Pension and Other Postretirement Benefit Plans | 12 Months Ended |
Dec. 31, 2014 |
Compensation and Retirement Disclosure [Abstract] | |
Pension and Other Postretirement Benefit Plans | Note 14. Pension and Other Postretirement Benefit Plans |
We have multiple contributory and non-contributory defined benefit pension plans covering a significant portion of our U.S. and Canadian employees. We also sponsor a number of OPEB plans (e.g., defined benefit health care and life insurance plans) for retirees at certain locations. Benefits are based on years of service and, depending on the plan, average compensation earned by employees either during their last years of employment or over their careers. Our plan assets and cash contributions to the plans have been sufficient to provide pension benefits to participants and meet the funding requirements of the Employee Retirement Income Security Act of 1974 in the United States as well as applicable legislation in Canada. In particular, the cash contributions required for our material registered Canadian pension plans are specified in the funding relief regulations with regards to the solvency deficits in the affected plans, as further discussed below under “Canadian pension funding.” |
In addition to the previously described plans, we have a number of defined contribution plans covering substantially all of our U.S. employees and a significant portion of our Canadian employees. Under the U.S. defined contribution plan, employees are allowed to make contributions that we match. In addition, under the U.S. defined contribution plan, most employees also receive an automatic company contribution, regardless of the employee’s contribution. The amount of the automatic company contribution is a percentage of the employee’s pay, determined based on age and years of service. The Canadian registered defined contribution plans provide for mandatory contributions by employees and by us, as well as opportunities for employees to make additional optional contributions and receive, in some cases, matching contributions on those optional amounts. Our expense for the defined contribution plans totaled $22 million in 2014 and 2013, respectively, and totaled $21 million in 2012. |
Certain of the above plans are covered under collective bargaining agreements. |
The following tables include both our foreign (Canada and South Korea) and domestic (U.S.) plans. The assumptions used to measure the obligations of each of our foreign and domestic plans are not significantly different from each other, with the exception of the health care trend rates, which are presented below. |
The changes in our pension and OPEB obligations and plan assets for the years ended December 31, 2014 and 2013 and the funded status and reconciliation of amounts recognized in our Consolidated Balance Sheets as of December 31, 2014 and 2013 were as follows: |
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| Pension Plans | | OPEB Plans | | | | | | | | | | | | |
(In millions) | 2014 | | | 2013 | | | | 2014 | | | 2013 | | | | | | | | | | | | | | |
Change in benefit obligations: | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligations as of beginning of year | $ | 6,004 | | | $ | 6,724 | | | | $ | 310 | | | $ | 424 | | | | | | | | | | | | | | |
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Service cost | | 26 | | | | 33 | | | | | 1 | | | | 3 | | | | | | | | | | | | | | |
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Interest cost | | 274 | | | | 274 | | | | | 11 | | | | 16 | | | | | | | | | | | | | | |
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Actuarial loss (gain) | | 788 | | | | (208 | ) | | | | 10 | | | | (79 | ) | | | | | | | | | | | | | |
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Participant contributions | | 11 | | | | 18 | | | | | 4 | | | | 5 | | | | | | | | | | | | | | |
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Plan amendments | | — | | | | 18 | | | | | (91 | ) | | | (21 | ) | | | | | | | | | | | | | |
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Curtailments | | 4 | | | | 7 | | | | | — | | | | — | | | | | | | | | | | | | | |
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Settlements | | (5 | ) | | | (6 | ) | | | | — | | | | — | | | | | | | | | | | | | | |
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Benefits paid | | (440 | ) | | | (489 | ) | | | | (23 | ) | | | (27 | ) | | | | | | | | | | | | | |
Effect of foreign currency exchange rate changes | | (433 | ) | | | (367 | ) | | | | (12 | ) | | | (11 | ) | | | | | | | | | | | | | |
Benefit obligations as of end of year | | 6,229 | | | | 6,004 | | | | | 210 | | | | 310 | | | | | | | | | | | | | | |
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Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets as of beginning of year | | 5,013 | | | | 5,175 | | | | | — | | | | — | | | | | | | | | | | | | | |
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Actual return on plan assets | | 450 | | | | 472 | | | | | — | | | | — | | | | | | | | | | | | | | |
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Employer contributions | | 142 | | | | 133 | | | | | 19 | | | | 22 | | | | | | | | | | | | | | |
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Participant contributions | | 11 | | | | 18 | | | | | 4 | | | | 5 | | | | | | | | | | | | | | |
