PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS | 12 Months Ended |
Dec. 31, 2014 |
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS | PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS |
We sponsor several retirement programs for our employees. |
This note provides details about: |
| | | | | | | | | | | | | | | | | | |
• | types of plans we sponsor, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | significant transactions and events affecting plans we sponsor, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | funded status of plans we sponsor, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | pension assets, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | activity of plans we sponsor and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | actuarial assumptions. | | | | | | | | | | | | | | | | | |
TYPES OF PLANS WE SPONSOR |
The plans we sponsor in the U.S. and Canada differ according to each country’s requirements. |
In the U.S., our pension plans are: |
| | | | | | | | | | | | | | | | | | |
• | qualified — plans that qualify under the Internal Revenue Code; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | nonqualified — plans for select employees that provide additional benefits not qualified under the Internal Revenue Code. | | | | | | | | | | | | | | | | | |
In Canada, our pension plans are: |
| | | | | | | | | | | | | | | | | | |
• | registered — plans that are registered under the Income Tax Act and applicable provincial pension acts; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | nonregistered — plans for select employees that provide additional benefits that may not be registered under the Income Tax Act or provincial pension acts. | | | | | | | | | | | | | | | | | |
We also offer retiree medical and life insurance plans in the U.S. and Canada. These plans are referred to as other postretirement benefit plans in the following disclosures. |
Employee Eligibility and Accounting |
The Pension and Other Postretirement Benefit Plans section of Note 1: Summary of Significant Accounting Policies provides information about employee eligibility for pension plans and postretirement health care and life insurance benefits, as well as how we account for the plans and benefits. See "Effects of Significant Transactions and Events" below for changes to eligibility in the pension and other postretirement benefit plans. |
Measurement Date |
We measure the fair value of pension plan assets and pension and other postretirement benefit obligations as of the end of our fiscal year. The fair value of pension plan assets are estimated at the end of the year and are revised in the first half of the following year when the information needed to finalize fair values is received. Additionally, we receive updated census data that is used to estimate our projected benefit obligation. As a result of the Real Estate Divestiture as well as our selling, general and administrative cost reduction initiative, we remeasured our U.S. qualified pension plan during third quarter 2014. There were no significant events that triggered remeasurement in 2013. |
EFFECTS OF SIGNIFICANT TRANSACTIONS AND EVENTS |
The information that is provided in this note is affected by the following transactions and events. |
Amendments of Pension and Other Postretirement Benefit Plans for Salaried Employees |
Pension Benefit Plan Amendments |
During fourth quarter 2013, we ratified an amendment to the Weyerhaeuser Pension Plan that closes the plan to newly hired and rehired salaried or non union employees effective January 1, 2014. Certain union employee groups adopted similar amendments effective at other dates. Beginning at the effective date, new hires and rehires into groups affected by these amendments will receive a company contribution for retirement in their 401(k) plan. The change was announced in December 2013. |
During fourth quarter 2013, we ratified amendments to the Weyerhaeuser Company Limited Retirement Plan for Non-Union Employees and the Retirement Plan for Non-Union Employees of Weyerhaeuser Company Limited at Grand Prairie, Alberta and Grande Cache, Alberta that (1) closes these plans to new hires and rehires effective January 1, 2014 and (2) changes the early retirement reduction for current employees enrolled in these plans, effective for future years of service beginning January 1, 2016. These changes were announced to participants in December 2013. |
Postretirement Medical and Life Insurance Benefit Plan Amendments |
During fourth quarter 2014, the decision was ratified to reinstate or modify available options for U.S. and Canadian postretirement benefits for certain retirees. As a result, our postretirement obligation increased by $45 million. |
During fourth quarter 2013, the decision was ratified to eliminate Company funding of the Post-Medicare Health Reimbursement Account (HRA) for certain salaried retirees after 2014. This change was communicated to affected retirees during January 2014. As a result, we recognized a pretax gain of $151 million in 2014 from this plan amendment. |
Midyear Remeasurement of Assets and Liabilities |
Our pension plans are typically remeasured as of fiscal year-end unless a significant event occurs that requires remeasurement. As a result of the Real Estate Divestiture as well as our selling, general and administrative cost reduction initiative, we remeasured our U.S. qualified pension plan during third quarter 2014. |
The net effect of the remeasurement was as follows: |
| | | | | | | | | | | | | | | | | | |
• | We recognized a $9 million charge in third quarter 2014 for curtailments and special termination benefits. Of this amount, $6 million is included in the net gain on the Real Estate Divestiture and is presented in "Earnings from discontinued operations, net of income taxes" in our Consolidated Statement of Operations. The remaining $3 million is included in "Charges for restructuring, closures and impairments" in our Consolidated Statement of Operations. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | The funded status of our U.S. qualified pension plan was reduced by $291 million primarily as a result of a decline in the discount rate used to calculate the projected benefit obligation and also due to asset performance and curtailment and special terminations. The discount rate used to remeasure the pension plans’ liabilities was changed from a rate of 4.9 percent at December 31, 2013 to rates reflective of current bond rates on the remeasurement date. A discount rate of 4.4 percent was used as of July 7, 2014. There was no change to the expected rate of return assumption. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | Deferred tax liabilities decreased $108 million. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | Total equity decreased $183 million for changes in "Cumulative other comprehensive loss", reflecting the net effect of the items discussed above. Amounts deferred in cumulative other comprehensive loss will be amortized into net periodic pension cost (credits) in future periods. | | | | | | | | | | | | | | | | | |
