VERIZON COMMUNICATIONS INC | 2013 | FY | 3


Note 11

Employee Benefits

We maintain non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement health care and life insurance plans for our retirees and their dependents, which are both contributory and non-contributory, and include a limit on our share of the cost for certain recent and future retirees. In accordance with our accounting policy for pension and other postretirement benefits, operating expenses include pension and benefit related credits and/or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions. The adjustment is recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains/losses.

Pension and Other Postretirement Benefits

Pension and other postretirement benefits for many of our employees are subject to collective bargaining agreements. Modifications in benefits have been bargained from time to time, and we may also periodically amend the benefits in the management plans. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement health care and life insurance benefit plans.

 

Obligations and Funded Status

 

           (dollars in millions)  
     Pension     Health Care and Life  
At December 31,    2013     2012     2013     2012  

Change in Benefit Obligations

        

Beginning of year

   $   26,773     $   30,582     $ 26,844     $ 27,369  

Service cost

     395       358       318       359  

Interest cost

     1,002       1,449       1,095       1,284  

Plan amendments

     (149     183       (119     (1,826

Actuarial (gain) loss, net

     (2,327     6,074       (3,576     1,402  

Benefits paid

     (1,777     (2,735     (1,520     (1,744

Curtailment and termination benefits

     4                    

Annuity purchase

           (8,352            

Settlements paid

     (889     (786            
  

 

 

 

End of year

   $ 23,032     $ 26,773     $ 23,042     $ 26,844  
  

 

 

 

Change in Plan Assets

        

Beginning of year

   $ 18,282     $ 24,110     $ 2,657     $ 2,628  

Actual return on plan assets

     1,388       2,326       556       312  

Company contributions

     107       3,719       1,360       1,461  

Benefits paid

     (1,777     (2,735     (1,520     (1,744

Settlements paid

     (889     (786            

Annuity purchase

           (8,352            
  

 

 

 

End of year

   $ 17,111     $ 18,282     $ 3,053     $ 2,657  
  

 

 

 

Funded Status

        
  

 

 

 

End of year

   $ (5,921   $ (8,491   $ (19,989   $ (24,187
  

 

 

 

 

           (dollars in millions)  
     Pension     Health Care and Life  
At December 31,    2013     2012     2013     2012  

Amounts recognized on the balance sheet

        

Noncurrent assets

   $ 339     $ 236     $     $  

Current liabilities

     (137     (129     (710     (766

Noncurrent liabilities

     (6,123     (8,598     (19,279     (23,421
  

 

 

 

Total

   $   (5,921   $   (8,491   $ (19,989   $ (24,187
  

 

 

 

Amounts recognized in Accumulated Other
Comprehensive Income (Pre-tax)

        

Prior Service Benefit (Cost)

   $ 25     $ 181     $ (2,120   $ (2,247
  

 

 

 

Total

   $ 25     $ 181     $ (2,120   $ (2,247
  

 

 

 

Beginning in 2013, as a result of federal health care reform, Verizon no longer files for the Retiree Drug Subsidy (RDS) and instead contracts with a Medicare Part D plan on a group basis to provide prescription drug benefits to Medicare eligible retirees.

During 2012, we reached agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers on new, three-year contracts that cover approximately 43,000 Wireline employees. This resulted in the adoption of plan amendments which will result in lower other postretirement benefit costs in 2013 and beyond.

 

The accumulated benefit obligation for all defined benefit pension plans was $22.9 billion and $26.5 billion at December 31, 2013 and 2012, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:

 

     (dollars in millions)  
At December 31,    2013      2012  

Projected benefit obligation

   $ 22,610      $ 26,351  

Accumulated benefit obligation

     22,492        26,081  

Fair value of plan assets

     16,350        17,623  

Net Periodic Cost

The following table summarizes the benefit (income) cost related to our pension and postretirement health care and life insurance plans:

 

           (dollars in millions)  
     Pension     Health Care and Life  
Years Ended December 31,    2013     2012     2011     2013     2012     2011  

Service cost

   $ 395     $ 358     $ 307     $ 318     $ 359     $ 299  

Amortization of prior service cost (credit)

     6       (1     72       (247     (89     (57
  

 

 

 

Subtotal

     401       357       379       71       270       242  

Expected return on plan assets

     (1,245     (1,795     (1,976     (143     (171     (163

Interest cost

     1,002       1,449       1,590       1,095       1,284       1,421  
  

 

 

 

