TARGET CORP | 2013 | FY | 3

Pension and Postretirement Health Care Plans

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. Effective January 1, 2009, our U.S. qualified defined benefit pension plan was closed to new participants, with limited exceptions. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on each team members' date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost.

Change in Projected Benefit Obligation
Pension Benefits
 
Postretirement
Health Care Benefits
 
Qualified Plans
 
Nonqualified Plans
 
(millions)
2013

2012

 
2013

2012

 
2013

2012

Benefit obligation at beginning of period
$
3,164

$
3,015

 
$
37

$
38

 
$
121

$
100

Service cost
117

120

 
1

1

 
6

10

Interest cost
136

137

 
1

2

 
2

3

Actuarial (gain)/loss
(125
)
107

 
—

—

 
(3
)
18

Participant contributions
1

1

 
—

—

 
5

5

Benefits paid
(122
)
(126
)
 
(4
)
(3
)
 
(14
)
(12
)
Plan amendments
2

(90
)
 
—

(1
)
 
(44
)
(3
)
Benefit obligation at end of period
$
3,173

$
3,164

 
$
35

$
37

 
$
73

$
121



Change in Plan Assets
Pension Benefits
 
Postretirement
Health Care Benefits
 
Qualified Plans
 
Nonqualified Plans
 
(millions)
2013

2012

 
2013

2012

 
2013

2012

Fair value of plan assets at beginning of period
$
3,223

$
2,921

 
$
—

$
—

 
$
—

$
—

Actual return on plan assets
161

305

 
—

—

 
—

—

Employer contributions
4

122

 
4

3

 
9

7

Participant contributions
1

1

 
—

—

 
5

5

Benefits paid
(122
)
(126
)
 
(4
)
(3
)
 
(14
)
(12
)
Fair value of plan assets at end of period
3,267

3,223

 
—

—

 
—

—

Benefit obligation at end of period
3,173

3,164

 
35

37

 
73

121

Funded/(underfunded) status
$
94

$
59

 
$
(35
)
$
(37
)
 
$
(73
)
$
(121
)


Recognition of Funded/(Underfunded) Status
Qualified Plans
 
Nonqualified Plans (a)
(millions)
2013

2012

 
2013

2012

Other noncurrent assets
$
112

$
81

 
$
—

$
—

Accrued and other current liabilities
(2
)
(1
)
 
(9
)
(9
)
Other noncurrent liabilities
(16
)
(21
)
 
(99
)
(149
)
Net amounts recognized
$
94

$
59

 
$
(108
)
$
(158
)
(a) 
Includes postretirement health care benefits.

The following table summarizes the amounts recorded in accumulated other comprehensive income, which have not yet been recognized as a component of net periodic benefit expense:

Amounts in Accumulated Other Comprehensive Income
Pension Plans
 
Postretirement
Health Care Plans
 
(millions)
2013

2012

 
2013

2012

Net actuarial loss
$
792

$
947

 
$
49

$
58

Prior service credits
(80
)
(91
)
 
(62
)
(34
)
Amounts in accumulated other comprehensive income
$
712

$
856

 
$
(13
)
$
24



The following table summarizes the changes in accumulated other comprehensive income for the years ended February 1, 2014 and February 2, 2013, related to our pension and postretirement health care plans:

Change in Accumulated Other Comprehensive Income
Pension Benefits
 
Postretirement
Health Care Benefits
 
(millions)
Pretax

Net of Tax

 
Pretax

Net of Tax

January 28, 2012
$
1,027

$
623

 
$
3

$
2

Net actuarial loss
23

13

 
18

11

Amortization of net actuarial losses
(103
)
(63
)
 
(4
)
(2
)
Amortization of prior service costs and transition
—

—

 
10

6

Plan amendments
(91
)
(56
)
 
(3
)
(2
)
February 2, 2013
856

517

 
24

15

Net actuarial gain
(52
)
(32
)
 
(3
)
(2
)
Amortization of net actuarial losses
(103
)
(62
)
 
(6
)
(4
)
Amortization of prior service costs and transition
11

7

 
16

10

Plan amendment
—

—

 
(44
)
(27
)
February 1, 2014
$
712

$
430

 
$
(13
)
$
(8
)


The following table summarizes the amounts in accumulated other comprehensive income expected to be amortized and recognized as a component of net periodic benefit expense in 2014:

Expected Amortization of Amounts in Accumulated Other Comprehensive Income
(millions)
Pretax