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Settlements | | (5 | ) | | | (6 | ) | | | | — | | | | — | | | | | | | | | | | | | | |
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Benefits paid | | (440 | ) | | | (489 | ) | | | | (23 | ) | | | (27 | ) | | | | | | | | | | | | | |
Effect of foreign currency exchange rate changes | | (363 | ) | | | (290 | ) | | | | — | | | | — | | | | | | | | | | | | | | |
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Fair value of plan assets as of end of year | | 4,808 | | | | 5,013 | | | | | — | | | | — | | | | | | | | | | | | | | |
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Funded status as of end of year | $ | (1,421 | ) | | $ | (991 | ) | | | $ | (210 | ) | | $ | (310 | ) | | | | | | | | | | | | | |
Amounts recognized in our Consolidated Balance Sheets consisted of: | | | | | | | | | | | | | | | | | | | | | | | | | |
Other assets | $ | 5 | | | $ | 17 | | | | $ | — | | | $ | — | | | | | | | | | | | | | | |
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Accounts payable and accrued liabilities | | (4 | ) | | | (3 | ) | | | | (16 | ) | | | (21 | ) | | | | | | | | | | | | | |
Pension and OPEB obligations | | (1,422 | ) | | | (1,005 | ) | | | | (194 | ) | | | (289 | ) | | | | | | | | | | | | | |
Net obligations recognized | $ | (1,421 | ) | | $ | (991 | ) | | | $ | (210 | ) | | $ | (310 | ) | | | | | | | | | | | | | |
The total benefit obligations and the total fair value of plan assets for pension plans with benefit obligations in excess of plan assets were $5,947 million and $4,521 million, respectively, as of December 31, 2014, and were $5,079 million and $4,071 million, respectively, as of December 31, 2013. The total accumulated benefit obligations and the total fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5,765 million and $4,417 million, respectively, as of December 31, 2014, and were $5,014 million and $4,071 million, respectively, as of December 31, 2013. The total accumulated benefit obligations for all pension plans were $6,150 million and $5,931 million as of December 31, 2014 and 2013, respectively. |
Plan amendments |
In 2014, we modified our U.S. OPEB plan, whereby unionized participants, upon reaching Medicare eligibility, will be provided comparable Medicare coverage via a Medicare Exchange program, effective January 1, 2015. This plan amendment resulted in a prior service credit of $91 million. For additional information on this plan amendment, see Note 8, “Accumulated Other Comprehensive Loss.” In 2013, we also approved an amendment to our U.S. OPEB plan, effective January 1, 2014, whereby salaried retirees, upon reaching Medicare eligibility, are provided comparable Medicare coverage via a Medicare Exchange program. This plan amendment resulted in a prior service credit of $21 million and an actuarial gain of $36 million. |
In addition, following the restart of our previously closed Gatineau paper mill, 119 employees were reinstated to one of our pension plans in 2013, which resulted in a prior service cost of $18 million. |
Components of net periodic benefit cost |
The components of net periodic benefit cost relating to our pension and OPEB plans for the years ended December 31, 2014, 2013 and 2012 were as follows: |
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| Pension Plans | | OPEB Plans | | | | |
(In millions) | 2014 | | | 2013 | | | 2012 | | | | 2014 | | | 2013 | | | 2012 | | | | | | |
Service cost | $ | 26 | | | $ | 33 | | | $ | 36 | | | | $ | 1 | | | $ | 3 | | | $ | 3 | | | | | | |
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Interest cost | | 274 | | | | 274 | | | | 312 | | | | | 11 | | | | 16 | | | | 20 | | | | | | |
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Expected return on plan assets | | (300 | ) | | | (308 | ) | | | (340 | ) | | | | — | | | | — | | | | — | | | | | | |
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Amortization of prior service credits | | (2 | ) | | | (2 | ) | | | — | | | | | (11 | ) | | | (1 | ) | | | — | | | | | | |
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Amortization of actuarial losses (gains) | | 9 | | | | 25 | | | | — | | | | | (4 | ) | | | (2 | ) | | | — | | | | | | |
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Net periodic benefit cost before special events | | 7 | | | | 22 | | | | 8 | | | | | (3 | ) | | | 16 | | | | 23 | | | | | | |
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Curtailments and settlements | | 4 | | | | 3 | | | | 21 | | | | | — | | | | — | | | | — | | | | | | |
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| $ | 11 | | | $ | 25 | | | $ | 29 | | | | $ | (3 | ) | | $ | 16 | | | $ | 23 | | | | | | |
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The prior service credits and the actuarial gains and losses are amortized to “Cost of sales, excluding depreciation, amortization and distribution costs” in our Consolidated Statements of Operations, over the expected average remaining service lifetime or the average future lifetime, as applicable, of the respective plans. We estimate that $78 million of actuarial losses and $15 million of prior service credits will be amortized from accumulated other comprehensive loss into our Consolidated Statements of Operations in 2015. |
The following is a summary of the special events that impacted our net periodic benefit costs as a curtailment or settlement for the years ended December 31, 2014, 2013 and 2012: |
