PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Company has defined benefit pension plans that cover employees in the United States and a number of other countries. The U.S. qualified plan covering the parent company is the largest plan. Benefits for employees hired before January 1, 2008 are based on length of service and the employee’s three highest consecutive years of compensation. Employees hired after January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest.
The Company’s funding policy is to contribute to the plans when pension laws and/or economics either require or encourage funding. In 2013, Dow contributed $865 million to its pension plans, including contributions to fund benefit payments for its non-qualified supplemental plans. Dow expects to contribute approximately $800 million to its pension plans in 2014.
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for the plans are provided in the two tables below:
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| | | | | | | | | | | | | | | | | | |
Weighted-Average Assumptions for All Pension Plans | | Benefit Obligations at December 31 | | Net Periodic Costs for the Year |
| | 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Discount rate | | 4.54 | % | | 3.88 | % | | 4.93 | % | | 3.88 | % | | 4.93 | % | | 5.38 | % |
Rate of increase in future compensation levels | | 4.15 | % | | 3.96 | % | | 4.14 | % | | 3.96 | % | | 4.14 | % | | 4.16 | % |
Expected long-term rate of return on plan assets | | — |
| | — |
| | — |
| | 7.47 | % | | 7.60 | % | | 7.86 | % |
|
| | | | | | | | | | | | | | | | | | |
Weighted-Average Assumptions for U.S. Pension Plans | | Benefit Obligations at December 31 | | Net Periodic Costs for the Year |
| | 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Discount rate | | 4.92 | % | | 4.02 | % | | 4.98 | % | | 4.02 | % | | 4.98 | % | | 5.51 | % |
Rate of increase in future compensation levels | | 4.50 | % | | 4.50 | % | | 4.50 | % | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Expected long-term rate of return on plan assets | | — |
| | — |
| | — |
| | 7.85 | % | | 7.83 | % | | 8.18 | % |
The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Company’s historical experience with the pension fund asset performance is also considered. The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of Dow’s major U.S. plans are matched against the Towers Watson RATE:Link yield curve (based on 60th to 90th percentile bond yields) to arrive at a single discount rate for each plan.
The accumulated benefit obligation for all defined benefit pension plans was $23.8 billion at December 31, 2013 and $25.3 billion at December 31, 2012.
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| | | | | | | | |
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31 |
In millions | | 2013 |
| | 2012 |
|
Projected benefit obligations | | $ | 22,565 |
| | $ | 24,659 |
|
Accumulated benefit obligations | | $ | 21,554 |
| | $ | 23,422 |
|
Fair value of plan assets | | $ | 16,247 |
| | $ | 15,458 |
|
In addition to the U.S. qualified defined benefit pension plan, U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by the Company. Defined contribution plans also cover employees in some subsidiaries in other countries, including Australia, Brazil, Canada, Italy, Spain and the United Kingdom. Expense recognized for all defined contribution plans was $231 million in 2013, $186 million in 2012 and $163 million in 2011.
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits to retired employees. The Company’s plans outside of the United States are not significant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. In general, for employees hired before January 1, 1993, the plans provide benefits supplemental to Medicare when retirees are eligible for these benefits. The Company and the retiree share the cost of these benefits, with the Company portion increasing as the retiree has increased years of credited service, although there is a cap on the Company portion. The Company has the ability to change these benefits at any time. Employees hired after January 1, 2008 are not covered under the plans.
During the fourth quarter 2013, the Company started implementing an Employer Group Waiver Plan (“EGWP”) for its Medicare-eligible, retiree medical plan participants, which became effective on January 1, 2014. As a result, the Medicare Part D Retiree Drug Subsidy program (“RDS”) was eliminated on January 1, 2014. The EGWP does not significantly alter the benefits provided to retiree medical plan participants. The federal subsidies to be earned under the EGWP are expected to exceed those earned under the RDS and will be partially offset by increased costs related to the administration of the EGWP. The formation of the EGWP and the resulting change in assumption generated an actuarial gain of $250 million at December 31, 2013, included in "Accumulated other comprehensive loss" in the consolidated balance sheets. The Company also recognized a reduction in the postretirement benefit obligation of $250 million at December 31, 2013. The Company estimates net periodic benefit cost will decrease by approximately $25 million in 2014 due to the EGWP.