FUNDED STATUS OF PLANS WE SPONSOR |
The funded status of the plans we sponsor is determined by comparing the projected benefit obligation with the fair value of plan assets at the end of the year. |
Changes in Projected Benefit Obligations of Our Pension and Other Postretirement Benefit Plans |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | |
| PENSION | OTHER | | | | | | |
POSTRETIREMENT | | | | | | |
BENEFITS | | | | | | |
| 2014 | | 2013 | | 2014 | | 2013 | | | | | | | |
| | | | | |
Reconciliation of projected benefit obligation: | | | | | | | | | | |
Projected benefit obligation beginning of year | $ | 5,834 | | $ | 6,575 | | $ | 321 | | $ | 433 | | | | | | | |
| | | | | |
Service cost | 53 | | 64 | | 1 | | 1 | | | | | | | |
| | | | | |
Interest cost | 271 | | 244 | | 10 | | 12 | | | | | | | |
| | | | | |
Plan participants’ contributions | — | | — | | 13 | | 16 | | | | | | | |
| | | | | |
Actuarial (gains) losses | 1,006 | | (666 | ) | 4 | | (23 | ) | | | | | | |
| | | | | |
Foreign currency exchange rate changes | (87 | ) | (66 | ) | (7 | ) | (5 | ) | | | | | | |
Benefits paid (includes lump sum settlements) | (391 | ) | (317 | ) | (44 | ) | (50 | ) | | | | | | |
Plan amendments and other | 1 | | — | | 2 | | (66 | ) | | | | | | |
| | | | | |
Special/contractual termination benefits | 7 | | — | | — | | — | | | | | | | |
| | | | | |
Plan transfer/Acquisitions | 4 | | — | | 3 | | 3 | | | | | | | |
| | | | | |
Projected benefit obligation at end of year | $ | 6,698 | | $ | 5,834 | | $ | 303 | | $ | 321 | | | | | | | |
| | | | | |
Changes in Fair Value of Plan Assets |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | |
| PENSION | OTHER | | | | | | |
POSTRETIREMENT | | | | | | |
BENEFITS | | | | | | |
| 2014 | | 2013 | | 2014 | | 2013 | | | | | | | |
| | | | | |
Fair value of plan assets at beginning of year (estimated) | $ | 5,614 | | $ | 5,022 | | $ | — | | $ | — | | | | | | | |
| | | | | |
Adjustment for final fair value of plan assets | 53 | | 55 | | — | | — | | | | | | | |
| | | | | |
Actual return on plan assets | 368 | | 808 | | — | | — | | | | | | | |
| | | | | |
Foreign currency exchange rate changes | (75 | ) | (57 | ) | — | | — | | | | | | | |
| | | | | |
Employer contributions and benefit payments | 70 | | 103 | | 31 | | 34 | | | | | | | |
| | | | | |
Plan participants’ contributions | — | | — | | 13 | | 16 | | | | | | | |
| | | | | |
Plan transfer/Acquisitions | 4 | | — | | — | | — | | | | | | | |
| | | | | |
Benefits paid (includes lump sum settlements) | (391 | ) | (317 | ) | (44 | ) | (50 | ) | | | | | | |
Fair value of plan assets at end of year (estimated) | $ | 5,643 | | $ | 5,614 | | $ | — | | $ | — | | | | | | | |
| | | | | |
Funded Status of Our Pension and Other Postretirement Benefit Plans |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | |
| PENSION | OTHER | | | | | | |
POSTRETIREMENT | | | | | | |
BENEFITS | | | | | | |
| 2014 | | 2013 | | 2014 | | 2013 | | | | | | | |
| | | | | |
Noncurrent assets | $ | 8 | | $ | 35 | | $ | — | | $ | — | | | | | | | |
| | | | | |
Current liabilities | (21 | ) | (22 | ) | (26 | ) | (35 | ) | | | | | | |
Noncurrent liabilities | (1,042 | ) | (233 | ) | (277 | ) | (283 | ) | | | | | | |
Funded status | $ | (1,055 | ) | $ | (220 | ) | $ | (303 | ) | $ | (318 | ) | | | | | | |
Changes in actuarial assumptions had a negative effect on the funded status of the pension and postretirement plans as of the end of 2014. The primary actuarial assumption changes were driven by a change in the discount rates as well as adoption of the updated mortality tables for the U.S. pension and postretirement plans. The Company elected to implement the mortality assumption published by the Society of Actuaries in October 2014, effective December 31, 2014. The updated mortality tables accounted for $387 million of the increase to the pension liabilities as well as $11 million of the increase to the postretirement liabilities as of December 31, 2014. The discount rates decreased from 4.90 percent at the end of 2013 to 4.10 percent at the end of 2014 for the U.S. pension plans, and decreased from 4.0 percent at the end of 2013 to 3.60 percent at the end of 2014 for U.S. postretirement. The discount rates decreased from 4.70 percent at the end of 2013 to 3.90 percent at the end of 2014 for the Canadian pension plans, and decreased from 4.60 percent at the end of 2013 to 3.80 percent at the end of 2014 for Canadian postretirement. |
Our qualified and registered pension plans and a portion of our nonregistered pension plans are funded. We contribute to these plans according to established funding standards. The nonqualified pension plan, a portion of the nonregistered pension plans, and the other postretirement benefit plans are unfunded. For the unfunded plans, we pay benefits to retirees from our general assets as they come due. |
The values reported for our pension plan assets at the end of 2014 and 2013 were estimated. Additional information regarding the year-end values generally becomes available to us during the first half of the following year. We increased the fair value of plan assets by $53 million to reflect final valuations as of December 31, 2013. |
During 2014, we contributed $43 million for our Canadian registered plans, we made contributions and benefit payments of $3 million for our Canadian nonregistered pension plans and made benefit payments of $24 million for our nonqualified pension plans. |
The asset or liability on our Consolidated Balance Sheet representing the funded status of the plans is different from the cumulative income or expense that we have recorded related to these plans. These differences are actuarial gains and losses and prior service costs and credits that are deferred and will be amortized into our periodic benefit costs in future periods. These unamortized amounts are recorded in "Cumulative Other Comprehensive Loss", which is a component of total equity on our Consolidated Balance Sheet. The Cumulative Other Comprehensive Income (Loss) section of Note 16: Shareholder's Interest details changes in the amounts included in cumulative other comprehensive income (loss) by component. |
Accumulated Benefit Obligations Greater Than Plan Assets |
As of December 31, 2014, pension plans with accumulated benefit obligations greater than plan assets had: |
| | | | | | | | | | | | | | | | | | |
• | $6.6 billion in projected benefit obligations, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $6.5 billion in accumulated benefit obligations and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | assets with a fair value of $5.6 billion. | | | | | | | | | | | | | | | | | |
