Pension Benefits
We maintain a number of qualified and nonqualified defined benefit pension plans and defined contribution plans for eligible employees.
Defined Benefit Pension Plans
Eligible U.S. employees who were employed by the Company as of December 31, 1995 are covered under the Company-sponsored defined benefit retirement plan. In 1997, the plan was amended to freeze all plan benefits as of December 31, 1996. Benefits for the defined benefit retirement plan are based primarily on age of employees at date of retirement, years of creditable service and the average of the highest 60 months of pay during the 15 years prior to the plan freeze date. We also have defined benefit pension plans for eligible Canadian and United Kingdom employees, as well as an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives. Defined benefit plan assets and obligations are measured as of the Company's fiscal year-end.
The net periodic expense for our pension plans is as follows:
|
| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Service cost - benefits earned during the year | $ | 7 |
| | $ | 7 |
| | $ | 6 |
|
Interest cost on projected benefit obligation | 28 |
| | 31 |
| | 31 |
|
Expected return on assets | (28 | ) | | (31 | ) | | (29 | ) |
Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation | 32 |
| | 27 |
| | 28 |
|
Net periodic pension expense | $ | 39 |
| | $ | 34 |
| | $ | 36 |
|
The projected unit credit method is utilized in measuring net periodic pension expense over the employees' service life for the U.S. pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods.
Information regarding the changes in benefit obligations and plan assets for our pension plans is as follows:
|
| | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 |
Change in benefit obligations | | | |
Benefit obligation at beginning of period | $ | 670 |
| | $ | 625 |
|
Service cost | 7 |
| | 7 |
|
Interest cost | 28 |
| | 31 |
|
Actuarial loss | 73 |
| | 42 |
|
Benefit payments | (35 | ) | | (34 | ) |
Foreign exchange impact and other | (7 | ) | | (1 | ) |
Benefit obligation at end of period (1) | $ | 736 |
| | $ | 670 |
|
| | | |
Change in plan assets | | | |
Fair value of plan assets at beginning of period | $ | 410 |
| | $ | 416 |
|
Actual return on plan assets | 31 |
| | 12 |
|
Employer and participant contributions | 25 |
| | 17 |
|
Benefits paid | (35 | ) | | (34 | ) |
Foreign exchange impact and other | (6 | ) | | (1 | ) |
Fair value of plan assets at end of period | $ | 425 |
| | $ | 410 |
|
| | | |
Funded status at end of period | $ | (311 | ) | | $ | (260 | ) |
| | | |
Amounts recognized on the balance sheet | | | |
Current liabilities | $ | (3 | ) | | $ | (13 | ) |
Long-term liabilities | (308 | ) | | (247 | ) |
Total | $ | (311 | ) | | $ | (260 | ) |
| |
(1) | The benefit obligation is the projected benefit obligation. |
The accumulated benefit obligations for our pension plans were $733 million at March 31, 2013 and $667 million at March 31, 2012. The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all our pension plans with an accumulated benefit obligation in excess of plan assets.
|
| | | | | | | |
| March 31, |
(In millions) | 2013 | | 2012 |
Projected benefit obligation | $ | 736 |
| | $ | 670 |
|
Accumulated benefit obligation | 733 |
| | 667 |
|
Fair value of plan assets | 425 |
| | 410 |
|
Amounts recognized in accumulated other comprehensive income (pre-tax) consist of:
|
| | | | | | | |
| March 31, |
(In millions) | 2013 | | 2012 |
Net actuarial loss | $ | 310 |
| | $ | 274 |
|
Prior service cost | — |
| | 1 |
|
Net transition obligation | — |
| | 1 |
|
Total | $ | 310 |
| | $ | 276 |
|
Other changes in accumulated other comprehensive income (pre-tax) during the reporting periods were as follows:
|
| | | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Net actuarial loss | $ | 70 |
| | $ | 61 |
| | $ | 10 |
|
Amortization of: | | | | | |
Net actuarial loss | (31 | ) | | (25 | ) | | (26 | ) |
Prior service cost | (1 | ) | | (2 | ) | | (2 | ) |
Foreign exchange impact and other | (4 | ) | | — |
| | — |
|
Total recognized in other comprehensive loss (income) | $ | 34 |
| | $ | 34 |
| | $ | (18 | ) |
We expect to amortize $1 million of prior service cost and $37 million of actuarial loss for the pension plans from stockholders' equity to pension expense in 2014. Comparable 2013 amounts were $1 million and $31 million.
Projected benefit obligations relating to our unfunded U.S. plans were $205 million and $167 million at March 31, 2013 and 2012. Pension obligations for our unfunded plans are funded based on the recommendations of independent actuaries.