The Company funds most of the cost of these health care and life insurance benefits as incurred. In 2013, Dow did not make any contributions to its other postretirement benefit plan trusts. The trusts did not hold assets at December 31, 2013. Dow does not expect to contribute assets to its other postretirement benefits plan trusts in 2014.
The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the U.S. plans are provided below:
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| | | | | | | | | | | | | | | | | | |
U.S. Plan Assumptions for Other Postretirement Benefits | | Benefit Obligations at December 31 | | Net Periodic Costs for the Year |
| | 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Discount rate | | 4.37 | % | | 3.67 | % | | 4.66 | % | | 3.67 | % | | 4.66 | % | | 5.15 | % |
Expected long-term rate of return on plan assets | | — |
| | — |
| | — |
| | — | % | | 1.00 | % | | 3.60 | % |
Initial health care cost trend rate | | 7.45 | % | | 7.84 | % | | 8.28 | % | | 7.84 | % | | 8.28 | % | | 8.70 | % |
Ultimate health care cost trend rate | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % |
Year ultimate trend rate to be reached | | 2020 |
| | 2019 |
| | 2019 |
| | 2020 |
| | 2019 |
| | 2019 |
|
Increasing the assumed medical cost trend rate by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2013 by $25 million and decrease the net periodic postretirement benefit cost for the year by $1 million. Decreasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2013 by $29 million and the net periodic postretirement benefit cost for the year by $1 million.
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| | | | | | | | | | | | | | | | | | | | | | | | |
Net Periodic Benefit Cost for All Significant Plans |
| | Defined Benefit Pension Plans | | Other Postretirement Benefits |
In millions | | 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Service cost | | $ | 471 |
| | $ | 378 |
| | $ | 347 |
| | $ | 19 |
| | $ | 17 |
| | $ | 15 |
|
Interest cost | | 1,012 |
| | 1,093 |
| | 1,121 |
| | 78 |
| | 92 |
| | 100 |
|
Expected return on plan assets | | (1,248 | ) | | (1,262 | ) | | (1,305 | ) | | — |
| | (1 | ) | | (6 | ) |
Amortization of prior service cost (credit) | | 25 |
| | 26 |
| | 28 |
| | (4 | ) | | (4 | ) | | (1 | ) |
Amortization of unrecognized loss | | 788 |
| | 519 |
| | 374 |
| | 4 |
| | 1 |
| | 1 |
|
Curtailment/settlement/other (1) (2) | | 5 |
| | — |
| | (4 | ) | | — |
| | 9 |
| | — |
|
Net periodic benefit cost | | $ | 1,053 |
| | $ | 754 |
| | $ | 561 |
| | $ | 97 |
| | $ | 114 |
| | $ | 109 |
|
| |
(1) | Included $9 million of curtailment costs recorded in 2012 related to the 4Q12 Restructuring plan (see Note 3). |
| |
(2) | The 2013 impact primarily relates to settlements associated with the wind-up of a Canadian pension plan. |
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| | | | | | | | | | | | | | | | | | | | | | | | |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss for All Significant Plans |
| | Defined Benefit Pension Plans | | Other Postretirement Benefits |
In millions | | 2013 |
| | 2012 |
| | 2011 |
| | 2013 |
| | 2012 |
| | 2011 |
|
Net (gain) loss | | $ | (2,343 | ) | | $ | 3,135 |
| | $ | 2,009 |
| | $ | (404 | ) | | $ | 163 |
| | $ | 20 |
|
