RETIREMENT BENEFITS
Plan Descriptions
Defined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S. covering the majority of its employees. Pension benefits for most employees are based on the employee’s years of service, age and compensation. It is the policy of the company to fund at least the minimum amount required for all qualified plans, using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making payments into benefit trusts separate from the company.
Defined Contribution Plans – The company also sponsors 401(k) defined contribution plans in which most employees are eligible to participate, including certain employees covered under collective bargaining agreements. Company contributions for most plans are based on a cash matching of employee contributions up to 4 percent of compensation. In addition to the 401(k) defined contribution benefit, certain employees hired after June 30, 2008, are eligible to participate in a defined contribution program in lieu of a defined benefit pension plan. The company’s contributions to these defined contribution plans for the years ended December 31, 2013, 2012 and 2011, were $285 million, $293 million and $297 million, respectively.
Non-U.S. Benefit Plans – The company sponsors several benefit plans for non-U.S. employees. These plans are designed to provide benefits appropriate to local practice and in accordance with local regulations. Some of these plans are funded using benefit trusts that are separate from the company.
Medical and Life Benefits – The company provides a portion of the costs for certain health care and life insurance benefits for a substantial number of its active and retired employees. Certain covered employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age and years of service requirements. Qualifying dependents are also eligible for medical coverage. Approximately 62 percent of the company’s current pension retirees participate in the medical plans. The company reserves the right to amend or terminate the plans at any time. The company has capped the amount of its contributions to substantially all of its remaining post retirement medical and life benefit plans.
In addition to a company and employee cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, conformance to a schedule of reasonable fees, the use of managed care providers, and coordination of benefits with other plans. The plans also provide for a Medicare carve-out. Subsequent to January 1, 2005 (or earlier at some segments), newly hired employees are not eligible for post retirement medical and life benefits.
Summary Plan Results
The cost to the company of its retirement benefit plans in each of the three years ended December 31 is shown in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
| | Pension Benefits | | Medical and Life Benefits |
$ in millions | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Components of net periodic benefit cost | | | | | | | | | | | | |
Service cost | |
| $ 516 |
| |
| $ 522 |
| |
| $ 520 |
| |
| $ 36 |
| |
| $ 34 |
| |
| $ 32 |
|
Interest cost | | 1,117 |
| | 1,184 |
| | 1,223 |
| | 96 |
| | 109 |
| | 114 |
|
Expected return on plan assets | | (1,809 | ) | | (1,708 | ) | | (1,690 | ) | | (75 | ) | | (68 | ) | | (62 | ) |
Amortization of: | | | | | | | | | | | | |
Prior service (credit) cost | | (58 | ) | | (58 | ) | | 23 |
| | (51 | ) | | (51 | ) | | (51 | ) |
Net loss from previous years | | 608 |
| | 427 |
| | 162 |
| | 30 |
| | 21 |
| | 17 |
|
Other | | — |
| | 7 |
| | — |
| | — |
| | — |
| | (6 | ) |
Net periodic benefit cost | |
| $ 374 |
| |
| $ 374 |
| |
| $ 238 |
| |
| $ 36 |
| |
| $ 45 |
| |
| $ 44 |
|
The table below summarizes the components of changes in unamortized benefit plan costs for the years ended December 31, 2013, 2012 and 2011:
|
| | | | | | | | | | | | |
| Pension | | Medical and | | |
$ in millions | Benefits | | Life Benefits | | Total |
Changes in unamortized benefit plan costs | | | | | | |
Change in net actuarial loss | |
| $2,687 |
| |
| $138 |
| |
| $2,825 |
|
Change in prior service cost | | (608 | ) | | 6 |
| | (602 | ) |
