Retirement Plans
The Company has a funded defined benefit plan (“Pension Plan”) and defined contribution plans (“Retirement Plans”) which cover substantially all employees who work 1,000 hours or more in a year. In addition, the Company has an unfunded defined benefit supplementary retirement plan (“SERP”), which provides benefits, for certain employees, in excess of qualified plan limitations. Effective January 1, 2012, the Pension Plan was closed to new participants, with limited exceptions, and effective January 2, 2012, the SERP was closed to new participants.
In February 2013, the Company announced changes to the Pension Plan and SERP whereby eligible employees no longer earn future pension service credits after December 31, 2013, with limited exceptions. All retirement benefits attributable to service in subsequent periods will be provided through defined contribution plans. As a result of these changes, the Company recognized reductions in the projected benefit obligations of the Pension Plan of $254 million and the SERP of $42 million as of February 2, 2013.
Pension Plan
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the Pension Plan as of February 1, 2014 and February 2, 2013:
|
| | | | | | | |
| 2013 | | 2012 |
| (millions) |
Change in projected benefit obligation | | | |
Projected benefit obligation, beginning of year | $ | 3,555 |
| | $ | 3,458 |
|
Service cost | 112 |
| | 117 |
|
Interest cost | 143 |
| | 157 |
|
Actuarial (gain) loss | (117 | ) | | 283 |
|
Benefits paid | (220 | ) | | (206 | ) |
Actuarial gain due to curtailment | — |
| | (254 | ) |
Projected benefit obligation, end of year | 3,473 |
| | 3,555 |
|
Changes in plan assets | | | |
Fair value of plan assets, beginning of year | 3,387 |
| | 3,069 |
|
Actual return on plan assets | 379 |
| | 374 |
|
Company contributions | — |
| | 150 |
|
Benefits paid | (220 | ) | | (206 | ) |
Fair value of plan assets, end of year | 3,546 |
| | 3,387 |
|
Funded status at end of year | $ | 73 |
| | $ | (168 | ) |
Amounts recognized in the Consolidated Balance Sheets at
February 1, 2014 and February 2, 2013 | | | |
Other assets | $ | 73 |
| | $ | — |
|
Other liabilities | — |
| | (168 | ) |
| $ | 73 |
| | $ | (168 | ) |
Amounts recognized in accumulated other comprehensive loss at
February 1, 2014 and February 2, 2013 | | | |
Net actuarial loss | $ | 931 |
| | $ | 1,326 |
|
The accumulated benefit obligation for the Pension Plan was $3,453 million as of February 1, 2014 and $3,496 million as of February 2, 2013.
Net pension costs and other amounts recognized in other comprehensive loss for the Pension Plan included the following actuarially determined components:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| (millions) |
Net Periodic Pension Cost | | | | | |
Service cost | $ | 112 |
| | $ | 117 |
| | $ | 102 |
|
Interest cost | 143 |
| | 157 |
| | 160 |
|
Expected return on assets | (242 | ) | | (253 | ) | | (248 | ) |
Amortization of net actuarial loss | 141 |
| | 141 |
| | 88 |
|
Amortization of prior service credit | — |
| | (1 | ) | | (1 | ) |
| 154 |
| | 161 |
| | 101 |
|
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss | | | | | |
Net actuarial (gain) loss | (254 | ) | | (91 | ) | | 530 |
|
Amortization of net actuarial loss | (141 | ) | | (141 | ) | | (88 | ) |
Amortization of prior service credit | — |
| | 1 |
| | 1 |
|
| (395 | ) | | (231 | ) | | 443 |
|
Total recognized in net periodic pension cost and
other comprehensive loss | $ | (241 | ) | | $ | (70 | ) | | $ | 544 |
|
The estimated net actuarial loss for the Pension Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2014 is $26 million.
The following weighted average assumptions were used to determine the projected benefit obligations for the Pension Plan at February 1, 2014 and February 2, 2013:
|
| | | | | |
| 2013 | | 2012 |
Discount rate | 4.50 | % | | 4.15 | % |
Rate of compensation increases | 4.10 | % | | 4.50 | % |
The following weighted average assumptions were used to determine the net periodic pension cost for the Pension Plan:
|
| | | | | | | | |
| 2013 | | 2012 | | 2011 |
Discount rate | 4.15 | % | | 4.65 | % | | 5.40 | % |
Expected long-term return on plan assets | 7.50 | % | | 8.00 | % | | 8.00 | % |
Rate of compensation increases | 4.50 | % | | 4.50 | % | | 4.50 | % |
The Pension Plan’s assumptions are evaluated annually and updated as necessary.