Amortization of prior service (cost) credit | | (25 | ) | | (26 | ) | | (28 | ) | | 4 |
| | 4 |
| | 1 |
|
Amortization of unrecognized loss | | (793 | ) | | (519 | ) | | (370 | ) | | (4 | ) | | (1 | ) | | (1 | ) |
Total recognized in other comprehensive (income) loss | | $ | (3,161 | ) | | $ | 2,590 |
| | $ | 1,611 |
| | $ | (404 | ) | | $ | 166 |
| | $ | 20 |
|
Total recognized in net periodic benefit cost and other comprehensive (income) loss | | $ | (2,108 | ) | | $ | 3,344 |
| | $ | 2,172 |
| | $ | (307 | ) | | $ | 280 |
| | $ | 129 |
|
|
| | | | | | | | | | | | | | | | |
Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans |
In millions | | Defined Benefit Pension Plans | | Other Postretirement Benefits |
Change in projected benefit obligations | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Benefit obligations at beginning of year | | $ | 26,840 |
| | $ | 22,763 |
| | $ | 2,210 |
| | $ | 2,088 |
|
Service cost | | 471 |
| | 378 |
| | 19 |
| | 17 |
|
Interest cost | | 1,012 |
| | 1,093 |
| | 78 |
| | 92 |
|
Plan participants’ contributions | | 17 |
| | 38 |
| | — |
| | — |
|
Actuarial changes in assumptions and experience | | (2,029 | ) | | 3,811 |
| | (401 | ) | | 164 |
|
Acquisition/divestiture/other activity | | — |
| | (51 | ) | | — |
| | — |
|
Benefits paid | | (1,322 | ) | | (1,347 | ) | | (156 | ) | | (164 | ) |
Currency impact | | 123 |
| | 150 |
| | (8 | ) | | 4 |
|
Termination benefits/curtailment cost/settlements (1) | | (85 | ) | | 5 |
| | — |
| | 9 |
|
Benefit obligations at end of year | | $ | 25,027 |
| | $ | 26,840 |
| | $ | 1,742 |
| | $ | 2,210 |
|
| | | | | | | | |
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 17,725 |
| | $ | 16,119 |
| | $ | 65 |
| | $ | 154 |
|
Actual return on plan assets | | 1,548 |
| | 1,950 |
| | — |
| | 1 |
|
Currency impact | | 85 |
| | 129 |
| | — |
| | — |
|
Employer contributions | | 865 |
| | 903 |
| | — |
| | (10 | ) |
Plan participants’ contributions | | 17 |
| | 38 |
| | — |
| | — |
|
Acquisition/divestiture/other activity | | (91 | ) | | (67 | ) | | — |
| | — |
|
Benefits paid | | (1,322 | ) | | (1,347 | ) | | (65 | ) | | (80 | ) |
Fair value of plan assets at end of year | | $ | 18,827 |
| | $ | 17,725 |
| | $ | — |
| | $ | 65 |
|
| | | | | | | | |
Funded status at end of year | | $ | (6,200 | ) | | $ | (9,115 | ) | | $ | (1,742 | ) | | $ | (2,145 | ) |
| | | | | | | | |
Net amounts recognized in the consolidated balance sheets at December 31: |
Noncurrent assets | | $ | 139 |
| | $ | 92 |
| | $ | — |
| | $ | — |
|
Current liabilities | | (66 | ) | | (69 | ) | | (157 | ) | | (99 | ) |
Noncurrent liabilities | | (6,273 | ) | | (9,138 | ) | | (1,585 | ) | | (2,046 | ) |
Net amounts recognized in the consolidated balance sheets | | $ | (6,200 | ) | | $ | (9,115 | ) | | $ | (1,742 | ) | | $ | (2,145 | ) |
| | | | | | | | |
Pretax amounts recognized in AOCI at December 31: | | | | | | | | |
Net loss (gain) | | $ | 7,815 |
| | $ | 10,951 |
| | $ | (253 | ) | | $ | 155 |
|
Prior service cost (credit) | | 103 |
| | 128 |
| | (7 | ) | | (11 | ) |
Pretax balance in AOCI at end of year | | $ | 7,918 |
| | $ | 11,079 |
| | $ | (260 | ) | | $ | 144 |
|
(1) The 2013 impact primarily relates to settlements associated with the wind-up of a Canadian pension plan.
