Pensions And Other Postretirement Benefits | 12 Months Ended |
Dec. 31, 2013 |
Pensions And Other Postretirement Benefits [Abstract] | ' |
Pensions And Other Postretirement Benefits | ' |
11. Pensions and Other Postretirement Benefits |
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We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and death benefits to eligible retired employees and their dependents; these plans can be amended or terminated at our option. Under our health care plans, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies. |
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Pension and Other Postretirement Benefit Obligations and Plan Assets |
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| | | Other Postretirement |
| Pension Benefits | | Benefits |
| 2013 | | 2012 | | 2013 | | 2012 |
| ($ in millions) |
Change in benefit obligations: | | | | | | | | | | | |
Benefit obligation at beginning of year | $ | 2,285 | | $ | 2,027 | | $ | 1,311 | | $ | 1,206 |
Service cost | | 41 | | | 34 | | | 16 | | | 15 |
Interest cost | | 81 | | | 89 | | | 50 | | | 54 |
Actuarial (gains) losses | | (196) | | | 253 | | | (471) | | | 82 |
Benefits paid | | (120) | | | (118) | | | (51) | | | (46) |
Benefit obligation at end of year | | 2,091 | | | 2,285 | | | 855 | | | 1,311 |
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Change in plan assets: | | | | | | | | | | | |
Fair value of plan assets at beginning of year | | 1,791 | | | 1,670 | | | 205 | | | 186 |
Actual return on plan assets | | 432 | | | 227 | | | 34 | | | 19 |
Employer contribution | | 12 | | | 12 | | | 51 | | | 46 |
Benefits paid | | (120) | | | (118) | | | (51) | | | (46) |
Fair value of plan assets at end of year | | 2,115 | | | 1,791 | | | 239 | | | 205 |
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Funded status at end of year | $ | 24 | | $ | (494) | | $ | (616) | | $ | (1,106) |
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Amounts recognized in the Consolidated | | | | | | | | | | | |
Balance Sheets: | | | | | | | | | | | |
Noncurrent assets | $ | 256 | | $ | 1 | | $ | - | | $ | - |
Current liabilities | | (14) | | | (13) | | | (50) | | | (57) |
Noncurrent liabilities | | (218) | | | (482) | | | (566) | | | (1,049) |
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Net amount recognized | $ | 24 | | $ | (494) | | $ | (616) | | $ | (1,106) |
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Amounts recognized in other comprehensive | | | | | | | | | | | |
income (before tax): | | | | | | | | | | | |
Net (gain) loss | $ | 585 | | $ | 1,160 | | $ | (88) | | $ | 459 |
Prior service cost | | 4 | | | 4 | | | - | | | - |
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Our accumulated benefit obligation for our defined benefit pension plans is $1.9 billion and $2.1 billion at |
December 31, 2013 and 2012, respectively. Our unfunded pension plans, included above, which in all cases have no assets and therefore have an accumulated benefit obligation in excess of plan assets, had projected benefit obligations of $231 million at December 31, 2013, and $239 million at December 31, 2012, and had accumulated benefit obligations of $206 million at December 31, 2013, and $215 million at December 31, 2012. |
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Pension and Other Postretirement Benefit Cost Components |
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| 2013 | | 2012 | | 2011 | | | |
| ($ in millions) | | | |
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Pension benefits: | | | | | | | | | | | |
Service cost | $ | 41 | | $ | 34 | | $ | 28 | | | |
Interest cost | | 81 | | | 89 | | | 92 | | | |
Expected return on plan assets | | (142) | | | (138) | | | (140) | | | |
Amortization of net losses | | 89 | | | 75 | | | 67 | | | |
Amortization of prior service cost | | - | | | - | | | 3 | | | |
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Net cost | $ | 69 | | $ | 60 | | $ | 50 | | | |
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Other postretirement benefits: | | | | | | | | | | | |
Service cost | $ | 16 | | $ | 15 | | $ | 14 | | | |
Interest cost | | 50 | | | 54 | | | 58 | | | |
Expected return on plan assets | | (16) | | | (15) | | | (15) | | | |
Amortization of net losses | | 58 | | | 53 | | | 44 | | | |
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Net cost | $ | 108 | | $ | 107 | | $ | 101 | | | |
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Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income |
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| 2013 | | | | | |
| | | | | Other | | | | | |
| Pension | | | Postretirement | | | | | |
| Benefits | | | Benefits | | | | | |
| ($ in millions) | | | | | |
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Net gain arising during the year | $ | 486 | | | $ | 489 | | | | | |
Amortization of net losses | | 89 | | | | 58 | | | | | |
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Total recognized in other comprehensive income | $ | 575 | | | $ | 547 | | | | | |
Total recognized in net periodic cost | | | | | | | | | | | |
and other comprehensive income | $ | 506 | | | $ | 439 | | | | | |
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Net actuarial gains arising during the year to our pension benefits were due primarily to a higher than expected return on plan assets and an increase in our discount rate. Net actuarial gains arising during the year related to our other postretirement benefits were due to changes in our estimate of the allocation of medical claims costs between our Medicare eligible and non-Medicare eligible populations, lower estimates of prescription drug costs and an increase in our discount rate. |
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The estimated net losses for the pension benefit plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the next year are $54 million. There is no expected amortization for the other postretirement benefit plans over the next year. |
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Pension and Other Postretirement Benefits Assumptions |
Costs for pension and other postretirement benefits are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows: |
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| 2013 | | 2012 | | 2011 | | | |