As of December 31, 2013, pension plans with accumulated benefit obligations greater than plan assets had: |
| | | | | | | | | | | | | | | | | | |
• | $971 million in projected benefit obligations, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $948 million in accumulated benefit obligations and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | assets with a fair value of $726 million. | | | | | | | | | | | | | | | | | |
The accumulated benefit obligation for all of our defined benefit pension plans was: |
| | | | | | | | | | | | | | | | | | |
• | $6.5 billion at December 31, 2014; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $5.7 billion at December 31, 2013. | | | | | | | | | | | | | | | | | |
PENSION ASSETS |
Our Investment Policies and Strategies |
Our investment policies and strategies guide and direct how we manage funds for the benefit plans we sponsor. These funds include our: |
| | | | | | | | | | | | | | | | | | |
• | U.S. Pension Trust — funds our U.S. qualified pension plans; | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | Canadian Pension Trust — funds our Canadian registered pension plans; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | Retirement Compensation Arrangements — fund a portion of our Canadian nonregistered pension plans. | | | | | | | | | | | | | | | | | |
U.S. and Canadian Pension Trusts |
Our U.S. pension trust holds the funds for our U.S. qualified pension plans, while our Canadian pension trust holds the funds for our Canadian registered pension plans. |
Our strategy within the trusts is to invest: |
| | | | | | | | | | | | | | | | | | |
• | directly in a diversified mix of nontraditional investments; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | indirectly through derivatives to promote effective use of capital, increase returns and manage associated risk. | | | | | | | | | | | | | | | | | |
Consistent with past practice and in accordance with investment guidelines established by the company’s investment committee, the investment managers of the company’s pension plan asset portfolios utilize a diversified set of investment strategies. |
Our direct investments include: |
| | | | | | | | | | | | | | | | | | |
• | cash and short-term investments, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | hedge funds, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | private equity, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | real estate fund investments and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | common and preferred stocks. | | | | | | | | | | | | | | | | | |
Our indirect investments include: |
| | | | | | | | | | | | | | | | | | |
• | equity index derivatives, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | fixed income derivatives and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | swaps and other derivative instruments. | | | | | | | | | | | | | | | | | |
The overall return for our pension trusts includes: |
| | | | | | | | | | | | | | | | | | |
• | returns earned on our direct investments and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | returns earned on the derivatives we use. | | | | | | | | | | | | | | | | | |
Cash and short-term investments generally consist of highly liquid money market and government securities and are primarily held to fund benefit payments, capital calls and margin requirements. |
Hedge fund investments generally consist of privately-offered managed pools primarily structured as limited liability entities, with the general members or partners of such limited liability entities serving as portfolio manager and thus being responsible for the fund’s underlying investment decisions. Generally, these funds have varying degrees of liquidity and redemption provisions. Underlying investments within these funds may include long and short public and private equities, corporate, mortgage and sovereign debt, options, swaps, forwards and other derivative positions. These funds may also use varying degrees of leverage. |
Private equity investments consist of investments in private equity, mezzanine, distressed, co-investments and other structures. Private equity funds generally participate in buyouts and venture capital of limited liability entities through unlisted equity and debt instruments. These funds may also employ borrowing at the underlying entity level. Mezzanine and distressed funds generally follow strategies of investing in the debt of public or private companies with additional participation through warrants or other equity type options. |
Real estate fund investments in real property may be initiated through private transactions between principals or public market vehicles such as real estate investment trusts and are generally held in limited liability entities. |
Common and preferred stocks are equity instruments that generally have resulted from transactions related to private equity investment holdings. |
Swaps and other derivative instruments generally are comprised of swaps, futures, forwards or options. In accordance with our investment risk and return objectives, some of these instruments are utilized to achieve target equity and bond asset exposure or to reduce exposure to certain market risks or to help manage the liquidity of our investments. The resulting asset mix achieved is intended to allow the assets to perform comparably with established benchmarks. Others, mainly total return swaps with limited exchange of principal, are designed to gain exposure to the return characteristics of specific financial strategies. |
All swap, forward and option contracts are executed in a diversified manner through a number of financial institutions and in accordance with our investment guidelines. |
Retirement Compensation Arrangements |
Retirement Compensation Arrangements fund a portion of our Canadian nonregistered pension plans. |
Under Retirement Compensation Arrangements, our contributions are split: |
| | | | | | | | | | | | | | | | | | |
• | 50 percent to our investments in a portfolio of equities; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | 50 percent to a noninterest-bearing refundable tax account held by the Canada Revenue Agency — as required by Canadian tax rules. | | | | | | | | | | | | | | | | | |
The Canadian tax rules requirement means that — on average, over time — approximately 50 percent of our Canadian nonregistered pension plans’ assets do not earn returns. |
Managing Risk |
Investments and contracts, in general, are subject to risk, including market price, liquidity, currency, interest rate and credit risks. We have established governance practices to manage certain risks. The following provides an overview of these risks and describes actions we take to mitigate the potential adverse effects of these risks on the performance of our pension plan assets. Generally, we manage these risks through: |