In 2014, an estimated net loss of $507 million and prior service cost of $23 million for the defined benefit pension plans will be amortized from AOCI to net periodic benefit cost. In 2014, an estimated net gain of $14 million and prior service credit of $2 million for other postretirement benefit plans will be amortized from AOCI to net periodic benefit cost.
Estimated Future Benefit Payments
The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:
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| | | | | | | | |
Estimated Future Benefit Payments at December 31, 2013 |
In millions | | Defined Benefit Pension Plans |
| | Other Postretirement Benefits |
|
2014 | | $ | 1,263 |
| | $ | 160 |
|
2015 | | 1,280 |
| | 157 |
|
2016 | | 1,305 |
| | 152 |
|
2017 | | 1,333 |
| | 145 |
|
2018 | | 1,378 |
| | 141 |
|
2019 through 2023 | | 7,401 |
| | 636 |
|
Total | | $ | 13,960 |
| | $ | 1,391 |
|
Plan Assets
Plan assets consist mainly of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private equity and absolute return strategies. At December 31, 2013, plan assets totaled $18.8 billion and included no Company common stock. At December 31, 2012, plan assets totaled $17.7 billion and included no Company common stock. In 2013, the Company received $32 million from residual plan assets after the completion of a non-U.S. pension plan wind-up.
Investment Strategy and Risk Management for Plan Assets
The Company’s investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans.
The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposure and rebalancing the asset allocation. The plans use value at risk, stress testing, scenario analysis and Monte Carlo simulations to monitor and manage both the risk within the portfolios and the surplus risk of the plans.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities include investment and non-investment grade corporate bonds of companies diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities, emerging market securities and fixed income related funds. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts; and interest rate, equity, commodity and foreign exchange derivative investments and hedges.
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| | |
Strategic Weighted-Average Target Allocation of Plan Assets for All Significant Plans |
Asset Category | Target Allocation |
|
Equity securities | 39 | % |
Fixed Income securities | 38 | % |
Alternative investments | 22 | % |
Other investments | 1 | % |
Total | 100 | % |
Concentration of Risk
The Company mitigates the credit risk of investments by establishing guidelines with investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Company and external managers. Credit risk related to derivative activity is mitigated by utilizing multiple counterparties and through collateral support agreements.
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately half of the liability is covered by a participating group annuity issued by Prudential Insurance Company.
The following tables summarize the bases used to measure the Company’s pension plan assets at fair value for the years ended December 31, 2013 and 2012:
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| | | | | | | | | | | | | | | | |
Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2013 | | Quoted Prices in Active Markets for Identical Items |
| | Significant Other Observable Inputs |
| | Significant Unobservable Inputs |
| | |
In millions | | (Level 1) |
| | (Level 2) |
| | (Level 3) |
| | Total |
|
Cash and cash equivalents | | $ | 83 |
| | $ | 1,179 |
| | $ | — |
| | $ | 1,262 |
|
Equity securities: | | | | | | | | |
U.S. equity (1) | | $ | 2,759 |
| | $ | 695 |
| | $ | — |
| | $ | 3,454 |
|
Non-U.S. equity – developed countries | | 2,014 |
| | 1,122 |
| | 2 |
| | 3,138 |
|
Emerging markets | | 648 |
| | 574 |
| | 10 |
| | 1,232 |
|
