ABBOTT LABORATORIES | 2013 | FY | 3


Note 12 — Post-Employment Benefits

        Retirement plans consist of defined benefit, defined contribution and medical and dental plans. Information for Abbott's major defined benefit plans and post-employment medical and dental benefit plans is as follows:

 
  Defined Benefit
Plans
  Medical and
Dental Plans
 
(in millions)
  2013   2012   2013   2012  

Projected benefit obligations, January 1

  $ 11,322   $ 9,212   $ 1,889   $ 1,657  

Service cost — benefits earned during the year

    303     389     43     61  

Interest cost on projected benefit obligations

    276     460     59     81  

(Gains) losses, primarily changes in discount rates, plan design changes, law changes and differences between actual and estimated health care costs

    (650 )   1,461     (156 )   148  

Benefits paid

    (185 )   (308 )   (60 )   (63 )

Separation of AbbVie Inc. 

    (4,654 )       (450 )    

Other, including foreign currency translation

    20     108     (28 )   5  
                   

Projected benefit obligations, December 31

  $ 6,432   $ 11,322   $ 1,297   $ 1,889  
                   
                   

Plan assets at fair value, January 1

  $ 7,949   $ 6,961   $ 417   $ 389  

Actual return on plans' assets

    727     878     61     48  

Company contributions

    724     379     40     40  

Benefits paid

    (185 )   (302 )   (56 )   (60 )

Separation of AbbVie Inc. 

    (3,107 )            

Other, primarily foreign currency translation

    15     33          
                   

Plan assets at fair value, December 31

  $ 6,123   $ 7,949   $ 462   $ 417  
                   
                   

Projected benefit obligations greater than plan assets, December 31

  $ (309 ) $ (3,373 ) $ (835 ) $ (1,472 )
                   
                   

Long-term assets

  $ 685   $ 69   $   $  

Short-term liabilities

    (11 )   (43 )        

Long-term liabilities

    (983 )   (3,399 )   (835 )   (1,472 )
                   

Net liability

  $ (309 ) $ (3,373 ) $ (835 ) $ (1,472 )
                   
                   

Amounts Recognized in Accumulated Other Comprehensive Income (loss):

                         

Actuarial losses, net

  $ 1,791   $ 4,923   $ 334   $ 701  

Prior service cost (credits)

    20     61     (252 )   (322 )
                   

Total

  $ 1,811   $ 4,984   $ 82   $ 379  
                   
                   

        In connection with separation of AbbVie on January 1, 2013, Abbott transferred to AbbVie Accumulated other comprehensive losses, net of income taxes, of approximately $1.4 billion. The projected benefit obligations for non-U.S. defined benefit plans was $2.0 billion and $3.1 billion at December 31, 2013 and 2012, respectively. The accumulated benefit obligations for all defined benefit plans were $5.5 billion and $9.6 billion at December 31, 2013 and 2012, respectively.

        For plans where the accumulated benefit obligations exceeded plan assets at December 31, 2013 and 2012, the aggregate accumulated benefit obligations, the projected benefit obligations and the aggregate plan assets were as follows:

(in millions)
  2013   2012  

Accumulated benefit obligation

  $ 408   $ 8,100  

Projected benefit obligation

    505     9,619  

Fair value of plan assets

        6,243  

        In 2011, $776 million of assets and liabilities of a plan sponsored by Abbott Healthcare BV, a Dutch subsidiary of Abbott Laboratories, were irrevocably transferred to a Dutch insurance company in full settlement of that plan. The assets were used to purchase an annuity contract to fulfill the plan's obligations.

