| |
14 . | EMPLOYEE BENEFIT PLANS |
Defined Benefit Plans
We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based primarily on years of service and compensation during specific periods under final average pay and cash balance formulas. We fund our pension plans as required by local regulations. In the U.S., all qualified pension plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard. We typically do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements because contributions to these pension plans may be less economic and investment returns may be less attractive than our other investment alternatives.
In February 2013, we announced changes to certain of our U.S. qualified pension plans that cover the majority of our U.S. employees who work in our refining segment and corporate operations. Benefits under our primary pension plan changed from a final average pay formula to a cash balance formula with staged effective dates that commence either on July 1, 2013 or January 1, 2015 depending on the age and service of the affected employees. All final average pay benefits will be frozen as of December 31, 2014, with all future benefits to be earned under the new cash balance formula. These plan amendments resulted in a $328 million decrease to pension liabilities and a related increase to other comprehensive income during the year ended December 31, 2013. The benefit of this remeasurement will be amortized into income through 2025.
We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most of our employees become eligible for these benefits if, while still working for us, they reach normal retirement age or take early retirement. These plans are unfunded, and retired employees share the cost with us. Individuals who became our employees as a result of an acquisition became eligible for other postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.
In October 2013, we announced changes to our U.S. retiree health care plans to utilize more efficient insurance products for Medicare eligible retirees. These plan changes resulted in a $43 million decrease to our benefit obligations for other postretirement benefit plans and a related increase to other comprehensive income during the year ended December 31, 2013.
The changes in benefit obligation related to all of our defined benefit plans, the changes in fair value of plan assets(a), and the funded status of our defined benefit plans as of and for the years ended were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| December 31, | | December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Changes in benefit obligation: | | | | | | | |
Benefit obligation as of beginning of year | $ | 2,307 |
| | $ | 1,881 |
| | $ | 436 |
| | $ | 438 |
|
Service cost | 137 |
| | 140 |
| | 12 |
| | 12 |
|
Interest cost | 86 |
| | 93 |
| | 18 |
| | 21 |
|
Participant contributions | — |
| | — |
| | 15 |
| | 14 |
|
Plan amendments | (274 | ) | | 9 |
| | (43 | ) | | — |
|
Curtailment gain | (6 | ) | | (16 | ) | | — |
| | — |
|
Benefits paid | (170 | ) | | (90 | ) | | (37 | ) | | (35 | ) |
Actuarial (gain) loss | (169 | ) | | 289 |
| | (77 | ) | | (17 | ) |
Other | 3 |
| | 1 |
| | — |
| | 3 |
|
Benefit obligation as of end of year | $ | 1,914 |
| | $ | 2,307 |
| | $ | 324 |
| | $ | 436 |
|
| | | | | | | |
Changes in plan assets(a): | | | | | | | |
Fair value of plan assets as of beginning of year | $ | 1,729 |
| | $ | 1,487 |
| | $ | — |
| | $ | — |
|
Actual return on plan assets | 306 |
| | 167 |
| | — |
| | — |
|
Valero contributions | 41 |
| | 164 |
| | 19 |
| | 19 |
|
Participant contributions | — |
| | — |
| | 15 |
| | 14 |
|
Benefits paid | (170 | ) | | (90 | ) | | (37 | ) | | (35 | ) |
Other | 3 |
| | 1 |
| | 3 |
| | 2 |
|
Fair value of plan assets as of end of year | $ | 1,909 |
| | $ | 1,729 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Reconciliation of funded status(a): | | | | | | | |
Fair value of plan assets as of end of year | $ | 1,909 |
| | $ | 1,729 |
| | $ | — |
| | $ | — |
|
Less benefit obligation as of end of year | 1,914 |
| | 2,307 |
| | 324 |
| | 436 |
|
Funded status as of end of year | $ | (5 | ) | | $ | (578 | ) | | $ | (324 | ) | | $ | (436 | ) |
| | | | | | | |
Accumulated benefit obligation | $ | 1,811 |
| | $ | 1,857 |
| | n/a |
| | n/a |
|
___________________________
| |
(a) | Plan assets include only the assets associated with pension plans subject to legal minimum funding standards. Plan assets associated with U.S. nonqualified pension plans are not included here because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans. As a result, the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 20 for the assets associated with certain U.S. nonqualified pension plans. |
Amounts recognized in our balance sheet for our pension and other postretirement benefits plans as of December 31, 2013 and 2012 include (in millions):
|
| | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2013 | | 2012 | | 2013 | | 2012 |
Deferred charges and other assets, net | $ | 208 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Accrued expenses | (11 | ) | | (11 | ) | | (19 | ) | | (21 | ) |
Other long-term liabilities | (202 | ) | | (567 | ) | | (305 | ) | | (415 | ) |
| $ | (5 | ) | | $ | (578 | ) | | $ | (324 | ) | | $ | (436 | ) |
The accumulated benefit obligations for certain of our pension plans exceed the fair values of the assets of those plans. For those plans, the table below presents the total projected benefit obligation, accumulated benefit obligation, and fair value of the plan assets (in millions).
