RETIREMENT PLANS
We provide defined-contribution benefits, as well as defined-benefit pension and other post-retirement benefits, to eligible employees.
Retirement Plan Summary Information
Defined-contribution Benefits. We provide eligible employees the opportunity to participate in defined-contribution savings plans (commonly known as 401(k) plans), which permit contributions on a before-tax and after-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate in the plans. Under most plans, the employee may contribute to various investment alternatives, including investment in our common stock. In some of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $203 in 2011, $201 in 2012 and $204 in 2013. The defined-contribution plans held approximately 31 million and 27 million shares of our common stock, representing approximately 9 percent and 8 percent of our outstanding shares, on December 31, 2012 and 2013, respectively.
Pension Benefits. We have six noncontributory and six contributory trusteed, qualified defined-benefit pension plans covering eligible government business employees, and two noncontributory and four contributory plans covering eligible commercial business employees, including some employees of our international operations. The primary factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Our primary government pension plan, which comprises the majority of our unfunded obligation, was closed to new salaried participants on January 1, 2007. Additionally, we made changes to this plan for certain participants effective in 2014 that limit or cease the benefits that accrue for future service. As a result of these modifications, the plan’s projected benefit obligation (PBO) was reduced by approximately $205.
We also sponsor one funded and several unfunded non-qualified supplemental executive plans, which provide participants with additional benefits, including excess benefits over limits imposed on qualified plans by federal tax law.
Other Post-retirement Benefits. We maintain plans that provide post-retirement healthcare and life insurance coverage for certain of our employees and retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement.
Contributions and Benefit Payments
It is our policy to fund our defined-benefit retirement plans in a manner that optimizes the tax deductibility and contract recovery of contributions, considered within our capital deployment framework. We make discretionary and required contributions to our pension plans to provide for benefits attributed to service to date and to be earned in the future. Our required contributions are determined in accordance with IRS regulations. The contributions to our pension plans depend on a variety of factors, including discount rates and annual returns on our plan assets. We contributed $601 to our pension plans in 2013, including approximately $250 of voluntary contributions. We expect to contribute approximately $550 to our pension plans in 2014.
We maintain several tax-advantaged accounts, primarily Voluntary Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations for some of our post-retirement benefit plans. For non-funded plans, claims are paid as received. We contributed $25 to our other post-retirement plans in 2013 and expect to contribute a similar amount in 2014.
We expect the following benefits to be paid from our retirement plans over the next 10 years:
|
| | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
2014 | $ | 496 |
| | $ | 82 |
|
2015 | 520 |
| | 83 |
|
2016 | 543 |
| | 83 |
|
2017 | 569 |
| | 82 |
|
2018 | 596 |
| | 82 |
|
2019-2023 | 3,427 |
| | 397 |
|
Government Contract Considerations
Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense business groups. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent recovery of the cost is considered probable based on our backlog and probable follow-on contracts, we defer the excess in contracts in process on the Consolidated Balance Sheets until the cost is allocable to contracts. See Note G for discussion of our deferred contract costs. For other plans, the amount allocated to contracts and included in revenues has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenues and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.
In 2011, changes were made to the CAS to harmonize the regulations with the Pension Protection Act of 2006 (PPA). For certain contracts awarded prior to February 27, 2012, we are entitled to recover additional pension costs from our customers resulting from the CAS harmonization with the PPA. We submitted REAs of approximately $165 for these contracts in 2012. These REAs remain outstanding on December 31, 2013, and are subject to negotiation with our customer, the U.S. Department of Defense.
Defined-benefit Retirement Plan Summary Financial Information
Estimating retirement plan assets, liabilities and costs requires the extensive use of actuarial assumptions. These include the long-term rate of return on plan assets, the interest rate used to discount projected benefit payments, healthcare cost trend rates and future salary increases. Given the long-term nature of the assumptions being made, actual outcomes typically differ from these estimates.
Our annual benefit cost consists of three primary elements: the cost of benefits earned by employees for services rendered during the year, an interest charge on our plan liabilities and an assumed return on our plan assets for the year. The annual cost also includes gains and losses resulting from changes in actuarial assumptions, differences between the actual and assumed long-term rate of return on assets and gains and losses resulting from changes we make to plan benefit terms.