        The components of the net periodic benefit cost were as follows:

 
  Defined Benefit Plans   Medical and
Dental Plans
 
 
  2013   2012   2011   2013   2012   2011  
 
  (in millions)
 

Service cost — benefits earned during the year

  $ 303   $ 389   $ 332   $ 43   $ 61   $ 55  

Interest cost on projected benefit obligations

    276     460     446     59     81     88  

Expected return on plans' assets

    (396 )   (611 )   (608 )   (36 )   (33 )   (34 )

Settlement

            40              

Amortization of actuarial losses

    169     244     163     34     34     38  

Amortization of prior service cost (credits)

    3     2     4     (35 )   (42 )   (42 )
                           

Total cost

    355     484     377     65     101     105  

Less: Discontinued operations

        (206 )   (176 )       (48 )   (49 )
                           

Net cost — continuing operations

  $ 355   $ 278   $ 201   $ 65   $ 53   $ 56  
                           
                           

        Other comprehensive income (loss) for each respective year includes the amortization of actuarial losses and prior service costs (credits) as noted in the previous table. Other comprehensive income (loss) for each respective year also includes: net actuarial gains and prior service credits of $995 million for defined benefit plans and $201 million for medical and dental plans in 2013; net actuarial losses of $1.2 billion for defined benefit plans and net actuarial losses of $134 million for medical and dental plans in 2012; and net actuarial losses of $1.1 billion for defined benefit plans and net actuarial gains of $66 million for medical and dental plans in 2011. The actuarial losses for 2012 and 2011 related to the businesses transferred to AbbVie as part of the separation were $167 million and $19 million, respectively; prior service costs were not significant.

        The pretax amount of actuarial losses and prior service cost (credits) included in Accumulated other comprehensive income (loss) at December 31, 2013 that is expected to be recognized in the net periodic benefit cost in 2014 is $102 million and $2 million of expense, respectively, for defined benefit pension plans and $17 million of expense and $37 million of income, respectively, for medical and dental plans.

        The weighted average assumptions used to determine benefit obligations for defined benefit plans and medical and dental plans are as follows:

 
  2013   2012   2011  

Discount rate

    4.9 %   4.3 %   5.0 %

Expected aggregate average long-term change in compensation

    5.0 %   5.3 %   5.3 %

        The weighted average assumptions used to determine the net cost for defined benefit plans and medical and dental plans are as follows:

 
  2013   2012   2011  

Discount rate

    4.2 %   5.0 %   5.4 %

Expected return on plan assets

    7.8 %   8.0 %   7.8 %

Expected aggregate average long-term change in compensation

    5.0 %   5.3 %   5.1 %

        The assumed health care cost trend rates for medical and dental plans at December 31 were as follows:

 
  2013   2012   2011  

Health care cost trend rate assumed for the next year

    7 %   7 %   7 %

Rate that the cost trend rate gradually declines to

    5 %   5 %   5 %

Year that rate reaches the assumed ultimate rate

    2019     2019     2019  

        The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott's expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date. A one-percentage point increase/(decrease) in the assumed health care cost trend rate would increase/(decrease) the accumulated post-employment benefit obligations as of December 31, 2013, by $177 million /$(146) million, and the total of the service and interest cost components of net post-employment health care cost for the year then ended by approximately $18 million/$(14) million.

        The following table summarizes the bases used to measure the defined benefit and medical and dental plan assets at fair value:

 
   
  Basis of Fair Value Measurement  
 
  Outstanding
Balances
  Quoted
Prices in
Active Markets
  Significant
Other
Observable
Inputs
  Significant
Unobservable
Inputs
 
 
  (in millions)
 

December 31, 2013:

                         

Equities:

                         

U.S. large cap (a)

  $ 1,618   $ 741   $ 877   $  

U.S. mid cap (b)

    409     134     275      

International (c)

    1,319     608     711      

Fixed income securities:

                         

U.S. government securities (d)

    453     61     392      

Corporate debt instruments (e)

    378     108     270      

Non-U.S. government securities (f)

    536     305     231      

Other (g)

    77     69     8      

Absolute return funds (h)

    1,474     197     791     486  

Commodities (i)

    170     6     97     67  

Other (j)

    151     149         2  
                   

 

  $ 6,585   $ 2,378   $ 3,652   $ 555  
                   
                   

December 31, 2012:

                         

Equities:

                         

U.S. large cap (a)

  $ 1,831   $ 1,058   $ 773   $  

U.S. mid cap (b)

    491     133     358      

International (c)

    1,607     657     950      

Fixed income securities:

                         

U.S. government securities (d)

    899     172     727      

Corporate debt instruments (e)

    736     355     381      

Non-U.S. government securities (f)

    374     83     291      

Other (g)

    24         24      

Absolute return funds (h)

    2,070     85     1,246     739  

Commodities (i)

    222     9     172     41  

Other (j)

    112     109         3  
                   

 

  $ 8,366   $ 2,661   $ 4,922   $ 783  
                   
                   

Prior year amounts have been revised to conform with the current year's asset classifications.