Amortization of: | | | | | | |
Prior service (cost) credit | | (23 | ) | | 51 |
| | 28 |
|
Net loss from previous years | | (162 | ) | | (17 | ) | | (179 | ) |
Tax benefit related to above items | | (752 | ) | | (71 | ) | | (823 | ) |
Change in unamortized benefit plan costs – 2011 | |
| $1,142 |
| |
| $107 |
| |
| $1,249 |
|
Change in net actuarial loss | |
| $2,353 |
| |
| $151 |
| |
| $2,504 |
|
Change in prior service cost | | (2 | ) | | — |
| | (2 | ) |
Amortization of: | | | | | | |
Prior service credit | | 58 |
| | 51 |
| | 109 |
|
Net loss from previous years | | (427 | ) | | (21 | ) | | (448 | ) |
Tax benefit related to above items | | (788 | ) | | (72 | ) | | (860 | ) |
Change in unamortized benefit plan costs – 2012 | |
| $1,194 |
| |
| $109 |
| |
| $1,303 |
|
Change in net actuarial loss | |
| ($2,158 | ) | |
| ($280 | ) | |
| ($2,438 | ) |
Amortization of: | | | | | | |
Prior service credit | | 58 |
| | 51 |
| | 109 |
|
Net loss from previous years | | (608 | ) | | (30 | ) | | (638 | ) |
Tax expense related to above items | | 1,075 |
| | 102 |
| | 1,177 |
|
Change in unamortized benefit plan costs – 2013 | |
| ($1,633 | ) | |
| ($157 | ) | |
| ($1,790 | ) |
Unamortized benefit plan costs consist primarily of accumulated actuarial losses totaling $3.3 billion and $5.1 billion, both after tax, as of December 31, 2013 and 2012, respectively. The change in net actuarial loss from pension benefits in 2013 was primarily due to the increase in the discount rate assumption to 4.99 percent at December 31, 2013, from 4.12 percent at December 31, 2012.
In December 2011, the company adopted certain changes in its defined benefit pension plans designed to enable the company to remain competitive within its marketplace and provide the affordability its customers require. These changes represent modifications to the defined benefits available to employees hired prior to July 1, 2008, who retire beginning after December 31, 2012. As a result of these changes, the company recognized a reduction of approximately $640 million in its projected benefit obligations for the affected employee groups as of December 31, 2011. Due to these changes, certain nonqualified benefit plans experienced curtailments, however the net impact of these curtailment events was not material.
|
| | | | | | | | | | | | | |
| | Pension Benefits | | Medical and Life Benefits |
$ in millions | | 2013 | | 2012 | | 2013 | | 2012 |
Amounts recorded in accumulated other comprehensive loss | | | | | | | | |
Net actuarial loss | | ($5,291 | ) | |
| ($8,057 | ) | | ($151 | ) | | ($461 | ) |
Prior service credit | | 423 |
| | 481 |
| | 47 |
| | 98 |
|
Income tax benefits related to above items | | 1,928 |
| | 3,003 |
| | 44 |
| | 146 |
|
Unamortized benefit plan costs | | ($2,940 | ) | |
| ($4,573 | ) | | ($ 60 | ) | | ($217 | ) |
The following tables set forth the funded status and amounts recognized in the consolidated statements of financial position for the company’s defined benefit pension and retiree health care and life insurance benefit plans. Pension benefits data includes the qualified plans, foreign plans, as well as 11 domestic unfunded non-qualified plans for benefits provided to directors, officers and certain employees. The company uses a December 31 measurement date for all of its plans. |
| | | | | | | | | | | | |
| | Pension Benefits | | Medical and Life Benefits |
$ in millions | | 2013 | | 2012 | | 2013 | | 2012 |
Change in projected benefit obligation | | | | | | | | |
Projected benefit obligation at beginning of year | | $27,746 |
| | $24,129 |
| | $2,448 |
| | $2,235 |
|
Service cost | | 516 |
| | 522 |
| | 36 |
| | 34 |
|
Interest cost | | 1,117 |
| | 1,184 |
| | 96 |
| | 109 |
|
Participant contributions | | 12 |
| | 12 |
| | 77 |
| | 81 |
|
Plan amendments | | — |
| | (1 | ) | | — |
| | — |
|
Actuarial (gain) loss | | (2,063 | ) | | 3,114 |
| | (219 | ) | | 202 |
|
Benefits paid | | (1,365 | ) | | (1,220 | ) | | (227 | ) | | (227 | ) |
Other | | 9 |
| | 6 |
| | 13 |
| | 14 |
|
Projected benefit obligation at end of year | | $25,972 |
| | $27,746 |
| | $2,224 |
