Note 6 Employee Benefit Plans
Pension and Postemployment Plans. Teradata currently sponsors defined benefit pension plans for certain of its international employees. For those international pension plans for which the Company holds asset balances, those assets are primarily invested in common/collective trust funds (which include publicly traded common stocks, corporate and government debt securities, real estate indirect investments, cash or cash equivalents) and insurance contracts.
Postemployment obligations relate to benefits provided to involuntarily terminated employees and certain inactive employees after employment but before retirement. These benefits are paid in accordance with various foreign statutory laws and regulations, and Teradata’s established postemployment benefit practices and policies. Postemployment benefits may include disability benefits, supplemental unemployment benefits, severance, workers’ compensation benefits, continuation of health care benefits and life insurance coverage, and are funded on a pay-as-you-go basis.
Pension and postemployment benefit costs for the years ended December 31 were as follows:
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| In millions | Pension | Postemployment | Pension | Postemployment | Pension | Postemployment | ||||||||||||||||||
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Service cost |
$ | 10 | $ | 3 | $ | 9 | $ | 4 | $ | 9 | $ | 4 | ||||||||||||
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Interest cost |
3 | 1 | 4 | 1 | 4 | 2 | ||||||||||||||||||
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Expected return on plan assets |
(2 | ) | 0 | (3 | ) | 0 | (3 | ) | 0 | |||||||||||||||
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Settlement charge |
1 | 0 | 1 | 0 | 3 | 0 | ||||||||||||||||||
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Employee contributions |
(1 | ) | 0 | (1 | ) | 0 | (1 | ) | 0 | |||||||||||||||
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Amortization of actuarial loss (gain) |
2 | (1 | ) | 1 | 0 | 1 | 0 | |||||||||||||||||
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Total costs |
$ | 13 | $ | 3 | $ | 11 | $ | 5 | $ | 13 | $ | 6 | ||||||||||||
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The underfunded amount of pension and postemployment obligations is recorded as a liability in the Company’s consolidated balance sheet. The following tables present the changes in benefit obligations, plan assets, funded status and the reconciliation of the funded status to amounts recognized in the consolidated balance sheets and in accumulated other comprehensive income at December 31:
| Pension | Postemployment | |||||||||||||||
| In millions | 2013 | 2012 | 2013 | 2012 | ||||||||||||
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Change in benefit obligation |
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Benefit obligation at January 1 |
$ | 122 | $ | 108 | $ | 25 | $ | 33 | ||||||||
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Service cost |
8 | 8 | 3 | 4 | ||||||||||||
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Interest cost |
4 | 4 | 1 | 1 | ||||||||||||
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Plan participant contributions |
1 | 1 | 0 | 0 | ||||||||||||
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Actuarial loss (gain) |
6 | 9 | 3 | (11 | ) | |||||||||||
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Benefits paid |
(6 | ) | (7 | ) | (4 | ) | (2 | ) | ||||||||
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Currency translation adjustments |
(6 | ) | (1 | ) | (1 | ) | 0 | |||||||||
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Benefit obligation at December 31 |
129 | 122 | 27 | 25 | ||||||||||||
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Change in plan assets |
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Fair value of plan assets at January 1 |
69 | 59 | 0 | 0 | ||||||||||||
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Actual return on plan assets |
9 | 5 | 0 | 0 | ||||||||||||
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Company contributions |
10 | 12 | 0 | 0 | ||||||||||||
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Benefits paid |
(6 | ) | (7 | ) | 0 | 0 | ||||||||||
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Currency translation adjustments |
(7 | ) | (1 | ) | 0 | 0 | ||||||||||
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Plan participant contribution |
1 | 1 | 0 | 0 | ||||||||||||
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Fair value of plan assets at December 31 |
76 | 69 | 0 | 0 | ||||||||||||
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Funded status (underfunded) |
$ | (53 | ) | $ | (53 | ) | $ | (27 | ) | $ | (25 | ) | ||||
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Amounts Recognized in the Balance Sheet |
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Noncurrent assets |
$ | 1 | $ | — | $ | — | $ | — | ||||||||
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Current liabilities |
(1 | ) | (1 | ) | (4 | ) | (4 | ) | ||||||||
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Noncurrent liabilities |
(53 | ) | (52 | ) | (23 | ) | (21 | ) | ||||||||
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Net amounts recognized |
$ | (53 | ) | $ | (53 | ) | $ | (27 | ) | $ | (25 | ) | ||||
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Amounts Recognized in Accumulated Other Comprehensive Income |
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Net actuarial loss (gain) |
$ | 26 | $ | 32 | $ | (12 | ) | $ | (16 | ) | ||||||
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Prior service credit |
(2 | ) | (2 | ) | 0 | 0 | ||||||||||
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Total |
$ | 24 | $ | 30 | $ | (12 | ) | $ | (16 | ) | ||||||
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The accumulated pension benefit obligation was $120 million at December 31, 2013 and $113 million at December 31, 2012. For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of assets were $55 million, $49 million and $3 million, respectively, at December 31, 2013, and $98 million, $90 million and $45 million , respectively, at December 31, 2012.