Convertible bonds | | 23 |
| | 326 |
| | — |
| | 349 |
|
Equity derivatives | | 5 |
| | (27 | ) | | — |
| | (22 | ) |
Total equity securities | | $ | 5,449 |
| | $ | 2,690 |
| | $ | 12 |
| | $ | 8,151 |
|
Fixed income securities: | | | | | | | | |
U.S. government and municipalities | | $ | — |
| | $ | 1,154 |
| | $ | — |
| | $ | 1,154 |
|
U.S. agency and agency mortgage-backed securities | | — |
| | 313 |
| | — |
| | 313 |
|
Corporate bonds – investment grade | | — |
| | 1,397 |
| | — |
| | 1,397 |
|
Non-U.S. governments – developed countries | | — |
| | 1,075 |
| | — |
| | 1,075 |
|
Non-U.S. corporate bonds – developed countries | | — |
| | 838 |
| | 2 |
| | 840 |
|
Emerging market debt | | — |
| | 106 |
| | — |
| | 106 |
|
Other asset-backed securities | | — |
| | 113 |
| | 15 |
| | 128 |
|
High yield bonds | | — |
| | 178 |
| | 20 |
| | 198 |
|
Other fixed income funds | | — |
| | 243 |
| | 200 |
| | 443 |
|
Fixed income derivatives | | (1 | ) | | (31 | ) | | — |
| | (32 | ) |
Total fixed income securities | | $ | (1 | ) | | $ | 5,386 |
| | $ | 237 |
| | $ | 5,622 |
|
Alternative investments: | | | | | | | | |
Real estate | | $ | 30 |
| | $ | 33 |
| | $ | 1,338 |
| | $ | 1,401 |
|
Private equity | | — |
| | — |
| | 1,017 |
| | 1,017 |
|
Absolute return | | — |
| | 611 |
| | 406 |
| | 1,017 |
|
Total alternative investments | | $ | 30 |
| | $ | 644 |
| | $ | 2,761 |
| | $ | 3,435 |
|
Other investments | | $ | — |
| | $ | 317 |
| | $ | 40 |
| | $ | 357 |
|
Total pension plan assets at fair value | | $ | 5,561 |
| | $ | 10,216 |
| | $ | 3,050 |
| | $ | 18,827 |
|
(1) Includes no Company common stock.
|
| | | | | | | | | | | | | | | | |
Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2012 | | Quoted Prices in Active Markets for Identical Items |
| | Significant Other Observable Inputs |
| | Significant Unobservable Inputs |
| | |
In millions | | (Level 1) |
| | (Level 2) |
| | (Level 3) |
| | Total |
|
Cash and cash equivalents | | $ | 20 |
| | $ | 599 |
| | $ | — |
| | $ | 619 |
|
Equity securities: | | | | | | | | |
U.S. equity (1) | | $ | 2,143 |
| | $ | 318 |
| | $ | — |
| | $ | 2,461 |
|
Non-U.S. equity – developed countries | | 1,989 |
| | 1,203 |
| | 4 |
| | 3,196 |
|
Emerging markets | | 728 |
| | 487 |
| | 9 |
| | 1,224 |
|
Convertible bonds | | — |
| | 243 |
| | — |
| | 243 |
|
Equity derivatives | | 3 |
| | 19 |
| | — |
| | 22 |
|
Total equity securities | | $ | 4,863 |
| | $ | 2,270 |
| | $ | 13 |
| | $ | 7,146 |
|
Fixed income securities: | | | | | | | | |
U.S. government and municipalities | | $ | — |
| | $ | 1,464 |
| | $ | 2 |
| | $ | 1,466 |
|
U.S. agency and agency mortgage-backed securities | | — |
| | 432 |
| | — |
| | 432 |
|
Corporate bonds – investment grade | | — |
| | 1,626 |
| | — |
| | 1,626 |
|
Non-U.S. governments – developed countries | | — |
| | 1,039 |
| | 1 |
| | 1,040 |
|
Non-U.S. corporate bonds – developed countries | | — |
| | 802 |
| | 1 |
| | 803 |
|
Emerging market debt | | — |
| | 72 |
| | — |
| | 72 |
|
Other asset-backed securities | | — |
| | 122 |
| | 15 |
| | 137 |
|
High yield bonds | | — |
| | 287 |
| | 21 |
| | 308 |
|
Other fixed income funds | | — |
| | 228 |
| | 218 |
| | 446 |
|
Fixed income derivatives | | 1 |
| | 119 |
| | — |
| | 120 |
|
Total fixed income securities | | $ | 1 |
| | $ | 6,191 |
| | $ | 258 |
| | $ | 6,450 |
|
Alternative investments: | | | | | | | | |
Real estate | | $ | 32 |
| | $ | 30 |
| | $ | 1,224 |
| | $ | 1,286 |
|
Private equity | | — |
| | — |
| | 991 |
| | 991 |
|
Absolute return | | — |
| | 527 |
| | 300 |
| | 827 |
|
Total alternative investments | | $ | 32 |
| | $ | 557 |
| | $ | 2,515 |
| | $ | 3,104 |
|
Other investments | | $ | — |
| | $ | 364 |
| | $ | 42 |
| | $ | 406 |
|
Total pension plan assets at fair value | | $ | 4,916 |
| | $ | 9,981 |
| | $ | 2,828 |
| | $ | 17,725 |
|
(1) Includes no Company common stock.