We recognize an asset or liability on the Consolidated Balance Sheets equal to the funded status of each of our defined-benefit retirement plans. The funded status is the difference between the fair value of the plan’s assets and its benefit obligation. Changes in plan assets and liabilities due to differences between actuarial assumptions and the actual results of the plan are recorded directly to AOCL in shareholders’ equity on the Consolidated Balance Sheets rather than charged to earnings. These differences are then amortized over future years as a component of our annual benefit cost. We amortize actuarial differences under qualified plans on a straight-line basis over the average remaining service period of eligible employees. We recognize the difference between the actual and expected return on plan assets for qualified plans over five years. The deferral of these differences reduces the volatility of our annual benefit cost that can result either from year-to-year changes in the assumptions or from actual results that are not necessarily representative of the long-term financial position of these plans. We recognize differences under nonqualified plans immediately.
Our annual pension and other post-retirement benefit costs consisted of the following:
|
| | | | | | | | | | | | |
| Pension Benefits | |
Year Ended December 31 | 2011 | | 2012 | | 2013 | |
Service cost | $ | 245 |
| | $ | 266 |
| | $ | 298 |
| |
Interest cost | 517 |
| | 523 |
| | 492 |
| |
Expected return on plan assets | (599 | ) | | (588 | ) | | (590 | ) | |
Recognized net actuarial loss | 173 |
| | 287 |
| | 409 |
| |
Amortization of prior service credit | (43 | ) | | (42 | ) | | (67 | ) | |
Annual benefit cost | $ | 293 |
| | $ | 446 |
| | $ | 542 |
| |
|
| | | | | | | | | | | | |
| Other Post-retirement Benefits | |
Year Ended December 31 | 2011 | | 2012 | | 2013 | |
Service cost | $ | 13 |
| | $ | 12 |
| | $ | 15 |
| |
Interest cost | 62 |
| | 59 |
| | 53 |
| |
Expected return on plan assets | (31 | ) | | (30 | ) | | (29 | ) | |
Recognized net actuarial loss | 4 |
| | 10 |
| | 26 |
| |
Amortization of prior service cost | 6 |
| | 7 |
| | 7 |
| |
Annual benefit cost | $ | 54 |
| | $ | 58 |
| | $ | 72 |
| |
The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined-benefit retirement plans:
|
| | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits | |
Year Ended December 31 | 2012 | | 2013 | | 2012 | | 2013 | |
Change in Benefit Obligation | | | | | | | | |
Benefit obligation at beginning of year | $ | (10,242 | ) | | $ | (12,114 | ) | | $ | (1,179 | ) | | $ | (1,384 | ) | |
Service cost | (266 | ) | | (298 | ) | | (12 | ) | | (15 | ) | |
Interest cost | (523 | ) | | (492 | ) | | (59 | ) | | (53 | ) | |
Amendments | — |
| | 234 |
| | — |
| | — |
| |
Actuarial gain (loss) | (1,527 | ) | | 1,094 |
| | (211 | ) | | 177 |
| |
Settlement/curtailment/other | (7 | ) | | 2 |
| | (5 | ) | | 11 |
| |
Benefits paid | 451 |
| | 561 |
| | 82 |
| | 81 |
| |
Benefit obligation at end of year | $ | (12,114 | ) | | $ | (11,013 | ) | | $ | (1,384 | ) | | $ | (1,183 | ) | |
Change in Plan/Trust Assets | | | | | | | | |
Fair value of assets at beginning of year | $ | 6,250 |
| | $ | 7,227 |
| | $ | 379 |
| | $ | 426 |
| |
Actual return on plan assets | 874 |
| | 1,200 |
| | 64 |
| | 116 |
| |
Employer contributions | 532 |
| | 601 |
| | 32 |
| | 25 |
| |
Settlement/curtailment/other | 12 |
| | (3 | ) | | — |
| | — |
| |
Benefits paid | (441 | ) | | (549 | ) | | (49 | ) | | (48 | ) | |
Fair value of assets at end of year | $ | 7,227 |
| | $ | 8,476 |
| | $ | 426 |
| | $ | 519 |
| |
Funded status at end of year | $ | (4,887 | ) | | $ | (2,537 | ) | | $ | (958 | ) | | $ | (664 | ) | |
| |
Amounts recognized on our Consolidated Balance Sheets consisted of the following:
|
| | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits | |
December 31 | 2012 | | 2013 | | 2012 | | 2013 | |
Noncurrent assets | $ | 144 |
| | $ | 178 |
| | $ | — |
| | $ | — |
| |
Current liabilities | (114 | ) | | (104 | ) | | (204 | ) | | (199 | ) | |
Noncurrent liabilities | (4,917 | ) | | (2,611 | ) | | (754 | ) | | (465 | ) | |
