan. Since January 1, 2008, when the plan was amended, we no longer make employer contribution credits to the plan; employee account balances earn annual interest credits until the employee’s retirement. In addition to the defined benefit pension plan, we have non-qualified unfunded supplemental retirement plans, referred to as SERPs, that provide certain officers with defined pension benefits in excess of allowable qualified plan limits. Non-U.S. employees participate in local defined benefit plans. State Street Bank and certain of its U.S. subsidiaries participate in a post-retirement plan that provides health care and insurance benefits for certain retired employees.
The following tables present combined information for the U.S. and non-U.S. defined benefit plans, and information for the post-retirement plan, as of the December 31 measurement date:
|
| | | | | | | | | | | | | | | |
| Primary U.S. and Non-U.S. Defined Benefit Plans | | Post-Retirement Plan |
(In millions) | 2013 | | 2012 | | 2013 | | 2012 |
Benefit obligations: | | | | | | | |
Beginning of year | $ | 1,129 |
| | $ | 1,017 |
| | $ | 132 |
| | $ | 112 |
|
Service cost | 11 |
| | 11 |
| | 8 |
| | 6 |
|
Interest cost | 43 |
| | 45 |
| | 5 |
| | 5 |
|
Employee contributions | 1 |
| | 1 |
| | — |
| | — |
|
Plan amendments | — |
| | (2 | ) | | — |
| | — |
|
Acquisitions and transfers | 1 |
| | — |
| | — |
| | — |
|
Actuarial losses (gains) | (83 | ) | | 85 |
| | (31 | ) | | 14 |
|
Benefits paid | (28 | ) | | (36 | ) | | (6 | ) | | (6 | ) |
Expenses paid | — |
| | (1 | ) | | — |
| | — |
|
Premiums paid | (1 | ) | | — |
| | — |
| | — |
|
Curtailments | (1 | ) | | — |
| | — |
| | — |
|
Settlements | (2 | ) | | (1 | ) | | — |
| | — |
|
Special termination benefits | — |
| | — |
| | — |
| | 1 |
|
Foreign currency translation | 6 |
| | 10 |
| | — |
| | — |
|
End of year | $ | 1,076 |
| | $ | 1,129 |
| | $ | 108 |
| | $ | 132 |
|
| | | | | | | |
Plan assets at fair value: | | | | | | | |
Beginning of year | $ | 1,075 |
| | $ | 928 |
| | $ | — |
| | $ | — |
|
Actual return on plan assets | 58 |
| | 69 |
| | — |
| | — |
|
Employer contributions | 8 |
| | 104 |
| | 6 |
| | 6 |
|
Employee contributions | 1 |
| | 1 |
| | — |
| | — |
|
Acquisitions and transfers | 1 |
| | — |
| | — |
| | — |
|
Benefits paid | (28 | ) | | (36 | ) | | (6 | ) | | (6 | ) |
Expenses paid | — |
| | (1 | ) | | — |
| | — |
|
Premiums paid | (1 | ) | | — |
| | — |
| | — |
|
Settlements | (2 | ) | | (1 | ) | | — |
| | — |
|
Foreign currency translation | 4 |
| | 11 |
| | — |
| | — |
|
End of year | $ | 1,116 |
| | $ | 1,075 |
| | $ | — |
| | $ | — |
|
Accrued benefit expense: | | | | | | | |
Funded status (plan assets less benefit obligations) | $ | 40 |
| | $ | (54 | ) | | $ | (108 | ) | | $ | (132 | ) |
Net accrued benefit expense | $ | 40 |
| | $ | (54 | ) | | $ | (108 | ) | | $ | (132 | ) |
|
| | | | | | | | | | | | | | | |
| Primary U.S. and Non-U.S. Defined Benefit Plans | | Post- Retirement Plan |
(In millions) | 2013 | | 2012 | | 2013 | | 2012 |
Amounts recognized in consolidated statement of condition as of December 31: | | | | | | | |
Non-current assets | $ | 124 |
| | $ | 40 |
| | $ | — |
| | $ | — |
|
Current liabilities | (1 | ) | | (1 | ) | | (7 | ) | | (8 | ) |
Non-current liabilities | (83 | ) | | (93 | ) | | (101 | ) | | (124 | ) |
Net accrued amount recognized in statement of condition | $ | 40 |
| | $ | (54 | ) | | $ | (108 | ) | | $ | (132 | ) |
Amounts recognized in accumulated other comprehensive income: | | | | | | | |