For pension plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For pension or other postretirement benefit plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources.
Some pension plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 2 or 3 measurements) is determined based on the lowest level classification of significant holdings within the fund. For all other pension plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
For pension plan assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager’s investment valuation.
The following table summarizes the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2012 and 2013:
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| | | | | | | | | | | | | | | | | | | | |
Fair Value Measurement of Level 3 Pension Plan Assets | | Equity Securities |
| | Fixed Income Securities |
| | Alternative Investments |
| | Other Investments |
| | Total |
|
In millions |
Balance at January 1, 2012 | | $ | 16 |
| | $ | 100 |
| | $ | 2,328 |
| | $ | 42 |
| | $ | 2,486 |
|
Actual return on plan assets: | | | | | | | | | | |
Relating to assets sold during 2012 | | (5 | ) | | 2 |
| | (59 | ) | | — |
| | (62 | ) |
Relating to assets held at Dec 31, 2012 | | (3 | ) | | 19 |
| | 193 |
| | — |
| | 209 |
|
Purchases, sales and settlements | | 7 |
| | 141 |
| | (54 | ) | | — |
| | 94 |
|
Transfers into (out of) Level 3, net | | (2 | ) | | (4 | ) | | 99 |
| | — |
| | 93 |
|
Foreign currency impact | | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Balance at December 31, 2012 | | $ | 13 |
| | $ | 258 |
| | $ | 2,515 |
| | $ | 42 |
| | $ | 2,828 |
|
Actual return on plan assets: | | | | | | | | | | |
Relating to assets sold during 2013 | | — |
| | 42 |
| | 176 |
| | — |
| | 218 |
|
Relating to assets held at Dec 31, 2013 | | — |
| | (32 | ) | | 67 |
| | (1 | ) | | 34 |
|
Purchases, sales and settlements | | 2 |
| | (27 | ) | | (5 | ) | | (1 | ) | | (31 | ) |
Transfers (out of) Level 3, net | | (3 | ) | | (2 | ) | | — |
| | — |
| | (5 | ) |
Foreign currency impact | | — |
| | (2 | ) | | 8 |
| | — |
| | 6 |
|
Balance at December 31, 2013 | | $ | 12 |
| | $ | 237 |
| | $ | 2,761 |
| | $ | 40 |
| | $ | 3,050 |
|
The following table summarizes the bases used to measure the Company’s other postretirement benefit plan assets at fair value for the year ended December 31, 2012:
|
| | | | | | | | | | | | | |
| | Basis of Fair Value Measurements of Other Postretirement Benefit Plan Assets at December 31, 2012 | | Quoted Prices in Active Markets for Identical Items |
| | Significant Other Observable Inputs |
| | |
| |
| | In millions | | (Level 1) |
| | (Level 2) |
| | Total |
|
| | Cash and cash equivalents | | $ | — |
| | $ | 7 |
| | $ | 7 |
|
| | Fixed income securities | | — |
| | 58 |
| | 58 |
|
| | Total assets at fair value | | $ | — |
| | $ | 65 |
| | $ | 65 |
|