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Pension funded status: | | | | | | | | | | | |
Discount rate | | 4.60% | | | 3.65% | | | 4.50% | | | |
Future salary increases | | 4.50% | | | 4.50% | | | 4.50% | | | |
Other postretirement benefits funded status: | | | | | | | | | | | |
Discount rate | | 4.65% | | | 3.80% | | | 4.55% | | | |
Pension cost: | | | | | | | | | | | |
Discount rate | | 3.65% | | | 4.50% | | | 5.25% | | | |
Return on assets in plans | | 8.25% | | | 8.25% | | | 8.75% | | | |
Future salary increases | | 4.50% | | | 4.50% | | | 4.50% | | | |
Other postretirement benefits cost: | | | | | | | | | | | |
Discount rate | | 3.80% | | | 4.55% | | | 5.40% | | | |
Return on assets in plans | | 8.00% | | | 8.00% | | | 8.50% | | | |
Health care trend rate | | 7.33% | | | 7.70% | | | 8.10% | | | |
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To determine the discount rates, we utilize analyses in which the projected annual cash flows from the pension and other postretirement benefit plans were matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans. |
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Health Care Cost Trend Assumptions |
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For measurement purposes at December 31, 2013, increases in the per capita cost of covered health care benefits were assumed to be 6.94% for 2014. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2019 and remain at that level thereafter. |
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Assumed health care cost trend rates have a significant effect on the amounts reported in the consolidated financial statements. To illustrate, a one-percentage point change in the assumed health care cost trend would have the following effects: |
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| One-percentage point | | | | | | |
| Increase | | Decrease | | | | | | |
| ($ in millions) | | | | | | |
Increase (decrease) in: | | | | | | | | | | | |
Total service and interest cost components | $ | 11 | | $ | (9) | | | | | | |
Postretirement benefit obligation | | 100 | | | (84) | | | | | | |
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Asset Management |
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Nine investment firms manage our defined benefit pension plans' assets under investment guidelines approved by our Benefits Investment Committee that is comprised of members of our management. Investments are restricted to domestic and international equity securities, domestic and international fixed income securities, and unleveraged exchange-traded options and financial futures. Limitations restrict investment concentration and use of certain derivative investments. The target asset allocation for equity is 75% of the pension plans' assets. The fixed income portfolio is invested in the Barclays Government/Credit Bond Index Fund, except that the Canadian earmarked portion of the portfolio is maintained in U.S. Treasury Bonds. Equity investments must be in liquid securities listed on national exchanges. No investment is permitted in our securities (except through commingled pension trust funds). Investment managers' returns are expected to meet or exceed selected market indices by prescribed margins. |
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Our pension plans' weighted-average asset allocations, by asset category, were as follows: |
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| Percentage of plan | | | | | | |
| assets at December 31, | | | | | | |
| 2013 | | 2012 | | | | | | |
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Domestic equity securities | | 54% | | | 52% | | | | | | |
International equity securities | | 22% | | | 22% | | | | | | |
Debt securities | | 20% | | | 24% | | | | | | |
Cash and cash equivalents | | 4% | | | 2% | | | | | | |
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Total | | 100% | | | 100% | | | | | | |
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The other postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an asset allocation at December 31, 2013, of 65% in equity securities and 35% in debt securities compared with 58% in equity securities and 42% in debt securities at December 31, 2012. The target asset allocation for equity is between 50% and 75% of the plan's assets. |
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The plans' assumed future returns are based principally on the asset allocations and historic returns for the plans' asset classes determined from both actual plan returns and, over longer time periods, market returns for those asset classes. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a three-year period. We assumed a rate of return on pension plan assets of 8.25% for both 2013 and 2012 and 8.75% for 2011. A one-percentage point change to the rate of return assumption would result in an $18 million change to the net pension cost and, as a result, an equal change in “Compensation and benefits” expense. For 2014, we assume an 8.25% return on pension plan assets. |
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Fair Value of Plan Assets |
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Following is a description of the valuation methodologies used for pension plan assets measured at fair value. |
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Common stock: Shares held by the plan at year end are valued at the official closing price as defined by the exchange or at the most recent trade price of a security at the close of the active market. |
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Common collective trusts: Valued at the net asset value (NAV) of shares held by the plan at year end, based on the quoted market prices of the underlying assets of the trusts. The investments are valued using NAV as a practical expedient for fair value. The common collective trusts hold equity securities, fixed income securities and cash and cash equivalents. |
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Corporate bonds and other fixed income instruments: When available, valued at an estimated price at which a dealer would pay for a similar security at year end using observable market inputs. Otherwise, valued at an estimated price at which a dealer would pay for a similar security at year end using unobservable market inputs. |