The following table presents the pre-tax net changes in projected benefit obligations recognized in other comprehensive income during 2013 and 2012:
| Pension | Postemployment | |||||||||||||||
| In millions | 2013 | 2012 | 2013 | 2012 | ||||||||||||
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Actuarial (gain) loss arising during the year |
($ | 1 | ) | $ | 7 | $ | 2 | ($ | 12 | ) | ||||||
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Amortization of (gain) loss included in net periodic benefit cost |
(2 | ) | (1 | ) | 1 | 0 | ||||||||||
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Recognition of loss due to settlement |
(1 | ) | (1 | ) | 0 | 0 | ||||||||||
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Foreign currency exchange |
(1 | ) | 0 | 0 | 0 | |||||||||||
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Total recognized in other comprehensive (income) expense |
($ | 5 | ) | $ | 5 | $ | 3 | ($ | 12 | ) | ||||||
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The following table presents the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost during 2014:
| In millions | Pension | Postemployment | ||||||
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Net loss (gain) to be recognized in other comprehensive income |
$ | 2 | ($ | 1 | ) | |||
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The weighted-average rates and assumptions used to determine benefit obligations at December 31, 2013 and 2012, and net periodic benefit cost for the years ended December 31, 2013 and 2012, were as follows:
| Pension Benefit Obligations | Pension Benefit Cost | |||||||
| 2013 | 2012 | 2013 | 2012 | |||||
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Discount rate |
3.0% | 3.0% | 3.0% | 3.7% | ||||
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Rate of compensation increase |
3.2% | 3.3% | 3.3% | 3.3% | ||||
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Expected return on plan assets |
N/A | N/A | 3.4% | 4.0% | ||||
| Postemployment Benefit Obligations | Postemployment Benefit Cost | |||||||
| 2013 | 2012 | 2013 | 2012 | |||||
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Discount rate |
3.8% | 3.4% | 3.4% | 4.1% | ||||
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Rate of compensation increase |
3.7% | 3.8% | 3.8% | 3.7% | ||||
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Involuntary turnover rate |
1.0% | 1.0% | 1.0% | 1.5% | ||||
The Company determines the expected return on assets based on individual plan asset allocations, historical capital market returns, and long-run interest rate assumptions, with input from its actuaries, investment managers, and independent investment advisors. The company emphasizes long-term expectations in its evaluation of return factors, discounting or ignoring short-term market fluctuations. Expected asset returns are reviewed annually, but are generally modified only when asset allocation strategies change or long-term economic trends are identified.
The discount rate used to determine year-end 2013 U.S. benefit obligations was derived by matching the plans’ expected future cash flows to the corresponding yields from the Citigroup Pension Liability Index. This yield curve has been constructed to represent the available yields on high-quality fixed-income investments across a broad range of future maturities. International discount rates were determined by examining interest rate levels and trends within each country, particularly yields on high-quality long-term corporate bonds, relative to our future expected cash flows.
Gains and losses have resulted from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and differences between actual and assumed asset returns. These gains and losses (except those differences being amortized to the market-related value) are only amortized to the extent that they exceed 10% of the higher of the market-related value or the projected benefit obligation of each respective plan.
Plan Assets. The weighted-average asset allocations at December 31, 2013 and 2012, by asset category are as follows:
| Actual Asset Allocation | ||||||||||||
| As of December 31 | Target Asset | |||||||||||
| 2013 | 2012 | Allocation | ||||||||||
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Equity securities |
34 | % | 39 | % | 36 | % | ||||||
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Debt securities |
37 | % | 36 | % | 41 | % | ||||||
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Insurance (annuity) contracts |
13 | % | 11 | % | 13 | % | ||||||
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Real estate |
6 | % | 5 | % | 3 | % | ||||||
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Other |
10 | % | 9 | % | 7 | % | ||||||
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Total |
100 | % | 100 | % | 100 | % | ||||||
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Fair Value. Fair value measurements are established utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are more fully described in Note 9.
The following is a description of the valuation methodologies used for pension assets as of December 31, 2013.
Common/collective trust funds (which include money market funds, equity funds, bond funds, real-estate indirect investment, etc): Valued at the net asset value (“NAV”) of shares held by the Plan at year end, as reported to the Plan by the trustee, which represents the fair value of shares held by the Plan. Because the NAV of the shares held in the common/collective trust funds are derived by the value of the underlying investments, which are detailed in the table below, the Company has classified these underlying investments as Level 2 fair value measurements.
