(20) Pension plans

Several of our subsidiaries individually sponsor defined benefit pension plans covering certain employees. Benefits under the plans are generally based on years of service and compensation, although benefits under certain plans are based on years of service and fixed benefit rates. Our subsidiaries make contributions to the plans, generally, to meet regulatory requirements. Additional amounts may be contributed on a discretionary basis.

The components of net periodic pension expense for each of the three years ending December 31, 2012 are as follows (in millions).


	2012			2011			2010
Service cost	$	247		$	191		$	165
Interest cost		583			568			543
Expected return on plan assets		(610	)		(579	)		(528	)
Other, primarily amortization of actuarial losses		220			102			69

Net pension expense	$	440		$	282		$	249

The accumulated benefit obligation is the actuarial present value of benefits earned based on service and compensation prior to the valuation date. As of December 31, 2012 and 2011, the accumulated benefit obligation was $12,915 million and $11,947 million, respectively. The projected benefit obligation (“PBO”) is the actuarial present value of benefits earned based upon service and compensation prior to the valuation date and, if applicable, includes assumptions regarding future compensation levels. A reconciliation of the changes in the PBOs for each of the years ending December 31, 2012 and 2011 is shown in the table that follows (in millions).


	2012			2011
Projected benefit obligation, beginning of year	$	12,992		$	10,598
Service cost		247			191
Interest cost		583			568
Benefits paid		(879	)		(579	)
Business acquisitions		8			1,017
Actuarial (gains) or losses and other		1,122			1,197

Projected benefit obligation, end of year	$	14,073		$	12,992

Benefit obligations under qualified U.S. defined benefit pension plans are funded through assets held in trusts. Pension obligations under certain non-U.S. plans and non-qualified U.S. plans are unfunded. As of December 31, 2012, PBOs of non-qualified U.S. plans and non-U.S. plans which are not funded through assets held in trusts were $1,048 million. A reconciliation of the changes in assets of all plans for each of the years ending December 31, 2012 and 2011 is presented in the table that follows (in millions).


	2012			2011
Plan assets at beginning of year	$	9,150		$	8,246
Employer contributions		649			523
Benefits paid		(879	)		(579	)
Actual return on plan assets		1,429			361
Business acquisitions		6			632
Other		81			(33	)

Plan assets at end of year	$	10,436		$	9,150

Fair value measurements for pension assets as of December 31, 2012 and 2011 follow (in millions).


	Total Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Cash and equivalents	$	900	$	345	$	555	$	—
Government obligations		899		529		370		—
Investment funds		2,069		413		1,650		6
Corporate debt obligations		689		86		603		—
Equity securities		5,444		5,211		233		—
Other		435		12		97		326

	$	10,436	$	6,596	$	3,508	$	332

December 31, 2011
Cash and equivalents	$	830	$	797	$	33	$	—
Government obligations		915		534		380		1
Investment funds		1,872		402		1,465		5
Corporate debt obligations		1,180		95		1,085		—
Equity securities		3,618		3,432		186		—
Other		735		37		314		384

	$	9,150	$	5,297	$	3,463	$	390

Refer to Note 17 for a discussion of the three levels in the hierarchy of fair values. Pension assets measured at fair value with significant unobservable inputs (Level 3) for the years ending December 31, 2012 and 2011 consisted primarily of real estate and limited partnership interests. Pension plan assets are generally invested with the long-term objective of earning amounts sufficient to cover expected benefit obligations, while assuming a prudent level of risk. Allocations may change as a result of changing market conditions and investment opportunities. The expected rates of return on plan assets reflect subjective assessments of expected invested asset returns over a period of several years. Generally, past investment returns are not given significant consideration when establishing assumptions for expected long-term rates of returns on plan assets. Actual experience will differ from the assumed rates.

Benefits payments expected over the next ten years are as follows (in millions): 2013 – $704; 2014 – $708; 2015 – $719; 2016 – $701; 2017 – $750; and 2018 to 2022 – $3,877. Sponsoring subsidiaries expect to contribute $377 million to defined benefit pension plans in 2013.

The net funded status of the defined benefit pension plans is summarized in the table that follows (in millions).


	December 31,
	2012			2011
Amounts recognized in the Consolidated Balance Sheets:
Accounts payable, accruals and other liabilities	$	3,441		$	3,686
Losses and loss adjustment expenses		256			214
Other assets		(60	)		(58	)

	$	3,637		$	3,842

A reconciliation of the pre-tax accumulated other comprehensive income (loss) related to defined benefit pension plans for each of the two years ending December 31, 2012 follows (in millions). We estimate that $221 million of the balance at December 31, 2012 will be included in pension expense in 2013.


	2012			2011
Balance at beginning of year	$	(2,521	)	$	(1,395	)
Amount included in net periodic pension expense		130			76
Gains (losses) current period and other		(125	)		(1,202	)

Balance at end of year	$	(2,516	)	$	(2,521	)

Weighted average interest rate assumptions used in determining projected benefit obligations and net periodic pension expense were as follows.


	2012			2011
Applicable to pension benefit obligations:
Discount rate		4.0	%		4.6	%
Expected long-term rate of return on plan assets		6.6			6.9
Rate of compensation increase		3.6			3.7
Discount rate applicable to pension expense		4.5			5.3

Several of our subsidiaries also sponsor defined contribution retirement plans, such as 401(k) or profit sharing plans. Employee contributions to the plans are subject to regulatory limitations and the specific plan provisions. Several of the plans provide that the subsidiary match these contributions up to levels specified in the plans and provide for additional discretionary contributions as determined by management. Employer contributions expensed with respect to these plans were $637 million, $572 million and $567 million for the years ending December 31, 2012, 2011 and 2010, respectively.