HONEYWELL INTERNATIONAL INC | 2013 | FY | 3


Note 23. Pension and Other Postretirement Benefits

 

We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans covering the majority of our employees and retirees. Pension benefits for substantially all U.S. employees are provided through non-contributory, qualified and non-qualified defined benefit pension plans. U.S. defined benefit pension plans comprise 75 percent of our projected benefit obligation. All non-union hourly and salaried employees joining Honeywell for the first time after December 31, 2012, are not eligible to participate in Honeywell's U.S. defined benefit pension plans. Non-U.S. employees, who are not U.S. citizens, are covered by various retirement benefit arrangements, some of which are considered to be defined benefit pension plans for accounting purposes. Non-U.S. defined benefit pension plans comprise 25 percent of our projected benefit obligation.

We also sponsor postretirement benefit plans that provide health care benefits and life insurance coverage to eligible retirees. Our retiree medical plans mainly cover U.S. employees who retire with pension eligibility for prescription drug, hospital, professional and other medical services. Most of the U.S. retiree medical plans require deductibles and copayments, and virtually all are integrated with Medicare. Retiree contributions are generally required based on coverage type, plan and Medicare eligibility. All non-union hourly and salaried employees joining Honeywell after January 1, 2000 are not eligible to participate in our retiree medical and life insurance plans. Less than 5 percent of Honeywell's U.S. employees are eligible for a retiree medical subsidy from the Company; and this subsidy is limited to a fixed-dollar amount. In addition, more than seventy-five percent of Honeywell's current retirees either have no Company subsidy or have a fixed-dollar subsidy amount. This significantly limits our exposure to the impact of future health care cost increases. The retiree medical and life insurance plans are not funded. Claims and expenses are paid from our operating cash flow.

In 2013, Honeywell amended its U.S. retiree medical plans to no longer offer certain retirees Company group coverage. This plan amendment reduced the accumulated postretirement benefit obligation by $166 million which will be recognized as part of net periodic postretirement benefit cost over the expected future lifetime of the remaining participants in the plans. Also in 2013, in connection with a new collective bargaining agreement reached with a union group, Honeywell amended its plans eliminating the Company subsidy for these union employees. The plan amendment resulted in a curtailment gain of $42 million which was included as part of net periodic postretirement benefit cost. The curtailment gain represents the recognition in net periodic postretirement benefit cost of prior service credits attributable to the future years of service of the union group for which future accrual of benefits has been eliminated.

In 2011, in connection with new collective bargaining agreements reached with several of its union groups, Honeywell amended its U.S. retiree medical plans eliminating the subsidy for those union employees which resulted in curtailment gains totaling $167 million. The curtailment gains represented the recognition in net periodic postretirement benefit cost of prior service credits attributable to the future years of service of the union groups for which future accrual of benefits was eliminated.

 

The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with our significant pension and other postretirement benefit plans at December 31, 2013 and 2012.

  Pension Benefits
  U.S. Plans Non-U.S. Plans
  2013 2012 2013 2012
Change in benefit obligation:           
 Benefit obligation at beginning of year$ 17,117 $ 15,600 $ 5,272 $ 4,648
 Service cost  272   256   58   48
 Interest cost  677   738   215   221
 Plan amendments  14   -   -   -
 Actuarial (gains) losses  (975)   1,493   72   372
 Acquisitions  190   -   44   -
 Benefits paid  (1,005)   (970)   (198)   (188)
 Settlements and curtailments  -   -   -   (16)
 Other  -   -   60   187
 Benefit obligation at end of year  16,290   17,117   5,523   5,272
Change in plan assets:           
 Fair value of plan assets at beginning of year  14,345   12,836   4,527   3,958
 Actual return on plan assets  3,191   1,654   428   336
 Company contributions  28   825   183   271
 Acquisitions  168   -   45   -
 Benefits paid  (1,005)   (970)   (198)   (188)
 Settlements and curtailments  -   -   -   (16)
 Other  -   -   52   166
 Fair value of plan assets at end of year  16,727   14,345   5,037   4,527
Funded status of plans$ 437 $ (2,772) $ (486) $ (745)
Amounts recognized in Consolidated Balance            
Sheet consist of:           
 Prepaid pension benefit cost(1)$ 839 $ - $ 120 $ 87
 Accrued pension liability(2)  (402)   (2,772)   (606)   (832)
Net amount recognized $ 437 $ (2,772) $ (486) $ (745)
             
(1) Included in Other Assets on Consolidated Balance Sheet
(2) Included in Other Liabilities - Non-Current on Consolidated Balance Sheet