Net liability recognized | $ | (4,887 | ) | | $ | (2,537 | ) | | $ | (958 | ) | | $ | (664 | ) | |
Amounts deferred in AOCL consisted of the following:
|
| | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits | |
December 31 | 2012 | | 2013 | | 2012 | | 2013 | |
Net actuarial loss | $ | 5,737 |
| | $ | 3,618 |
| | $ | 401 |
| | $ | 109 |
| |
Prior service (credit) cost | (214 | ) | | (387 | ) | | 21 |
| | 10 |
| |
Total amount recognized in AOCL, pretax | $ | 5,523 |
| | $ | 3,231 |
| | $ | 422 |
| | $ | 119 |
| |
The following is a reconciliation of the change in AOCL for our defined-benefit retirement plans:
|
| | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits | |
Year Ended December 31 | 2012 | | 2013 | | 2012 | | 2013 | |
Net actuarial loss (gain) | $ | 1,241 |
| | $ | (1,704 | ) | | $ | 177 |
| | $ | (264 | ) | |
Prior service cost | — |
| | (234 | ) | | — |
| | — |
| |
Amortization of: | | | | | | | | |
Net actuarial loss from prior years | (287 | ) | | (409 | ) | | (10 | ) | | (26 | ) | |
Prior service credit (cost) | 42 |
| | 67 |
| | (7 | ) | | (7 | ) | |
Other* | (5 | ) | | (12 | ) | | (2 | ) | | (6 | ) | |
Change in AOCL, pretax | $ | 991 |
| | $ | (2,292 | ) | | $ | 158 |
| | $ | (303 | ) | |
* Includes foreign exchange translation and curtailment adjustments.
The following table represents amounts deferred in AOCL on the Consolidated Balance Sheets on December 31, 2013, that we expect to recognize in our retirement benefit cost in 2014:
|
| | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits | |
Prior service (credit) cost | $ | (67 | ) | | $ | 5 |
| |
Net actuarial loss | 294 |
| | 9 |
| |
A pension plan’s funded status is the difference between the plan’s assets and its PBO. The PBO is the present value of future benefits attributed to employee services rendered to date, including assumptions about future compensation levels. A pension plan’s accumulated benefit obligation (ABO) is the present value of future benefits attributed to employee services rendered to date, excluding assumptions about future compensation levels. The ABO for all defined-benefit pension plans was $11.5 billion and $10.6 billion on December 31, 2012 and 2013, respectively. On December 31, 2012 and 2013, some of our pension plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:
|
| | | | | | | | |
December 31 | 2012 | | 2013 | |
PBO | $ | (11,956 | ) | | $ | (10,627 | ) | |
ABO | (11,323 | ) | | (10,275 | ) | |
Fair value of plan assets | 7,028 |
| | 7,988 |
| |
Retirement Plan Assumptions
We calculate the plan assets and liabilities for a given year and the net periodic benefit cost for the subsequent year using assumptions determined as of December 31 of the year in question.
The following table summarizes the weighted average assumptions used to determine our benefit obligations:
|
| | | | | | |
Assumptions on December 31 | 2012 | | 2013 | |
Pension Benefits | | | | |
Discount rate | 4.22 | % | | 4.95 | % | |
Rate of increase in compensation levels | 3.77 | % | | 3.70 | % | |
Other Post-retirement Benefits | | | | |
Discount rate | 3.97 | % | | 4.74 | % | |
Healthcare cost trend rate: | | | | |
Trend rate for next year | 8.00 | % | | 8.00 | % | |
Ultimate trend rate | 5.00 | % | | 5.00 | % | |
Year rate reaches ultimate trend rate | 2019 |
| | 2019 |
| |
The following table summarizes the weighted average assumptions used to determine our net periodic benefit costs:
|
| | | | | | | | | |
Assumptions for Year Ended December 31 | 2011 | | 2012 | | 2013 | |
Pension Benefits | | | | | | |
Discount rate | 5.73 | % | | 5.22 | % | | 4.22 | % | |
Expected long-term rate of return on assets | 8.37 | % | | 8.24 | % | | 8.14 | % | |
Rate of increase in compensation levels | 3.86 | % | | 3.77 | % | | 3.79 | % | |
Other Post-retirement Benefits | | | | | | |
Discount rate | 5.54 | % | | 5.13 | % | | 3.97 | % | |
Expected long-term rate of return on assets | 8.03 | % | | 8.03 | % | | 8.03 | % | |
We base the discount rate on a current yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. We determine the long-term rate of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy.
