PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
|12 Months Ended|
Dec. 31, 2021
|Retirement Benefits [Abstract]|
|PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS||PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement health care and life insurance benefit plans covering substantially all U.S. employees. We also sponsor nonqualified, unfunded defined benefit pension plans for certain employees. In addition, our Company and its subsidiaries have various pension plans and other forms of postretirement benefit arrangements outside the United States.
We refer to the funded defined benefit pension plan in the United States that is not associated with collective bargaining agreements as the “primary U.S. plan.” As of December 31, 2021, the primary U.S. plan represented 61 percent and 57 percent of the Company’s consolidated projected benefit obligation and pension plan assets, respectively.
Obligations and Funded Status
The following table sets forth the changes in the benefit obligations and the fair value of plan assets for our pension and other postretirement benefit plans (in millions):
1 For pension plans, the benefit obligation is the projected benefit obligation. For other postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation. The accumulated benefit obligation for our pension plans was $8,431 million and $9,263 million as of December 31, 2021 and 2020, respectively.
2 A change in the weighted-average discount rate was the primary driver of net actuarial loss (gain) during 2021 and 2020. For our primary U.S. pension plan, an increase in the discount rate resulted in an actuarial gain of $197 million during 2021, and a decrease in the discount rate resulted in an actuarial loss of $491 million during 2020. Other drivers of net actuarial loss (gain) included assumption updates, plan experience and our strategic realignment initiatives. Refer to Note 18.
3 Settlements and curtailments were primarily related to our strategic realignment initiatives. Refer to Note 18.
Pension and other postretirement benefit plan amounts recognized in our consolidated balance sheets were as follows (in millions):
Certain of our pension plans have a projected benefit obligation in excess of the fair value of plan assets. For these plans, the projected benefit obligation and the fair value of plan assets were as follows (in millions):
Certain of our pension plans have an accumulated benefit obligation in excess of the fair value of plan assets. For these plans, the accumulated benefit obligation and the fair value of plan assets were as follows (in millions):
All of our other postretirement benefit plans have an accumulated postretirement benefit obligation in excess of the fair value of plan assets.
Pension Plan Assets
The following table presents total assets by asset class for our U.S. and non-U.S. pension plans (in millions):
1 Mutual, pooled and commingled funds include investments in equity securities, fixed-income securities and combinations of both. There are a significant number of mutual, pooled and commingled funds from which investors can choose. The selection of the type of fund is dictated by the specific investment objectives and needs of a given plan. These objectives and needs vary greatly between plans.
2 Fair value disclosures related to our pension plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall; a reconciliation of the beginning and ending balances of Level 3 assets; and information about the valuation techniques and inputs used to measure the fair value of our pension plan assets.
Investment Strategy for U.S. Pension Plans
The Company utilizes the services of investment managers to actively manage the assets of our U.S. pension plans. We have established asset allocation targets and investment guidelines with each investment manager. Our asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the plans. Selection of the targeted asset allocation for U.S. pension plan assets was based upon a review of the expected return and risk characteristics of each asset class, as well as the correlation of returns among asset classes. Our target allocation is a mix of 42 percent equity investments, 30 percent fixed-income investments and 28 percent alternative investments. We believe this target allocation will enable us to achieve the following long-term investment objectives:
(1)optimize the long-term return on plan assets at an acceptable level of risk;
(2)maintain a broad diversification across asset classes and among investment managers; and
(3)maintain careful control of the risk level within each asset class.
The guidelines that have been established with each investment manager provide parameters within which the investment managers agree to operate, including criteria that determine eligible and ineligible securities, diversification requirements and credit quality standards, where applicable. Investment managers agree to obtain written approval for deviations from stated investment style or guidelines. As of December 31, 2021, no investment manager was responsible for more than 8 percent of total U.S. pension plan assets.
Our target allocation of 42 percent equity investments is composed of 60 percent global equities, 16 percent emerging market equities and 24 percent domestic small-cap and mid-cap equities. Optimal returns through our investments in global equities are achieved through security selection as well as country and sector diversification. Investments in our common stock accounted for approximately 5 percent of total global equities and approximately 3 percent of total U.S. pension plan assets. Our investments in global equities are intended to provide diversified exposure to both U.S. and non-U.S. equity markets. Our investments in both emerging market equities and domestic small-cap and mid-cap equities may experience large swings in their market value. Our investments in these asset classes are selected based on capital appreciation potential.
Our target allocation of 30 percent fixed-income investments is composed of 33 percent long-duration bonds and 67 percent with multi-strategy alternative credit managers. Long-duration bonds are intended to provide a stable rate of return through investments in high-quality publicly traded debt securities. Our investments in long-duration bonds are diversified in order to mitigate duration and credit exposure. Multi-strategy alternative credit managers invest in a combination of high-yield bonds, bank loans, structured credit and emerging market debt. These investments are in lower-rated and non-rated debt securities, which generally produce higher returns compared to long-duration bonds and also help to diversify our overall fixed-income portfolio.
Our target allocation for alternative investments is 28 percent. These alternative investments include hedge funds, reinsurance, private equity limited partnerships, leveraged buyout funds, international venture capital partnerships and real estate. The objective of investing in alternative investments is to provide a higher rate of return than that which is typically available from publicly traded equity securities. Alternative investments are inherently illiquid and require a long-term perspective in evaluating investment performance.