| | | | | | | | | | | | | | | | | | |
• | selection and diversification of managers and strategies, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | use of limited-liability vehicles, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | diversification and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | constraining risk profiles to predefined limits on the percentage of pension trust assets that can be invested in certain categories. | | | | | | | | | | | | | | | | | |
Market price risk is the risk that the future value of a financial instrument will fluctuate as a result of changes in its market price, whether caused by factors specific to the individual investment, its issuer, or any other market factor that may affect its price. We attempt to mitigate market price risk on the company’s pension plan asset portfolios by investing in a diversified set of assets whose returns exhibit low correlation to those of traditional asset classes and each other. In addition, we and our investment advisers monitor the investments on a regular basis to ensure the decision to invest in particular assets continues to be suitable, including performing ongoing qualitative and quantitative assessments and comprehensive investment and operational due diligence. Special attention is paid to organizational changes made by the underlying fund managers and to changes in policy relative to their investment objectives, valuation, hedging strategy, degree of diversification, leverage, alignment of fund principles and investors, risk governance and costs. |
Liquidity risk is the risk that the pension trusts will encounter difficulty in meeting obligations associated with their financial liabilities. Our financial obligations as they relate to the pension plans may consist of distributions and redemptions payable to pension plan participants, payments to counterparties and fees to service providers. As established, pension plan assets primarily consist of investments in limited liability pools for which there is no active secondary market. As a result, the investments may be illiquid. Further, hedge funds are subject to potential restrictions that may affect the timing of the realization of pending redemptions. Private equity funds are subject to distribution and funding schedules that are set by the private equity funds’ respective managers and market activity. To mitigate liquidity risk on the company’s pension plan asset portfolios, the hedge fund portfolios have been diversified across manager’s strategies and funds that possess varying liquidity provisions and the private equity portfolios have been diversified across different vintage years and strategies. In addition, the investment committee regularly reviews cash flows of the pension trusts and sets appropriate guidelines to address liquidity needs. |
Currency risk arises from holding pension plan assets denominated in a currency other than the currency in which its liabilities are settled. Such risk is managed generally through notional contracts designed to hedge the net exposure to non-functional currencies. |
Interest rate risk is the risk that a change in interest rates will adversely affect the fair value of fixed income securities. The pension trust’s primary exposure to interest rate risk is indirect and through their investments in limited liability pools. Such indirect exposure is managed by the respective fund managers in conjunction with their investment level decisions and predefined investment mandates. |
Credit risk relates to the extent to which failures by counterparties to discharge their obligations could reduce the amount of future cash flows on hand at the balance sheet date. The pension trusts’ exposure to counterparty credit risk is reflected in settlement receivables from derivative contracts within the pension plan assets. In evaluating credit risk, we will often be dependent upon information provided by the counterparty or a rating agency, which may be inaccurate. We decrease exposure to credit risk by only dealing with highly-rated financial counterparties, and as of year-end, our counterparties each had a credit rating of at least A from Standard and Poor’s. |
We further manage this risk through: |
| | | | | | | | | | | | | | | | | | |
• | diversification of counterparties, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | predefined settlement and margining provisions and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | documented agreements. | | | | | | | | | | | | | | | | | |
We expect that none of our counterparties will fail to meet its obligations. Also, no principal is at risk as a result of these types of investments. Only the amount of unsettled net receivables is at risk. |
We are also exposed to credit risk indirectly through counterparty relationships struck by the underlying managers of investments in limited liability pools. This indirect exposure is mitigated through a due diligence process, which focuses on monitoring each investment fund to ensure the decision to invest in or maintain exposure to a fund continues to be suitable for the pension plans’ asset portfolios. |
While we do not target specific direct investment or derivative allocations, we have established guidelines on the percentage of pension trust assets that can be invested in certain categories to provide diversification by investment type fund and investment managers, as well as to manage overall liquidity. |
Assets within our qualified and registered pension plans in our U.S. and Canadian pension trusts were invested as follows: |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| DECEMBER 31, | | DECEMBER 31, | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | |
Fixed income | 12.2 | % | 11.4 | % | | | | | | | | | | | | | | |
Hedge funds | 60.6 | | 57.5 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Private equity and related funds | 25.3 | | 28.6 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Real estate and related funds | 1.4 | | 1.8 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Common and preferred stock and equity index instruments | 0.7 | | 0.9 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Accrued liabilities | (0.2 | ) | (0.2 | ) | | | | | | | | | | | | | | |
Total | 100 | % | 100 | % | | | | | | | | | | | | | | |
Assets within our nonregistered plans that we are allowed to manage were invested as follows: |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| DECEMBER 31, | | DECEMBER 31, | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | |
Equities | 52.8 | % | 55.5 | % | | | | | | | | | | | | | | |
Cash and cash equivalents | 47.2 | | 44.5 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total | 100 | % | 100 | % | | | | | | | | | | | | | | |