| | $2,448 |
|
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Medical and Life Benefits |
$ in millions | | 2013 | | 2012 | | 2013 | | 2012 |
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $22,962 |
| | $21,340 |
| | $1,062 |
| |
| $ 946 |
|
Gain on plan assets | | 1,907 |
| | 2,463 |
| | 137 |
| | 119 |
|
Employer contributions | | 579 |
| | 366 |
| | 114 |
| | 129 |
|
Participant contributions | | 12 |
| | 12 |
| | 77 |
| | 81 |
|
Benefits paid | | (1,365 | ) | | (1,220 | ) | | (227 | ) | | (227 | ) |
Other | | 3 |
| | 1 |
| | 12 |
| | 14 |
|
Fair value of plan assets at end of year | | 24,098 |
| | 22,962 |
| | 1,175 |
| | 1,062 |
|
Funded status | | ($ 1,874 | ) | |
| ($4,784 | ) | | ($1,049 | ) | | ($1,386 | ) |
Amounts recognized in the Consolidated Statements of Financial Position | | | | | | | | |
Non-current assets | |
| $ 117 |
| |
| $ 7 |
| |
| $ 72 |
| |
| $ 49 |
|
Current liability | | (122 | ) | | (111 | ) | | (36 | ) | | (30 | ) |
Non-current liability | | (1,869 | ) | | (4,680 | ) | | (1,085 | ) | | (1,405 | ) |
The following table shows those amounts expected to be recognized in net periodic benefit cost in 2014: |
| | | | | | | |
$ in millions | Pension Benefits | | Medical and Life Benefits |
Amounts expected to be recognized in 2014 net periodic benefit cost | | | | | |
Net actuarial loss | | $327 |
| | | $ 9 |
|
Prior service credit | | (59 | ) | | | (30 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $25.7 billion and $27.2 billion at December 31, 2013 and 2012, respectively.
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
|
| | | | | | | | |
| | December 31 |
$ in millions | | 2013 | | 2012 |
Projected benefit obligation | |
| $24,129 |
| |
| $27,645 |
|
Accumulated benefit obligation | | 23,830 |
| | 27,146 |
|
Fair value of plan assets | | 22,138 |
| | 22,853 |
|
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine the benefit obligations and the net periodic benefit cost: |
| | | | | | | | | | | | |
| | Pension Benefits | | Medical and Life Benefits |
| | 2013 | | 2012 | | 2013 | | 2012 |
Assumptions used to determine benefit obligation at December 31 | | | | | | | | |
Discount rate | | 4.99 | % | | 4.12 | % | | 4.90 | % | | 4.02 | % |
Initial cash balance crediting rate assumed for the next year | | 3.90 | % | | 3.00 | % | | | | |
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate) | | 4.70 | % | | 4.25 | % | | | | |
Year that the cash balance crediting rate reaches the ultimate rate | | 2019 |
| | 2018 |
| | | | |
Rate of compensation increase | | 3.00 | % | | 2.75 | % | | | | |
Initial health care cost trend rate assumed for the next year | | | | | | 6.50 | % | | 7.00 | % |
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate) | | | | | | 5.00 | % | | 5.00 | % |
Year that the health care cost trend rate reaches the ultimate trend rate | | | | | | 2017 |
| | 2017 |
|
Assumptions used to determine benefit cost for the year ended December 31 | | | | | | | | |
Discount rate | | 4.12 | % | | 5.03 | % | | 4.02 | % | | 5.02 | % |
Initial cash balance crediting rate assumed for the next year | | 3.00 | % | | 3.25 | % | | | | |
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate) | | 4.25 | % | | 4.50 | % | | | | |
Year that the cash balance crediting rate reaches the ultimate rate | | 2018 |
| | 2017 |
| | | | |
Expected long-term return on plan assets | | 8.00 | % | | 8.25 | % | | 7.33 | % | | 7.44 | % |
Rate of compensation increase | | 2.75 | % | | 2.75 | % | | | | |
Initial health care cost trend rate assumed for the next year | | | | | | 7.00 | % | | 7.50 | % |
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate) | | | | | | 5.00 | % | | 5.00 | % |
Year that the health care cost trend rate reaches the ultimate trend rate | | | | | | 2017 |
| | 2017 |
|
The discount rate is generally based on the yield of high-quality corporate fixed-income investments. At the end of each year, the discount rate is primarily determined using a portfolio of high-quality bonds matching the notional cash inflows with the expected benefit payments for each significant benefit plan.
