Pension and Other Employee Benefits
We have pension plans covering the majority of our employees, including certain employees in foreign countries (Pension Benefits). Our primary pension obligations relate to our domestic IRS qualified pension plans. We also provide certain health care and life insurance benefits to retired employees and to eligible employees upon retirement through other postretirement benefit plans (Other Benefits).
The fair value of plan assets for our domestic and foreign Pension Benefit plans was as follows:
|
| | | | | | | |
(In millions) | 2013 |
| | 2012 |
|
Domestic Pension Benefit plan | $ | 18,822 |
| | $ | 16,733 |
|
Foreign Pension Benefit plan | 806 |
| | 717 |
|
We maintain a defined contribution plan that includes a 401(k) plan. Covered employees hired or rehired after January 1, 2007, are eligible for a Company contribution based on age and service, instead of participating in our pension plans. These and other covered employees are eligible to contribute up to a specific percentage of their pay to the 401(k) plan. We match the employee’s contribution, generally up to 3% or 4% of the employee’s pay, which is invested in the same way as employee contributions. Total expense for our contributions was $279 million, $272 million and $273 million in 2013, 2012 and 2011, respectively.
At December 31, 2013 and December 31, 2012, there was $14.4 billion and $12.1 billion invested in our defined contribution plan, respectively. At December 31, 2013 and December 31, 2012, $1.4 billion and $1.0 billion of these amounts were invested in our stock fund, respectively.
We also sponsor nonqualified defined benefit and defined contribution plans to provide benefits in excess of qualified plan limits. We have set aside certain assets in a separate trust, which we expect to be used to pay for trust obligations. The fair value of marketable securities held in trust, which are considered Level 1 assets under the fair value hierarchy, consisted of the following at December 31:
|
| | | | | | | |
(In millions) | 2013 |
| | 2012 |
|
Marketable securities held in trust | $ | 479 |
| | $ | 407 |
|
Included in marketable securities held in trust in the table above was $304 million and $259 million at December 31, 2013 and December 31, 2012, respectively, related to the nonqualified defined contribution plans. The liabilities related to the nonqualified defined contribution plans were $300 million and $251 million at December 31, 2013 and December 31, 2012, respectively.
We also maintain additional contractual pension benefits agreements for certain executive officers. The liability associated with such agreements was $34 million and $36 million at December 31, 2013 and December 31, 2012, respectively.
Contributions and Benefit Payments
We may make both required and discretionary contributions to our pension plans. Required contributions are primarily determined in accordance with the Pension Protection Act (PPA), which amended the Employee Retirement Income Security Act of 1974 (ERISA) rules and are affected by the actual return on plan assets and plan funded status. The funding requirements under PPA require us to fully fund our pension plans over a rolling seven-year period as determined annually based upon the funded status at the beginning of the year. In July 2012, the Surface Transportation Extension act, which is also referred to as the Moving Ahead for Progress in the 21st Century Act (STE Act), was passed by Congress and signed by the President. The STE Act includes a provision for temporary pension funding relief due to the low interest rate environment. The provision reduced our cash funding requirements primarily in 2012 and 2013. We made the following required and discretionary contributions to our pension and other postretirement benefit plans during the years ended December 31:
|
| | | | | | | | | | | |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Required pension contributions | $ | 778 |
| | $ | 721 |
| | $ | 1,078 |
|
Discretionary pension contributions | 300 |
| | 500 |
| | 750 |
|
Other postretirement benefit contributions | 22 |
| | 19 |
| | 18 |
|
Total | $ | 1,100 |
| | $ | 1,240 |
| | $ | 1,846 |
|
We periodically evaluate whether to make additional discretionary contributions. We expect to make required contributions of approximately $875 million and $25 million to our pension and other postretirement benefit plans, respectively, in 2014.
The table below reflects the total Pension Benefits expected to be paid from the plans or from our assets, including both our share of the benefit cost and the participants’ share of the cost, which is funded by participant contributions. Other Benefit payments reflect our portion only.
|
| | | | | | | |
(In millions) | Pension Benefits |
| | Other Benefits |
|
2014 | $ | 1,568 |
| | $ | 57 |
|
2015 | 1,606 |
| | 57 |
|
2016 | 1,600 |
| | 57 |
|
2017 | 1,590 |
| | 57 |
|
2018 | 1,523 |
| | 57 |
|
Thereafter (next 5 years) | 7,980 |
| | 277 |
|
Defined Benefit Retirement Plan Summary Financial Information
The tables below outline the components of net periodic benefit expense (income) and related actuarial assumptions of our domestic and foreign Pension Benefits and Other Benefits plans.