Valuation of Our Plan Assets |
The pension assets are stated at fair value based upon the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. We do not value pension investments based upon a forced or distressed sale scenario. Instead, we consider both observable and unobservable inputs that reflect assumptions applied by market participants when setting the exit price of an asset or liability in an orderly transaction within the principal market of that asset or liability. |
We value the pension plan assets based upon the observability of exit pricing inputs and classify pension plan assets based upon the lowest level input that is significant to the fair value measurement of the pension plan assets in their entirety. The fair value hierarchy we follow is outlined below; |
Level 1: Inputs are unadjusted quoted prices for identical assets and liabilities traded in an active market. |
Level 2: Inputs are quoted prices in non-active markets for which pricing inputs are observable either directly or indirectly at the reporting date. |
Level 3: Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. |
The pension assets are comprised of cash and short-term investments, derivative contracts, common and preferred stock and fund units. The fund units are typically limited liability interests in hedge funds, private equity funds, real estate funds and cash funds. Each of these assets participates in its own unique principal market. |
Cash and short-term investments, when held directly, are valued at cost. |
Common and preferred stocks are valued at exit prices quoted in the public markets. |
Derivative contracts held by our pension trusts are not publicly traded and each derivative contract is specifically negotiated with a unique financial counterparty and references either illiquid fund units or a unique number of synthetic units of a publicly reported market index. The derivative contracts are valued based upon valuation statements received from the financial counterparties. |
Fund units are valued based upon the net asset values of the funds which we believe represent the per-unit prices at which new investors are permitted to invest and the prices at which existing investors are permitted to exit. To the degree net asset values as of the end of the year have not been received, we use the most recently reported net asset values and adjust for market events and cash flows that have occurred between the interim date and the end of the year to estimate the fair values as of the end of the year. |
Assets that do not have readily available quoted prices in an active market require a higher degree of judgment to value and have a higher degree of risk that the value that could have been realized upon sale as of the valuation date could be different from the reported value than assets with observable pricing inputs. It is possible that the full extent of market price, liquidity, currency, interest rate, or credit risks may not be fully factored into the fair values of our pension plan assets that use significant unobservable inputs. Approximately $4.8 billion, or 85.8 percent, of our pension plan assets were classified as Level 3 assets as of December 31, 2014. |
We estimate the fair value of pension plan assets based upon the information available during the year-end reporting process. In some cases, primarily private equity funds, the information available consists of net asset values as of an interim date, cash flows between the interim date and the end of the year, and market events. When the difference is significant, we revise the year-end estimated fair value of pension plan assets to incorporate year-end net asset values received after we have filed our annual report on Form 10-K. We increased the fair value of pension assets in the second quarter of 2014 by $53 million, or 1.0 percent. |
The net pension plan assets, when categorized in accordance with this fair value hierarchy, are as follows: |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | |
2014 | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | |
| | | | | |
Pension trust investments: | | | | | | | | | | |
Fixed income instruments | $ | 646 | | $ | 36 | | $ | 3 | | $ | 685 | | | | | | | |
| | | | | |
Hedge funds | 103 | | (22 | ) | 3,333 | | 3,414 | | | | | | | |
| | | | | |
Private equity and related funds | — | | 3 | | 1,422 | | 1,425 | | | | | | | |
| | | | | |
Real estate and related funds | — | | — | | 82 | | 82 | | | | | | | |
| | | | | |
Common and preferred stock and equity index instruments | 25 | | 12 | | — | | 37 | | | | | | | |
| | | | | |
Total pension trust investments | $ | 774 | | $ | 29 | | $ | 4,840 | | $ | 5,643 | | | | | | | |
| | | | | |
Accrued liabilities, net | | | | (13 | ) | | | | | | |
Pension trust net assets | | | | $ | 5,630 | | | | | | | |
| | | | | |
Canadian nonregistered plan assets: | | | | | | | | | | |
Cash | $ | 7 | | $ | — | | $ | — | | $ | 7 | | | | | | | |
| | | | | |
Investments | 6 | | — | | — | | 6 | | | | | | | |
| | | | | |
Total Canadian nonregistered plan assets | $ | 13 | | $ | — | | $ | — | | $ | 13 | | | | | | | |
| | | | | |
Total plan assets | | | | $ | 5,643 | | | | | | | |
| | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | |
2013 | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | |
| | | | | |
Pension trust investments: | | | | | | | | | | |
Fixed income instruments | $ | 567 | | $ | 68 | | $ | 3 | | $ | 638 | | | | | | | |
| | | | | |
Hedge funds | — | | (7 | ) | 3,225 | | 3,218 | | | | | | | |
| | | | | |
Private equity and related funds | — | | (2 | ) | 1,606 | | 1,604 | | | | | | | |
| | | | | |
Real estate and related funds | — | | — | | 101 | | 101 | | | | | | | |
| | | | | |
Common and preferred stock and equity index instruments | 23 | | 29 | | — | | 52 | | | | | | | |
| | | | | |
Total pension trust investments | $ | 590 | | $ | 88 | | $ | 4,935 | | $ | 5,613 | | | | | | | |
| | | | | |
Accrued liabilities, net | | | | (13 | ) | | | | | | |
Pension trust net investments | | | | $ | 5,600 | | | | | | | |
| | | | | |
Canadian nonregistered plan assets: | | | | | | | | | | |
Cash | $ | 8 | | $ | — | | $ | — | | $ | 8 | | | | | | | |
| | | | | |
Investments | 6 | | — | | — | | 6 | | | | | | | |
| | | | | |
Total Canadian nonregistered plan assets | $ | 14 | | $ | — | | $ | — | | $ | 14 | | | | | | | |
| | | | | |
Total plan assets | | | | $ | 5,614 | | | | | | | |
| | | | | |
A reconciliation of the beginning and ending balances of the pension plan assets measured at fair value using significant unobservable inputs (Level 3) is presented below: |
| | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | |
| INVESTMENTS | | | |
| Hedge funds | | Private equity and | | Real estate and | | Fixed Income | | Total | | | | |
related funds | related funds | | | |