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| Pension Plans | | OPEB Plans | | | | |
(In millions) | 2014 | | | 2013 | | | 2012 | | | | 2014 | | | 2013 | | | 2012 | | | | | | |
Settlements resulting from lump-sum payouts | $ | — | | | $ | — | | | $ | 10 | | | | $ | — | | | $ | — | | | $ | — | | | | | | |
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Curtailments resulting from closure related and other workforce reductions | | 4 | | | | 3 | | | | 11 | | | | | — | | | | — | | | | — | | | | | | |
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| $ | 4 | | | $ | 3 | | | $ | 21 | | | | $ | — | | | $ | — | | | $ | — | | | | | | |
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In 2014, we recorded net charges for curtailments related to the permanent closure of our Laurentide and Iroquois Falls paper mills (eliminating approximately 470 positions and resulting in the curtailment of two of our pension plans). The net costs of these curtailments were included in “Closure costs, impairment, and other related charges” in our Consolidated Statements of Operations for the year ended December 31, 2014. |
In 2013, we recorded charges for curtailments primarily related to an extended period of market-related outage at our Fort Frances paper mill, which was permanently closed on May 6, 2014, resulting in the elimination of approximately 150 positions. The cost of this curtailment was included in “Closure costs, impairment, and other related charges” in our Consolidated Statements of Operations for the year ended December 31, 2013. |
In 2012, we recorded charges for curtailments and settlements primarily related to the indefinite idling of part of our Mersey operations (eliminating 176 positions), a workforce reduction at our Baie-Comeau paper mill (eliminating 90 positions) and the lump-sum payments for the vested terminated employees in certain of our U.S. pension plans. The cost of these curtailments and settlements was included in “Closure costs, impairment and other related charges” in our Consolidated Statements of Operations for the year ended December 31, 2012. |
Assumptions used to determine benefit obligations and net periodic benefit cost |
The weighted-average assumptions used to determine the benefit obligations at the measurement dates and the net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012 were as follows: |
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| Pension Plans | | OPEB Plans | | | | | | | | | | | | |
| 2014 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2012 | | | | | | | | | | | | | |
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Benefit obligations: | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | 4 | % | | 4.9 | % | | 4.3 | % | | 4 | % | | 5 | % | | 4.2 | % | | | | | | | | | | | | |
Rate of compensation increase | 2.5 | % | | 2.5 | % | | 2.5 | % | | | | | | | | | | | | | | | | | | | | | |
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Net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | 4.9 | % | | 4.3 | % | | 4.9 | % | | 5 | % | | 4.2 | % | | 4.9 | % | | | | | | | | | | | | |
Expected return on assets | 6.5 | % | | 6.3 | % | | 6.5 | % | | | | | | | | | | | | | | | | | | | | | |
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Rate of compensation increase | 2.5 | % | | 2.5 | % | | 1.2 | % | | | | | | | | | | | | | | | | | | | | | |
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The discount rate for our domestic and foreign plans was determined with a model that develops a hypothetical high-quality bond portfolio, where the bonds are theoretically purchased to settle the expected benefit payments of the plans. The discount rate reflects the single rate that produces the same discounted values as the value of the theoretical bond portfolio. In determining the expected return on assets, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. In determining the rate of compensation increase, we reviewed historical salary increases and promotions, while considering current industry conditions, the terms of collective bargaining agreements with our employees and the outlook for our industry. In determining the life expectancy rate of our domestic and foreign plans, we used recently-issued actuarially-determined mortality tables and improvement scales. For the foreign plans, the mortality tables were adjusted with the result of our historical mortality experience study. Consistent with our future expectations, the rate used reflects a longer life expectancy for the employees who participate in our pension and OPEB plans. |
The assumed health care cost trend rates used to determine the benefit obligations for our domestic and foreign OPEB plans as of December 31, 2014 and 2013 were as follows: |
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| 2014 | | 2013 | | | | | | | | | | | | | | | | |
| Domestic Plans | Foreign Plans | | Domestic Plans | Foreign Plans | | | | | | | | | | | | | | | | |
Health care cost trend rate assumed for next year | 7.2 | % | | 4.4 | % | | | 7.5 | % | | 4.4 | % | | | | | | | | | | | | | | | | | |
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | 4.5 | % | | 3.8 | % | | | 4.5 | % | | 3.8 | % | | | | | | | | | | | | | | | | | |
Year that the rate reaches the ultimate trend rate | 2028 | | | 2033 | | | | 2028 | | | 2033 | | | | | | | | | | | | | | | | | | |