|
| | | | | | | |
| December 31, |
| 2013 | | 2012 |
Projected benefit obligation | $ | 215 |
| | $ | 250 |
|
Accumulated benefit obligation | 168 |
| | 191 |
|
Fair value of plan assets | 3 |
| | 31 |
|
Benefit payments that we expect to pay, including amounts related to expected future services, and the anticipated Medicare subsidies that we expect to receive are as follows for the years ending December 31 (in millions):
|
| | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
2014 | $ | 100 |
| | $ | 19 |
|
2015 | 125 |
| | 19 |
|
2016 | 116 |
| | 20 |
|
2017 | 127 |
| | 20 |
|
2018 | 146 |
| | 21 |
|
2019-2023 | 820 |
| | 107 |
|
We plan to contribute approximately $38 million to our pension plans and $19 million to our other postretirement benefit plans during 2014.
The components of net periodic benefit cost were as follows for the years ended (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| December 31, | | December 31, |
| 2013 | | 2012 |
| 2011 | | 2013 | | 2012 | | 2011 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 137 |
| | $ | 140 |
| | $ | 104 |
| | $ | 12 |
| | $ | 12 |
| | $ | 11 |
|
Interest cost | 86 |
| | 93 |
| | 85 |
| | 18 |
| | 21 |
| | 22 |
|
Expected return on plan assets | (131 | ) | | (125 | ) | | (112 | ) | | — |
| | — |
| | — |
|
Amortization of: | | | | | | | | | | | |
Prior service cost (credit) | (19 | ) | | 3 |
| | 2 |
| | (14 | ) | | (23 | ) | | (23 | ) |
Net actuarial loss | 57 |
| | 33 |
| | 12 |
| | — |
| | 1 |
| | 2 |
|
Special charges (credits) | (5 | ) | | (3 | ) | | 4 |
| | — |
| | — |
| | 4 |
|
Net periodic benefit cost | $ | 125 |
| | $ | 141 |
| | $ | 95 |
| | $ | 16 |
| | $ | 11 |
| | $ | 16 |
|
Amortization of prior service cost (credit) shown in the above table was based on a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under each respective plan. Amortization of the net actuarial loss shown in the above table was based on the straight-line amortization of the excess of the unrecognized loss over 10 percent of the greater of the projected benefit obligation or market-related value of plan assets (smoothed asset value) over the average remaining service period of active employees expected to receive benefits under each respective plan. Special credits in 2013 and 2012 include curtailments and settlements related to our employees at our Aruba Refinery, partially offset by settlements related to lump sum payments in excess of thresholds. Special charges in 2011 related to purchase accounting for the Meraux Acquisition and settlements related to lump sum payments in excess of thresholds.