Balance as of December 31, 2012 | $ | 2,767 | | $ | 1,577 | | $ | 91 | | $ | 4 | | $ | 4,439 | | | | |
| | |
Net realized gains (losses) | 164 | | 90 | | (19 | ) | — | | 235 | | | | |
| | |
Net change in unrealized appreciation (depreciation) | 275 | | 138 | | 23 | | (1 | ) | 435 | | | | |
| | |
Purchases | 743 | | 188 | | 29 | | — | | 960 | | | | |
| | |
Sales | (645 | ) | (387 | ) | (23 | ) | — | | (1,055 | ) | | | |
| | |
Settlements | (79 | ) | — | | — | | — | | (79 | ) | | | |
| | |
Balance as of December 31, 2013 | 3,225 | | 1,606 | | 101 | | 3 | | 4,935 | | | | |
| | |
Net realized gains (losses) | 186 | | 128 | | 8 | | — | | 322 | | | | |
| | |
Net change in unrealized appreciation (depreciation) | 76 | | (130 | ) | (4 | ) | — | | (58 | ) | | | |
| | |
Purchases | 541 | | 177 | | 5 | | — | | 723 | | | | |
| | |
Sales | (540 | ) | (359 | ) | (28 | ) | — | | (927 | ) | | | |
| | |
Issuances | 52 | | — | | — | | — | | 52 | | | | |
| | |
Settlements | (132 | ) | — | | — | | — | | (132 | ) | | | |
| | |
Transfers, Out(1) | $ | (75 | ) | — | | — | | — | | (75 | ) | | | |
| | |
Balance as of December 31, 2014 | $ | 3,333 | | $ | 1,422 | | $ | 82 | | $ | 3 | | $ | 4,840 | | | | |
| | |
(1) One hedge fund completed an initial public offering during 2014; as such the security was transferred from Level 3 to Level 1 in 2014. | | | |
This table shows the fair value of the derivatives held by our pension trusts — which fund our qualified and registered plans — at the end of the last two years. |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | | | | | | | |
| DECEMBER 31, | | DECEMBER 31, | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | |
Equity index instruments | $ | 13 | | $ | 29 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Forward contracts | (32 | ) | (9 | ) | | | | | | | | | | | | |
Swaps | 436 | | 405 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 417 | | $ | 425 | | | | | | | | | | | | | |
| | | | | | | | | | | |
This table shows the aggregate notional amount of the derivatives held by our pension trusts — which fund our qualified and registered plans — at the end of the last two years. |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | | | | | | | |
| DECEMBER 31, | | DECEMBER 31, | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | |
Equity index instruments | $ | 361 | | $ | 399 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Forward contracts | 535 | | 638 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Swaps | 1,824 | | 1,568 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 2,720 | | $ | 2,605 | | | | | | | | | | | | | |
| | | | | | | | | | | |
ACTIVITY OF PLANS WE SPONSOR |
Net Periodic Benefit Cost (Credit) |
|
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS |
| PENSION | OTHER POSTRETIREMENT |
BENEFITS |
| 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | |
|
Net periodic benefit cost (credit): | | | | | | |
Service cost(1) | $ | 53 | | $ | 64 | | $ | 53 | | $ | 1 | | $ | 1 | | $ | 1 | |
|
Interest cost | 271 | | 244 | | 262 | | 10 | | 12 | | 15 | |
|
Expected return on plan assets | (467 | ) | (439 | ) | (422 | ) | — | | — | | — | |
|
Amortization of actuarial loss | 125 | | 221 | | 175 | | 12 | | 14 | | 13 | |
|
Amortization of prior service cost (credit)(2)(3) | 5 | | 7 | | 7 | | (161 | ) | (23 | ) | (127 | ) |
|
Recognition of curtailments, settlements and special termination benefits due to closures, restructuring or divestitures(1) | 9 | | — | | — | | — | | — | | — | |
|
Other | — | | — | | — | | (4 | ) | — | | 4 | |
|
Net periodic benefit cost (credit) | $ | (4 | ) | $ | 97 | | $ | 75 | | $ | (142 | ) | $ | 4 | | $ | (94 | ) |
|
(1) Service cost includes $2 million in 2014, $4 million in 2013 and $3 million in 2012 for employees that were part of the Real Estate Divestiture. These charges are included in our results of discontinued operations. Curtailment and special termination benefits are related to involuntary terminations, due to restructuring activities, as well as the Real Estate Divestiture. |
(2) During fourth quarter 2011, we ratified amendments to our postretirement medical and life insurance benefit plans for U.S. salaried employees that reduced or eliminated certain benefits that were available to both past and present employees. The company recognized a gain of $103 million in 2012 due to these benefit changes. This gain is included in other operating income and reflected in the amortization of prior service credit in the table above. The benefit related to the fourth quarter 2011 amendments was fully recognized in first and second quarter 2012. |
(3) During fourth quarter 2013, the decision was ratified to eliminate Company funding of the Post-Medicare Health Reimbursement Account (HRA) for certain salaried retirees after 2014. This change was communicated to affected retirees during January 2014. As a result, we recognized a pretax gain of $151 million in 2014 from this plan amendment. |
Estimated Amortization from Cumulative Other Comprehensive Loss in 2015 |
Amortization of the net actuarial loss and prior service cost (credit) of our pension and postretirement benefit plans will affect our other comprehensive income in 2015. The net effect of the estimated amortization will be an increase in net periodic benefit costs or a decrease in net periodic benefit credits in 2015. |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | | | | |
| PENSION | | OTHER POSTRETIREMENT BENEFITS | | TOTAL | | | | | | | | | | |
| | | | | | | | |
Net actuarial loss | $ | 178 | | $ | 10 | | $ | 188 | | | | | | | | | | |
| | | | | | | | |
Prior service cost (credit) | 4 | | (9 | ) | (5 | ) | | | | | | | | | |
| | | | | | | | |
Net effect cost | $ | 182 | | $ | 1 | | $ | 183 | | | | | | | | | | |
| | | | | | | | |
Expected Pension Funding |
Established funding standards govern the funding requirements for our qualified and registered pension plans. We fund the benefit payments of our nonqualified and nonregistered plans as benefit payments come due. |
During 2015, based on estimated year-end asset values and projections of plan liabilities, we expect to: |
| | | | | | | | | | | | | | | | | | |
• | be required to contribute approximately $38 million for our Canadian registered plan; | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | be required to contribute or make benefit payments for our Canadian nonregistered plans of $3 million; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | make benefit payments of approximately $19 million for our U.S. nonqualified pension plans. | | | | | | | | | | | | | | | | | |
|
We do not anticipate a contribution being required for our U.S. qualified pension plan for 2015. |
Expected Postretirement Benefit Funding |