|
| | | | | | | | | | | |
Components of Net Periodic Pension Expense (Income) | Pension Benefits |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Service cost | $ | 579 |
| | $ | 516 |
| | $ | 471 |
|
Interest cost | 996 |
| | 1,047 |
| | 1,069 |
|
Expected return on plan assets | (1,495 | ) | | (1,422 | ) | | (1,272 | ) |
Amounts reflected in net funded status | 80 |
| | 141 |
| | 268 |
|
Amortization of prior service cost included in net periodic pension expense | 9 |
| | 10 |
| | 11 |
|
Recognized net actuarial loss | 1,150 |
| | 939 |
| | 792 |
|
Loss due to curtailments/settlements | 1 |
| | 3 |
| | 2 |
|
Amounts reclassified during the year | 1,160 |
| | 952 |
| | 805 |
|
Net periodic pension expense (income) | $ | 1,240 |
| | $ | 1,093 |
| | $ | 1,073 |
|
Net periodic pension expense (income) also includes expense from foreign Pension Benefits plans of $4 million, $7 million and $11 million in 2013, 2012 and 2011, respectively.
|
| | | | | | | | | | | |
Components of Net Periodic Postretirement Expense (Income) | Other Benefits |
(In millions) | 2013 |
| | 2012 |
| | 2011 |
|
Service cost | $ | 8 |
| | $ | 8 |
| | $ | 9 |
|
Interest cost | 32 |
| | 38 |
| | 41 |
|
Expected return on plan assets | (32 | ) | | (31 | ) | | (34 | ) |
Amounts reflected in net funded status | 8 |
| | 15 |
| | 16 |
|
Amortization of transition obligation | — |
| | 1 |
| | 4 |
|
Amortization of prior service cost included in net periodic postretirement expense | (2 | ) | | (3 | ) | | (10 | ) |
Recognized net actuarial loss | 4 |
| | 3 |
| | 3 |
|
Amounts reclassified during the year | 2 |
| | 1 |
| | (3 | ) |
Net periodic postretirement expense (income) | $ | 10 |
| | $ | 16 |
| | $ | 13 |
|
|
| | | | | | | | | | | | | | | |
Funded Status – Amounts Recognized on our Balance Sheets | Pension Benefits | | Other Benefits |
(In millions) December 31: | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Noncurrent assets | $ | 119 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Current liabilities | (74 | ) | | (69 | ) | | (13 | ) | | (13 | ) |
Noncurrent liabilities | (3,387 | ) | | (7,138 | ) | | (288 | ) | | (397 | ) |
Net amount recognized on our balance sheets | $ | (3,342 | ) | | $ | (7,207 | ) | | $ | (301 | ) | | $ | (410 | ) |
|
| | | | | | | | | | | | | | | |
Reconciliation of Amounts Recognized on our Balance Sheets | Pension Benefits | | Other Benefits |
(In millions) December 31: | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Accumulated other comprehensive loss: | | | | | | | |
Prior service (cost) credit | $ | (13 | ) | | $ | (22 | ) | | $ | 5 |
| | $ | 7 |
|
Net loss | (7,892 | ) | | (11,913 | ) | | (23 | ) | | (123 | ) |
Accumulated other comprehensive loss | (7,905 | ) | | (11,935 | ) | | (18 | ) | | (116 | ) |
Accumulated contributions in excess (below) net periodic benefit or cost | 4,563 |
| | 4,728 |
| | (283 | ) | | (294 | ) |
Net amount recognized on our balance sheets | $ | (3,342 | ) | | $ | (7,207 | ) | | $ | (301 | ) | | $ | (410 | ) |
|
| | | | | | | | | | | | | | | |
Sources of Change in Accumulated Other Comprehensive Loss | Pension Benefits | | Other Benefits |
(In millions) | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Amortization of initial net obligation | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Net change initial net obligation | — |
| | — |
| | — |
| | 1 |
|
Prior service (cost) credit arising during period | — |
| | (2 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) included in net income | 9 |
| | 10 |
| | (2 | ) | | (3 | ) |
Net change in prior service (cost) credit not recognized in net income during that period | 9 |
| | 8 |
| | (2 | ) | | (3 | ) |
Actuarial gain (loss) arising during period | 2,869 |
| | (2,219 | ) | | 96 |
| | 2 |
|
Amortization of net actuarial (gain) loss included in net income | 1,150 |
| | 939 |
| | 4 |
| | 3 |
|
Net change in actuarial gain (loss) not included in net income during the period | 4,019 |
| | (1,280 | ) | | 100 |
| | 5 |
|
Effect of exchange rates | 2 |
| | (6 | ) | | — |
| | — |
|
Total change in accumulated other comprehensive loss during period | $ | 4,030 |
| | $ | (1,278 | ) | | $ | 98 |
| | $ | 3 |
|
The amounts in accumulated other comprehensive loss at December 31, 2013 expected to be recognized as components of net periodic benefit cost in 2014 are as follows:
|
| | | | | | | |
Adjustments to Accumulated Other Comprehensive Loss (in millions) | Pension Benefits | | Other Benefits |
Amortization of net loss | $ | (889 | ) | | $ | (1 | ) |
Amortization of prior service (cost) credit | (7 | ) | | 1 |
|
Total | $ | (896 | ) | | $ | — |
|
The projected benefit obligation (PBO) represent the present value of Pension Benefits earned through the end of the year, with allowance for future salary increases. The accumulated benefit obligation (ABO) is similar to the PBO, but does not provide for future salary increases. The PBO, ABO and asset values for our domestic qualified pension plans were as follows:
|
| | | | | | | |
(In millions) | 2013 |
| | 2012 |
|
PBO for domestic qualified pension plans | $ | 21,396 |
| | $ | 23,082 |
|
ABO for domestic qualified pension plans | 19,595 |
| | 20,828 |
|
Asset values for domestic qualified pension plans | 18,822 |
| | 16,733 |
|
The PBO and fair value of plans assets for Pension Benefits plans with PBOs in excess of plan assets were $21,529 million and $18,068 million, respectively, at December 31, 2013 and $24,657 million and $17,450 million, respectively, at December 31, 2012.