Pre-tax amounts recognized in other comprehensive income for the years ended were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| December 31, | | December 31, |
| 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Net gain (loss) arising during the year: | | | | | | | | | | | |
Net actuarial gain (loss) | $ | 290 |
| | $ | (245 | ) | | $ | (294 | ) | | $ | 77 |
| | $ | 17 |
| | $ | 9 |
|
Prior service cost | — |
| | (9 | ) | | (4 | ) | | — |
| | — |
| | — |
|
Remeasurement due to plan amendments | 328 |
| | — |
| | — |
| | 43 |
| | — |
| | — |
|
Net (gain) loss reclassified into income: | | | | | | | | | | | |
Net actuarial loss | 57 |
| | 33 |
| | 12 |
| | — |
| | 1 |
| | 2 |
|
Prior service cost (credit) | (19 | ) | | 3 |
| | 2 |
| | (14 | ) | | (23 | ) | | (23 | ) |
Curtailment and settlement loss | 1 |
| | 12 |
| | 4 |
| | — |
| | — |
| | — |
|
Total changes in other comprehensive income (loss) | $ | 657 |
| | $ | (206 | ) | | $ | (280 | ) | | $ | 106 |
| | $ | (5 | ) | | $ | (12 | ) |
The pre-tax amounts in accumulated other comprehensive income as of December 31, 2013 and 2012 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2013 |
| 2012 | | 2013 | | 2012 |
Prior service cost (credit) | $ | (233 | ) | | $ | 21 |
| | $ | (110 | ) | | $ | (81 | ) |
Net actuarial loss (gain) | 479 |
| | 882 |
| | (44 | ) | | 34 |
|
Total | $ | 246 |
| | $ | 903 |
| | $ | (154 | ) | | $ | (47 | ) |
The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2013 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2014 (in millions):
|
| | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
Amortization of prior service credit | $ | (22 | ) | | $ | (18 | ) |
Amortization of net actuarial loss (gain) | 35 |
| | (1 | ) |
Total | $ | 13 |
| | $ | (19 | ) |
The weighted-average assumptions used to determine the benefit obligations as of December 31, 2013 and 2012 were as follows:
|
| | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2013 | | 2012 | | 2013 | | 2012 |
Discount rate | 4.92 | % | | 4.28 | % | | 4.88 | % | | 4.19 | % |
Rate of compensation increase | 3.81 | % | | 3.73 | % | | — | % | | — | % |
The discount rate assumption used to determine the benefit obligations as of December 31, 2013 and 2012 for the majority of our pension plans and other postretirement benefit plans was based on the Aon Hewitt AA Only Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was designed by Aon Hewitt to provide a means for plan sponsors to value the liabilities of their pension plans or postretirement benefit plans. It is a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from one-half year to 99 years. Each bond issue underlying the curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investor Services (Moody’s), Standard and Poor’s Ratings Service (S&P), and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuances among those with average ratings of double-A are included in this yield curve.
We based our December 31, 2013, 2012, and 2011 discount rate assumption on the Aon Hewitt AA Only Above Median yield curve because we believe it is representative of the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates.
The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2013, 2012, and 2011 were as follows:
|
| | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement Benefit Plans |
| 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Discount rate | 4.33 | % | | 5.08 | % | | 5.40 | % | | 4.19 | % | | 4.97 | % | | 5.22 | % |
Expected long-term rate of return on plan assets | 7.62 | % | | 7.67 | % | | 7.69 | % | | — | % | | — | % | | — | % |
Rate of compensation increase | 3.73 | % | | 3.68 | % | | 3.56 | % | | — | % | | — | % | | — | % |
The assumed health care cost trend rates as of December 31, 2013 and 2012 were as follows:
|
| | | | | |
| 2013 | | 2012 |
Health care cost trend rate assumed for the next year | 7.39 | % | | 7.32 | % |
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate) | 5.00 | % | | 5.00 | % |
Year that the rate reaches the ultimate trend rate | 2020 |
| | 2020 |
|
Assumed health care cost trend rates impact the amounts reported for retiree health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects on other postretirement benefits (in millions):
|
| | | | | | | |
| 1% Increase | | 1% Decrease |
Effect on total of service and interest cost components | $ | — |
| | $ | — |
|
Effect on accumulated postretirement benefit obligation | 3 |
| | (3 | ) |
The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2013 and 2012 by level of the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value as a practical expedient for fair value. As previously noted, we do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans.