Investment Strategy for Non-U.S. Pension Plans
The long-term target allocation for 70 percent of our international subsidiaries’ pension plan assets, primarily certain of our European and Canadian plans, was 66 percent equity securities, 4 percent fixed-income securities and 30 percent other investments. The actual allocation for the remaining 30 percent of the Company’s international subsidiaries’ pension plan assets consisted of 44 percent mutual, pooled and commingled funds; 21 percent fixed-income securities; 1 percent equity securities and 34 percent other investments. The investment strategies for our international subsidiaries’ pension plans vary greatly, and in some instances are influenced by local law. None of our pension plans outside the United States is individually significant for separate disclosure.
Other Postretirement Benefit Plan Assets
Plan assets associated with other postretirement benefits primarily represent funding of one of the U.S. postretirement benefit plans through a Voluntary Employee Beneficiary Association (“VEBA”), a tax-qualified trust. The VEBA assets are primarily invested in liquid assets due to the level and timing of expected future benefit payments.
The following table presents total assets by asset class for our other postretirement benefit plans (in millions):
1Fair value disclosures related to our other postretirement benefit plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall and information about the valuation techniques and inputs used to measure the fair value of our other postretirement benefit plan assets.
Components of Net Periodic Benefit Cost (Income)
Net periodic benefit cost or income for our pension and other postretirement benefit plans consisted of the following (in millions):
1The Company has elected to use the actual fair value of plan assets as the market-related value of assets in the determination of the expected return on plan assets.
2Actuarial gains and losses are amortized using a corridor approach. The gain/loss corridor is equal to 10 percent of the greater of the benefit obligation and the market-related value of assets. Gains and losses in excess of the corridor are generally amortized over the average future working lifetime of the plan participants.
3Settlement charges were primarily related to our strategic realignment initiatives. Refer to Note 18.
All of the amounts in the table above, other than service cost, were recorded in the line item other income (loss) — net in our consolidated statements of income.
Impact on Accumulated Other Comprehensive Income
The following table sets forth the pretax changes in AOCI for our pension and other postretirement benefit plans (in millions):
1 Includes $117 million of recognized net actuarial loss due to the impact of settlements, which were primarily related to our strategic realignment initiatives. Refer to Note 18.
2 Includes $23 million of recognized net actuarial loss due to the impact of settlements, which were primarily related to our strategic realignment initiatives. Refer to Note 18.
3 Includes $15 million of net actuarial loss occurring during the year due to the impact of curtailments.
The following table sets forth the pretax amounts in AOCI for our pension and other postretirement benefit plans (in millions):
Certain weighted-average assumptions used in computing the benefit obligations for our pension and other postretirement benefit plans were as follows:
Certain weighted-average assumptions used in computing net periodic benefit cost or income were as follows:
The discount rate assumptions used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. Rates for U.S. and certain non-U.S. plans at December 31, 2021 were determined using a cash flow matching technique whereby the rates of a yield curve, developed from high-quality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. For other non-U.S. plans, we base the discount rate assumption on comparable indices within each of the countries. The Company measures the service cost and interest cost components of net periodic benefit cost or income for pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans’ projected cash flows. The rate of compensation increase assumption is determined by the Company based upon annual reviews.
The current cash balance interest crediting rate for the primary U.S. pension plan is the yield on six-month U.S. Treasury bills on the last day of September of the previous plan year, plus 150 basis points. The Company assumes that the current cash balance interest crediting rate will grow linearly over 10 years to the ultimate interest crediting rate assumption.
The expected long-term rate of return assumption for U.S. pension plan assets is based upon the target asset allocation and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class, as well as correlations among asset classes. We evaluate the rate of return assumption on an annual basis. The expected long-term rate of return assumption used in computing 2021 net periodic benefit income for the U.S. pension plans was 7.25 percent. As of December 31, 2021, the 5-year, 10-year and 15-year annualized return on plan assets for the primary U.S. plan was 10.7 percent, 9.7 percent and 6.8 percent, respectively. The annualized return since inception was 10.6 percent.
The weighted-average assumptions for health care cost trend rates were as follows:
We review external data and our own historical trends for health care costs to determine the health care cost trend rate assumptions. The Company’s U.S. postretirement benefit plans are primarily defined-dollar benefit plans that limit the effects of health care inflation because the plans have established dollar limits for determining our contributions.
The expected benefit payments for our pension and other postretirement benefit plans for the 10 years succeeding December 31, 2021 are as follows (in millions):
The Company anticipates making contributions to our pension trusts in 2022 of $26 million, all of which will be allocated to our international plans. These contributions are generally made in accordance with local laws and tax regulations.
Defined Contribution Plans
Our Company sponsors qualified defined contribution plans covering substantially all U.S. employees. Under the largest U.S. defined contribution plan, we match participants’ contributions up to a maximum of 3.5 percent of compensation, subject to an IRS limit on compensation. The Company’s expense for the U.S. plans totaled $32 million, $43 million and $43 million in 2021, 2020 and 2019, respectively. We also sponsor defined contribution plans in certain locations outside the United States. The Company’s expense for these plans totaled $79 million, $63 million and $64 million in 2021, 2020 and 2019, respectively.
Multi-Employer Retirement Plans
The Company participates in various multi-employer retirement plans. Multi-employer retirement plans are designed to provide benefits to or on behalf of employees of multiple employers. These plans are typically established under collective bargaining agreements. Multi-employer retirement plans are generally governed by a board of trustees composed of representatives of both management and labor and are generally funded through employer contributions.The Company’s expense for multi-employer retirement plans totaled $1 million, $2 million and $5 million in 2021, 2020 and 2019, respectively. The plans we currently participate in have contractual arrangements that extend into 2025. If, in the future, we choose to withdraw from any of the multi-employer retirement plans in which we currently participate, we would record the appropriate withdrawal liability, if any, at that time
The entire disclosure for retirement benefits.
Reference 1: http://www.xbrl.org/2003/role/exampleRef