The ABO and fair value of plan assets for Pension Benefits plans with ABOs in excess of plan assets were $18,980 million and $17,425 million, respectively, at December 31, 2013 and $22,252 million and $17,411 million, respectively, at December 31, 2012. The ABO for all Pension Benefits plans was $21,050 million and 22,288 million at December 31, 2013 and December 31, 2012, respectively.
The tables below provide a reconciliation of benefit obligations, plan assets, funded status and related actuarial assumptions of our domestic and foreign Pension Benefits and Other Benefits plans.
|
| | | | | | | | | | | | | | | |
Change in Projected Benefit Obligation | Pension Benefits | | Other Benefits |
(In millions) | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Projected benefit obligation at beginning of year | $ | 24,657 |
| | $ | 21,613 |
| | $ | 818 |
| | $ | 812 |
|
Service cost | 579 |
| | 516 |
| | 8 |
| | 8 |
|
Interest cost | 996 |
| | 1,047 |
| | 32 |
| | 38 |
|
Plan participants’ contributions | 15 |
| | 18 |
| | 43 |
| | 44 |
|
Amendments | — |
| | 2 |
| | — |
| | — |
|
Plan curtailments/settlements | (6 | ) | | (5 | ) | | — |
| | — |
|
Actuarial loss (gain) | (1,798 | ) | | 2,670 |
| | (70 | ) | | 13 |
|
Foreign exchange loss (gain) | — |
| | 29 |
| | — |
| | — |
|
Benefits paid | (1,473 | ) | | (1,233 | ) | | (99 | ) | | (97 | ) |
Projected benefit obligation at end of year | $ | 22,970 |
| | $ | 24,657 |
| | $ | 732 |
| | $ | 818 |
|
The PBO for our domestic and foreign Pension Benefits plans was $22,157 million and $813 million, respectively at December 31, 2013 and $23,836 million and $821 million, respectively, at December 31, 2012.
|
| | | | | | | | | | | | | | | |
Change in Plan Assets | Pension Benefits | | Other Benefits |
(In millions) | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Fair value of plan assets at beginning of year | $ | 17,450 |
| | $ | 15,552 |
| | $ | 408 |
| | $ | 396 |
|
Actual return (loss) on plan assets | 2,563 |
| | 1,868 |
| | 57 |
| | 46 |
|
Company contributions | 1,078 |
| | 1,221 |
| | 22 |
| | 19 |
|
Plan participants’ contributions | 15 |
| | 18 |
| | 43 |
| | 44 |
|
Plan settlements | (6 | ) | | (3 | ) | | — |
| | — |
|
Foreign exchange gain (loss) | 1 |
| | 27 |
| | — |
| | — |
|
Benefits paid | (1,473 | ) | | (1,233 | ) | | (99 | ) | | (97 | ) |
Fair value of plan assets at end of year | $ | 19,628 |
| | $ | 17,450 |
| | $ | 431 |
| | $ | 408 |
|
Retirement Plan Assumptions
|
| | | | | | | | |
Weighted-Average Net Periodic Benefit Cost Assumptions | Pension Benefits |
| 2013 |
| | 2012 |
| | 2011 |
|
Discount rate | 4.15 | % | | 5.00 | % | | 5.73 | % |
Expected long-term rate of return on plan assets | 8.67 | % | | 8.68 | % | | 8.68 | % |
Rate of compensation increase | | | | | |
Range | 2% -7% |
| | 2% -7% |
| | 2% -7% |
|
Average | 4.40 | % | | 4.40 | % | | 4.50 | % |
|
| | | | | | | | |
Weighted-Average Net Periodic Benefit Cost Assumptions | Other Benefits |
| 2013 |
| | 2012 |
| | 2011 |
|
Discount rate | 4.00 | % | | 5.00 | % | | 5.50 | % |
Expected long-term rate of return on plan assets | 8.24 | % | | 8.25 | % | | 8.25 | % |
Rate of compensation increase | | | | | |
Range | 2% -7% |
| | 2% -7% |
| | 2% -7% |
|
Average | 4.50 | % | | 4.50 | % | | 4.50 | % |
Health care trend rate in the next year | 4.00 | % | | 4.00 | % | | 4.00 | % |
Gradually declining to an ultimate trend rate | 4.00 | % | | 4.00 | % | | 4.00 | % |
Year that the rate reaches ultimate trend rate | * |
| | * |
| | 2027 |
|
* Currently at the ultimate trend rate.