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Municipal bonds: Valued at an estimated price at which a dealer would pay for a security at year end using observable market-based inputs. |
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Commingled funds: Valued at the NAV of shares held by the plan at year end, based on the quoted market prices of the underlying assets of the funds. The investments are valued using NAV as a practical expedient for fair value. The commingled funds hold equity securities. |
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Interest bearing cash: Short-term bills or notes are valued at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs; money market funds are valued at the closing price reported on the active market on which the funds are traded. |
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United States Government and agencies securities: Valued at an estimated price at which a dealer would pay for a security at year end using observable as well as unobservable market-based inputs. Inflation adjusted instruments utilize the appropriate index factor. |
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Preferred stock: Shares held by the plan at year end are valued at the most recent trade price of a security at the close of the active market or at an estimated price at which a dealer would pay for a similar security at year end using primarily observable as well as unobservable market-based inputs. |
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The following table sets forth the pension plans' assets by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets). |
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| 31-Dec-13 | | | |
| Level 1 | | Level 2 | | Total | | | |
| ($ in millions) | | | |
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Common stock | $ | 1,245 | | $ | - | | $ | 1,245 | | | |
Common collective trusts: | | | | | | | | | | | |
Debt securities | | - | | | 423 | | | 423 | | | |
International equity securities | | - | | | 265 | | | 265 | | | |
Commingled funds | | - | | | 95 | | | 95 | | | |
Interest bearing cash | | 83 | | | - | | | 83 | | | |
U.S. government and agencies securities | | - | | | 4 | | | 4 | | | |
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Total investments | $ | 1,328 | | $ | 787 | | $ | 2,115 | | | |
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| 31-Dec-12 | | | |
| Level 1 | | Level 2 | | Total | | | |
| ($ in millions) | | | |
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Common stock | $ | 1,028 | | $ | - | | $ | 1,028 | | | |
Common collective trusts: | | | | | | | | | | | |
Debt securities | | - | | | 433 | | | 433 | | | |
International equity securities | | - | | | 211 | | | 211 | | | |
Commingled funds | | - | | | 84 | | | 84 | | | |
Interest bearing cash | | 31 | | | - | | | 31 | | | |
U.S. government and agencies securities | | - | | | 3 | | | 3 | | | |
Preferred stock | | - | | | 1 | | | 1 | | | |
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Total investments | $ | 1,059 | | $ | 732 | | $ | 1,791 | | | |
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Following is a description of the valuation methodologies used for other postretirement benefit plan assets measured at fair value. |
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Trust-owned life insurance: Valued at our share of the net assets of trust-owned life insurance issued by a major insurance company. The underlying investments of that trust consist of a U.S. stock account and a U.S. bond account, valued based upon the aggregate market values of the underlying investments. The loan asset account is valued at cash surrender value at the time of the loan, plus accrued interest. |
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The other postretirement benefit plan assets consisted of trust-owned life insurance with fair values of |
$239 million and $205 million at December 31, 2013 and 2012, respectively, and are valued under level 2 of the fair value hierarchy. There were no level 1 or level 3 related assets. |
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The methods used to value pension and other postretirement benefit plan assets may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. |
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Contributions and Estimated Future Benefit Payments |
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In 2014, we expect to contribute approximately $14 million to our unfunded pension plans for payments to pensioners and approximately $50 million to our other postretirement benefit plans for retiree health and death benefits. We do not expect to contribute to our funded pension plan in 2014. |
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Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: |
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| | | Other | | | | | | |
| Pension | | Postretirement | | | | | | |
| Benefits | | Benefits | | | | | | |
| ($ in millions) | | | | | | |
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2014 | $ | 127 | | $ | 50 | | | | | | |
2015 | | 130 | | | 51 | | | | | | |
2016 | | 133 | | | 52 | | | | | | |
2017 | | 135 | | | 53 | | | | | | |
2018 | | 137 | | | 54 | | | | | | |
Years 2019 - 2023 | | 693 | | | 272 | | | | | | |
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The other postretirement benefits payments include an estimated average annual reduction due to the Medicare Part D subsidy of approximately $6 million. |
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Other Postretirement Coverage |
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Under collective bargaining agreements, Norfolk Southern and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and totaled $41 million in 2013, $47 million in 2012, and $48 million in 2011. |
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Section 401(k) Plans |
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Norfolk Southern and certain subsidiaries provide Section 401(k) savings plans for employees. Under the plans, we match a portion of employee contributions, subject to applicable limitations. Our matching contributions, recorded as an expense, under these plans were $19 million in 2013, $18 million in 2012, and $17 million in 2011. |
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