Our retiree medical and life insurance plans are unfunded. Benefits for these plans are paid from our general assets as they come due. We expect to make benefit payments of $26 million for our U.S. and Canadian other postretirement benefit plans in 2015, including $9 million expected to be required to cover benefit payments under collectively bargained contractual obligations. |
Estimated Projected Benefit Payments for the Next 10 Years |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | | | | | | | |
| PENSION | OTHER | | | | | | | | | | | | |
POSTRETIREMENT | | | | | | | | | | | | |
BENEFITS | | | | | | | | | | | | |
2015 | $ | 348 | | $ | 26 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2016 | $ | 354 | | $ | 25 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2017 | $ | 361 | | $ | 24 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2018 | $ | 370 | | $ | 23 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2019 | $ | 379 | | $ | 22 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2020-2024 | $ | 1,979 | | $ | 98 | | | | | | | | | | | | | |
| | | | | | | | | | | |
ACTUARIAL ASSUMPTIONS |
We use actuarial assumptions to estimate our benefit obligations and our net periodic benefit costs. |
Rates We Use in Estimating Our Benefit Obligations |
We use assumptions to estimate our benefit obligations that include: |
| | | | | | | | | | | | | | | | | | |
• | discount rates in the U.S. and Canada, including discount rates used to value lump sum distributions; | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | rates of compensation increases for our salaried and hourly employees in the U.S. and Canada; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | estimated percentages of eligible retirees who will elect lump sum payments of benefits. | | | | | | | | | | | | | | | | | |
Discount Rates and Rates of Compensation Increase Used in Estimating Our Pension and Other Postretirement Benefit Obligation |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| PENSION | OTHER POSTRETIREMENT | | | | | | | | | | |
BENEFITS | | | | | | | | | | |
| DECEMBER 31, | | DECEMBER 31, | | DECEMBER 31, | | DECEMBER 31, | | | | | | | | | | | |
2014 | 2013 | 2014 | 2013 | | | | | | | | | | |
Discount rates: | | | | | | | | | | | | | | |
United States | 4.1 | % | 4.9 | % | 3.6 | % | 4 | % | | | | | | | | | | |
Canada | 3.9 | % | 4.7 | % | 3.8 | % | 4.6 | % | | | | | | | | | | |
Lump sum distributions (US salaried and nonqualified plans only)(1) | PPA Table | PPA Table | N/A | | N/A | | | | | | | | | | | |
| | | | | | | | | |
Rate of compensation increase: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Salaried: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
United States | 2.50% for 2014, 2015 | 2.50% for 2013, 2014 | N/A | | N/A | | | | | | | | | | | |
and 3.50% thereafter | and 3.50% thereafter | | | | | | | | | | |
Canada | 2.50% for 2014, 2015 | 2.50% for 2013, 2014 | N/A | | N/A | | | | | | | | | | | |
and 3.50% thereafter | and 3.50% thereafter | | | | | | | | | | |
Hourly: | | | | | | | | | | | | | | |
United States | 3 | % | 3 | % | 3 | % | 3 | % | | | | | | | | | | |
Canada | 3.25 | % | 3.25 | % | N/A | | N/A | | | | | | | | | | | |
| | | | | | | | | |
Election of lump sum or installment distributions (US salaried and nonqualified plans only) | 60 | % | 60 | % | N/A | | N/A | | | | | | | | | | | |
| | | | | | | | | |
(1) The PPA Phased Table: Interest and mortality assumptions as mandated by Pension Protection Act of 2006 including the phase out of the prior interest rate basis in 2013. | | | | | | | | | | |
Estimating Our Net Periodic Benefit Costs |
The assumptions we use to estimate our net periodic benefit costs include: |
| | | | | | | | | | | | | | | | | | |
• | discount rates in the U.S. and Canada, including discount rates used to value lump sum distributions; | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | expected returns on our plan assets; | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | rates of compensation increases for our salaried and hourly employees in the U.S. and Canada; and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | estimated percentages of eligible retirees who will elect lump sum payments of benefits. | | | | | | | | | | | | | | | | | |
This table shows the discount rates, expected returns on our plan assets and rates of compensation increases we used the last three years to estimate our net periodic benefit costs. |
Rates Used to Estimate Our Net Periodic Benefit Costs |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| PENSION | OTHER | | | | | | | | | | | | |
POSTRETIREMENT | | | | | | | | | | | | |
BENEFITS | | | | | | | | | | | | |
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | | | | | | | | | | | | |
Discount rates: | | | | | | | | | | | | | | | | | | |
United States | 4.90% for the first half of 2014 and 4.40% for the second half of 2014 | 3.70% | 4.50% | 4.00% | 3.00% | 4.10% | | | | | | | | | | | | |
Salaried – lump sum distributions (U.S. salaried and nonqualified plan only)(1) | PPA Table | PPA phased | PPA phased | N/A | N/A | N/A | | | | | | | | | | | | |
Table | Table | | | | | | | | | | | | |
Canada | 4.70% | 4.10% | 4.90% | 4.60% | 4.00% | 4.80% | | | | | | | | | | | | |
Expected return on plan assets: | | | | | | | | | | | | | | | | | | |
Qualified/registered plans | 9.00% | 9.00% | 9.00% | | | | | | | | | | | | | | | |
Nonregistered plans (Canada only) | 3.50% | 3.50% | 3.50% | | | | | | | | | | | | | | | |
Rate of compensation increase: | | | | | | | | | | | | | | | | | | |
Salaried: | | | | | | | | | | | | | | | | | | |
United States | 2.50% for 2014 | 2.50% for 2013 | 2.00% for 2012 | N/A | N/A | N/A | | | | | | | | | | | | |
and 3.50% thereafter | and 3.50% thereafter | and 3.50% thereafter | | | | | | | | | | | | |
Canada | 2.50% for 2014 | 2.50% for 2013 | 2.10% for 2012 | N/A | N/A | N/A | | | | | | | | | | | | |
and 3.50% thereafter | and 3.50% thereafter | and 3.50% thereafter | | | | | | | | | | | | |
Hourly: | | | | | | | | | | | | | | | | | | |
United States | 3.00% | 3.00% | 3.00% | 3.00% | 3.00% | 3.00% | | | | | | | | | | | | |
Canada | 3.25% | 3.25% | 3.25% | N/A | N/A | N/A | | | | | | | | | | | | |
Election of lump sum distributions (U.S. salaried and nonqualified plans only) | 60.00% | 56.00% | 60.00% | N/A | N/A | N/A | | | | | | | | | | | | |
(1) PPA Phased Table: Interest and mortality assumptions as mandated by Pension Protection Act of 2006 including the phase out of the prior interest rate basis in 2013. | | | | | | | | | | | | |
Expected Return on Plan Assets |
We estimate the expected long-term return on assets for our: |
| | | | | | | | | | | | | | | | | | |
• | qualified and registered pension plans and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | nonregistered plans. | | | | | | | | | | | | | | | | | |
Qualified and Registered Pension Plans. Our expected long-term rate of return for plan assets as of December 31, 2014, is comprised of: |
| | | | | | | | | | | | | | | | | | |