|
| | | | | | | | | | | |
Weighted-Average Year-End Benefit Obligation Assumptions | Pension Benefits | | Other Benefits |
| 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Discount rate | 5.06 | % | | 4.15 | % | | 5.01 | % | | 4.00 | % |
Rate of compensation increase | | | | | | | |
Range | 2% -7% |
| | 2% -7% |
| | 2% -7% |
| | 2% -7% |
|
Average | 4.39 | % | | 4.40 | % | | 4.50 | % | | 4.50 | % |
Health care trend rate in the next year | | | | | 4.00 | % | | 4.00 | % |
Gradually declining to an ultimate trend rate of | | | | | 4.00 | % | | 4.00 | % |
Year that the rate reaches the ultimate trend rate | | | | | * |
| | * |
|
* Currently at the ultimate trend rate.
The weighted-average discount rate for our domestic Pension Benefits plans was 5.08% and 4.15% at December 31, 2013 and December 31, 2012, respectively. Our foreign Pension Benefits plan assumptions have been included in the Pension Benefits assumptions in the table above.
The long-term ROA represents the average rate of earnings expected over the long term on the assets invested to provide for anticipated future benefit payment obligations. The long-term ROA used to calculate net periodic pension cost is set annually at the beginning of each year. Given the long-term nature of the ROA assumption, which we believe should not be solely reactive to short-term market conditions that may not persist, we expect the long-term ROA to remain unchanged unless there are significant changes in our investment strategy, the underlying economic assumptions, or other major factors. To establish our long-term ROA assumption, we employ a “building block” approach. As part of our annual process for determining whether it is appropriate to change our long-term ROA assumption, we first review the existing long-term ROA assumption against a statistically determined reasonable range of outcomes, which we consider to be between the 25th and 75th percentile likelihood of achieving a long-term return over future years (consistent with Actuarial Standards of Practice 27). Therefore, it is less than 25 percent likely that the long-term return of the pension plan would fall below or above the 25th and 75th percentiles points, respectively (i.e., it is 50 percent likely that the long-term return of the pension plan will be within the 25th and 75th percentile range). The building block approach and the reasonable range of outcomes are based upon our asset allocation assumptions and long-term capital market assumptions. Such assumptions incorporate the economic outlook for various asset classes over short and long-term periods and also take into consideration other factors, including historical market performance, inflation and interest rates. The reasonable range of long-term returns that was used to validate the long-term ROA assumption for the calculation of the net periodic benefit cost for 2013, 2012 and 2011, are shown below.
|
| | | | | | |
Percentile | 2013 |
| 2012 |
| 2011 |
|
25th | 5.62 | % | 6.15 | % | 6.67 | % |
75th | 9.41 | % | 9.84 | % | 10.65 | % |
Long-term domestic ROA of 8.75% fell between the 65th–70th percentile, 60th–65th percentile and 50th–55th percentile of the reasonable range for 2013, 2012 and 2011 respectively. The 50th percentile of the reasonable range used to develop each of the 2013, 2012 and 2011 long-term ROA was 7.51%, 7.99% and 8.66%, respectively.
Once our long-term ROA has been determined to be within the 25th to 75th percentile range of results, we review historical averages and patterns of returns to confirm reasonability of our long-term ROA assumption compared to past results. While history is not solely indicative of future market expectations, it does provide insight into general historical trends and long-term asset performance. In validating the 2013 long-term ROA assumption, we reviewed our pension plan asset performance since 1986. Our average annual actual rate of return since 1986 of 9.29%, determined on an arithmetic basis, exceeds our estimated 8.75% assumed return. Arithmetic annual averages represent the simple average returns over independent annual periods, whereas geometric returns reflect the compound average returns of dependent annual periods. The average annual actual return on a geometric basis for the same period was 8.57%. In addition, the actual annual returns have exceeded our long-term ROA assumption of 8.75% in seven of the past ten years. Since we have not had a significant change in investment strategy, our existing long-term ROA assumption of 8.75% is within the reasonable range and our historical trends and averages do not indicate a trend or pattern of returns significantly above or below our existing assumption, we determined our long-term ROA assumption for our domestic pension plans in 2013 would remain at 8.75%, consistent with our 2012 assumption. If we significantly change our long-term investment allocation or strategy, or if there is a significant change in the economic assumptions, then our long-term ROA assumption could change.
