Retirement Plans
Our company and subsidiaries have various plans that cover a significant number of our employees. These plans include defined contribution plans, defined benefit plans, and other postretirement plans:
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- | our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of pension benefits the participant is to receive. Contributions to these plans are based on pretax income and/or discretionary amounts determined on an annual basis. Our expense for the defined contribution plans for continuing operations totaled $313 million in 2013, $293 million in 2012, and $245 million in 2011; |
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- | our defined benefit plans, which include both funded and unfunded pension plans, define an amount of pension benefit to be provided, usually as a function of age, years of service, and/or compensation. The unfunded obligations and net periodic benefit cost of our United States defined benefit plans were not material for the periods presented; and |
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- | our postretirement plans other than pensions are offered to specific eligible employees. The accumulated benefit obligations and net periodic benefit cost for these plans were not material for the periods presented. |
Funded status
For our international pension plans, at December 31, 2013, the projected benefit obligation was $1.2 billion and the fair value of plan assets was $887 million, which resulted in an unfunded obligation of $268 million. At December 31, 2012, the projected benefit obligation was $1.0 billion and the fair value of plan assets was $754 million, which resulted in an unfunded obligation of $276 million. The accumulated benefit obligation for our international plans was $1.1 billion at December 31, 2013 and $961 million at December 31, 2012.
The following table presents additional information about our international pension plans.
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| | | | | | |
| December 31 |
Millions of dollars | 2013 | 2012 |
Amounts recognized on the Consolidated Balance Sheets | | |
Accrued employee compensation and benefits | $ | 17 |
| $ | 10 |
|
Employee compensation and benefits | 251 |
| 266 |
|
Pension plans in which projected benefit obligation exceeded plan assets | | |
Projected benefit obligation | $ | 1,123 |
| $ | 1,004 |
|
Fair value of plan assets | 854 |
| 727 |
|
Pension plans in which accumulated benefit obligation exceeded plan assets | | |
Accumulated benefit obligation | $ | 1,046 |
| $ | 935 |
|
Fair value of plan assets | 854 |
| 726 |
|
Fair value measurements of plan assets
The following table sets forth by level within the fair value hierarchy the fair value of assets held by our international pension plans.
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| | | | | | | | | | | | |
Millions of dollars | Level 1 | Level 2 | Level 3 | Total |
Common/collective trust funds (a) | | | | |
Equity funds | $ | — |
| $ | 247 |
| $ | — |
| $ | 247 |
|
Bond funds | — |
| 118 |
| — |
| 118 |
|
Balanced funds | — |
| 13 |
| — |
| 13 |
|
Non-United States equity securities | 165 |
| — |
| — |
| 165 |
|
United States equity securities | 139 |
| — |
| — |
| 139 |
|
Corporate bonds | — |
| 110 |
| — |
| 110 |
|
Other assets | 2 |
| 59 |
| 34 |
| 95 |
|
Fair value of plan assets at December 31, 2013 | $ | 306 |
| $ | 547 |
| $ | 34 |
| $ | 887 |
|
| | | | |
Common/collective trust funds (a) | | | | |
Equity funds | $ | — |
| $ | 204 |
| $ | — |
| $ | 204 |
|
Bond funds | — |
| 112 |
| — |
| 112 |
|
Balanced funds | — |
| 13 |
| — |
| 13 |
|
Non-United States equity securities | 130 |
| — |
| — |
| 130 |
|
United States equity securities | 110 |
| — |
| — |
| 110 |
|
Corporate bonds | — |
| 107 |
| — |
| 107 |
|
Other assets | 27 |
| 16 |
| 35 |
| 78 |
|
Fair value of plan assets at December 31, 2012 | $ | 267 |
| $ | 452 |
| $ | 35 |
| $ | 754 |
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(a) | Strategies are generally to invest in equity or debt securities, or a combination thereof, that match or outperform certain predefined indices. |
Our Level 1 plan asset fair values are based on quoted prices in active markets for identical assets, our Level 2 plan asset fair values are based on significant observable inputs for similar assets, and our Level 3 plan asset fair values are based on significant unobservable inputs.
Equity securities are traded in active markets and valued based on their quoted fair value by independent pricing vendors. Corporate bonds are valued using quotes from independent pricing vendors based on recent trading activity and other relevant information, including other observable inputs such as market interest rate curves, referenced credit spreads, and estimated prepayment rates. Common/collective trust funds are valued at the net asset value of units held by the plans at year-end.
Our investment strategy varies by country depending on the circumstances of the underlying plan. Typically, less mature plan benefit obligations are funded by using more equity securities, as they are expected to achieve long-term growth while exceeding inflation. More mature plan benefit obligations are funded using more fixed income securities, as they are expected to produce current income with limited volatility. The fixed income allocation is generally invested with a similar maturity profile to that of the benefit obligations to ensure that changes in interest rates are adequately reflected in the assets of the plan. Risk management practices include diversification by issuer, industry, and geography, as well as the use of multiple asset classes and investment managers within each asset class.
For our United Kingdom pension plan, which constituted 81% of our international pension plans’ projected benefit obligation at December 31, 2013, the target asset allocation during 2013 and 2012 was 65% equity securities and 35% fixed income securities. Beginning in 2014, we are implementing a de-risking program intended to improve the funded status, with the plan's assets increasingly invested over time in low-risk fixed income securities.
Net periodic benefit cost
Net periodic benefit cost for our international pension plans was $32 million in 2013, $26 million in 2012, and $27 million in 2011.
Actuarial assumptions
Certain weighted-average actuarial assumptions used to determine benefit obligations of our international pension plans at December 31 were as follows:
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| | |
| 2013 | 2012 |
Discount rate | 4.8% | 4.8% |
Rate of compensation increase | 5.5% | 5.5% |
Certain weighted-average actuarial assumptions used to determine net periodic benefit cost of our international pension plans for the years ended December 31 were as follows:
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| | | |
| 2013 | 2012 | 2011 |
Discount rate | 4.8% | 5.2% | 7.1% |
Expected long-term return on plan assets | 6.4% | 6.5% | 5.7% |
Rate of compensation increase | 5.5% | 5.4% | 6.2% |
Assumed long-term rates of return on plan assets, discount rates for estimating benefit obligations, and rates of compensation increases vary by plan according to local economic conditions. Discount rates were determined based on the prevailing market rates of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations. Expected long-term rates of return on plan assets were determined based upon an evaluation of our plan assets and historical trends and experience, taking into account current and expected market conditions.
Other information
Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In certain countries the funding requirements are mandatory, while in other countries they are discretionary. We currently expect to contribute $17 million to our international pension plans in 2014.
Benefit payments. Expected benefit payments over the next 10 years are approximately $40 million annually for our international pension plans.