• | a 7.3 percent assumed return from direct investments and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | a 1.7 percent assumed return from derivatives. | | | | | | | | | | | | | | | | | |
Determining our expected return: |
| | | | | | | | | | | | | | | | | | |
• | requires a high degree of judgment, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | uses our historical fund returns as a base and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | places added weight on more recent pension plan asset performance. | | | | | | | | | | | | | | | | | |
Over the 30 years it has been in place, our U.S. pension trust investment strategy has achieved a 14.6 percent net compound annual return rate. The past 5 years, our net compounded annual return was 10.6 percent. |
Nonregistered plans. Canadian tax rules require that 50 percent of the assets for nonregistered plans go to a noninterest-bearing refundable tax account. As a result, the return we earn investing the other 50 percent is spread over 100 percent of the assets. |
Our expected long-term annual rate of return on the equity portion of this portfolio — the portion we are allowed to invest and manage — is 7 percent. We base that expected rate of return on: |
| | | | | | | | | | | | | | | | | | |
• | historical experience and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | future return expectations. | | | | | | | | | | | | | | | | | |
Our expected overall annual return on assets that fund our nonregistered plans is 3.5 percent. |
Actual Returns on Assets Held by Our Pension Trusts |
Based on valuations received as of year-end, our total actual return on assets held by our pension trusts was a gain of approximately $368 million in 2014. These trusts fund our qualified, registered and a portion of our nonregistered pension plans. |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
DOLLAR AMOUNTS IN MILLIONS | | | | | | | | | |
| 2014 | | 2013 | | 2012 | | | | | | | | | | |
| | | | | | | | |
Direct investments | $ | 258 | | $ | 568 | | $ | 324 | | | | | | | | | | |
| | | | | | | | |
Derivatives | 110 | | 240 | | 166 | | | | | | | | | | |
| | | | | | | | |
Total | $ | 368 | | $ | 808 | | $ | 490 | | | | | | | | | | |
| | | | | | | | |
HEALTH CARE COSTS |
Rising costs of health care affect the costs of our other postretirement plans. |
Health Care Cost Trend Rates |
We use assumptions about health care cost trend rates to estimate the cost of benefits we provide. In 2014, the assumed weighted health care cost trend rate was: |
| | | | | | | | | | | | | | | | | | |
• | 6.4 percent in the U.S. and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | 5.7 percent in Canada. | | | | | | | | | | | | | | | | | |
This table shows the assumptions we use in estimating the annual cost increase for health care benefits we provide. |
Assumptions We Use in Estimating Health Care Benefit Costs |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| 2014 | 2013 | | | | | | | | | | |
| U.S. | | CANADA | | U.S. | | CANADA | | | | | | | | | | | |
| | | | | | | | | |
Weighted health care cost trend rate assumed for next year | 6.3 | % | 5.6 | % | 6.4 | % | 5.7 | % | | | | | | | | | | |
Rate to which cost trend rate is assumed to decline (ultimate trend rate) | 4.5 | % | 4.3 | % | 4.5 | % | 4.3 | % | | | | | | | | | | |
Year that the rate reaches the ultimate trend rate | 2029 | | 2028 | | 2029 | | 2028 | | | | | | | | | | | |
| | | | | | | | | |
The assumed health care cost trend rate can significantly influence projected postretirement benefit plan payments. Some of the benefits are defined dollar amounts and are unaffected by changes in health care costs. To determine the health care cost trend rate, we look at historical market experience, current environment and future expectations. The following table demonstrates the effect a 1 percent change in assumed health care cost trend rates would have with all other assumptions remaining constant. |
Effect of a 1 Percent Change in Health Care Costs |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
AS OF DECEMBER 31, 2014 (DOLLAR AMOUNTS IN MILLIONS) | | | | | | | | | | | | |
| 1% INCREASE | | 1% DECREASE | | | | | | | | | | | | | |
| | | | | | | | | | | |
Effect on total service and interest cost components | less than $1 | | less than $(1) | | | | | | | | | | | | | |
| | | | | | | | | | | |
Effect on accumulated postretirement benefit obligation | $ | 14 | | $ | (12 | ) | | | | | | | | | | | | |
| | | | | | | | | | | |
UNION-ADMINISTERED MULTIEMPLOYER BENEFIT PLANS |
We contribute to multiemployer defined benefit plans under the terms of collective-bargaining agreements that cover some of our union-represented employees. |
The U.S. plans are established to provide retirement income for eligible employees who meet certain age and service requirements at retirement. The benefits are generally based on: |
| | | | | | | | | | | | | | | | | | |
• | a percentage of the employer contributions paid into the plan on the eligible employee's behalf or | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | a formula considering an eligible employee's service, the total contributions paid on their behalf plus a benefit based on the value of an eligible employee's account. | | | | | | | | | | | | | | | | | |
The Canadian plan is a negotiated cost defined benefit plan. The plan is established to provide retirement income for members based on their number of years of service in the industry, and the benefit rate that applied to that service. |
|
The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: |
| | | | | | | | | | | | | | | | | | |
• | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | If we choose to stop participating in some of the multiemployer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. | | | | | | | | | | | | | | | | | |
As of December 31, 2014, these plans covered approximately 1,200 of our employees. |
Our contributions were: |
| | | | | | | | | | | | | | | | | | |
• | $4 million in 2014, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $4 million in 2013 and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $4 million in 2012. | | | | | | | | | | | | | | | | | |
There have been no significant changes that affect the comparability of the 2014, 2013 and 2012 contributions. None of our contributions exceeded more than 5 percent of any plan's total contributions during 2014, 2013 or 2012. |
DEFINED CONTRIBUTION PLANS |
We sponsor various defined contribution plans for our U.S. and Canadian salaried and hourly employees. Our contributions to these plans were: |
| | | | | | | | | | | | | | | | | | |
• | $20 million in 2014, | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $20 million in 2013 and | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
• | $19 million in 2012. | | | | | | | | | | | | | | | | | |