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For the health care cost trend rates, we considered historical trends for these costs, actual experience of the plans, recently enacted health care legislation as well as future expectations. |
Variations in this health care cost trend rate can have a significant effect on the amounts reported. A 1% change in this assumption would have had the following impact on our 2014 OPEB obligation and costs for our domestic and foreign plans: |
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| 1% Increase | | 1% Decrease |
(Dollars in millions) | Domestic Plans | Foreign Plans | | Domestic Plans | Foreign Plans |
OPEB obligation | $ | 4 | | | 5 | % | | $ | 7 | | | 5 | % | | | $ | (3 | ) | | (4 | )% | | $ | (6 | ) | | (4 | )% | |
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Service and interest costs | $ | 1 | | | 15 | % | | $ | — | | | 5 | % | | | $ | (1 | ) | | (13 | )% | | $ | — | | | (4 | )% | |
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Fair value of plan assets |
The fair value of plan assets held by our pension plans as of December 31, 2014 was as follows: |
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(In millions) | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. companies | $ | 678 | | | $ | 678 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | |
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Non-U.S. companies | | 1,015 | | | | 723 | | | | 292 | | | | — | | | | | | | | | | | | | | | |
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Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate and government securities | | 2,715 | | | | 494 | | | | 2,221 | | | | — | | | | | | | | | | | | | | | |
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Asset-backed securities | | 110 | | | | — | | | | 110 | | | | — | | | | | | | | | | | | | | | |
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Bank loans/foreign annuities | | 4 | | | | — | | | | — | | | | 4 | | | | | | | | | | | | | | | |
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Real estate | | 47 | | | | — | | | | — | | | | 47 | | | | | | | | | | | | | | | |
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Cash and cash equivalents | | 197 | | | | 197 | | | | — | | | | — | | | | | | | | | | | | | | | |
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Accrued interest and dividends | | 42 | | | | — | | | | 42 | | | | — | | | | | | | | | | | | | | | |
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| $ | 4,808 | | | $ | 2,092 | | | $ | 2,665 | | | $ | 51 | | | | | | | | | | | | | | | |
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The fair value of plan assets held by our pension plans as of December 31, 2013 was as follows: |
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(In millions) | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. companies | $ | 751 | | | $ | 751 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | |
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Non-U.S. companies | | 912 | | | | 636 | | | | 276 | | | | — | | | | | | | | | | | | | | | |
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Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate and government securities | | 2,611 | | | | 240 | | | | 2,371 | | | | — | | | | | | | | | | | | | | | |
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Asset-backed securities | | 161 | | | | — | | | | 161 | | | | — | | | | | | | | | | | | | | | |
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Bank loans/foreign annuities | | 40 | | | | — | | | | — | | | | 40 | | | | | | | | | | | | | | | |
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Real estate | | 48 | | | | — | | | | — | | | | 48 | | | | | | | | | | | | | | | |
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Cash and cash equivalents | | 444 | | | | 444 | | | | — | | | | — | | | | | | | | | | | | | | | |
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Accrued interest and dividends | | 46 | | | | — | | | | 46 | | | | — | | | | | | | | | | | | | | | |
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| $ | 5,013 | | | $ | 2,071 | | | $ | 2,854 | | | $ | 88 | | | | | | | | | | | | | | | |
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Equity securities include large-cap and mid-cap publicly-traded companies mainly located in the United States, Canada and other developed countries, as well as commingled equity funds invested in the same types of securities. The fair value of the equity securities is determined based on quoted market prices (Level 1) or the net asset values per share that are derived from the accumulated fair values of the equity securities within the commingled funds (Level 2). |
Debt securities include corporate bonds of U.S. and Canadian companies from diversified industries, bonds and Treasuries issued by the U.S. government and the Canadian federal and provincial governments, asset-backed securities and commingled fixed income funds invested in these same types of securities. The fair value of the debt securities is determined based on quoted market prices (Level 1), market-corroborated inputs such as matrix prices, yield curves and indices (Level 2) or the net asset values per share that are derived from the accumulated fair values of the debt securities within the commingled funds (Level 2). Bank loan investments are primarily located in the U.S. The fair value of bank loans is determined based on the mid-point of the bid and ask price points (Level 3). |