Prior service credit | $ | (1 | ) | | $ | — |
| | $ | 2 |
| | $ | 3 |
|
Net loss | (263 | ) | | (365 | ) | | (16 | ) | | (49 | ) |
Accumulated other comprehensive loss | (264 | ) | | (365 | ) | | (14 | ) | | (46 | ) |
Cumulative employer contributions in excess of net periodic benefit cost | 304 |
| | 311 |
| | (94 | ) | | (86 | ) |
Net obligation recognized in consolidated statement of condition | $ | 40 |
| | $ | (54 | ) | | $ | (108 | ) | | $ | (132 | ) |
Accumulated benefit obligation | $ | 1,051 |
| | $ | 1,105 |
| | $ | — |
| | $ | — |
|
Actuarial assumptions (U.S. plans): | | | | | | | |
Used to determine benefit obligations as of December 31: | | | | | | | |
Discount rate | 4.75 | % | | 3.75 | % | | 4.75 | % | | 3.75 | % |
Used to determine periodic benefit cost for the years ended December 31: | | | | | | | |
Discount rate | 3.75 | % | | 4.50 | % | | 3.75 | % | | 4.50 | % |
Expected long-term rate of return on plan assets | 6.75 |
| | 6.75 |
| | — |
| | — |
|
Assumed health care cost trend rates as of December 31: | | | | | | | |
Cost trend rate assumed for next year | — |
| | — |
| | 7.95 | % | | 8.08 | % |
Rate to which the cost trend rate is assumed to decline | — |
| | — |
| | 4.50 |
| | 4.50 |
|
Year that the rate reaches the ultimate trend rate | — |
| | — |
| | 2029 |
| | 2029 |
|
The following table presents expected benefit payments for the next ten years:
|
| | | | | | | | | | | |
(In millions) | Primary U.S. and Non-U.S. Defined Benefit Plans | | Non- Qualified SERPs | | Post-Retirement Plan |
2014 | $ | 37 |
| | $ | 27 |
| | $ | 7 |
|
2015 | 37 |
| | 29 |
| | 7 |
|
2016 | 39 |
| | 11 |
| | 7 |
|
2017 | 38 |
| | 15 |
| | 7 |
|
2018 | 30 |
| | 12 |
| | 7 |
|
2019-2023 | 189 |
| | 57 |
| | 39 |
|
The accumulated benefit obligation for all of our U.S. defined benefit pension plans was $841 million and $947 million as of December 31, 2013 and 2012, respectively.
To develop the assumption of the expected long-term rate of return on plan assets, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This analysis resulted in the determination of the expected long-term rate of return on plan assets of 6.75% for the year ended December 31, 2013.
Plan Assets:
The primary purpose of the investment policy and strategy is to invest plan assets in a manner that provides for sufficient resources to be available to meet the plans’ benefit and expense obligations when due. The asset portfolio, together with contributions, is intended to provide adequate liquidity to make benefit payments when due while preserving principal and maximizing returns, given appropriate risk constraints. A secondary objective is to enhance the plans’ long-term viability through the generation of competitive returns that will limit the financial burden on State Street and contribute to our ability to maintain our retirement plans.
Plan assets are managed solely in the interests of the participants and consistent with generally recognized fiduciary standards, including all applicable provisions of the Employee Retirement Income Security Act, or ERISA, and other applicable laws and regulations. Management believes that its investment policy satisfies the standards of prudence and diversification prescribed by ERISA. Plan assets are diversified across asset classes to achieve a balance between risk and return and between income and growth of assets through capital appreciation, to produce a prudently well-diversified portfolio.