   Other Postretirement Benefits 
   2013 2012 
 Change in benefit obligation:      
  Benefit obligation at beginning of year $ 1,477 $ 1,534 
  Service cost   -   1 
  Interest cost   44   53 
  Plan amendments   (175)   (1) 
  Actuarial (gains) losses   (108)   34 
  Benefits paid   (142)   (144) 
  Benefit obligation at end of year   1,096   1,477 
 Change in plan assets:      
  Fair value of plan assets at beginning of year   -   - 
  Actual return on plan assets   -   - 
  Company contributions   -   - 
  Benefits paid   -   - 
  Fair value of plan assets at end of year   -   - 
 Funded status of plans$ (1,096) $ (1,477) 
         
 Amounts recognized in Consolidated Balance Sheet consist of:      
  Accrued liabilities   (130)   (167) 
  Postretirement benefit obligations other than pensions(1)  (966)   (1,310) 
 Net amount recognized $ (1,096) $ (1,477) 
         
 (1) Excludes Non-U.S. plans of $53 and $55 million in 2013 and 2012, respectively.  

Amounts recognized in Accumulated Other Comprehensive (Income) Loss associated with our significant pension and other postretirement benefit plans at December 31, 2013 and 2012 are as follows

  Pension Benefits 
  U.S. Plans Non-U.S. Plans 
  2013 2012 2013 2012 
 Transition obligation $ - $ - $ 3 $ 5 
 Prior service cost (credit)   111   120   (14)   (16) 
 Net actuarial (gain) loss  (1,378)   1,712   434   530 
 Net amount recognized$ (1,267) $ 1,832 $ 423 $ 519 

  Other Postretirement Benefits 
  2013 2012 
 Prior service (credit) $ (168) $ (48) 
 Net actuarial loss   256   391 
 Net amount recognized$ 88 $ 343 

The components of net periodic benefit cost and other amounts recognized in other comprehensive (income) loss for our significant plans for the years ended December 31, 2013, 2012, and 2011 include the following components:

   Pension Benefits
   U.S. Plans Non-U.S. Plans
Net Periodic Benefit Cost201320122011 201320122011
Service cost $ 272$ 256$ 232 $ 58$ 48$ 59
Interest cost   677  738  761   215  221  239
Expected return on plan assets  (1,076)  (1,020)  (1,014)   (308)  (291)  (284)
Amortization of transition             
 obligation  -  -  -   2  2  2
Amortization of prior service             
 cost (credit)  23  28  33   (2)  (2)  (2)
Recognition of actuarial losses  -  707  1,568   51  250  234
Settlements and curtailments  -  -  24   -  2  1
Net periodic benefit (income) cost$ (104)$ 709$ 1,604 $ 16$ 230$ 249
                
Other Changes in Plan Assets and             
Benefits Obligations Recognized inU.S. Plans Non-U.S. Plans
Other Comprehensive (Income) Loss201320122011 201320122011
Actuarial (gains) losses$ (3,090)$ 859$ 1,628 $ (48)$ 327$ 368
Prior service cost (credit)  14  -  5   -  -  -
Transition obligation             
 recognized during year  -  -  -   (2)  (2)  (2)
Prior service (cost) credit             
 recognized during year  (23)  (28)  (33)   2  2  2
Actuarial losses recognized             
 during year  -  (707)  (1,568)   (51)  (250)  (234)
Foreign exchange translation             
 adjustments  -  -  -   3  23  (11)
 Total recognized in other             
  comprehensive (income) loss$ (3,099)$ 124$ 32 $ (96)$ 100$ 123
 Total recognized in net periodic             
  benefit (income) cost and other             
  comprehensive (income) loss$ (3,203)$ 833$ 1,636 $ (80)$ 330$ 372

The estimated prior service cost (credit) for pension benefits that will be amortized from accumulated other comprehensive (income) loss into net periodic benefit cost in 2014 are expected to be $23 million and $(2) million for U.S. and Non-U.S. benefit plans, respectively.