Real estate investments are located in Canada. The fair value of the real estate is determined based on an appraisal completed by a national real estate firm. Those appraisers use several valuation concepts, including the cost approach, market approach and income approach (Level 3). |
The fair value of accrued interest and dividends is determined based on market-corroborated inputs such as declared dividends and stated interest rates (Level 2). |
The changes in Level 3 pension plan assets for the years ended December 31, 2014 and 2013 were as follows: |
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(In millions) | Bank Loans/Foreign | Real Estate | Total | | | | | | | | | | | | | | | | | |
Annuities | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2012 | $ | 41 | | | $ | 46 | | | $ | 87 | | | | | | | | | | | | | | | | | | | |
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Unrealized gains relating to assets held as of December 31, 2013 | | 2 | | | | 5 | | | | 7 | | | | | | | | | | | | | | | | | | | |
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Purchases | | 40 | | | | — | | | | 40 | | | | | | | | | | | | | | | | | | | |
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Sales | | (41 | ) | | | — | | | | (41 | ) | | | | | | | | | | | | | | | | | | |
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Effect of foreign currency exchange rate changes | | (2 | ) | | | (3 | ) | | | (5 | ) | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2013 | | 40 | | | | 48 | | | | 88 | | | | | | | | | | | | | | | | | | | |
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Unrealized (losses) gains relating to assets held as of December 31, 2014 | | (2 | ) | | | 3 | | | | 1 | | | | | | | | | | | | | | | | | | | |
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Realized gains | | 2 | | | | — | | | | 2 | | | | | | | | | | | | | | | | | | | |
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Purchases | | 11 | | | | — | | | | 11 | | | | | | | | | | | | | | | | | | | |
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Sales | | (44 | ) | | | — | | | | (44 | ) | | | | | | | | | | | | | | | | | | |
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Effect of foreign currency exchange rate changes | | (3 | ) | | | (4 | ) | | | (7 | ) | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2014 | $ | 4 | | | $ | 47 | | | $ | 51 | | | | | | | | | | | | | | | | | | | |
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Long-term strategy and objective |
Our investment strategy and objective is to maximize the long-term rate of return on our plan assets within an acceptable level of risk in order to meet our current and future obligations to pay benefits to qualifying employees and their beneficiaries while minimizing and stabilizing pension benefit costs and contributions. One way we accomplish this objective is to diversify our plan investments. Diversification of assets is achieved through strategic allocations to various asset classes, as well as various investment styles within these asset classes, and by retaining multiple, experienced third-party investment management firms with complementary investment styles and philosophies to implement these allocations. Risk is further managed by reviewing our investment policies at least annually and monitoring our fund managers at least quarterly for compliance with mandates and performance measures. A series of permitted and prohibited investments are listed in our respective investment policies, which are provided to our fund managers. The use of derivative financial instruments for speculative purposes and investments in the equity or debt securities of Resolute Forest Products and its affiliates are prohibited. |
We have established a target asset allocation and an allowable range from such target asset allocation for our plans based upon analysis of risk/return tradeoffs and correlations of asset mixes given long-term historical returns, prospective capital market returns, forecasted benefit payments and the forecasted timing of those payments. The targeted asset allocation of the plan assets is designed to hedge the change in the pension liabilities resulting from fluctuations in the discount rate by investing in debt and other securities, while also generating excess returns required to reduce the unfunded pension deficit by investing in equity securities with higher potential returns. The targeted asset allocation of the plan assets is 50% equity securities, with an allowable range of 30% to 60%, and 50% debt and other securities, with an allowable range of 40% to 70%, including up to 5% in short-term instruments required for near-term liquidity needs. Approximately 60% of the equity securities are targeted to be invested in the U.S. and Canada, with the balance in other developed and emerging countries. Substantially all of the debt securities are targeted to be invested in the U.S. and Canada. The asset allocation for each plan is reviewed periodically and rebalanced toward the targeted asset mix when the fair value of the investments within an asset class falls outside the predetermined range. |
Expected benefit payments and future contributions |
As of December 31, 2014, benefit payments expected to be paid over the next 10 years are as follows: |
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(In millions) | Pension Plans (1) | OPEB Plans | | | | | | | | | | | | | | | | | | | | | |