With respect to our U.S. pension plan, plan assets are primarily invested in pooled investment funds of State Street Bank. The measurement of the fair value of the participation units owned by the plans is based on the redemption value on the last business day of the plan year, where values are based on the fair value of the underlying assets in each fund. The net asset value of units of participation in other funds is based on the fair value of the underlying securities in each fund.
Alternative investments are composed of investments in limited liability corporations and limited liability partnerships. The fair value of these investments is measured by the fund managers, and represent the plans’ proportionate share of the estimated fair value of the underlying net assets of the limited liability corporations.
The methods described above may produce a fair-value calculation that may not be indicative of net realizable value or be reflective of future fair values. Furthermore, while management believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to measure the fair value of certain financial instruments could result in a different fair-value measurement as of the reporting date.
With respect to our U.K. pension plan, plan assets are invested in sub-funds of Managed Pension Funds Limited, a U.K.-incorporated insurance vehicle of which the ultimate parent company is State Street. The fair value of these investments is measured based on the mid-market price of the underlying investments held by Managed Pension Funds Limited. This valuation method may produce a calculation that is not indicative of net realizable value or reflective of future fair values.
The following tables present, by level within the fair value hierarchy prescribed by GAAP, the plans’ assets measured at fair value on a recurring basis, and activity related to assets categorized in level 3, as of the dates and for the years indicated:
|
| | | | | | | | | | | | | | | |
| Fair-Value Measurements on a Recurring Basis as of December 31, 2013 |
(In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Total Net Carrying Value |
Assets: | | | | | | | |
U.S. Pension Plan | | | | | | | |
Investments in pooled investment funds: | | | | | | | |
Domestic large cap equity | $ | — |
| | $ | 64 |
| | $ | — |
| | $ | 64 |
|
Domestic small cap equity | — |
| | 15 |
| | — |
| | 15 |
|
Developed international equities | — |
| | 80 |
| | — |
| | 80 |
|
Emerging markets equity | — |
| | 23 |
| | — |
| | 23 |
|
Investment grade fixed-income | — |
| | 498 |
| | — |
| | 498 |
|
High-yield debt | — |
| | 39 |
| | — |
| | 39 |
|
Real estate investment trusts | — |
| | 23 |
| | — |
| | 23 |
|
Alternative investments (commingled fund) | — |
| | — |
| | 5 |
| | 5 |
|
Alternative investments (fund of funds) | — |
| | — |
| | 27 |
| | 27 |
|
Private equity | — |
| | — |
| | 2 |
| | 2 |
|
Total U.S. Pension Plan | — |
| | 742 |
| | 34 |
| | 776 |
|
U.K. Pension Plan | | | | | | | |
Investments in pooled investment funds: | | | | | | | |
Developed international equity | — |
| | 33 |
| | — |
| | 33 |
|
U.K. fixed-income | — |
| | 181 |
| | — |
| | 181 |
|
Emerging market index | — |
| | 9 |
| | — |
| | 9 |
|
Alternative investments | — |
| | — |
| | 43 |
| | 43 |
|
Total U.K. Pension Plan | — |
| | 223 |
| | 43 |
| | 266 |
|
Other Non-U.S. Pension Plans (excluding U.K.) | | | | | | | |
Insurance group annuity contracts | — |
| | — |
| | 70 |
| | 70 |
|
Total Other Non-U.S. Pension Plans (Excluding U.K.) | — |
| | — |
| | 70 |
| | 70 |
|
Total assets carried at fair value | $ | — |
| | $ | 965 |
| | $ | 147 |
| | $ | 1,112 |
|
|
| | | | | | | | | | | | | | | |