The discount rate used to determine the present value of the projected benefit obligation for the Pension Plan is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
The Company develops its expected long-term rate of return on plan asset assumption by evaluating input from several professional advisors taking into account the asset allocation of the portfolio and long-term asset class return expectations, as well as long-term inflation assumptions. Expected returns for each major asset class are considered along with their volatility and the expected correlations among them. These expectations are based upon historical relationships as well as forecasts of how future returns may vary from historical returns. Returns by asset class and correlations among asset classes are combined using the target asset allocation to derive an expected return for the portfolio as a whole. Long-term historical returns of the portfolio are also considered. Portfolio returns are calculated net of all expenses, therefore, the Company also analyzes expected costs and expenses, including investment management fees, administrative expenses, Pension Benefit Guaranty Corporation premiums and other costs and expenses. As of February 2, 2013, the Company lowered the assumed annual long-term rate of return for the Pension Plan's assets from 8.00% to 7.50% based on expected future returns on the portfolio.
The Company develops its rate of compensation increase assumption based on recent experience and reflects an estimate of future compensation levels taking into account general increase levels, seniority, promotions and other factors. The salary increase assumption is used to project employees’ pay in future years and its impact on the projected benefit obligation for the Pension Plan.
The assets of the Pension Plan are managed by investment specialists with the primary objectives of payment of benefit obligations to Plan participants and an ultimate realization of investment returns over longer periods in excess of inflation. The Company employs a total return investment approach whereby a mix of domestic and foreign equity securities, fixed income securities and other investments is used to maximize the long-term return on the assets of the Pension Plan for a prudent level of risk. Risks are mitigated through the asset diversification and the use of multiple investment managers. The target allocation for plan assets is currently 50% equity securities, 40% debt securities, 5% real estate and 5% private equities.
The Company generally employs investment managers to specialize in a specific asset class. These managers are chosen and monitored with the assistance of professional advisors, using criteria that include organizational structure, investment philosophy, investment process, performance compared to market benchmarks and peer groups.
The Company periodically conducts an analysis of the behavior of the Pension Plan’s assets and liabilities under various economic and interest rate scenarios to ensure that the long-term target asset allocation is appropriate given the liabilities.
The fair values of the Pension Plan assets as of February 1, 2014, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (millions) |
Cash and cash equivalents | $ | 211 |
| | $ | — |
| | $ | 211 |
| | $ | — |
|
Equity securities: | | | | | | | |
U.S. | 834 |
| | 354 |
| | 480 |
| | — |
|
International | 748 |
| | — |
| | 748 |
| | — |
|
Fixed income securities: | | | | | | | |
U. S. Treasury bonds | 221 |
| | — |
| | 221 |
| | — |
|
Other Government bonds | 39 |
| | — |
| | 39 |
| | — |
|
Agency backed bonds | 22 |
| | — |
| | 22 |
| | — |
|
Corporate bonds | 388 |
| | — |
| | 388 |
| | — |
|
Mortgage-backed securities and forwards | 95 |
| | — |
| | 95 |
| | — |
|
Asset-backed securities | 20 |
| | — |
| | 20 |
| | — |
|
Pooled funds | 454 |
| | — |
| | 454 |
| | — |
|
Other types of investments: | | | | | | | |
Real estate | 214 |
| | — |
| | — |
| | 214 |
|
Hedge funds | 167 |
| | — |
| | — |
| | 167 |
|
Private equity | 167 |
| | — |
| | — |
| | 167 |
|
Total | $ | 3,580 |
| | $ | 354 |
| | $ | 2,678 |
| | $ | 548 |
|
The fair values of the Pension Plan assets as of February 2, 2013, excluding interest and dividend receivables and pending investment purchases and sales, by asset category are as follows:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (millions) |
Cash and cash equivalents | $ | 204 |
| | $ | — |
| | $ | 204 |
| | $ | — |
|
Equity securities: | | | | | | | |
U.S. | 832 |
| | 290 |
| | 542 |
| | — |
|
International | 818 |
| | — |
| | 818 |
| | — |
|
Fixed income securities: | | | | | | | |
U. S. Treasury bonds | 136 |
| | — |
| | 136 |
| | — |
|
Other Government bonds | 34 |
| | — |
| | 34 |
| | — |
|
Agency backed bonds | 6 |
| | — |
| | 6 |
| | — |
|
Corporate bonds | 338 |
| | — |
| | 338 |
| | — |
|
Mortgage-backed securities and forwards | 102 |
| | — |
| | 102 |
| | — |
|
Asset-backed securities | 24 |
| | — |
| | 24 |
| | — |
|
Pooled funds | 303 |
| | — |
| | 303 |
| | — |
|
Other types of investments: | | | | | | | |
Real estate | 280 |
| | — |
| | — |
| | 280 |
|
Hedge funds | 154 |
| | — |
| | — |
| | 154 |
|
Private equity | 160 |
| | — |
| | — |
| | 160 |
|
Total | $ | 3,391 |
| | $ | 290 |
| | $ | 2,507 |
| | $ | 594 |
|
Corporate bonds consist primarily of investment grade bonds of U.S. issuers from diverse industries.