These assumptions are based on our best judgment, including consideration of current and future market conditions. Changes in these estimates impact future pension and post-retirement benefit costs. As discussed above, we defer recognition of the cumulative benefit cost for our government plans in excess of costs allocable to contracts to provide a better matching of revenues and expenses. Therefore, the impact of annual changes in financial reporting assumptions on the cost for these plans does not affect our operating results either positively or negatively. For our domestic pension plans that represent the majority of our total obligation, the following hypothetical changes in the discount rate and expected long-term rate of return on plan assets would have had the following impact in 2013:
|
| | | | | | | |
| Increase 25 basis points | | Decrease 25 basis points |
Increase (decrease) to net pension cost from: | | | |
Change in discount rate | $ | (37 | ) | | $ | 31 |
|
Change in long-term rate of return on plan assets | (16 | ) | | 16 |
|
A 25-basis-point change in these assumed rates would not have had a measurable impact on the benefit cost for our other post-retirement plans in 2013. For our healthcare plans, the effect of a 1 percentage point increase or decrease in the assumed healthcare cost trend rate on the net periodic benefit cost is $8 and ($6), respectively, and the effect on the accumulated post-retirement benefit obligation is $102 and ($83), respectively.
Plan Assets
A committee of our board of directors is responsible for the strategic oversight of our defined-benefit retirement plan assets held in trust. Management reports to the committee on a regular basis and is responsible for making all investment decisions related to retirement plan assets in compliance with the company’s policies.
Our investment policy endeavors to strike the appropriate balance among capital preservation, asset growth and current income. The objective of our investment policy is to generate future returns consistent with our assumed long-term rate of return used to determine our benefit obligations and net periodic benefit costs. Target allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. At the end of 2013, our asset allocation policy ranges were:
|
| |
Equities | 25 - 75% |
Fixed income | 10 - 50% |
Cash | 0 - 15% |
Other asset classes | 0 - 20% |
More than 90 percent of our pension plan assets are held in a single trust for our primary domestic government and commercial pension plans. On December 31, 2013, the trust was invested largely in publicly traded equities and fixed-income securities, but may invest in other asset classes in the future consistent with our investment policy. Our investments in equity assets include U.S. and international securities and equity funds as well as futures contracts on U.S. equity indices. Our investments in fixed-income assets include U.S. Treasury and U.S. agency securities, corporate bonds, mortgage-backed securities, futures contracts and international securities. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility, to gain exposure to an asset class or to adjust the duration of fixed-income assets.
Assets for our international pension plans are held in trusts in the countries in which the related operations reside. Our international operations maintain investment policies for their individual plans based on country-specific regulations. The international plan assets are primarily invested in commingled funds comprised of international and U.S. equities and fixed-income securities.
We hold assets in VEBA trusts for some of our other post-retirement plans. These assets are generally invested in equities, corporate bonds and equity-based mutual funds. Our asset allocation strategy for the VEBA trusts considers potential fluctuations in our post-retirement liability, the taxable nature of certain VEBA trusts, tax deduction limits on contributions and the regulatory environment.
Our retirement plan assets are reported at fair value. See Note D for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities and commingled funds. These securities (and the underlying investments of the funds) are actively traded and valued using quoted prices for identical securities from the market exchanges. Our Level 2 assets consist of fixed-income securities and commingled funds that are not actively traded or whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally determined using valuation models that use observable inputs such as interest rates, bond yields, low-volume market quotes and quoted prices for similar assets. Our plan assets that are invested in commingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. We had minimal Level 3 plan assets on December 31, 2013. These investments include real estate and hedge funds, insurance deposit contracts and direct private equity investments.
