EMPLOYEE BENEFIT PLANS
We sponsor defined benefit and defined contribution pension plans, healthcare plans and disability and survivorship plans for eligible employees and retirees and their eligible family members.
Defined Benefit Pension Plans. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules (“Alternative Funding Rules”) for defined benefit plans that are frozen. Delta elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate. We estimate the funding under these plans will total approximately $925 million in 2014, which includes $250 million of contributions above the minimum funding requirements.
Defined Contribution Pension Plans. Delta sponsors several defined contribution plans. These plans generally cover different employee groups and employer contributions vary by plan. The cost associated with our defined contribution pension plans is shown in the tables below.
Postretirement Healthcare Plans. We sponsor healthcare plans that provide benefits to eligible retirees and their dependents who are under age 65. We have generally eliminated company-paid post age 65 healthcare coverage, except for (1) subsidies available to a limited group of retirees and their dependents and (2) a group of retirees who retired prior to 1987. Benefits under these plans are funded from current assets and employee contributions. During 2012, we remeasured our postretirement healthcare obligation to account for changes to retiree medical benefits resulting from the final integration of wages and benefits following our merger with Northwest Airlines and the voluntary workforce reduction programs offered to eligible employees. As a result, we recorded $116 million of special termination benefits in restructuring and other items (see Note 16).
Postemployment Plans. We provide certain other welfare benefits to eligible former or inactive employees after employment but before retirement, primarily as part of the disability and survivorship plans. Substantially all employees are eligible for benefits under these plans in the event of death and/or disability.
Benefit Obligations, Fair Value of Plan Assets and Funded Status
|
| | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement and Postemployment Benefits |
| December 31, | | December 31, |
(in millions) | 2013 | 2012 | | 2013 | 2012 |
Benefit obligation at beginning of period | $ | 21,489 |
| $ | 19,293 |
| | $ | 3,582 |
| $ | 3,570 |
|
Service cost | — |
| — |
| | 49 |
| 56 |
|
Interest cost | 861 |
| 930 |
| | 143 |
| 164 |
|
Actuarial (gain) loss | (2,212 | ) | 2,334 |
| | (301 | ) | 147 |
|
Benefits paid, including lump sums and annuities | (1,078 | ) | (1,057 | ) | | (313 | ) | (310 | ) |
Participant contributions | — |
| — |
| | 45 |
| 58 |
|
Plan amendments | — |
| — |
| | — |
| (219 | ) |
Special termination benefits | — |
| — |
| | — |
| 116 |
|
Settlements | — |
| (11 | ) | | — |
| — |
|
Benefit obligation at end of period(1) | $ | 19,060 |
| $ | 21,489 |
| | $ | 3,205 |
| $ | 3,582 |
|
| | | | | |
Fair value of plan assets at beginning of period | $ | 8,196 |
| $ | 7,789 |
| | $ | 1,004 |
| $ | 972 |
|
Actual gain on plan assets | 905 |
| 778 |
| | 129 |
| 134 |
|
Employer contributions | 914 |
| 697 |
| | 191 |
| 222 |
|
Participant contributions | — |
| — |
| | 45 |
| 58 |
|
Benefits paid, including lump sums and annuities | (1,078 | ) | (1,057 | ) | | (326 | ) | (382 | ) |
Settlements | — |
| (11 | ) | | — |
| — |
|
Fair value of plan assets at end of period | $ | 8,937 |
| $ | 8,196 |
|
| $ | 1,043 |
| $ | 1,004 |
|
| | | | | |
Funded status at end of period | $ | (10,123 | ) | $ | (13,293 | ) | | $ | (2,162 | ) | $ | (2,578 | ) |
| |
(1) | At each period-end presented, our accumulated benefit obligations for our pension plans are equal to the benefit obligations shown above. |
Balance Sheet Position |
| | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement and Postemployment Benefits |
| December 31, | | December 31, |
(in millions) | 2013 | 2012 | | 2013 | 2012 |
Current liabilities | $ | (22 | ) | $ | (24 | ) | | $ | (139 | ) | $ | (132 | ) |
Noncurrent liabilities | (10,101 | ) | (13,269 | ) | | (2,023 | ) | (2,446 | ) |
Total liabilities | $ | (10,123 | ) | $ | (13,293 | ) | | $ | (2,162 | ) | $ | (2,578 | ) |
| | | | | |
Net actuarial loss | $ | (5,349 | ) | $ | (7,958 | ) | | $ | (103 | ) | $ | (473 | ) |
Prior service credit | — |
| — |
| | 161 |
| 187 |
|
Total accumulated other comprehensive income (loss), pre-tax | $ | (5,349 | ) | $ | (7,958 | ) | | $ | 58 |
| $ | (286 | ) |
During 2013, the net actuarial loss recorded in AOCI related to our benefit plans decreased to $5.3 billion from $8.2 billion. This decrease is primarily due to the increase in discount rates from 2012 to 2013.
Estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2014 are a net actuarial loss of $111 million. Amounts are generally amortized from AOCI over the expected future lifetime of plan participants.
Net Periodic Cost |
| | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement and Postemployment Benefits |
| Year Ended December 31, | | Year Ended December 31, |
(in millions) | 2013 | 2012 | 2011 | | 2013 | 2012 | 2011 |
Service cost | $ | — |
| $ | — |
| $ | — |
| | $ | 49 |
| $ | 56 |
| $ | 52 |
|
Interest cost | 861 |
| 930 |
| 969 |
| | 143 |
| 164 |
| 180 |
|
Expected return on plan assets | (734 | ) | (705 | ) | (724 | ) | | (84 | ) | (77 | ) | (90 | ) |
Amortization of prior service credit | — |
| — |
| — |
| | (26 | ) | (21 | ) | (3 | ) |
Recognized net actuarial loss (gain) | 221 |
| 143 |
| 55 |
| | 25 |
| 23 |
| (11 | ) |
Settlements | 6 |
| — |
| — |
| | — |
| — |
| — |
|
Special termination benefits | — |
| — |
| — |
| | — |
| 116 |
| — |
|
Net periodic cost | $ | 354 |
| $ | 368 |
| $ | 300 |
| | $ | 107 |
| $ | 261 |
| $ | 128 |
|
Defined contribution plan costs | 490 |
| 426 |
| 377 |
| | — |
| — |
| — |
|
Total cost | $ | 844 |
| $ | 794 |
| $ | 677 |
| | $ | 107 |
| $ | 261 |
| $ | 128 |
|
Assumptions
We used the following actuarial assumptions to determine our benefit obligations and our net periodic cost for the periods presented:
|
| | | | |
| December 31, |
Benefit Obligations(1)(2) | 2013 | 2012 |
Weighted average discount rate | 5.01 | % | 4.11 | % |
|
| | | | | | |
| Year Ended December 31, |
Net Periodic Cost(2) | 2013 | 2012 | 2011 |
Weighted average discount rate - pension benefit | 4.10 | % | 4.95 | % | 5.70 | % |
Weighted average discount rate - other postretirement benefit(4) | 4.00 | % | 4.63 | % | 5.55 | % |
Weighted average discount rate - other postemployment benefit | 4.13 | % | 4.88 | % | 5.63 | % |
Weighted average expected long-term rate of return on plan assets | 8.94 | % | 8.94 | % | 8.93 | % |
Assumed healthcare cost trend rate(3) | 7.00 | % | 7.00 | % | 7.00 | % |
| |
(1) | Our 2013 and 2012 benefit obligations are measured using a mortality table projected to 2017 and 2016, respectively. |
| |
(2) | Future compensation levels do not impact our frozen defined benefit pension plans or other postretirement plans and impact only a small portion of our other postemployment liability. |
| |
(3) | Assumed healthcare cost trend rate at December 31, 2013 is assumed to decline gradually to 5.00% by 2022 and remain level thereafter. |
| |
(4) | Our assumptions reflect various remeasurements of certain portions of our obligations and represent the weighted average of the assumptions used for each measurement date. |
Healthcare Cost Trend Rate. Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans. A 1% change in the healthcare cost trend rate used in measuring the accumulated plan benefit obligation for these plans at December 31, 2013, would have the following effects:
|
| | | | | | |
(in millions) | 1% Increase | 1% Decrease |
Increase (decrease) in total service and interest cost | $ | 1 |
| $ | (1 | ) |
Increase (decrease) in the accumulated plan benefit obligation | 15 |
| (25 | ) |
Expected Long-Term Rate of Return. Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets. We review our rate of return on plan asset assumptions annually. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. Our actual historical annualized three and five year rate of return on plan assets for our defined benefit pension plans was approximately 9% and 12%, respectively, as of December 31, 2013. The investment strategy for our defined benefit pension plan assets is to use a diversified mix of global public and private equity portfolios, public and private fixed income portfolios and private real estate and natural resource investments to earn a long-term investment return that meets or exceeds our annualized return target. Our expected long-term rate of return on assets for net periodic pension benefit cost for the year ended December 31, 2013 was 9%.
Benefit Payments
Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations. Actual benefit payments may vary significantly from these estimates. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets.