| Fair-Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2013 |
| U.S. Pension Plan | | U.K. Pension Plan | | Non-U.S. Pension Plans (Excluding U.K.) |
(In millions) | Alternative Investments | | Private Equity | | Alternative Investments | | Insurance group annuity contract |
Assets: | | | | | | | |
Fair value as of December 31, 2012 | $ | 19 |
| | $ | 2 |
| | $ | 39 |
| | $ | 61 |
|
Purchases | 12 |
| | — |
| | 3 |
| | 13 |
|
Sales | — |
| | — |
| | — |
| | (5 | ) |
Unrealized gains | 1 |
| | — |
| | 1 |
| | 1 |
|
Fair value as of December 31, 2013 | $ | 32 |
| | $ | 2 |
| | $ | 43 |
| | $ | 70 |
|
|
| | | | | | | | | | | | | | | |
| Fair-Value Measurements on a Recurring Basis as of December 31, 2012 |
(In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Total Net Carrying Value |
Assets: | | | | | | | |
U.S. Pension Plan | | | | | | | |
Investments in pooled investment funds: | | | | | | | |
Domestic large cap equity | $ | — |
| | $ | 144 |
| | $ | — |
| | $ | 144 |
|
Domestic small cap equity | — |
| | 16 |
| | — |
| | 16 |
|
Developed international equities | — |
| | 80 |
| | — |
| | 80 |
|
Emerging markets equity | — |
| | 42 |
| | — |
| | 42 |
|
Investment grade fixed-income | — |
| | 390 |
| | — |
| | 390 |
|
High-yield debt | — |
| | 32 |
| | — |
| | 32 |
|
Real estate investment trusts | — |
| | 24 |
| | — |
| | 24 |
|
Alternative investments (commingled fund) | — |
| | — |
| | 5 |
| | 5 |
|
Alternative investments (fund of funds) | — |
| | — |
| | 14 |
| | 14 |
|
Private equity | — |
| | — |
| | 2 |
| | 2 |
|
U.S. money-market mutual funds | — |
| | 7 |
| | — |
| | 7 |
|
Total U.S. Pension Plan | — |
| | 735 |
| | 21 |
| | 756 |
|
U.K. Pension Plan | | | | | | | |
Investments in insurance vehicles: | | | | | | | |
Developed international equity | — |
| | 30 |
| | — |
| | 30 |
|
U.K. fixed-income | — |
| | 177 |
| | — |
| | 177 |
|
Emerging market index | — |
| | 9 |
| | — |
| | 9 |
|
Alternative investments | — |
| | — |
| | 39 |
| | 39 |
|
Total U.K. Pension Plan | — |
| | 216 |
| | 39 |
| | 255 |
|
Other Non-U.S. Pension Plans (excluding U.K.) | | | | | | | |
Insurance group annuity contracts | — |
| | — |
| | 61 |
| | 61 |
|
Total Other Non-U.S. Pension Plans (Excluding U.K.) | — |
| | — |
| | 61 |
| | 61 |
|
Total assets carried at fair value | $ | — |
| | $ | 951 |
| | $ | 121 |
| | $ | 1,072 |
|
|
| | | | | | | | | | | | | | | |
| Fair-Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2012 |
| U.S. Pension Plan | | U.K. Pension Plan | | Non-U.S. Pension Plans (Excluding U.K.) |
(In millions) | Alternative Investments | | Private Equity | | Alternative Investments | | Insurance group annuity contract |
Assets: | | | | | | | |
Fair value as of December 31, 2011 | $ | 19 |
| | $ | 2 |
| | $ | 32 |
| | $ | 57 |
|
Purchases and sales, net | — |
| | — |
| | 3 |
| | 4 |
|
Unrealized gains | — |
| | — |
| | 4 |
| | — |
|
Fair value as of December 31, 2012 | $ | 19 |
| | $ | 2 |
| | $ | 39 |
| | $ | 61 |
|
The plans’ investment strategies are intended to reduce the concentration risk of an adverse influence on investment values from the poor performance of a small number of individual investments through diversification of the plans' assets. The significant holdings of the plans are reviewed quarterly so that the plans do not exceed the allowable maximum amount per issuer. The plans are re-balanced monthly so that actual weights of the plan assets are within the allowable ranges set forth in the investment policy. The plans’ operating cash flows (benefit payments, expenses, contributions) are used to bring the weights back into line on a monthly basis. If these cash flows do not provide sufficient benefit, additional re-balancing is effected.