Net of Tax

Net actuarial loss
$
70

$
43

Prior service credits
(27
)
(16
)
Total amortization expense
$
43

$
27



The following table summarizes our net pension and postretirement health care benefits expense for the years 2013, 2012 and 2011:

Net Pension and Postretirement Health Care 
Benefits Expense
Pension Benefits
 
Postretirement
Health Care Benefits
 
(millions)
2013

2012

2011

 
2013

2012

2011

Service cost benefits earned during the period
$
118

$
121

$
117

 
$
6

$
10

$
10

Interest cost on projected benefit obligation
137

139

137

 
2

3

4

Expected return on assets
(235
)
(220
)
(206
)
 
—

—

—

Amortization of losses
103

103

67

 
6

3

4

Amortization of prior service cost
(11
)
—

(2
)
 
(16
)
(10
)
(10
)
Settlement and Special Termination Charges
3

—

—

 
—

—

—

Total
$
115

$
143

$
113

 
$
(2
)
$
6

$
8



Prior service cost amortization is determined using the straight-line method over the average remaining service period of team members expected to receive benefits under the plan.

Defined Benefit Pension Plan Information
(millions)
2013

 
2012

Accumulated benefit obligation (ABO) for all plans (a)
$
3,149

 
$
3,140

Projected benefit obligation for pension plans with an ABO in excess of plan assets (b)
54

 
59

Total ABO for pension plans with an ABO in excess of plan assets
48

 
53

(a) 
The present value of benefits earned to date assuming no future salary growth.
(b) 
The present value of benefits earned to date by plan participants, including the effect of assumed future salary increases.

Assumptions

Benefit Obligation Weighted Average Assumptions
Pension Benefits
 
Postretirement
Health Care Benefits
 
2013

2012

 
2013

2012

Discount rate
4.77
%
4.40
%
 
3.30
%
2.75
%
Average assumed rate of compensation increase
3.00

3.00

 
n/a

n/a




Net Periodic Benefit Expense Weighted Average Assumptions
 Pension Benefits
 
Postretirement
Health Care Benefits
 
 
2013

2012

2011

 
2013

2012

2011

Discount rate
4.40
%
4.65
%
5.50
%
 
2.75
%
3.60
%
4.35
%
Expected long-term rate of return on plan assets
8.00

8.00

8.00

 
n/a

n/a

n/a

Average assumed rate of compensation increase
3.00

3.50

4.00

 
n/a

n/a

n/a



The weighted average assumptions used to measure net periodic benefit expense each year are the rates as of the beginning of the year (i.e., the prior measurement date). Based on a stable asset allocation, our most recent compound annual rate of return on qualified plans' assets was 10.4 percent, 8.3 percent, 7.2 percent, and 9.2 percent for the 5-year, 10-year, 15-year and 20-year time periods, respectively.
The market-related value of plan assets, which is used in calculating expected return on assets in net periodic benefit cost, is determined each year by adjusting the previous year's value by expected return, benefit payments and cash contributions. The market-related value is adjusted for asset gains and losses in equal 20 percent adjustments over a five-year period.
We review the expected long-term rate of return on an annual basis, and revise it as appropriate. Additionally, we monitor the mix of investments in our portfolio to ensure alignment with our long-term strategy to manage pension cost and reduce volatility in our assets. Our expected annualized long-term rate of return assumptions as of February 1, 2014 were 8.0 percent for domestic and international equity securities, 5.0 percent for long-duration debt securities, 8.0 percent for balanced funds and 9.5 percent for other investments. These estimates are a judgmental matter in which we consider the composition of our asset portfolio, our historical long-term investment performance and current market conditions.
An increase in the cost of covered health care benefits of 7.5 percent was assumed for 2013 and 7.0 percent is assumed for 2014. The rate will be reduced to 5.0 percent in 2019 and thereafter.

Health Care Cost Trend Rates – 1% Change
(millions)
1% Increase

1% Decrease

Effect on total of service and interest cost components of net periodic postretirement health care benefit expense
$
1

$
(1
)
Effect on the health care component of the accumulated postretirement benefit obligation
5

(5
)


Plan Assets

Our asset allocation policy is designed to reduce the long-term cost of funding our pension obligations. The plan invests with both passive and active investment managers depending on the investment's asset class. The plan also seeks to reduce the risk associated with adverse movements in interest rates by employing an interest rate hedging program, which may include the use of interest rate swaps, total return swaps and other instruments.