The fair value of the real estate, hedge funds and private equity investments represents the reported net asset value of shares or underlying assets of the investment. Private equity and real estate investments are valued using fair values per the most recent financial reports provided by the investment sponsor, adjusted as appropriate for any lag between the date of the financial reports and the Company’s reporting date. The real estate investments are diversified across property types and geographical areas primarily in the United States of America. Private equity investments generally consist of limited partnerships in the United States of America, Europe and Asia. The hedge fund investments are through a fund of funds approach.
Due to the nature of the underlying assets of the real estate, hedge funds and private equity investments, changes in market conditions and the economic environment may significantly impact the net asset value of these investments and, consequently, the fair value of the Pension Plan’s investments. These investments are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with the governing documents. Redemption of these investments is subject to restrictions including lock-up periods where no redemptions are allowed, restrictions on redemption frequency and advance notice periods for redemptions. As of February 1, 2014 and February 2, 2013, certain of these investments are generally subject to lock-up periods, ranging from three to fifteen years, certain of these investments are subject to restrictions on redemption frequency, ranging from daily to twice per year, and certain of these investments are subject to advance notice requirements, ranging from sixty-day notification to ninety-day notification. As of February 1, 2014 and February 2, 2013, the Pension Plan had unfunded commitments related to certain of these investments totaling $150 million and $144 million, respectively.
The following table sets forth a summary of changes in fair value of the Pension Plan’s level 3 assets for 2013 and 2012:
|
| | | | | | | |
| 2013 | | 2012 |
| (millions) |
Balance, beginning of year | $ | 594 |
| | $ | 533 |
|
Actual gain on plan assets: | | | |
Relating to assets still held at the reporting date | 1 |
| | 7 |
|
Relating to assets sold during the period | 48 |
| | 23 |
|
Purchases | 77 |
| | 71 |
|
Sales | (172 | ) | | (40 | ) |
Balance, end of year | $ | 548 |
| | $ | 594 |
|
During 2012, the Company made a funding contribution to the Pension Plan totaling $150 million. The Company does not anticipate making funding contributions to the Pension Plan in 2014.
The following benefit payments are estimated to be paid from the Pension Plan:
|
| | | |
| (millions) |
Fiscal year | |
2014 | $ | 274 |
|
2015 | 256 |
|
2016 | 248 |
|
2017 | 244 |
|
2018 | 240 |
|
2019-2023 | 1,107 |
|
Supplementary Retirement Plan
The following provides a reconciliation of benefit obligations, plan assets and funded status of the supplementary retirement plan as of February 1, 2014 and February 2, 2013:
|
| | | | | | | |
| 2013 | | 2012 |
| (millions) |
Change in projected benefit obligation | | | |
Projected benefit obligation, beginning of year | $ | 795 |
| | $ | 771 |
|
Service cost | 6 |
| | 6 |
|
Interest cost | 32 |
| | 35 |
|
Actuarial (gain) loss | (17 | ) | | 76 |
|
Plan amendment | 8 |
| | — |
|
Benefits paid | (54 | ) | | (51 | ) |
Actuarial gain due to curtailment | — |
| | (42 | ) |
Projected benefit obligation, end of year | 770 |
| | 795 |
|
Change in plan assets | | | |
Fair value of plan assets, beginning of year | — |
| | — |
|
Company contributions | 54 |
| | 51 |
|
Benefits paid | (54 | ) | | (51 | ) |
Fair value of plan assets, end of year | — |
| | — |
|
Funded status at end of year | $ | (770 | ) | | $ | (795 | ) |
Amounts recognized in the Consolidated Balance Sheets at
February 1, 2014 and February 2, 2013 | | | |
Accounts payable and accrued liabilities | $ | (59 | ) | | $ | (58 | ) |
Other liabilities | (711 | ) | | (737 | ) |
| $ | (770 | ) | | $ | (795 | ) |
Amounts recognized in accumulated other comprehensive loss at
February 1, 2014 and February 2, 2013 | | | |
Net actuarial loss | $ | 176 |
| | $ | 212 |
|
Prior service cost | 8 |
| | — |
|
| $ | 184 |
| | $ | 212 |
|
The accumulated benefit obligation for the supplementary retirement plan was $770 million as of February 1, 2014 and $788 million as of February 2, 2013.