(a)
A mix of index funds that track the S&P 500 (60 percent in 2013 and 50 percent in 2012) and separate actively managed equity accounts that are benchmarked to the Russell 1000 (40 percent in 2013 and 50 percent in 2012).

(b)
A mix of index funds (70 percent in 2013 and 75 percent in 2012) and separate actively managed equity accounts (30 percent in 2013 and 25 percent in 2012) that track or are benchmarked to the S&P 400 midcap index.

(c)
Primarily separate actively managed pooled investment accounts that are benchmarked to the MSCI and MSCI emerging market indices.

(d)
Index funds not actively managed (50 percent in 2013 and 2012) and separate actively managed accounts (50 percent in 2013 and 2012).

(e)
Index funds not actively managed (40 percent in 2013 and 20 percent in 2012) and separate actively managed accounts (60 percent in 2013 and 80 percent in 2012).

(f)
Primarily United Kingdom, Japan and Irish government-issued bonds.

(g)
Primarily mortgage backed securities.

(h)
Primarily funds invested by managers that have a global mandate with the flexibility to allocate capital broadly across a wide range of asset classes and strategies including, but not limited to equities, fixed income, commodities, interest rate futures, currencies and other securities to outperform an agreed upon benchmark with specific return and volatility targets.

(i)
Primarily investments in liquid commodity future contracts and private energy funds.

(j)
Primarily cash and cash equivalents.

        Equities that are valued using quoted prices are valued at the published market prices. Equities in a common collective trust or a registered investment company that are valued using significant other observable inputs are valued at the net asset value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund minus its liabilities. Fixed income securities that are valued using significant other observable inputs are valued at prices obtained from independent financial service industry-recognized vendors. Absolute return funds and commodities are valued at the NAV provided by the fund administrator. Private energy funds are valued at the NAV provided by the partnership on a one-quarter lag adjusted for known cash flows and significant events through the reporting date.

        The following table summarizes the change in the value of assets that are measured using significant unobservable inputs:

 
  2013   2012  
 
  (in millions)
 

January 1

  $ 783   $ 682  

Transfers in (out of) from other categories

    6     6  

Separation of AbbVie, Inc. 

    (165 )    

Actual return on plan assets:

             

Assets on hand at year end

    29     59  

Assets sold during the year

    51     (4 )

Purchases, sales and settlements, net

    (149 )   40  
           

December 31

  $ 555   $ 783  
           
           

        The investment mix of equity securities, fixed income and other asset allocation strategies is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities. Investment allocations are made across a range of markets, industry sectors, capitalization sizes, and in the case of fixed income securities, maturities and credit quality. The plans do not directly hold any securities of Abbott. There are no known significant concentrations of risk in the plans' assets. Abbott's medical and dental plans' assets are invested in a similar mix as the pension plan assets. The actual asset allocation percentages at year end are consistent with the company's targeted asset allocation percentages.

        The plans' expected return on assets, as shown above is based on management's expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions.

        Abbott funds its domestic pension plans according to IRS funding limitations. International pension plans are funded according to similar regulations. Abbott funded $724 million in 2013 and $379 million in 2012 to defined pension plans. Abbott expects to contribute approximately $400 million to its pension plans in 2014, of which approximately $300 million relates to its main domestic pension plan.

        Total benefit payments expected to be paid to participants, which includes payments funded from company assets, as well as paid from the plans, are as follows:

(in millions)
  Defined
Benefit Plans
  Medical and
Dental Plans
 

2014

  $ 186   $ 71  

2015

    198     73  

2016

    213     74  

2017

    229     76  

2018

    249     77  

2019 to 2023

    1,578     417  

        The Abbott Stock Retirement Plan is the principal defined contribution plan. Abbott's contributions to this plan were $86 million in 2013, $150 million in 2012 and $151 million in 2011. The contribution amounts in 2012 and 2011 include amounts associated with the businesses transferred to AbbVie.


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