Subtotal

     158       11       (7     1,023       1,383       1,500  

Remeasurement (gain) loss, net

     (2,470     5,542       4,146       (3,989     1,262       1,787  
  

 

 

 

Net periodic benefit (income) cost

     (2,312     5,553       4,139       (2,966     2,645       3,287  

Curtailment and termination benefits

                 4                               –                 –                 –  
  

 

 

 

Total

   $ (2,308   $ 5,553     $ 4,139     $ (2,966   $ 2,645     $ 3,287  
  

 

 

 

Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:

 

            (dollars in millions)  
     Pension      Health Care and Life  
At December 31,    2013     2012      2013     2012  

Prior service cost

   $ (149   $ 183      $ (119   $ (1,826

Reversal of amortization items

                                           

Prior service cost

     (6     1        247       89  
  

 

 

 

Total recognized in other comprehensive (income) loss (pre-tax)

   $ (155   $ 184      $ 128     $ (1,737)   
  

 

 

 

The estimated prior service cost for the defined benefit pension plan that will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is not significant. The estimated prior service cost for the defined benefit postretirement plans that will be amortized from Accumulated other comprehensive income into net periodic benefit (income) cost over the next fiscal year is $0.3 billion.

Assumptions

The weighted-average assumptions used in determining benefit obligations follow:

 

     Pension     Health Care and Life  
At December 31,    2013     2012     2013     2012  

Discount Rate

     5.00     4.20     5.00     4.20

Rate of compensation increases

     3.00       3.00       N/A        N/A   

 

The weighted-average assumptions used in determining net periodic cost follow:

 

     Pension     Health Care and Life  
At December 31,    2013     2012     2011     2013     2012     2011  

Discount Rate

     4.20     5.00     5.75     4.20     5.00     5.75

Expected return on plan assets

     7.50       7.50       8.00       5.60       7.00       6.00  

Rate of compensation increases

     3.00       3.00       3.00       N/A        N/A        N/A   

In order to project the long-term target investment return for the total portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period. Those estimates are based on a combination of factors including the current market interest rates and valuation levels, consensus earnings expectations and historical long-term risk premiums. To determine the aggregate return for the pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy.

The assumed health care cost trend rates follow:

 

     Health Care and Life  
At December 31,    2013     2012     2011  

Healthcare cost trend rate assumed for next year

     6.50     7.00     7.50

Rate to which cost trend rate gradually declines

     4.75       5.00       5.00  

Year the rate reaches the level it is assumed to remain thereafter

     2020       2016       2016  

A one-percentage point change in the assumed health care cost trend rate would have the following effects:

 

     (dollars in millions)  
One-Percentage Point    Increase      Decrease  

Effect on 2013 service and interest cost

   $ 184       $ (150

Effect on postretirement benefit obligation as of December 31, 2013

     2,539        (2,086

Plan Assets

Historically, our portfolio strategy emphasized a long-term equity orientation, significant global diversification, and the use of both public and private investments. In an effort to reduce the risk of our portfolio strategy and better align assets with liabilities, we have shifted our strategy to one that is more liability driven, where cash flows from investments better match projected benefit payments but result in lower asset returns. We intend to reduce the likelihood that assets will decline at a time when liabilities increase (referred to as liability hedging), with the goal to reduce the risk of underfunding to the plan and its participants and beneficiaries. Both active and passive management approaches are used depending on perceived market efficiencies and various other factors. Our diversification and risk control processes serve to minimize the concentration of risk.

While target allocation percentages will vary over time, the company’s overall investment strategy is to achieve a mix of assets, which allows us to meet projected benefits payments while taking into consideration risk and return. The current target allocation for plan assets is designed so that 70% of the assets have the objective of achieving a return in excess of the growth in liabilities (comprised of public equities, private equities, real estate, hedge funds and emerging debt) and 30% of the assets are invested as liability hedging assets (typically longer duration fixed income). This allocation will shift as funded status improves to a higher allocation to liability hedging assets. Target policies will be revisited periodically to ensure they are in line with fund objectives. Due to our diversification and risks control processes, there are no significant concentrations of risk, in terms of sector, industry, geography or company names.

Pension and healthcare and life plans assets do not include significant amounts of Verizon common stock.