   Other Postretirement Benefits
   Years Ended December 31,
Net Periodic Benefit Cost  2013 2012 2011
Service cost  $ - $ 1 $ 1
Interest cost    44   53   69
Amortization of prior service (credit)    (13)   (14)   (34)
Recognition of actuarial losses   27   34   38
Settlements and curtailments   (42)   (6)   (167)
Net periodic benefit (income) cost $ 16 $ 68 $ (93)
           
   Years Ended December 31,
Other Changes in Plan Assets and Benefits Obligations  2013 2012 2011
Recognized in Other Comprehensive (Income) Loss         
Actuarial (gains) losses $ (108) $ 34 $ 6
Prior service (credit)   (175)   (1)   (21)
Prior service credit recognized during year   13   14   34
Actuarial losses recognized during year   (27)   (34)   (38)
Settlements and curtailments   42   6   167
Total recognized in other comprehensive (income) loss  $ (255) $ 19 $ 148
Total recognized in net periodic benefit (income) cost and          
 other comprehensive (income) loss $ (239) $ 87 $ 55

The estimated net loss and prior service (credit) for other postretirement benefits that will be amortized from accumulated other comprehensive (income) loss into net periodic benefit cost in 2014 are expected to be $24 and $(20) million, respectively.

Major actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our significant benefit plans are presented in the following table.

 

 

 Pension Benefits 
 U.S. Plans Non-U.S. Plans 
 2013 2012 2011 2013 2012 2011 
Actuarial assumptions used to determine             
benefit obligations as of December 31:            
Discount rate 4.89% 4.06% 4.89% 4.29% 4.29% 4.84%
Expected annual rate of            
compensation increase 4.50% 4.50% 4.50% 2.81% 3.55% 3.67%
             
Actuarial assumptions used to determine            
net periodic benefit (income) cost for             
years ended December 31:            
Discount rate 4.06% 4.89% 5.25% 4.29% 4.84% 5.40%
Expected rate of return            
on plan assets 7.75% 8.00% 8.00% 6.99% 7.03% 7.06%
Expected annual rate of            
compensation increase 4.50% 4.50% 4.50% 3.55% 3.67% 3.79%

    Other Postretirement Benefits 
    2013  2012  2011 
Actuarial assumptions used to determine benefit          
 obligations as of December 31:         
  Discount rate   4.05%  3.40%  4.00%
            
Actuarial assumptions used to determine net periodic         
 benefit cost for years ended December 31:         
  Discount rate  3.40%  4.00%  4.70%

The discount rate for our U.S. pension and other postretirement benefits plans reflects the current rate at which the associated liabilities could be settled at the measurement date of December 31. To determine discount rates for our U.S. pension and other postretirement benefit plans, we use a modeling process that involves matching the expected cash outflows of our benefit plans to a yield curve constructed from a portfolio of high quality, fixed-income debt instruments. We use the average yield of this hypothetical portfolio as a discount rate benchmark. The discount rate used to determine the other postretirement benefit obligation is lower principally due to a shorter expected duration of other postretirement plan obligations as compared to pension plan obligations.

Our expected rate of return on U.S. plan assets of 7.75 percent is a long-term rate based on historical plan asset returns over varying long-term periods combined with current market conditions and broad asset mix considerations. We review the expected rate of return on an annual basis and revise it as appropriate.

For non-U.S. benefit plans, none of which was individually material, assumptions reflect economic assumptions applicable to each country.

Pension Benefits

Included in the aggregate data in the tables above are the amounts applicable to our pension plans with accumulated benefit obligations exceeding the fair value of plan assets. Amounts related to such plans were as follows:

 

   December 31, 
   U.S. Plans Non-U.S. Plans 
   2013 2012 2013 2012 
 Projected benefit obligation  $576 $17,117 $911 $4,670 
 Accumulated benefit obligation $569 $16,288 $855 $4,426 
 Fair value of plan assets  $174 $14,345 $307 $3,837 

Accumulated benefit obligation for our U.S. defined benefit pension plans were $15.7 and $16.3 billion and for our Non-U.S. defined benefit plans were $5.3 and $5.0 billion at December 31, 2013 and 2012, respectively.

Our asset investment strategy for our U.S. pension plans focuses on maintaining a diversified portfolio using various asset classes in order to achieve our long-term investment objectives on a risk adjusted basis. Our actual invested positions in various securities change over time based on short and longer-term investment opportunities. To achieve our objectives, we have established long-term target allocations as follows: 60-70 percent equity securities, 10-20 percent fixed income securities and cash, 5-15 percent real estate investments, and 10-20 percent other types of investments. Equity securities include publicly-traded stock of companies located both inside and outside the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities, and U.S. Treasuries. Real estate investments include direct investments in commercial properties and investments in real estate funds. Other types of investments include investments in private equity and hedge funds that follow several different strategies. We review our assets on a regular basis to ensure that we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations.

Our non-U.S. pension assets are typically managed by decentralized fiduciary committees with the Honeywell Corporate Investments group providing standard funding and investment guidance. Local regulations, local funding rules, and local financial and tax considerations are part of the funding and investment allocation process in each country. While our non-U.S. investment policies are different for each country, the long-term investment objectives are generally the same as those for the U.S. pension assets.