The following table summarizes, the benefit payments that are scheduled to be paid in the years ending December 31:
|
| | | | | | |
(in millions) | Pension Benefits | Other Postretirement and Postemployment Benefits |
2014 | $ | 1,128 |
| $ | 272 |
|
2015 | 1,136 |
| 272 |
|
2016 | 1,154 |
| 273 |
|
2017 | 1,175 |
| 270 |
|
2018 | 1,194 |
| 264 |
|
2019-2023 | 6,226 |
| 1,311 |
|
Plan Assets
We have adopted and implemented investment policies for our defined benefit pension plans and disability and survivorship plan for pilots that incorporate strategic asset allocation mixes intended to best meet the plans' long-term obligations. This asset allocation policy mix utilizes a diversified mix of investments and is reviewed periodically. The weighted average target and actual asset allocations for the plans are as follows:
|
| | | | | |
| December 31, 2013 |
| Target | Actual |
Diversified fixed income | 23 | % | | 12 | % |
Domestic equity securities | 21 |
| | 14 |
|
Non-U.S. developed equity securities | 20 |
| | 23 |
|
Alternative investments | 19 |
| | 21 |
|
Non-U.S. emerging equity securities | 6 |
| | 6 |
|
Hedge funds | 5 |
| | 6 |
|
Cash equivalents | 5 |
| | 14 |
|
High yield fixed income | 1 |
| | 4 |
|
Total | 100 | % | | 100 | % |
The overall asset mix of the portfolios is more heavily weighted in equity-like investments. Active management strategies are utilized where feasible in an effort to realize investment returns in excess of market indices. As part of these strategies, we are required to hold increased amounts of cash collateral associated with certain derivative investments. We use derivatives instead of holding the underlying securities to mitigate certain risks and facilitate asset allocation.
Benefit Plan Assets Measured at Fair Value on a Recurring Basis
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.
| |
• | Level 1. Observable inputs such as quoted prices in active markets; |
| |
• | Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
| |
• | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:
| |
(a) | Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; and |
| |
(b) | Income approach. Techniques to convert future amounts to a single current value based on market expectations (including present value techniques, option-pricing and excess earnings models). |
Benefit Plan Assets. Benefit plan assets relate to our defined benefit pension plans and certain of our postemployment benefit plans that are funded through trusts. The following table shows our benefit plan assets by asset class. These investments are presented net of the related benefit obligation in pension, postretirement and related benefits on the Consolidated Balance Sheets.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 | | December 31, 2012 |
(in millions) | Total | Level 1 | Level 2 | Level 3 | Valuation Technique | | Total | Level 1 | Level 2 | Level 3 | Valuation Technique |
Common stock | | | | | | | | | | | |
U.S. | $ | 558 |
| $ | 558 |
| $ | — |
| $ | — |
| (a) | | $ | 575 |
| $ | 575 |
| $ | — |
| $ | — |
| (a) |
Non-U.S. | 1,269 |
| 1,216 |
| 53 |
| — |
| (a) | | 923 |
| 886 |
| 37 |
| — |
| (a) |
Mutual funds | | | | | | | | | | | |
U.S. | 3 |
| — |
| 3 |
| — |
| (a) | | 69 |
| — |
| 69 |
| — |
| (a) |
Non-U.S. | 43 |
| — |
| 43 |
| — |
| (a) | | 129 |
| — |
| 129 |
| — |
| (a) |
Non-U.S. emerging markets | 327 |
| — |
| 327 |
| — |
| (a) | | 466 |
| — |
| 466 |
| — |
| (a) |
Diversified fixed income | 218 |
| — |
| 218 |
| — |
| (a) | | 390 |
| — |
| 390 |
| — |
| (a) |
High yield | 348 |
| — |
| 348 |
| — |
| (a)(b) | | 153 |
| — |
| 153 |
| — |
| (a)(b) |
Commingled funds | | | | | | | | | | | |
U.S. | 864 |
| — |
| 864 |
| — |
| (a) | | 824 |
| — |
| 824 |
| — |
| (a) |
Non-U.S. | 782 |
| — |
| 782 |
| — |
| (a) | | 688 |
| — |
| 688 |
| — |
| (a) |
Non-U.S. emerging markets | 319 |
| — |
| 319 |
| — |
| (a) | | 178 |
| — |
| 178 |
| — |
| (a) |
Diversified fixed income | 680 |
| — |
| 680 |
| — |
| (a) | | 763 |
| — |
| 763 |
| — |
| (a) |
High yield | 98 |
| — |
| 39 |
| 59 |
| (a) | | 38 |
| — |
| 25 |
| 13 |
| (a) |
Alternative investments | | | | | | | | | | | |
Private equity | 1,366 |
| — |
| — |
| 1,366 |
| (a)(b) | | 1,466 |
| — |
| — |
| 1,466 |
| (a)(b) |
Real estate and natural resources | 688 |
| — |
| — |
| 688 |
| (a)(b) | | 613 |
| — |
| — |
| 613 |
| (a)(b) |
Hedge Funds | 552 |
| — |
| — |
| 552 |
| (a)(b) | | 484 |
| — |
| — |
| 484 |
| (a)(b) |
Fixed income | 155 |
| — |
| 155 |
| — |
| (a)(b) | | 573 |
| — |
| 573 |
| — |
| (a)(b) |
Cash equivalents and other | 1,610 |
| 28 |
| 1,582 |
| — |
| (a) | | 818 |
| 77 |
| 741 |
| — |
| (a) |
Total benefit plan assets | $ | 9,880 |
| $ | 1,802 |
| $ | 5,413 |
| $ | 2,665 |
| | | $ | 9,150 |
| $ | 1,538 |
| $ | 5,036 |
| $ | 2,576 |
| |
Common Stock. Common stock is valued at the closing price reported on the active market on which the individual securities are traded.