Our domestic pension plans’ actual rates of return were approximately 15%, 12% and (1)% for 2013, 2012 and 2011, respectively. The difference between the actual rate of return and our long-term ROA assumption is included in deferred losses.
The long-term ROA assumptions for foreign Pension Benefits plans are based on the asset allocations and the economic environment prevailing in the locations where the Pension Benefits plans reside. Foreign pension assets do not make up a significant portion of the total assets for all of our Pension Benefits plans.
For purposes of determining pension expense under GAAP, a calculated “market-related value” of our plan assets is used to develop the amount of deferred asset gains or losses to be amortized. The market-related value of assets is determined using actual asset gains or losses over a three year period. Under GAAP, a “corridor” approach may be elected and applied in the recognition of asset and liability gains or losses which limits expense recognition to the net outstanding gains and losses in excess of the greater of 10 percent of the projected benefit obligation or the calculated "market-related value" of assets. We do not use a “corridor” approach in the calculation of FAS expense.
The effect of a 1% increase or decrease in the assumed health care trend rate for each future year for the aggregate of service cost and interest cost is less than $1 million and for the accumulated postretirement benefit obligation is a $7 million increase or decrease.
Plan Assets
Substantially all our domestic Pension Benefit Plan (Plan) assets, which consist of investments in cash and cash equivalents, publicly traded U.S. and international equity securities, private equity funds, private real estate funds, fixed-income securities, commingled funds and other investments such as insurance contracts and derivatives, are held in a master trust, which was established for the investment of assets of our Company-sponsored retirement plans. The assets of the master trust are overseen by our Investment Committee comprised of members of senior management drawn from appropriate diversified levels of the executive management team.
The Investment Committee is responsible for setting the policy that provides the framework for management of the Plan assets. In accordance with its responsibilities and charter, the Investment Committee meets on a regular basis to review the performance of the Plan assets and compliance with the investment policy. The policy sets forth an investment structure for managing Plan assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of overall diversification and total investment return over the long term while maintaining sufficient liquidity to pay the benefits of the Plan. Asset allocation ranges are set to produce the highest return on investment taking into account investment risks that are prudent and reasonable given prevailing market conditions. In developing the asset allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and funded status. Based on these studies and other appropriate information, the Investment Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns.
The investment policy asset allocation ranges for the Plan, as set by the Investment Committee, for the year ended December 31, 2013 were as follows:
|
| |
Asset Category | |
Global equity (combined U.S. and international equity) | 40% - 60% |
U.S. equities | 25% - 40% |
International equities | 15% - 25% |
Fixed-income securities | 25% - 40% |
Cash and cash equivalents | 1% - 10% |
Private equity and private real estate | 3% - 8% |
Other (including absolute return funds) | 5% - 20% |
The Investment Committee appoints the investment fiduciary, who is responsible for making investment decisions within the framework of the Investment Policy and for supervising the internal pension investment team. The pension investment team is comprised of experienced financial managers, who are all employees of the Company. The investment fiduciary reports back to the Investment Committee. During times of unusual market conditions, the investment fiduciary may seek authorization from the Investment Committee to change the investing allocation ranges to reasonably limit excessive volatility or other undesirable consequences.
Taking into account the asset allocation ranges, the investment fiduciary determines the specific allocation of the Plan’s investments within various asset classes. The Plan utilizes select investment strategies which are executed through separate account or fund structures with external investment managers who demonstrate experience and expertise in the appropriate asset classes and styles. The selection of investment managers is done with careful evaluation of all aspects of performance and risk, due diligence of internal operations and controls, reputation, systems evaluation and a review of investment managers' policies and processes. The Plan also utilizes funds that track an index and are highly liquid. Investment performance is monitored frequently against appropriate benchmarks and tracked to compliance guidelines with the assistance of third party performance evaluation tools and metrics.
Consistent with the objective of maximizing return while minimizing risk, multiple investment strategies are employed to diversify risk such that no single investment or manager holding presents a significant exposure to the total investment portfolio. Plan assets are invested in numerous diversified strategies with the intent to minimize correlations. This allows for diversification of returns. Plan assets can be invested in funds that track an index and are designed to achieve diversification across the related indices. The Plan had $4 billion invested in such funds across 4 indices as of December 31, 2013. Other than funds that track an index, no individual investment strategy represented more than 5% of the Plan as of December 31, 2013. Further, within each separate account strategy, guidelines are established which set forth the list of authorized investments, the typical portfolio characteristics and diversification required by limiting the amount that can be invested by sector, country and issuer.