Insurance contracts: Valued by discounting the related future benefit payments using a current year-end market discount rate, which represents the fair value of the insurance contract. The Company has classified these contracts as Level 3 assets for fair value measurement purposes.
The following table sets forth by level, within the fair value hierarchy, the pension plan assets at fair value as of December 31, 2013:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets | Other | Signficant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| In millions | December 31, 2013 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
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Money market funds |
$ | 3 | $ | 0 | $ | 3 | $ | 0 | ||||||||
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Equity funds |
26 | 0 | 26 | 0 | ||||||||||||
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Bond/fixed-income funds |
28 | 0 | 28 | 0 | ||||||||||||
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Real-estate indirect investment |
5 | 0 | 5 | 0 | ||||||||||||
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Commodities/Other |
4 | 0 | 4 | 0 | ||||||||||||
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Insurance contracts |
10 | 0 | 0 | 10 | ||||||||||||
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Total Assets at fair value |
$ | 76 | $ | 0 | $ | 66 | $ | 10 | ||||||||
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The table below sets forth a summary of changes in the fair value of the pension plan level 3 assets for the year ended December 31, 2013:
| In millions | Insurance Contracts |
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Balance as of January 1, 2013 |
$ | 8 | ||
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Purchases, sales and settlements, net |
2 | |||
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Balance as of December 31, 2013 |
$ | 10 | ||
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The following table sets forth by level, within the fair value hierarchy, the pension plan assets at fair value as of December 31, 2012:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets | Other | Signficant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
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| In millions | December 31, 2012 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
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Money market funds |
$ | 2 | $ | 0 | $ | 2 | $ | 0 | ||||||||
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Equity funds |
27 | 0 | 27 | 0 | ||||||||||||
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Bond/fixed-income funds |
25 | 0 | 25 | 0 | ||||||||||||
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Real-estate indirect investment |
4 | 0 | 4 | 0 | ||||||||||||
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Commodities/Other |
3 | 0 | 3 | 0 | ||||||||||||
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Insurance contracts |
8 | 0 | 0 | 8 | ||||||||||||
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Total Assets at fair value |
$ | 69 | $ | 0 | $ | 61 | $ | 8 | ||||||||
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The table below sets forth a summary of changes in the fair value of the pension plan level 3 assets for the year ended December 31, 2012:
| In Millions | Insurance Contracts |
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Balance as of January 1, 2012 |
$ | 7 | ||
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Purchases, sales and settlements, net |
1 | |||
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Balance as of December 31, 2012 |
$ | 8 | ||
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Investment Strategy. Teradata employs a number of investment strategies across its various international pension plans. In some countries, particularly where Teradata does not have a large employee base, the Company may use insurance (annuity) contracts to satisfy its future pension payment obligations, whereby the Company makes pension plan contributions to an insurance company in exchange for which the pension plan benefits will be paid when the members reach a specified retirement age or on earlier exit of members from the plan. In other countries, the Company may employ local asset managers to manage investment portfolios according to the investment policies and guidelines established by the Company, and with consideration to individual plan liability structure and local market environment and risk tolerances. The Company’s investment policies and guidelines primarily emphasize diversification across and within asset classes to maximize long-term returns subject to prudent levels of risk, with the overall objective of enabling the plans to meet their future obligations. The investment portfolios contain a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across domestic and international stocks, small and large capitalization stocks, and growth and value stocks. Fixed-income assets are diversified across government and corporate bonds. Where applicable, real estate investments are made through real estate securities, partnership interests or direct investment, and are diversified by property type and location.
Cash Flows Related to Employee Benefit Plans
Cash Contributions. The Company expects to contribute approximately $9 million to the international pension plans and $4 million for postemployment benefit obligations in 2014.
Estimated Future Benefit Payments. The Company expects to make the following benefit payments reflecting past and future service from its pension and postemployment plans:
| Pension | Postemployment | |||||||
| In millions | Benefits | Benefits | ||||||
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2014 |
$ | 4 | $ | 4 | ||||
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2015 |
$ | 6 | $ | 4 | ||||
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2016 |
$ | 7 | $ | 4 | ||||
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2017 |
$ | 7 | $ | 4 | ||||
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2018 |
$ | 7 | $ | 3 | ||||
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2019-2023 |
$ | 32 | $ | 15 | ||||
Savings Plans. U.S. employees and many international employees participate in defined contribution savings plans. These plans generally provide either a specified percent of pay or a matching contribution on participating employees’ voluntary elections. The Company’s matching contributions typically are subject to a maximum percentage or level of compensation. Employee contributions can be made pre-tax, after-tax or a combination thereof. The expense for the U.S. savings plan was $23 million in 2013, $21 million in 2012 and $19 million in 2011. The expense for international subsidiary savings plans was $17 million in 2013, $18 million in 2012 and $14 million in 2011.