Asset Category
Current Targeted

Actual Allocation
 
Allocation

2013

2012

Domestic equity securities (a)
19
%
21
%
20
%
International equity securities
12

12

11

Debt securities
25

26

27

Balanced funds
30

28

29

Other (b)
14

13

13

Total
100
%
100
%
100
%
(a) 
Equity securities include our common stock in amounts substantially less than 1 percent of total plan assets as of February 1, 2014 and February 2, 2013.
(b) 
Other assets include private equity, mezzanine and high-yield debt, natural resources and timberland funds, multi-strategy hedge funds, derivative instruments and a 5 percent allocation to real estate.

Fair Value Measurements
 
Fair Value at February 1, 2014
 
Fair Value at February 2, 2013
(millions)
Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Cash and cash equivalents
$
150

$
6

$
144

$
—

$
174

$
5

$
169

$
—

Common collective trusts (a)
1,000

—

1,000

—

878

—

878

—

Government securities (b)
282

—

282

—

296

—

296

—

Fixed income (c)
541

—

541

—

560

—

560

—

Balanced funds (d)
903

—

903

—

925

—

925

—

Private equity funds (e)
221

—

—

221

236

—

—

236

Other (f)
170

—

43

127

154

—

32

122

Total plan assets
$
3,267

$
6

$
2,913

$
348

$
3,223

$
5

$
2,860

$
358

(a) 
Passively managed index funds with holdings in domestic and international equities.
(b) 
Investments in government securities and passively managed index funds with holdings in long-term government bonds.
(c) 
Investments in corporate bonds, mortgage-backed securities and passively managed index funds with holdings in long-term corporate bonds.
(d) 
Investments in equities, nominal and inflation-linked fixed income securities, commodities and public real estate.
(e) 
Includes investments in venture capital, mezzanine and high-yield debt, natural resources and timberland funds.
(f) 
Investments in multi-strategy hedge funds (including domestic and international equity securities, convertible bonds and other alternative investments), real estate and derivative investments.

Level 3 Reconciliation
Actual Return on Plan Assets (a)
 
 
 
(millions)
Balance at
Beginning of
Period

Relating to
Assets Still Held
at the Reporting
Date

Relating to
Assets Sold
During the
Period

Purchases,
Sales and
Settlements

Transfer in
and/or out 
of Level 3

Balance at
End of 
Period

2012
 
 
 
 
 
 
Private equity funds
$
283

$
17

$
25

$
(89
)
$
—

$
236

Other
115

4

—

3

—

122

2013
 
 
 
 
 
 
Private equity funds
$
236

$
7

$
26

$
(48
)
$
—

$
221

Other
122

14

1

(10
)
—

127

(a) 
Represents realized and unrealized gains (losses) from changes in values of those financial instruments only for the period in which the instruments were classified as Level 3.

Position
 
Valuation Technique
Cash and cash equivalents
 
These investments are cash holdings and investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV for the investment vehicles is based on the value of the underlying assets owned by the fund minus applicable costs and liabilities, and then divided by the number of shares outstanding.
Equity securities
 
Valued at the closing price reported on the major market on which the individual securities are traded.
Common collective trusts/ balanced funds/ certain multi-strategy hedge funds
 
Valued using the NAV provided by the administrator of the fund. The NAV is a quoted transactional price for participants in the fund, which do not represent an active market.
Fixed income and government securities
 
Valued using matrix pricing models and quoted prices of securities with similar characteristics.
Private equity/ real estate/ certain multi-strategy hedge funds/ other
 
Valued by deriving Target's proportionate share of equity investment from audited financial statements. Private equity and real estate investments require significant judgment on the part of the fund manager due to the absence of quoted market prices, inherent lack of liquidity, and the long term of such investments. Certain multi-strategy hedge funds represent funds of funds that include liquidity restrictions and for which timely valuation information is not available.


Contributions

Our obligations to plan participants can be met over time through a combination of company contributions to these plans and earnings on plan assets. In 2013 we made no contributions to our qualified defined benefit pension plans. In 2012, we made discretionary contributions of $122 million. We are not required to make any contributions in 2014. However, depending on investment performance and plan funded status, we may elect to make a contribution. We expect to make contributions in the range of $5 million to $6 million to our postretirement health care benefit plan in 2014.

Estimated Future Benefit Payments

Benefit payments by the plans, which reflect expected future service as appropriate, are expected to be paid as follows:

Estimated Future Benefit Payments
(millions)
Pension
Benefits

Postretirement
Health Care Benefits

2014
$
152

$
6

2015
159

6

2016
169

7

2017
178

8

2018
188

8

2019-2023
1,058

45

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