The Plan’s investments are stated at fair value. Investments in equity securities (common and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income securities are generally valued using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Investments in private equity funds and private real estate funds are estimated at fair market value which primarily utilizes net asset values reported by the investment manager or fund administrator. We review independently appraised values, audited financial statements and additional pricing information to evaluate the net asset values. For the very limited group of securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value.
The fair value of our Plan assets by asset category and by level (as described in "Note 1: Summary of Significant Accounting Policies") at December 31, 2013 and December 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | |
Fair Value Measurements at December 31, 2013 | | | |
(In millions) | Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
U.S. equities | | | | | | | |
All capitalization(1) | $ | 6,647 |
| | $ | 2,805 |
| | $ | 3,842 |
| | $ | — |
|
International equities | | | | | | | |
Developed markets(1) | 3,136 |
| | 2,225 |
| | 911 |
| | — |
|
Emerging markets(1) | 488 |
| | 393 |
| | 95 |
| | — |
|
Fixed-income securities | | | | | | | |
U.S. Government and agency securities | 93 |
| | 93 |
| | — |
| | — |
|
Corporate debt securities/instruments | | | | | | | |
Investment grade bonds(2) | 1,477 |
| | — |
| | 1,477 |
| | — |
|
Non-investment grade bonds(2) | 427 |
| | — |
| | 427 |
| | — |
|
Emerging market debt | 51 |
| | 51 |
| | — |
| | — |
|
Core fixed-income(3) | 1,326 |
| | 1,228 |
| | 98 |
| | — |
|
Global multi-sector fixed-income(4) | 97 |
| | 97 |
| | — |
| | — |
|
Fixed-income hedge funds(5) | 171 |
| | — |
| | 164 |
| | 7 |
|
Securitized(6) | 754 |
| | — |
| | 754 |
| | — |
|
Convertible(7) | 207 |
| | 207 |
| | — |
| | — |
|
Cash and cash equivalents(8) | 1,239 |
| | 561 |
| | 678 |
| | — |
|
Other funds | | | | | | | |
Absolute return funds(9) | | | | | | | |
Relative value(10) | 464 |
| | — |
| | 318 |
| | 146 |
|
Event driven(11) | 323 |
| | — |
| | 168 |
| | 155 |
|
Equity hedge(12) | 329 |
| | — |
| | 323 |
| | 6 |
|
Macro(13) | 201 |
| | — |
| | 191 |
| | 10 |
|
Multi-strategy(14) | 125 |
| | — |
| | — |
| | 125 |
|
Private equity funds(15) | 598 |
| | — |
| | — |
| | 598 |
|
Private real estate funds | 537 |
| | — |
| | 208 |
| | 329 |
|
Insurance contracts | 26 |
| | — |
| | — |
| | 26 |
|
Other(17) | 106 |
| | — |
| | — |
| | 106 |
|
Total | $ | 18,822 |
| | $ | 7,660 |
| | $ | 9,654 |
| | $ | 1,508 |
|
|
| | | | | | | | | | | | | | | |
Fair Value Measurements at December 31, 2012 | | |
(In millions) | Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
U.S. equities | | | | | | | |
All capitalization(1) | $ | 4,626 |
| | $ | 1,817 |
| | $ | 2,809 |
| | $ | — |
|
International equities | | | | | | | |
Developed markets(1) | 2,350 |
| | 1,834 |
| | 516 |
| | — |
|
Emerging markets(1) | 658 |
| | 553 |
| | 105 |
| | — |
|
Fixed-income securities | | | | | | | |
U.S. Government and agency securities | 69 |
| | 69 |
| | — |
| | — |
|
Corporate debt securities/instruments | | | | | | | |
Investment grade bonds(2) | 1,989 |
| | — |
| | 1,989 |
| | — |
|
Non-investment grade bonds(2) | 336 |
| | — |
| | 336 |
| | — |
|
Emerging market debt | 181 |
| | 181 |
| | — |
| | — |
|
Core fixed-income(3) | 1,519 |
| | 1,281 |
| | 238 |
| | — |
|
Global multi-sector fixed-income(4) | 202 |
| | — |
| | 202 |
| | — |
|
Fixed-income hedge funds(5) | 297 |
| | — |
| | 230 |
| | 67 |
|
Securitized(6) | 480 |
| | — |
| | 480 |
| | — |
|
Cash and cash equivalents(8) | 874 |
| | 339 |
| | 535 |
| | — |
|
Other funds | | | | | | | |
Absolute return funds(9) | | | | | | | |
Relative value(10) | 358 |
| | — |
| | 358 |
| | — |
|
Event driven(11) | 203 |
| | — |
| | 131 |
| | 72 |
|
Equity hedge(12) | 118 |
| | — |
| | 113 |
| | 5 |
|
Macro(13) | 994 |
| | — |
| | 962 |
| | 32 |
|
Multi-strategy(14) | 581 |
| | 501 |
| | — |
| | 80 |
|
Private equity funds(15) | 397 |
| | — |
| | — |
| | 397 |
|
Private real estate funds | 299 |
| | — |
| | 50 |
| | 249 |
|
Insurance contracts | 25 |
| | — |
| | — |
| | 25 |
|
Payable for securities lending collateral(16) | (15 | ) | | — |
| | (15 | ) | | — |
|
Other(17) | 192 |
| | — |
| | — |
| | 192 |
|
Total | $ | 16,733 |
| | $ | 6,575 |
| | $ | 9,039 |
| | $ | 1,119 |
|
| |
(1) | U.S. and International equities primarily include investments across the spectrum of large, medium and small market capitalization stocks. |
| |