Expected employer contributions to the tax-qualified U.S. and non-U.S. defined benefit pension plans, SERPs, and post-retirement plan for 2014 are $7 million, $27 million and $7 million, respectively.
State Street has unfunded SERPs that provide certain officers with defined pension benefits in excess of qualified plan limits imposed by U.S. federal tax law.
The following table presents information for the SERPs for the years ended December 31:
|
| | | | | | | |
| Non-Qualified SERPs |
(In millions) | 2013 | | 2012 |
Benefit obligations: | | | |
Beginning of year | $ | 172 |
| | $ | 173 |
|
Service cost | 1 |
| | 1 |
|
Interest cost | 6 |
| | 7 |
|
Actuarial gain (loss) | (15 | ) | | 13 |
|
Benefits paid | (2 | ) | | (2 | ) |
Settlements | (8 | ) | | (20 | ) |
End of year | $ | 154 |
| | $ | 172 |
|
Accrued benefit expense: | | | |
Funded status (plan assets less benefit obligations) | $ | (154 | ) | | $ | (172 | ) |
Net accrued benefit expense | $ | (154 | ) | | $ | (172 | ) |
Amounts recognized in consolidated statement of condition as of December 31: | | | |
Current liabilities | $ | (27 | ) | | $ | (15 | ) |
Non-current liabilities | (127 | ) | | (157 | ) |
Net accrued amount recognized in consolidated statement of condition | $ | (154 | ) | | $ | (172 | ) |
Amounts recognized in accumulated other comprehensive income: | | | |
Net loss | $ | (36 | ) | | $ | (59 | ) |
Accumulated other comprehensive loss | (36 | ) | | (59 | ) |
Cumulative employer contributions in excess of net periodic benefit cost | (118 | ) | | (113 | ) |
Net obligation recognized in consolidated statement of condition | $ | (154 | ) | | $ | (172 | ) |
Accumulated benefit obligation | $ | 154 |
| | $ | 172 |
|
Actuarial assumptions: | | | |
Assumptions used to determine benefit obligations and periodic benefit costs are consistent with those described for the post-retirement plan, with the following exceptions: | | | |
Rate of increase in future compensation—SERPs | — | % | | — | % |
Rate of increase in future compensation—executive SERPs | — |
| | 10.00 | % |
For those defined benefit plans that have accumulated benefit obligations in excess of plan assets as of December 31, 2013 and 2012, the accumulated benefit obligations were $259 million and $1.05 billion, respectively, and the plan assets were $45 million and $810 million, respectively. For those defined benefit plans that have projected benefit obligations in excess of plan assets as of December 31, 2013 and 2012, the projected benefit obligations were $300 million and $1.08 billion, respectively, and the plan assets were $62 million and $814 million, respectively.
If trend rates for health care costs were increased by 1%, the post-retirement benefit obligation as of December 31, 2013 would have increased 7%, and the aggregate expense for service and interest costs for 2013 would have increased 11%. Conversely, if trend rates for health care costs were decreased by 1%, the post-retirement benefit obligation as of December 31, 2013 would have decreased 6%, and the aggregate expense for service and interest costs for 2013 would have decreased 9%. In addition, as part of recent corporate actions, a special termination benefit was provided to affected participants who were eligible for optional post-retirement medical coverage.