Through consultation with investment advisors, expected long-term returns for each of the plans’ strategic asset classes were developed. Several factors were considered, including current market data such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. Using policy target allocation percentages and the asset class expected returns, a weighted-average expected return was calculated.
The assumptions used for pension benefits are consistent with those used for retiree medical and life insurance benefits. The long-term rate of return on plan assets used for medical and life benefits is reduced to allow for the impact of tax on expected returns as the earnings of certain Voluntary Employee Beneficiary Association (VEBA) trusts are taxable, unlike the pension trust.
A one-percentage-point change in the initial through the ultimate health care cost trend rates would have had the following estimated effect on 2013 other post-retirement benefit results:
|
| | | | | | | | | |
$ in millions | 1-Percentage-
Point Decrease | | 1-Percentage-
Point Increase |
Increase (decrease) from change in health care cost trend rates to | | | | | |
Total service and interest cost | | $ | (5 | ) | | | $ | 4 |
|
Other post-retirement benefit liability | | (81 | ) | | | 67 |
|
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. The investment goal is to exceed the assumed rate of return over the long term within reasonable and prudent levels of risk. Liability studies are conducted on a regular basis to provide guidance in setting investment goals with an objective to balance risk. Risk targets are established and monitored against acceptable ranges.
Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with ERISA (Employee Retirement Income Security Act). Guidelines are established defining permitted investments within each asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for management of fixed income and alternative investments.
For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within the following ranges as of December 31, 2013:
|
| | | | | |
| | Asset Allocation Ranges |
Domestic equities | | 10% - 30% |
International equities | | 5% - 25% |
Fixed income securities | | 30% - 50% |
Alternative investments | | 15% - 30% |
The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31, 2013, and 2012, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category (see Note 1 for definition of levels). The significant amount of Level 2 investments in the table results from including in this category investments in pooled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis, and fixed income securities valued using model-based pricing services. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
$ in millions | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Asset category | | | | | | | | | | | | | | | | |
Cash and cash equivalents(1) | |
| $ 32 |
| |
| $ 92 |
| |
| $ 1,467 |
| |
| $ 1,748 |
| | | | | |
| $ 1,499 |
| |
| $ 1,840 |
|
Domestic equities | | 4,163 |
| | 3,657 |
| | 287 |
| | 318 |
| | 2 |
| |
| $ 2 |
| | 4,452 |
| | 3,977 |
|
International equities | | 2,473 |
| | 1,700 |
| | 1,741 |
| | 2,319 |
| | | | | | 4,214 |
| | 4,019 |
|
Fixed income securities | | | | | | | | | | | | | | | | |
U.S. Treasuries | | | | | | 1,602 |
| | 1,780 |
| | | | | | 1,602 |
| | 1,780 |
|
U.S. Government Agency | | | | | | 974 |
| | 968 |
| | | | | | 974 |
| | 968 |
|
Non-U.S. Government | | | | | | 422 |
| | 401 |
| | | | | | 422 |
| | 401 |
|
Corporate debt | | | | | | 4,744 |
| | 4,123 |
| | | | | | 4,744 |
| | 4,123 |
|
Asset backed | | | | | | 545 |
| | 528 |
| | 4 |
| | 4 |
| | 549 |
| | 532 |
|
High yield debt | | | | | | 922 |
| | 1,139 |
| | 1 |
| | 28 |
| | 923 |
| | 1,167 |
|
Bank loans | | | | | | 185 |
| | 223 |
| | | | | | 185 |
| | 223 |
|
Alternative Investments | | | | | | | | | | | | | | | | |
Hedge funds | | | | | | | | | | 821 |
| | 758 |
| | 821 |
| | 758 |
|
Private equities | | | | | | | | | | 2,075 |
| | 1,980 |
| | 2,075 |
| | 1,980 |
|
Real estate | | | | | | | | | | 2,767 |
| | 2,256 |
| | 2,767 |
| | 2,256 |
|
Other | | 26 |
| | (5 | ) | | 20 |
| | 5 |
| | | | | | 46 |
| | — |
|
Fair value of plan assets at the end of the year | |
| $6,694 |