The fair values of both our U.S. and non-U.S. pension plans assets at December 31, 2013 and 2012 by asset category are as follows:

  U.S. Plans 
  December 31, 2013 
    Total Level 1 Level 2 Level 3 
Common stock/preferred stock:         
 Honeywell common stock$ 1,697$ 1,697$ -$ - 
 U.S. large cap stocks  4,147  4,107  40  - 
 U.S. mid cap stocks  757  752  5  - 
 U.S. small cap stocks  215  210  5  - 
 International stocks  2,685  2,503  182  - 
 Real estate investment trusts  90  90  -  - 
Fixed income investments:         
 Short term investments  956  955  1  - 
 Government securities  266  -  266  - 
 Corporate bonds  2,931  -  2,931  - 
 Mortgage/Asset-backed securities  770  -  770  - 
 Insurance contracts  7  -  7  - 
Investments in private funds:         
 Private funds  1,058  -  -  1,058 
 Hedge funds  6  -  -  6 
 Real estate funds  237  -  -  237 
Direct investments:         
 Direct private investments  278  -  -  278 
 Real estate properties  627  -  -  627 
  $ 16,727$ 10,314$ 4,207$ 2,206 

  U.S. Plans 
  December 31, 2012 
    Total Level 1 Level 2 Level 3 
Common stock/preferred stock:         
 Honeywell common stock$ 1,182$ 1,182$ -$ - 
 U.S. large cap stocks  2,903  2,903  -  - 
 U.S. mid cap stocks  731  731  -  - 
 U.S. small cap stocks  261  261  -  - 
 International stocks  2,203  2,073  130  - 
 Real estate investment trusts  44  44  -  - 
Fixed income investments:         
 Short term investments  1,139  1,139  -  - 
 Government securities  266  -  266  - 
 Corporate bonds  2,728  -  2,728  - 
 Mortgage/Asset-backed securities  654  -  654  - 
 Insurance contracts  6  -  6  - 
Investments in private funds:         
 Private funds  1,100  -  -  1,100 
 Hedge funds  52  -  -  52 
 Real estate funds  254  -  -  254 
Direct investments:         
 Direct private investments  227  -  -  227 
 Real estate properties  595  -  -  595 
  $ 14,345$ 8,333$ 3,784$ 2,228 

  Non-U.S. Plans 
  December 31, 2013 
    Total Level 1 Level 2 Level 3 
Common stock/preferred stock:         
 U.S. companies$ 459$ 394$ 65$ - 
 Non-U.S. companies  1,929  244  1,685  - 
Fixed income investments:         
 Short-term investments  147  140  7  - 
 Government securities  1,303  -  1,303  - 
 Corporate bonds  656  -  656  - 
 Mortgage/Asset-backed securities  25  -  25  - 
 Insurance contracts  208  -  208  - 
Investments in private funds:         
 Private funds  67  -  -  67 
 Hedge funds  62  -  -  62 
 Real estate funds  181  -  -  181 
  $ 5,037$ 778$ 3,949$ 310 

  Non-U.S. Plans 
  December 31, 2012 
    Total Level 1 Level 2 Level 3 
Common stock/preferred stock:         
 U.S. companies$ 366$ 316$ 50$ - 
 Non-U.S. companies  1,605  176  1,429  - 
Fixed income investments:         
 Short-term investments  104  104  -  - 
 Government securities  1,321  -  1,321  - 
 Corporate bonds  571  -  571  - 
 Mortgage/Asset-backed securities  8  -  8  - 
 Insurance contracts  203  -  203  - 
Investments in private funds:         
 Private funds  136  -  -  136 
 Hedge funds  56  -  -  56 
 Real estate funds  157  -  -  157 
  $ 4,527$ 596$ 3,582$ 349 

The following tables summarize changes in the fair value of Level 3 assets for the years ended December 31, 2013 and 2012:

 

   U.S. Plans
      Direct         
    Private Private Hedge Real Estate Real Estate
    Funds Investments Funds Funds Properties
Balance at December 31, 2011 $ 1,039 $ 161 $ 60 $ 256 $ 553
Actual return on plan assets:               
 Relating to assets still held               
  at year-end   44   12   11   16   29
 Relating to assets sold                
  during the year   (1)   6   1   (1)   -
Purchases   147   65   4   31   41
Sales and settlements   (129)   (17)   (24)   (48)   (28)
                  