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | |
| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total as of
December 31,
2013 |
Equity securities: | | | | | | | |
U.S. companies(a) | $ | 529 |
| | $ | — |
| | $ | — |
| | $ | 529 |
|
International companies | 155 |
| | — |
| | — |
| | 155 |
|
Preferred stock | 3 |
| | — |
| | — |
| | 3 |
|
Mutual funds: | | | | | | | |
International growth | 131 |
| | — |
| | — |
| | 131 |
|
Index funds(b) | 160 |
| | — |
| | — |
| | 160 |
|
Corporate debt instruments | — |
| | 260 |
| | — |
| | 260 |
|
Government securities: | | | | | | | |
U.S. Treasury securities | 81 |
| | — |
| | — |
| | 81 |
|
Other government securities | — |
| | 79 |
| | — |
| | 79 |
|
Common collective trusts | — |
| | 373 |
| | — |
| | 373 |
|
Private fund | — |
| | 38 |
| | — |
| | 38 |
|
Insurance contracts | — |
| | 17 |
| | — |
| | 17 |
|
Interest and dividends receivable | 5 |
| | — |
| | — |
| | 5 |
|
Cash and cash equivalents | 72 |
| | 6 |
| | — |
| | 78 |
|
Total | $ | 1,136 |
| | $ | 773 |
| | $ | — |
| | $ | 1,909 |
|
______________________
See notes on page 102.
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | |
| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total as of
December 31,
2012 |
Equity securities: | | | | | | | |
U.S. companies(a) | $ | 441 |
| | $ | — |
| | $ | — |
| | $ | 441 |
|
International companies | 135 |
| | — |
| | — |
| | 135 |
|
Preferred stock | 2 |
| | 1 |
| | — |
| | 3 |
|
Mutual funds: | | | | | | | |
International growth | 127 |
| | — |
| | — |
| | 127 |
|
Index funds(b) | 117 |
| | — |
| | — |
| | 117 |
|
Corporate debt instruments | — |
| | 290 |
| | — |
| | 290 |
|
Government securities: | | | | | | | |
U.S. Treasury securities | 107 |
| | — |
| | — |
| | 107 |
|
Other government securities | 3 |
| | 65 |
| | — |
| | 68 |
|
Common collective trusts | — |
| | 294 |
| | — |
| | 294 |
|
Insurance contracts | — |
| | 17 |
| | — |
| | 17 |
|
Interest and dividends receivable | 5 |
| | — |
| | — |
| | 5 |
|
Cash and cash equivalents | 98 |
| | 27 |
| | — |
| | 125 |
|
Total | $ | 1,035 |
| | $ | 694 |
| | $ | — |
| | $ | 1,729 |
|
___________________
| |
(a) | Equity securities are held in a wide range of industrial sectors, including consumer goods, information technology, healthcare, industrials, and financial services. |
| |
(b) | This class includes primarily investments in approximately 60 percent equities and 40 percent bonds. |
The investment policies and strategies for the assets of our pension plans incorporate a well-diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment return objective and risk parameters, the pension plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. As of December 31, 2013, the target allocations for plan assets are 70 percent equity securities and 30 percent fixed income investments. Equity securities include international stocks and a blend of U.S. growth and value stocks of various sizes of capitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis.
The expected long-term rate of return on plan assets is based on a forward-looking expected asset return model. This model derives an expected rate of return based on the target asset allocation of a plan’s assets. The underlying assumptions regarding expected rates of return for each asset class reflect Aon Hewitt’s best expectations for these asset classes. The model reflects the positive effect of periodic rebalancing among diversified asset classes. We select an expected asset return that is supported by this model.
Defined Contribution Plans
We have defined contribution plans that cover most of our employees. Our contributions to these plans are based on employees’ compensation and/or a partial match of employee contributions to the plans. Our contributions to these defined contribution plans were $62 million, $61 million, and $59 million for the years ended December 31, 2013, 2012, and 2011, respectively.