| |
| $5,444 |
| |
| $12,909 |
| |
| $13,552 |
| |
| $5,670 |
| |
| $5,028 |
| |
| $25,273 |
| |
| $24,024 |
|
| |
(1) | Cash and cash equivalents are predominantly held in money market funds. |
The changes in the fair value of the pension and VEBA plan trust assets measured using Level 3 significant unobservable inputs during 2013 and 2012, are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
$ in millions | | Hedge funds and High-yield debt | | Private equities | | Real Estate | | Other | | Total |
Balance as of December 31, 2011 | |
| $1,446 |
| |
| $2,098 |
| |
| $1,788 |
| |
| $6 |
| |
| $5,338 |
|
Actual return on plan assets: | | | | | | | | | | |
Unrealized gains (losses), net | | 23 |
| | (122 | ) | | 68 |
| | 5 |
| | (26 | ) |
Realized gains (losses), net | | 47 |
| | — |
| | — |
| | (5 | ) | | 42 |
|
Purchases | | — |
| | 259 |
| | 846 |
| | — |
| | 1,105 |
|
Sales | | (730 | ) | | (255 | ) | | (446 | ) | | — |
| | (1,431 | ) |
Balance as of December 31, 2012 | |
| $ 786 |
| |
| $1,980 |
| |
| $2,256 |
| |
| $6 |
| |
| $5,028 |
|
Actual return on plan assets: | | | | | | | | | | |
Unrealized gains (losses), net | | (16 | ) | | 112 |
| | 262 |
| | — |
| | 358 |
|
Realized gains (losses), net | | 43 |
| | — |
| | — |
| | — |
| | 43 |
|
Purchases | | 200 |
| | 666 |
| | 763 |
| | — |
| | 1,629 |
|
Sales | | (191 | ) | | (683 | ) | | (514 | ) | | — |
| | (1,388 | ) |
Balance as of December 31, 2013 | |
| $ 822 |
| |
| $2,075 |
| |
| $2,767 |
| |
| $6 |
| |
| $5,670 |
|
Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers. Domestic and international equities consist primarily of common stocks and institutional common trust funds. Investments in common and preferred shares are valued at the last reported sales price of the stock on the last business day of the reporting period. Units in common trust funds and hedge funds are valued based on the redemption price of units owned by the trusts at year-end. Fair value for real estate and private equity partnerships is primarily based on valuation methodologies that include third party appraisals, comparable transactions, discounted cash flow valuation models and public market data.
Non-government fixed income securities are invested across various industry sectors and credit quality ratings. Generally, investment guidelines are written to limit securities, for example, to no more than 5 percent of each trust account, and to exclude the purchase of securities issued by the company. The number of real estate and private equity partnerships is 163 and the unfunded commitments are $899 million and $810 million as of December 31, 2013 and 2012, respectively. For alternative investments that cannot be redeemed, such as limited partnerships, the typical investment term is ten years. For alternative investments that permit redemptions, such redemptions are generally made quarterly and require a 90-day notice. The company is generally unable to determine the final redemption date and amount until the request is processed by the investment fund and therefore categorizes such alternative investments as Level 3 assets.
For the years ended December 31, 2013 and 2012, the defined benefit pension and VEBA trusts did not hold any Northrop Grumman common stock.
Benefit Payments
The following table reflects estimated future benefit payments for the next ten years, based upon the same assumptions used to measure the benefit obligation, and includes expected future employee service, as of December 31, 2013:
|
| | | | | | | | |
$ in millions | | Pension Plans | | Medical and Life Plans |
Year Ending December 31 | | | | |
2014 | |
| $1,341 |
| |
| $148 |
|
2015 | | 1,394 |
| | 154 |
|
2016 | | 1,446 |
| | 160 |
|
2017 | | 1,500 |
| | 165 |
|
2018 | | 1,557 |
| | 169 |
|
2019 through 2023 | | 8,556 |
| | 860 |
|
In 2014, the company expects to contribute the required minimum funding level of approximately $74 million to its pension plans and approximately $90 million to its other post-retirement benefit plans, with no expected additional voluntary pension contributions. During the years ended December 31, 2013 and 2012, the company made voluntary pension contributions of $500 million and $300 million, respectively.