 

Pension Plans

The fair values for the pension plans by asset category at December 31, 2013 are as follows:

 

            (dollars in millions)  
Asset Category    Total      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 968      $ 881      $ 87      $  

Equity securities

     4,200        3,300        900         

Fixed income securities

           

U.S. Treasuries and agencies

     1,097        691        406         

Corporate bonds

     2,953        212        2,579        162  

International bonds

     364        51        313         

Other

     3               3         

Real estate

     1,784                      1,784  

Other

           

Private equity

     3,942                      3,942  

Hedge funds

     1,800               604        1,196  
  

 

 

 

Total

   $   17,111      $ 5,135      $ 4,892      $ 7,084  
  

 

 

 

The fair values for the pension plans by asset category at December 31, 2012 are as follows:

 

            (dollars in millions)  
Asset Category    Total      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 1,618      $ 1,586      $ 32      $  

Equity securities

     2,944        2,469        475         

Fixed income securities

           

U.S. Treasuries and agencies

     1,589        1,125        464         

Corporate bonds

     2,456        35        2,225        196  

International bonds

     601        140        461         

Other

     210               210         

Real estate

     2,018                      2,018  

Other

           

Private equity

     5,039                      5,039  

Hedge funds

     1,807               1,249        558  
  

 

 

 

Total

   $   18,282      $ 5,355      $ 5,116      $ 7,811  
  

 

 

 

 

The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable inputs:

 

           (dollars in millions)  
      Corporate
Bonds
    Real
Estate
    Private
Equity
    Hedge
Funds
    Total  

Balance at January 1, 2012

   $ 189     $ 2,158     $ 6,055     $ 662     $ 9,064  

Actual gain on plan assets

     12       84       146       43       285  

Purchases and sales

     (14     (224     (1,162     (147     (1,547

Transfers in

     9                         9  
  

 

 

 

Balance at December 31, 2012

   $ 196     $ 2,018     $ 5,039     $ 558     $ 7,811  

Actual gain on plan assets

     12       81       674       84       851  

Purchases and sales

     (13     (315     (1,732     (124     (2,184

Transfers in (out)

     (33           (39     678       606  
  

 

 

 

Balance at December 31, 2013

   $ 162     $   1,784     $ 3,942     $ 1,196     $ 7,084  
  

 

 

 

Health Care and Life Plans

The fair values for the other postretirement benefit plans by asset category at December 31, 2013 are as follows:

 

            (dollars in millions)  
Asset Category    Total      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 237      $ 12      $ 225      $  

Equity securities

     2,178        1,324        854         

Fixed income securities

           

U.S. Treasuries and agencies

     121        94        27         

Corporate bonds

     252        45        207         

International bonds

     104        18        86         

Other

     161        40        121         
  

 

 

 

Total

   $   3,053      $ 1,533      $ 1,520      $         –  
  

 

 

 

The fair values for the other postretirement benefit plans by asset category at December 31, 2012 are as follows:

 

            (dollars in millions)  
Asset Category    Total      Level 1      Level 2      Level 3  

Cash and cash equivalents

   $ 291      $ 13      $ 278      $  

Equity securities

     1,753        1,004        749         

Fixed income securities

           

U.S. Treasuries and agencies

     118        80        38         

Corporate bonds

     192        11        181         

International bonds

     189        72        117         

Other

     114               114         
  

 

 

 

Total

   $   2,657      $ 1,180      $ 1,477      $         –  
  

 

 

 

 

The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of assets.

Cash and cash equivalents include short-term investment funds, primarily in diversified portfolios of investment grade money market instruments and are valued using quoted market prices or other valuation methods, and thus are classified within Level 1 or Level 2.

Equity securities are investments in common stock of domestic and international corporations in a variety of industry sectors, and are valued primarily using quoted market prices or other valuation methods, and thus are classified within Level 1 or Level 2.

Fixed income securities include U.S. Treasuries and agencies, debt obligations of foreign governments and domestic and foreign corporations. Fixed income also includes investments in collateralized mortgage obligations, mortgage backed securities and interest rate swaps. The fair value of fixed income securities is based on observable prices for identical or comparable assets, adjusted using benchmark curves, sector grouping, matrix pricing, broker/dealer quotes and issuer spreads, and thus is classified within Level 1 or Level 2.

Real estate investments include those in limited partnerships that invest in various commercial and residential real estate projects both domestically and internationally. The fair values of real estate assets are typically determined by using income and/or cost approaches or a comparable sales approach, taking into consideration discount and capitalization rates, financial conditions, local market conditions and the status of the capital markets, and thus are classified within Level 3.

Private equity investments include those in limited partnerships that invest in operating companies that are not publicly traded on a stock exchange. Investment strategies in private equity include leveraged buyouts, venture capital, distressed investments and investments in natural resources. These investments are valued using inputs such as trading multiples of comparable public securities, merger and acquisition activity and pricing data from the most recent equity financing taking into consideration illiquidity, and thus are classified within Level 3.

Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. The fair values of hedge funds are estimated using net asset value per share (NAV) of the investments. Verizon has the ability to redeem these investments at NAV within the near term and thus are classified within Level 2. Investments that cannot be redeemed in the near term are classified within Level 3.

Cash Flows

In 2013, contributions to our qualified pension plans were not material. Also in 2013, we contributed $0.1 billion to our nonqualified pension plans and $1.4 billion to our other postretirement benefit plans. We anticipate approximately $1.2 billion in contributions to our qualified pension plans, $0.2 billion to our nonqualified pension plans and $1.4 billion to our other postretirement benefit plans in 2014.

Estimated Future Benefit Payments

The benefit payments to retirees are expected to be paid as follows:

 

     (dollars in millions)  
Year    Pension Benefits      Health Care and Life  

2014

   $ 2,980      $ 1,582  

2015

     2,280        1,574  

2016

     1,742        1,538  

2017

     1,666        1,506  

2018

     1,377        1,474  

2019-2023

     6,712        6,846  

Savings Plan and Employee Stock Ownership Plans

We maintain four leveraged employee stock ownership plans (ESOP). Only one plan currently has unallocated shares. We match a certain percentage of eligible employee contributions to the savings plans with shares of our common stock from this ESOP. At December 31, 2013, the number of unallocated and allocated shares of common stock in this ESOP was 163 thousand and 62 million, respectively. All leveraged ESOP shares are included in earnings per share computations.

Total savings plan costs were $1.0 billion in 2013 and $0.7 billion in 2012 and 2011, respectively.

 

Pension Annuitization

On October 17, 2012, we, along with our subsidiary Verizon Investment Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension Plan (the Plan), entered into a definitive purchase agreement with The Prudential Insurance Company of America (Prudential) and Prudential Financial, Inc., pursuant to which the Plan would purchase a single premium group annuity contract from Prudential.

On December 10, 2012, upon issuance of the group annuity contract by Prudential, Prudential irrevocably assumed the obligation to make future annuity payments to approximately 41,000 Verizon management retirees who began receiving pension payments from the Plan prior to January 1, 2010. The amount of each retiree’s annuity payment equals the amount of such individual’s pension benefit. In addition, the group annuity contract is intended to replicate the same rights to future payments, such as survivor benefits, that are currently offered by the Plan.

We contributed approximately $2.6 billion to the Plan between September 1, 2012 and December 31, 2012 in connection with the transaction so that the Plan’s funding percentage would not decrease as a result of the transaction.

Severance Benefits

The following table provides an analysis of our actuarially determined severance liability recorded in accordance with the accounting standard regarding employers’ accounting for postemployment benefits:

 

                         (dollars in millions)  
Year    Beginning of Year      Charged to
Expense
     Payments     Other     End of Year  

2011

   $ 1,569      $ 32      $ (474   $ (14   $ 1,113  

2012

     1,113        396        (531     32       1,010  

2013

     1,010        134        (381     (6     757  

Severance, Pension and Benefit (Credits) Charges

During 2013, we recorded net pre-tax severance, pension and benefits credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The credits were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities from a weighted-average of 4.2% at December 31, 2012 to a weighted-average of 5.0% at December 31, 2013 ($4.3 billion), lower than assumed retiree medical costs and other assumption adjustments ($1.4 billion) and the difference between our estimated return on assets of 7.5% at December 31, 2012 and our actual return on assets of 8.6% at December 31, 2013 ($0.5 billion).

During 2012, we recorded net pre-tax severance, pension and benefits charges of approximately $7.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The charges were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities from a weighted-average of 5% at December 31, 2011 to a weighted-average of 4.2% at December 31, 2012 ($5.3 billion) and revisions to the retirement assumptions for participants and other assumption adjustments, partially offset by the difference between our estimated return on assets of 7.5% and our actual return on assets of 10% ($0.7 billion). As part of this charge, we also recorded $1.0 billion related to the annuitization of pension liabilities, as described above, as well as severance charges of $0.4 billion primarily for approximately 4,000 management employees.

During 2011, we recorded net pre-tax severance, pension and benefits charges of approximately $6.0 billion for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The charges were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities from 5.75% at December 31, 2010 to 5% at December 31, 2011 ($5.0 billion); the difference between our estimated return on assets of 8% and our actual return on assets of 5% ($0.9 billion); and revisions to the life expectancy of participants and other adjustments to assumptions.


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