Mutual and Commingled Funds. These funds are valued using the net asset value divided by the number of shares outstanding, which is based on quoted market prices of the underlying assets owned by the fund.
Alternative Investments. The valuation of alternative investments requires significant judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and the long-term nature of these assets. Accordingly, these assets are generally classified in Level 3. Alternative investments include private equity, real estate, energy and timberland. Investments are valued based on valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions. We also assess the potential for adjustment to the fair value of these investments due to the lag in the availability of data. In these cases, we solicit preliminary valuation updates at year-end from the investment managers and use that information and corroborating data from public markets to determine any needed adjustments to estimate fair value.
Fixed Income. Investments include corporate bonds, government bonds, collateralized mortgage obligations and other asset backed securities. These investments are generally valued at the bid price or the average of the bid and ask price. Prices are based on pricing models, quoted prices of securities with similar characteristics, or broker quotes.
Hedge Funds. Our hedge fund investments are primarily made through shares of limited partnerships or similar structures for which a liquid secondary market does not exist. Hedge funds are considered Level 3 assets. Hedge funds are valued monthly by a third-party administrator that has been appointed by the fund's general partner.
Foreign Currency Derivatives. Our foreign currency derivatives consist of various forward contracts and are valued based on data readily observable in public markets.
Cash Equivalents and Other. These investments primarily consist of short term investment funds which are valued using the net asset value. Cash is not included in the table above.
Changes in Level 3. The following table shows the changes in our benefit plan assets classified in Level 3:
|
| | | | | | | | | | | | | | | |
(in millions) | Private Equity | Real Estate | Hedge Funds | Commingled Funds | Total |
Balance at January 1, 2012 | $ | 1,517 |
| $ | 527 |
| $ | 432 |
| $ | 11 |
| $ | 2,487 |
|
Actual return on plan assets: | | | | | |
Related to assets still held at the reporting date | — |
| (11 | ) | 50 |
| 2 |
| 41 |
|
Related to assets sold during the period | 44 |
| 8 |
| (9 | ) | — |
| 43 |
|
Purchases, sales and settlements, net | (95 | ) | 89 |
| (2 | ) | — |
| (8 | ) |
Transfers from Level 3 | — |
| — |
| 13 |
| — |
| 13 |
|
Balance at December 31, 2012 | 1,466 |
| 613 |
| 484 |
| 13 |
| 2,576 |
|
Actual return on plan assets: | | | | | |
Related to assets still held at the reporting date | 98 |
| 61 |
| 49 |
| 2 |
| 210 |
|
Related to assets sold during the period | 64 |
| 19 |
| — |
| — |
| 83 |
|
Purchases, sales and settlements, net | (262 | ) | (5 | ) | 19 |
| 44 |
| (204 | ) |
Transfers to Level 3 | — |
| — |
| — |
| — |
| — |
|
Balance at December 31, 2013 | $ | 1,366 |
| $ | 688 |
| $ | 552 |
| $ | 59 |
| $ | 2,665 |
|
Other
We also sponsor defined benefit pension plans for eligible employees in certain foreign countries. These plans did not have a material impact on our Consolidated Financial Statements in any period presented.
Profit Sharing Program
Our broad based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined, we will pay a specified portion of that profit to employees. For the years ended December 31, 2013, 2012 and 2011, we accrued $506 million, $372 million and $264 million under the profit sharing program, respectively.