The following table presents the actuarially determined expense for our U.S. and non-U.S. defined benefit plans, post-retirement plan and SERPs for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary U.S. and Non-U.S. Defined Benefit Plans | | Post-Retirement Plan |
Years Ended December 31, | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
(In millions) | | | | | | | | | | | |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 11 |
| | $ | 11 |
| | $ | 9 |
| | $ | 8 |
| | $ | 6 |
| | $ | 6 |
|
Interest cost | 43 |
| | 45 |
| | 47 |
| | 5 |
| | 5 |
| | 6 |
|
Assumed return on plan assets | (63 | ) | | (59 | ) | | (58 | ) | | — |
| | — |
| | — |
|
Amortization of prior service cost | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of net loss | 24 |
| | 17 |
| | 12 |
| | 1 |
| | 1 |
| | 1 |
|
Net periodic benefit cost | 15 |
| | 12 |
| | 10 |
| | 14 |
| | 12 |
| | 13 |
|
Settlements | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Curtailments | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Special termination benefits | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Total expense | $ | 13 |
| | $ | 12 |
| | $ | 10 |
| | $ | 14 |
| | $ | 13 |
| | $ | 13 |
|
Estimated amounts that will be amortized from accumulated other comprehensive income over the next year: | | | | | | | | | | | |
Net loss | $ | (13 | ) | | $ | (24 | ) | | $ | (17 | ) | | $ | — |
| | $ | (2 | ) | | $ | (1 | ) |
Estimated amortization | $ | (13 | ) | | $ | (24 | ) | | $ | (17 | ) | | $ | — |
| | $ | (2 | ) | | $ | (1 | ) |
|
| | | | | | | | | | | |
| Non-Qualified SERPs |
Years Ended December 31, | 2013 | | 2012 | | 2011 |
(In millions) | | | | | |
Components of net periodic benefit cost: | | | | | |
Service cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 6 |
| | 7 |
| | 8 |
|
Amortization of net loss | 6 |
| | 5 |
| | 3 |
|
Net periodic benefit cost | 13 |
| | 13 |
| | 12 |
|
Settlements | 2 |
| | 6 |
| | 7 |
|
Total expense | $ | 15 |
| | $ | 19 |
| | $ | 19 |
|
Estimated amounts that will be amortized from accumulated other comprehensive income over the next year: | | | | | |
Net loss | $ | (4 | ) | | $ | (6 | ) | | $ | (5 | ) |
Estimated amortization | $ | (4 | ) | | $ | (6 | ) | | $ | (5 | ) |
Certain of our U.S. employees are eligible to contribute a portion of their pre-tax salary to a 401(k) savings plan, or post-tax Roth contributions, or both, up to the annual IRS limit. Our matching portion of these contributions is paid in cash, and we recorded related compensation and employee benefits expense in our consolidated statement of income of $61 million, $70 million, and $77 million in the years ended December 31, 2013, 2012 and 2011, respectively, in matching contributions. Effective April 1, 2012, our matching contribution in the U.S. was changed from 6% to 5% of employee contributions. In addition, employees in certain non-U.S. offices participate in other local plans. We recorded related compensation and employee benefits expense related to these local plans of $66 million, $65 million, and $65 million in the years ended December 31, 2013, 2012 and 2011.
We have a defined contribution supplemental executive retirement plan, referred to as a DC SERP, which provides for a discretionary contribution of cash and/or equity to certain executive officers. The amount is subject to certain vesting requirements as provided in the plan. We recorded compensation and employee benefits expense of $7 million, $11 million, and $10 million in the years ended December 31, 2013, 2012, and 2011, respectively, in our consolidated statement of income related to this DC SERP.
Shares of common stock and interest in the savings plan may be acquired by eligible employees through the Employee Stock Ownership Plan, referred to as an ESOP. The ESOP is a non-leveraged plan. Employee benefits expense is equal to the contribution specified by the plan formula and is composed of the cash contributed for the purchase of common stock on the open market or the fair value of the shares contributed from treasury stock. Dividends on shares held by the ESOP are charged to retained earnings, and shares are treated as outstanding for the calculation of earnings per common share.