Expected benefit payments, including assumed executive lump sum payments, for our pension plans are as follows: $33 million, $44 million, $159 million, $33 million and $44 million for 2014 to 2018 and $213 million for 2019 through 2023. Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Expected contributions to be made for our pension plans are $15 million for 2014.
Weighted-average assumptions used to estimate the net periodic pension expense and the actuarial present value of benefit obligations were as follows:
|
| | | | | | | | | |
| | Years Ended March 31, |
| | 2013 | | 2012 | | 2011 |
Net periodic pension expense | | | | | | |
Discount rates | | 4.22 | % | | 4.98 | % | | 5.30 | % |
Rate of increase in compensation | | 3.58 |
| | 3.74 |
| | 3.75 |
|
Expected long-term rate of return on plan assets | | 6.94 |
| | 7.60 |
| | 7.79 |
|
Benefit obligation | | | | | | |
Discount rates | | 3.55 | % | | 4.23 | % | | 4.99 | % |
Rate of increase in compensation | | 3.59 |
| | 3.56 |
| | 3.74 |
|
Our U.S. defined benefit pension plan liabilities are valued using a discount rate based on a yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose maturities are aligned with the expected benefit payments of our plans. For March 31, 2013, we used a weighted average discount rate of 3.40%, which represents a decrease of 75 basis points from our 2012 weighted-average discount rate of 4.15%.
Sensitivity to changes in the weighted-average discount rate for our U.S. pension plans is as follows:
|
| | | | | | |
(In millions) | | One Percentage Point Increase | | One Percentage Point Decrease |
Increase (decrease) on projected benefit obligation | | $ | (41) | | $ | 48 |
Increase (decrease) on net periodic pension cost | | | (2) | | | 3 |
Plan Assets
Investment Strategy: The overall objective for McKesson's pension plan assets is to generate long-term investment returns consistent with capital preservation and prudent investment practices, with a diversification of asset types and investment strategies. Periodic adjustments are made to provide liquidity for benefit payments and to rebalance plan assets to their target allocations.
The target allocations for plan assets at March 31, 2013 are 45% equity investments, 42% fixed income investments and 13% to all other types of investments, including cash and cash equivalents. The target allocations for plan assets at March 31, 2012 were 53% equity investments, 35% fixed income investments and 12% to all other types of investments, including cash and cash equivalents. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government securities, mortgage-backed securities, asset-backed securities, other directly held fixed income investments, and fixed income commingled funds. Other investments include real estate funds, hedge funds, other commingled funds and cash and cash equivalents.
We develop our expected long-term rate of return assumption based on the projected performance of the asset classes in which plan assets are invested. Our target asset allocation was determined based on the liability and risk tolerance characteristics of the plans and at times may be adjusted to achieve our overall investment objectives.
Fair Value Measurements: The following tables represent our pension plan assets as of March 31, 2013 and 2012, using the fair value hierarchy by asset class. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on unadjusted quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.
|
| | | | | | | | | | | | | | | |
| March 31, 2013 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 3 |
| | $ | 8 |
| | $ | — |
| | $ | 11 |
|
Equity securities: | | | | | | | |
Common and preferred stock | 20 |
| | — |
| | — |
| | 20 |
|
Equity commingled funds | — |
| | 209 |
| | — |
| | 209 |
|
Fixed income securities: | | | | | | | |
Government securities | — |
| | 12 |
| | — |
| | 12 |
|
Corporate bonds | — |
| | 28 |
| | — |
| | 28 |
|
Mortgage-backed securities | — |
| | 6 |
| | — |
| | 6 |
|
Asset-backed securities and other | — |
| | 22 |
| | — |
| | 22 |
|
Fixed income commingled funds | — |
| | 97 |
| | — |
| | 97 |
|
Other: | | | | | | | |
Real estate funds | — |
| | — |
| | 19 |
| | 19 |
|
Other commingled funds | — |
| | — |
| | — |
| | — |
|
Total | $ | 23 |
| | $ | 382 |
| | $ | 19 |
| | 424 |
|
Receivables (1) | | | | | | | 1 |
|
Payables (1) | | | | | | | — |
|
Total | | | | | | | $ | 425 |
|
| |
(1) | Represents pending trades at March 31, 2013. |
|
| | | | | | | | | | | | | | | |
| March 31, 2012 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 14 |
| | $ | 14 |
| | $ | — |
| | $ | 28 |
|
Equity securities: | | | | | | | |
Common and preferred stock | 100 |
| | — |
| | — |
| | 100 |
|
Equity commingled funds | — |
| | 134 |
| | — |
| | 134 |
|
Fixed income securities: | | | | | | | |
Government securities | — |
| | 11 |
| | — |
| | 11 |
|
Corporate bonds | — |
| | 48 |
| | — |
| | 48 |
|
Mortgage-backed securities | — |
| | 21 |
| | — |
| | 21 |
|
Asset-backed securities and other | — |
| | 20 |
| | — |
| | 20 |
|
Fixed income commingled funds | — |
| | 25 |
| | — |
| | 25 |
|
Other: | | | | | | | |
Real estate funds | — |
| | — |
| | 17 |
| | 17 |
|
Other Commingled funds | — |
| | 12 |
| | — |
| | 12 |
|
Total | $ | 114 |
| | $ | 285 |
| | $ | 17 |
| | 416 |
|
Receivables (1) | | | | | | | 6 |
|
Payables (1) | | | | | | | (12 | ) |
Total | | | | | | | $ | 410 |
|
| |
(1) | Represents pending trades at March 31, 2012. |
Cash and cash equivalents - Cash and cash equivalents include short-term investment funds that maintain daily liquidity and aim to have constant unit values of $1.00. The funds invest in short-term fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and high credit quality. Directly held cash and cash equivalents are classified as Level 1 investments. Cash and cash equivalents include commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 2 investments.