2015 | $ | 406 | | | $ | 16 | | | | | | | | | | | | | | | | | | | | | | | |
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2016 | | 407 | | | | 16 | | | | | | | | | | | | | | | | | | | | | | | |
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2017 | | 407 | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | |
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2018 | | 407 | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | |
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2019 | | 406 | | | | 14 | | | | | | | | | | | | | | | | | | | | | | | |
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2020 - 2024 | | 1,976 | | | | 67 | | | | | | | | | | | | | | | | | | | | | | | |
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(1) | Benefit payments are expected be paid from the plans’ net assets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
We expect our 2015 pension contributions (excluding contributions to our defined contribution plans) to be approximately $129 million, including pension contributions of Cdn $121 million ($104 million, based on the exchange rate in effect on December 31, 2014) related to our Canadian plans. |
Patient Protection and Affordable Care Act |
In March 2010, the Patient Protection and Affordable Care Act (the “PPACA”) was enacted, potentially impacting our cost to provide healthcare benefits to eligible active and retired employees. The PPACA has both short-term and long-term implications on benefit plan standards. Implementation of this legislation began in 2010 and is expected to continue in phases from 2011 through 2018. |
We have analyzed this legislation to determine: (i) the impact of the required plan standard changes on our employee healthcare plans, (ii) the effect of the excise tax on high cost healthcare plans and (iii) the resulting costs. The impact, for those changes that were currently estimable, was not material to our results of operations. In 2013, PPACA also introduced the health insurance exchange system to facilitate the purchase of state health insurance. Individuals may purchase insurance from a set of government standardized plans offering federal subsidies. In light of this new arrangement, we decided to transfer post‑Medicare coverage via a Medicare Exchange program starting in 2014 for U.S. non-unionized employees and in 2015 for U.S. unionized employees. For additional information, see Note 8, “Accumulated Other Comprehensive Loss.” |
Moving Ahead for Progress in the 21st Century Act and the Highway and Transportation Funding Act |
In July 2012, the Moving Ahead for Progress in the 21st Century Act (the “MAP-21”) was signed into law, offering optional short-term funding relief for domestic pension plan sponsors. The discount-rate stabilization provision in MAP-21 limits the discount rates applicable in determining funding requirements to rates within a specified corridor of a 25-year average. Additionally, in August 2014, the Highway and Transportation Funding Act (the “HATFA”) was signed into law, further extending the interest rate corridors implemented via the MAP-21. As a result of these enactments, the corridor was 10% and 15% of a 25-year average in 2014 and 2013, respectively. Under the HATFA, the corridor will be maintained at 10% through 2017, and widen an additional 5% each year to 30% in 2021 and beyond. Both enactments provide relief in the form of reduced minimum required contributions, and therefore, the required contributions for our domestic plans in 2014 and 2013 were reduced by $35 million and $23 million, respectively. |
Canadian pension funding |
Funding relief measures |
The funding of our material Canadian registered pension plans, which we refer to as the “affected plans,” representing approximately 70% of our unfunded pension obligations as of December 31, 2014, is governed by regulations specific to us, adopted by the provinces of Ontario and Québec. We refer to these regulations, the effect of which will lapse in 2020, as the “funding relief regulations.” |
As amended, the funding relief regulations provide that our aggregate annual contribution in respect of the solvency deficits in the affected plans for each year until 2020 is limited to a Cdn $80 million basic contribution and a supplemental contribution, beginning in 2016, if the plans’ aggregate solvency ratio is more than 2% below the target specified in the regulations for the preceding year, subject to certain conditions. The first such supplemental contribution, if any, which essentially prevents payments of benefits from further depleting the plans’ solvency ratio, is capped at Cdn $25 million. Any amount payable in respect of any subsequent year would be payable over a three year period. |
As part of the amendments to the funding relief regulations adopted in 2014, the annual basic contribution in respect of the solvency deficits in the affected plans was increased from Cdn $50 million to Cdn $80 million for each year from 2013 through 2020. The regulations previously included a conditional additional contribution feature based on a measure of free cash flow (as determined in accordance with the regulations), which would have applied as of 2013 below a certain solvency threshold, but this was removed in connection with the 2014 amendments. |