Net pension costs and other amounts recognized in other comprehensive loss for the supplementary retirement plan included the following actuarially determined components:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| (millions) |
Net Periodic Pension Cost | | | | | |
Service cost | $ | 6 |
| | $ | 6 |
| | $ | 6 |
|
Interest cost | 32 |
| | 35 |
| | 36 |
|
Amortization of net actuarial loss | 19 |
| | 17 |
| | 8 |
|
Amortization of prior service credit | — |
| | (1 | ) | | (1 | ) |
| 57 |
| | 57 |
| | 49 |
|
Other Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Loss | | | | | |
Net actuarial (gain) loss | (17 | ) | | 34 |
| | 90 |
|
Prior service cost | 8 |
| | — |
| | — |
|
Amortization of net actuarial loss | (19 | ) | | (17 | ) | | (8 | ) |
Amortization of prior service credit | — |
| | 1 |
| | 1 |
|
| (28 | ) | | 18 |
| | 83 |
|
Total recognized in net periodic pension cost and
other comprehensive loss | $ | 29 |
| | $ | 75 |
| | $ | 132 |
|
The estimated net actuarial loss for the supplementary retirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2014 is $5 million.
The following weighted average assumptions were used to determine the projected benefit obligations for the supplementary retirement plan at February 1, 2014 and February 2, 2013:
|
| | | | | |
| 2013 | | 2012 |
Discount rate | 4.50 | % | | 4.15 | % |
Rate of compensation increases | N/A |
| | 4.90 | % |
The following weighted average assumptions were used to determine net pension costs for the supplementary retirement plan:
|
| | | | | | | | |
| 2013 | | 2012 | | 2011 |
Discount rate | 4.15 | % | | 4.65 | % | | 5.40 | % |
Rate of compensation increases | 4.90 | % | | 4.90 | % | | 4.90 | % |
The supplementary retirement plan’s assumptions are evaluated annually and updated as necessary.
The discount rate used to determine the present value of the projected benefit obligation for the supplementary retirement plan is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
The Company developed its rate of compensation increase assumption based on recent experience and reflected an estimate of future compensation levels taking into account general increase levels, seniority, promotions and other factors. The salary increase assumption was used to project employees’ pay in future years and its impact on the projected benefit obligation for the supplementary retirement plan.
The following benefit payments are estimated to be funded by the Company and paid from the supplementary retirement plan:
|
| | | |
| (millions) |
Fiscal year | |
2014 | $ | 59 |
|
2015 | 63 |
|
2016 | 62 |
|
2017 | 63 |
|
2018 | 59 |
|
2019-2023 | 277 |
|
Retirement Plans
The Company has a qualified plan that permits participating associates to defer eligible compensation up to the maximum limits allowable under the Internal Revenue Code and beginning January 1, 2014, also has a non-qualified plan which permits participating associates to defer eligible compensation above the limits of the qualified plan. The Company contributes a matching percentage of employee contributions under both the qualified and non-qualified plans. Effective January 1, 2014, the Company's matching contribution to the qualified plan was enhanced for all participating employees, with limited exceptions. Prior to January 1, 2014, the matching contribution rate under the qualified plan was higher for those employees not eligible for the Pension Plan than for employees eligible for the Pension Plan.
At February 1, 2014 and February 2, 2013, the liability under the qualified plan, which is reflected in accounts payable and accrued liabilities on the Consolidated Balance Sheets, was $25 million and $14 million, respectively. Expense related to matching contributions for these plans amounted to $24 million for 2013, $14 million for 2012 and $10 million for 2011.
In connection with the non-qualified plan, the Company had mutual fund investments which are included in prepaid expenses and other current assets on the Consolidated Balance Sheets.
The Company has an additional deferred compensation plan wherein eligible executives elected to defer a portion of their compensation each year as either stock credits or cash credits. Effective January 1, 2014, no additional compensation will be deferred, with limited exceptions. The Company has transfered shares to a trust to cover the number estimated for distribution on account of stock credits currently outstanding. At February 1, 2014 and February 2, 2013, the liability under the plan, which is reflected in other liabilities on the Consolidated Balance Sheets, was $44 million and $44 million, respectively. Expense for 2013, 2012 and 2011 was immaterial.