The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:
|
| | | | | | | | | | | | | | | | |
|
Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Asset Category | December 31, 2012 | |
Cash | $ | 43 |
| | $ | 43 |
| | $ | — |
| | $ | — |
| |
Equity securities | | | | | | | | |
U.S. companies (a) | 500 |
| | 500 |
| | — |
| | — |
| |
International companies | 85 |
| | 85 |
| | — |
| | — |
| |
Private equity investments | 8 |
| | — |
| | — |
| | 8 |
| |
Fixed-income securities | | | | | | | | |
Treasury securities | 141 |
| | 141 |
| | — |
| | — |
| |
Corporate bonds (b) | 1,805 |
| | — |
| | 1,805 |
| | — |
| |
Commingled funds | | | | | | | | |
Equity funds | 3,791 |
| | 303 |
| | 3,488 |
| | — |
| |
Money market funds | 240 |
| | — |
| | 240 |
| | — |
| |
Fixed-income funds | 165 |
| | — |
| | 165 |
| | — |
| |
Real estate funds | 32 |
| | — |
| | — |
| | 32 |
| |
Commodity funds | 8 |
| | — |
| | 8 |
| | — |
| |
Hedge funds | 301 |
| | — |
| | 201 |
| | 100 |
| |
Other investments | | | | | | | | |
Insurance deposit agreements | 108 |
| | — |
| | — |
| | 108 |
| |
Total pension plan assets | $ | 7,227 |
| | $ | 1,072 |
| | $ | 5,907 |
| | $ | 248 |
| |
| |
(a) | No single equity holding amounted to more than 1 percent of the total fair value. |
| |
(b) | Our corporate bond investments had an average rating of BBB+. |
|
| | | | | | | | | | | | | | | | |
|
Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Asset Category | December 31, 2013 | |
Cash | $ | 35 |
| | $ | 35 |
| | $ | — |
| | $ | — |
| |
Equity securities | | | | | | | | |
U.S. companies (a) | 685 |
| | 685 |
| | — |
| | — |
| |
International companies | 128 |
| | 128 |
| | — |
| | — |
| |
Private equity investments | 10 |
| | — |
| | — |
| | 10 |
| |
Fixed-income securities | | | | | | | | |
Treasury securities | 428 |
| | 428 |
| | — |
| | — |
| |
Corporate bonds (b) | 2,227 |
| | — |
| | 2,227 |
| | — |
| |
Commingled funds | | | | | | | | |
Equity funds | 3,935 |
| | 286 |
| | 3,649 |
| | — |
| |
Money market funds | 97 |
| | — |
| | 97 |
| | — |
| |
Fixed-income funds | 303 |
| | — |
| | 303 |
| | — |
| |
Real estate funds | 34 |
| | — |
| | — |
| | 34 |
| |
Commodity funds | 8 |
| | — |
| | 8 |
| | — |
| |
Hedge funds | 471 |
| | — |
| | 288 |
| | 183 |
| |
Other investments | | | | | | | | |
Insurance deposit agreements | 115 |
| | — |
| | — |
| | 115 |
| |
Total pension plan assets | $ | 8,476 |
| | $ | 1,562 |
| | $ | 6,572 |
| | $ | 342 |
| |
| |
(a) | No single equity holding amounted to more than 1 percent of the total fair value. |
| |
(b) | Our corporate bond investments had an average rating of A-. |
The fair value of our other post-retirement plan assets by category and the corresponding level within the fair value hierarchy were as follows:
|
| | | | | | | | | | | | | | | | |
|
Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Asset Category | December 31, 2012 | |
Cash | $ | 18 |
| | $ | 18 |
| | $ | — |
| | $ | — |
| |
Equity securities | 120 |
| | 120 |
| | — |
| | — |
| |
Fixed-income securities | 56 |
| | 1 |
| | 55 |
| | — |
| |
Commingled funds | | | | | | | | |
Equity funds | 225 |
| | 4 |
| | 221 |
| | — |
| |
Fixed-income funds | 6 |
| | 6 |
| | — |
| | — |
| |
Hedge funds | 1 |
| | — |
| | 1 |
| | — |
| |
Total other post-retirement plan assets | $ | 426 |
| | $ | 149 |
| | $ | 277 |
| | $ | — |
| |
|
| | | | | | | | | | | | | | | | |
|
Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | |
Significant Unobservable Inputs (Level 3) | |
Asset Category | December 31, 2013 | |
Cash | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| |
Equity securities | 154 |
| | 154 |
| | — |
| | — |
| |
Fixed-income securities | 55 |
| | 2 |
| | 53 |
| | — |
| |
Commingled funds | | | | | | | | |
Equity funds | 296 |
| | 5 |
| | 291 |
| | — |
| |
Fixed-income funds | 6 |
| | 6 |
| | — |
| | — |
| |
Hedge funds | 2 |
| | — |
| | 1 |
| | 1 |
| |
Total other post-retirement plan assets | $ | 519 |
| | $ | 173 |
| | $ | 345 |
| | $ | 1 |
| |
The changes in our Level 3 retirement plan assets during 2012 and 2013 were not material.