Balance at December 31, 2012   1,100   227   52   254   595
Actual return on plan assets:               
 Relating to assets still held               
  at year-end   (10)   34   (22)   11   61
 Relating to assets sold                
  during the year   117   1   22   1   4
Purchases   94   37   9   15   15
Sales and settlements   (243)   (21)   (55)   (44)   (48)
Balance at December 31, 2013 $ 1,058 $ 278 $ 6 $ 237 $ 627
                  
       Non-U.S. Plans   
                 
       Private Hedge Real Estate   
       Funds Funds Funds   
Balance at December 31, 2011 $ 112 $ 54 $ 160   
Actual return on plan assets:            
 Relating to assets still held            
  at year-end   3   2   8   
 Relating to assets sold             
  during the year   3   -   -   
Purchases   21   -   21   
Sales and settlements   (3)   -   (32)   
                  
Balance at December 31, 2012   136   56   157   
Actual return on plan assets:            
 Relating to assets still held            
  at year-end   (6)   4   18   
 Relating to assets sold             
  during the year   3   -   (1)   
Purchases   4   2   12   
Sales and settlements   (70)   -   (5)   
Balance at December 31, 2013 $ 67 $ 62 $ 181   

The Company enters into futures contracts to gain exposure to certain markets. Sufficient cash or cash equivalents are held by our pension plans to cover the notional value of the futures contracts. At December 31, 2013 and 2012, our U.S. plans had contracts with notional amounts of $1,938 and $1,241 million, respectively. At December 31, 2013 and 2012, our Non-U.S. plans had contracts with notional amounts of $61 and $55 million, respectively. In both our U.S. and Non-U.S. pension plans, the notional derivative exposure is primarily related to outstanding equity futures contracts.

Common stocks, preferred stocks, real estate investment trusts, and short-term investments are valued at the closing price reported in the active market in which the individual securities are traded. Corporate bonds, mortgages, asset-backed securities, and government securities are valued either by using pricing models, bids provided by brokers or dealers, quoted prices of securities with similar characteristics or discounted cash flows and as such include adjustments for certain risks that may not be observable such as credit and liquidity risks. Certain securities are held in commingled funds which are valued using net asset values provided by the administrators of the funds. Investments in private equity, debt, real estate and hedge funds and direct private investments are valued at estimated fair value based on quarterly financial information received from the investment advisor and/or general partner. Investments in real estate properties are valued on a quarterly basis using the income approach. Valuation estimates are periodically supplemented by third party appraisals.

Our general funding policy for qualified pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. In 2013, 2012 and 2011, we were not required to make contributions to our U.S. pension plans. No contribution was made to the U.S. plans in 2013. However, in 2012 and 2011, we made voluntary contributions of $792 and $1,650 million, respectively, to the U.S. plans primarily to improve the funded status. These contributions do not reflect benefits paid directly from Company assets. In 2013, cash contributions of $156 million were made to our non-U.S. plans to satisfy regularly funding requirements. In 2014, we expect to make contributions of cash and/or marketable securities of approximately $150 million ($117 million of marketable securities were contributed in January 2014) to our non-U.S. defined benefit pension plans to satisfy regulatory funding standards. We are not required to make any contributions to our U.S. defined benefit pension plans in 2014.

Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:

 

   U.S. Plans  Non-U.S. Plans 
 2014$ 1,068 $ 202 
 2015  1,111   208 
 2016  1,106   213 
 2017  1,105   219 
 2018  1,118   226 
 2019-2023  5,675   1,228 

Other Postretirement Benefits

   December 31,  
   2013 2012  
 Assumed health care cost trend rate:       
  Health care cost trend rate assumed for next year   7.00%  7.00% 
  Rate that the cost trend rate gradually declines to   5.00%  5.00% 
  Year that the rate reaches the rate it is assumed to remain at  2019  2019  

The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:

 

   1 percentage point 
   Increase Decrease 
 Effect on total of service and interest cost components  $3 $(2) 
 Effect on postretirement benefit obligation  $84 $(52) 

 Benefit payments reflecting expected future service, as appropriate, are expected to be paid as follows: 
             
   Without Impact of Net of 
   Medicare SubsidyMedicare Subsidy 
 2014 $141   $130  
 2015  123    113  
 2016  119    108  
 2017  113    103  
 2018  108    97  
 2019-2023  448    399  

Employee Savings Plans

We sponsor employee savings plans under which we match, in the form of our common stock, savings plan contributions for certain eligible employees. Shares issued under the stock match plans were 2.0, 2.4, and 2.6 million at a cost of $159, $144 and $138 million in 2013, 2012, and 2011, respectively.


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