Common and preferred stock - This investment class consists of common and preferred shares issued by U.S. and non-U.S. corporations. Common shares are traded actively on exchanges and price quotes are readily available. Preferred shares may not be actively traded. Holdings of common shares are generally classified as Level 1 investments. Preferred shares are classified as Level 2 investments.
Equity commingled funds - Some equity investments are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 2 investments.
Fixed income securities - Government securities consist of bonds and debentures issued by central governments or federal agencies; corporate bonds consist of bonds and debentures issued by corporations; mortgage-backed securities consist of debt obligations secured by a mortgage or pool of mortgages; and asset-backed securities primarily consist of debt obligations secured by an asset or pool of assets other than mortgages. Inputs to the valuation methodology include quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Multiple prices and price types are obtained from pricing vendors whenever possible, enabling cross-provider price validations. Fixed income securities are generally classified as Level 2 investments.
Fixed income commingled funds - Some fixed income investments are held in commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 2 investments.
Real estate funds - The value of the real estate funds is reported by the fund manager and is based on a valuation of the underlying properties. Inputs used in the valuation include items such as cost, discounted future cash flows, independent appraisals and market based comparable data. The real estate funds are classified as Level 3 investments.
Hedge funds - The hedge funds are invested in fund of fund structures and consist of multiple investments in interest and currency funds designed to hedge the risk of rate fluctuations. Given the complex nature of valuation and the broad spectrums of investments, hedge funds are classified as Level 3 investments.
Other commingled funds - The other commingled funds are invested in equities, bonds, commodities, other alternative investments and cash and cash equivalents. These funds are valued based on the weekly net asset values derived from the quoted prices for the underlying securities in active markets and, for alternative investments, based on other valuation techniques. Other commingled funds are classified as Level 2 investments.
The following table represents a reconciliation of Level 3 plan assets held during the years ended March 31, 2013 and 2012:
|
| | | | | | | | | | | | |
(In millions) | | Real Estate Funds | | Hedge Funds | | Total |
Balance at March 31, 2011 | | $ | 5 |
| | $ | 5 |
| | $ | 10 |
|
Unrealized gain on plan assets still held | | 1 |
| | — |
| | 1 |
|
Purchases, sales and settlements | | 11 |
| | (5 | ) | | 6 |
|
Balance at March 31, 2012 | | $ | 17 |
| | $ | — |
| | $ | 17 |
|
Unrealized gain on plan assets still held | | 1 |
| | — |
| | 1 |
|
Purchases, sales and settlements | | 1 |
| | — |
| | 1 |
|
Balance at March 31, 2013 | | $ | 19 |
|
| $ | — |
| | $ | 19 |
|
Multiemployer Plans
We also contribute to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover union-represented employees. The risks of participating in these multiemployer plans are different from single-employer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Actions taken by other participating employers may lead to adverse changes in the financial condition of a multiemployer benefit plan and our withdrawal liability and contributions may increase. Contributions to the plans and amounts accrued were not material for the years ended March 31, 2013, 2012, and 2011.
Defined Contribution Plans
We have a contributory profit sharing investment plan (“PSIP”) for U.S. employees not covered by collective bargaining arrangements. Effective January 1, 2011, eligible employees may contribute to the PSIP up to 75% of their monthly eligible compensation for pre-tax contributions and up to 75% of compensation for catch-up contributions not to exceed IRS limits. The Company makes matching contributions in an amount equal to 100% of the employee's first 3% of pay contributed and 50% for the next 2% of pay contributed. The Company also may make an additional annual matching contribution for each plan year to enable participants to receive a full match based on their annual contribution. Contribution expenses for the PSIP were $61 million, $58 million and $59 million for the years ended March 31, 2013, 2012, and 2011.