(2) | Investment grade bonds are fixed-income securities with a rating equivalent to a Standard & Poors rating of BBB- or better. Non-investment grade bonds have a rating equivalent to a Standard & Poors rating of BB+ or less. |
| |
(3) | Core fixed-income securities are funds that invest primarily in intermediate-term high quality domestic bonds issued by various governmental or private sector entities. |
| |
(4) | Global multi-sector fixed-income investments are funds that invest globally among several sectors including governments, investment grade corporate bonds, high yield corporate bonds and emerging market bonds. |
| |
(5) | Fixed-income hedge funds can employ numerous strategies and seek to hedge some of the risk inherent in their investments by using a variety of methods, including short selling and derivative instruments. |
| |
(6) | Securitized fixed-income securities pool together various cash flow producing financial assets that are structured in a way that can achieve desired targeted credit, maturity or other characteristics and are typically collateralized by residential mortgages, commercial mortgages and other assets. |
| |
(7) | Convertible fixed-income securities are funds that invest in bonds that can be converted into a predetermined amount of the issuer's equity at certain times during the life of the bond, usually at the discretion of the bondholder. |
| |
(8) | Cash and cash equivalents are invested in highly liquid money market funds. Included in cash and cash equivalents is excess cash in investment manager accounts. This cash is available for immediate use and is used to fund daily operations and execute the investment policy. This amount is not considered to be part of the cash target allocation set forth in the investment policy. |
| |
(9) | Absolute return funds seek returns that are less volatile than long only funds under all market conditions. |
| |
(10) | Relative value fund strategies seek to capture arbitrage opportunities created by price discrepancies between related equity, debt and derivative financial instruments while minimizing or neutralizing market risk. |
| |
(11) | Event driven fund strategies seek to capture return opportunities created by special situations and corporate events tied to corporate merger and acquisition activity, restructuring, bankruptcy or financial distress. |
| |
(12) | Equity hedge fund strategies invest in global public equity securities, equity related options and derivatives and employ short selling with the objective of generating higher risk-adjusted returns than traditional investments in equity. |
| |
(13) | Macro fund strategies invest in futures, broad market indices and other financial instruments and seek to either generate positive returns regardless of market conditions or take advantage of global capital flows. |
| |
(14) | Multi-strategy funds allocate investments tactically across all asset classes globally based upon relative valuations to achieve maximum returns. |
| |
(15) | Private equity funds are predominantly invested in the U.S. and Western Europe. |
| |
(16) | The Plan participated in a securities lending program with the Trustee as of December 31, 2012 and exited the program by December 31, 2013. The program allowed the Trustee to loan securities, which are assets of the Plan, to approved brokers (Borrowers). The Trustee requires Borrowers, pursuant to a security loan agreement, to deliver collateral to secure each loan. The Plan bears the risk of loss with respect to the unfavorable change in fair value of the invested cash collateral. The market value of securities on loan is reflected in the various asset categories above. Loaned securities were predominantly U.S. equities, International equities, corporate bonds and U.S. Government bonds or treasuries. Cash collateral obligations of $15 million were received for securities on loan as of December 31, 2012. Cash collateral was invested in a separately maintained and managed cash collateral investment account. |
| |
(17) | As of December 31, 2013 and December 31, 2012, this category included $106 million and $192 million of net receivables and payables which consisted primarily of pending trades, interest, dividends and other payable expenses. |
|
| | | | | | | | | | | | | | | | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | |
(In millions) | Beginning Balance at Dec 31, 2012 | | Actual return on plan assets(1) | | Purchases, issuances, settlements | | Transfers in and/or out of Level 3 | | Ending Balance at Dec 31, 2013 |
Fixed-income securities | | | | | | | | | |
Fixed-income hedge funds | $ | 67 |
| | $ | 39 |
| | $ | (99 | ) | | $ | — |
| | $ | 7 |
|
Other funds | | | | | | | | | |