Should a plan move to surplus before the funding relief regulations expire in 2020, it will cease to be subject to the regulations. After 2020, the funding rules in place at the time will apply to any remaining deficit, if any. |
In connection with the establishment of the original funding relief regulations, our principal Canadian operating subsidiary made a number of undertakings applicable until the end of 2015, with a commitment to re-evaluate after the end of the initial term. As such, our subsidiary undertook to: |
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• | not pay a dividend at any time when the weighted average solvency ratio of its affected plans is less than 80%; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | abide by the compensation plan detailed in the Plans of Reorganization with respect to salaries, bonuses and severance; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | direct at least 60% of the maintenance and value-creation investments earmarked for our Canadian pulp and paper operations to projects in Québec and at least 30% to projects in Ontario; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | invest a minimum of Cdn $50 million over a two to three year construction period for a new condensing turbine at our Thunder Bay, Ontario, facility, subject to certain conditions; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | invest at least Cdn $75 million in strategic projects in Québec over a five-year period; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | maintain our head office and the then-current related functions in Québec; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | make an additional solvency deficit reduction contribution to its pension plans of Cdn $75, payable over four years, for each metric ton of capacity reduced in Québec or Ontario, in the event of downtime of more than six consecutive months or nine cumulative months over a period of 18 months; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | create a diversification fund by contributing Cdn $2 million per year for five years for the benefit of the municipalities and workers in our Québec operating regions; | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | pay an aggregate of Cdn $5 million over five years to be used for such environmental remediation purposes instructed by the province of Ontario; and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | maintain and renew certain financial assurances with the province of Ontario in respect of certain properties in the province. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Concerning the undertaking to make an additional solvency deficit reduction contribution for capacity reductions in Québec or Ontario, as part of the 2014 amendments to the funding relief regulations, it was determined that no additional contribution would be made in respect of any capacity reduction in Québec before April 13, 2013. The application of this undertaking in respect of capacity reductions in Ontario has yet to be settled. As a result of this undertaking to the provinces, starting in 2015 and for each of the next three years, we expect we will be required to make additional contributions of approximately Cdn $20 million. |
As originally adopted, the funding relief regulations provided that corrective measures would be required if the aggregate solvency ratio in the affected plans fell below a prescribed level under the targets specified by the regulations as of December 31 in any year through 2014. This requirement was definitively removed with the amendments to the funding relief regulations adopted in 2014. But according to the Ontario regulations, the corresponding 2011 and 2012 amounts in respect of Ontario plans (Cdn $110 million in the aggregate) have been deferred to after the expiration of the funding relief regulations in 2020, and will then be payable over five years in equal monthly installments starting on December 31, 2021, but only up to the elimination of the then remaining deficit, if any. |
Solvency deficit |
The requirement to make supplemental contributions is based in part on the aggregate solvency ratio of the affected plans. The aggregate solvency ratio calculation is based on a number of factors and assumptions, including the accrued benefits to be provided by the plans, interest rate levels, membership data and demographic experience. The assumptions used in the solvency calculation are materially different from the assumptions used to arrive at net pension and OPEB obligations for purposes of our consolidated financial statements. |
Under Canadian actuarial rules for solvency determinations, the liabilities are calculated on the assumption that the plans are terminated at the measurement date (each December 31 for the affected plans), and the liabilities are discounted primarily using a specified annuity purchase rate, which is that day’s spot interest rate on government securities in Canada plus a prescribed margin. By contrast, for purposes of our consolidated financial statements, the discount rate is determined with a model that develops a hypothetical high-quality bond portfolio, where the bonds are theoretically purchased to settle the expected benefit payments of the plans. |
As of December 31, 2014, a 1% change in the discount rate for solvency purposes would result in an approximate Cdn $380 million ($330 million, based on the exchange rate in effect on December 31, 2014) change in the solvency deficit. |