Absolute return funds | | | | | | | | | |
Relative value | — |
| | 11 |
| | 135 |
| | — |
| | 146 |
|
Event driven | 72 |
| | 30 |
| | 53 |
| | — |
| | 155 |
|
Equity hedge | 5 |
| | 1 |
| | — |
| | — |
| | 6 |
|
Macro | 32 |
| | 1 |
| | (23 | ) | | — |
| | 10 |
|
Multi-strategy | 80 |
| | 13 |
| | 32 |
| | — |
| | 125 |
|
Private equity funds | 397 |
| | 85 |
| | 116 |
| | — |
| | 598 |
|
Private real estate funds | 249 |
| | 49 |
| | 31 |
| | — |
| | 329 |
|
Insurance contracts | 25 |
| | — |
| | 1 |
| | — |
| | 26 |
|
Other | 192 |
| | — |
| | (86 | ) | | — |
| | 106 |
|
Total | $ | 1,119 |
| | $ | 229 |
| | $ | 160 |
| | $ | — |
| | $ | 1,508 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Beginning
Balance at
Dec 31,
2011 | | Actual return on plan assets(1) | | Purchases, issuances, settlements | | Transfers in and/or out of Level 3 | | Ending
Balance at
Dec 31,
2012 |
Fixed-income securities | |
| | |
| | |
| | |
| | |
|
Fixed-income hedge funds | $ | 53 |
| | $ | 28 |
| | $ | (14 | ) | | $ | — |
| | $ | 67 |
|
Other funds | | | |
| | | | |
| | |
|
Absolute return funds | | | | | | | | | |
Relative value | 23 |
| | — |
| | (23 | ) | | — |
| | — |
|
Event driven | 57 |
| | 9 |
| | 6 |
| | — |
| | 72 |
|
Equity hedge | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Macro | 22 |
| | 1 |
| | 9 |
| | — |
| | 32 |
|
Multi-strategy | — |
| | 2 |
| | 78 |
| | — |
| | 80 |
|
Private equity funds | 301 |
| | 45 |
| | 51 |
| | — |
| | 397 |
|
Private real estate funds | 182 |
| | 18 |
| | 49 |
| | — |
| | 249 |
|
Insurance contracts | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
Other | 89 |
| | — |
| | 103 |
| | — |
| | 192 |
|
Total | $ | 752 |
| | $ | 103 |
| | $ | 264 |
| | $ | — |
| | $ | 1,119 |
|
| |
(1) | The actual return on plan assets for assets still held at December 31, 2013 and December 31, 2012 was $95 million and $(32) million, respectively. |
The Plan limits the use of derivatives through direct or separate account investments such that the derivatives used are liquid and able to be readily valued in the market. Derivative usage in separate account structures is limited to hedging purposes or to gain market exposure in a non-speculative manner. The fair market value of the Plan’s derivatives through direct or separate account investments was approximately $20 million and less than $1 million as of December 31, 2013 and December 31, 2012, respectively.
In addition, assets are held in trust for non-U.S. Pension Benefits plans, primarily in the U.K. and Canada, which are governed locally in accordance with specific jurisdictional requirements. These assets are overseen by local management in Canada and by trustees with a combination of members representing plan participants and local management in the U.K. Investments in the non-U.S. Pension Benefits plans consist primarily of fixed-income securities and equity securities and had a fair market value of $806 million and $717 million at December 31, 2013 and December 31, 2012, respectively. These investments are valued using quoted prices in active markets (Level 1) as well as significant observable inputs (Level 2). Investments with significant unobservable inputs (Level 3) are immaterial in the non-U.S. Pension Benefits plans.
The fair market value of assets related to our Other Benefits was $431 million and $408 million as of December 31, 2013 and December 31, 2012, respectively. These assets included $189 million and $179 million at December 31, 2013 and December 31, 2012, respectively, that were invested in the master trust described above and are therefore invested in the same assets described above. The remaining investments are held within Voluntary Employees’ Beneficiary Association (VEBA) trusts. The assets of the VEBA trusts are also overseen by the Investment Committee and managed by the same investment fiduciary that manages the master trust’s investments. These assets are generally invested in mutual funds, and are valued primarily using quoted prices in active markets (Level 1) as well as significant observable inputs (Level 2). There were no Level 3 investments in the VEBA trusts at December 31, 2013 or December 31, 2012.
The table below details assets by category for our VEBA trusts. These assets consist primarily of publicly-traded equity securities and publicly-traded fixed-income securities.
|
| | | | | |
VEBA Trust Asset Information | Percent of Plan Assets at Dec 31: |
Asset category | 2013 |
| | 2012 |
|
Fixed-income securities | 34 | % | | 35 | % |
U.S. equities | 41 | % | | 41 | % |
International equities | 21 | % | | 20 | % |
Cash and cash equivalents | 4 | % | | 4 | % |
Total | 100 | % | | 100 | % |
