RETIREMENT BENEFITS PLANS

Eaton has defined benefits pension plans and other postretirement benefits plans.

Obligations and Funded Status



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2013			2012			2013			2012			2013			2012
Funded status
Fair value of plan assets	$	2,940		$	2,607		$	1,432		$	1,248		$	138		$	146
Benefit obligations	(3,625		)	(3,817		)	(2,127		)	(2,017		)	(867		)	(950		)
Funded status	$	(685	)	$	(1,210	)	$	(695	)	$	(769	)	$	(729	)	$	(804	)

Amounts recognized in the Consolidated Balance Sheets
Non-current assets	$	44		$	—		$	86		$	72		$	—		$	—
Current liabilities	(15		)	(15		)	(30		)	(33		)	(61		)	(62		)
Non-current liabilities	(714		)	(1,195		)	(751		)	(808		)	(668		)	(742		)
Total	$	(685	)	$	(1,210	)	$	(695	)	$	(769	)	$	(729	)	$	(804	)

Amounts recognized in Accumulated other comprehensive loss (pretax)
Net actuarial loss	$	1,051		$	1,618		$	515		$	550		$	190		$	269
Prior service cost (credit)	3			1			13			9			(6		)	(7		)
Other	—			2			—			—			—			—
Total	$	1,054		$	1,621		$	528		$	559		$	184		$	262

Change in Benefit Obligations



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2013			2012			2013			2012			2013			2012
Balance at January 1	$	3,817		$	2,899		$	2,017		$	1,505		$	950		$	853
Service cost	128			115			62			50			20			17
Interest cost	147			134			80			77			35			38
Actuarial (gain) loss	(223		)	264			21			196			(54		)	34
Gross benefits paid	(246		)	(132		)	(90		)	(78		)	(103		)	(94		)
Currency translation	—			—			36			54			(2		)	—
Acquisitions	—			536			—			212			—			74
Other	2			1			1			1			21			28
Balance at December 31	$	3,625		$	3,817		$	2,127		$	2,017		$	867		$	950

Accumulated benefit obligation	$	3,458		$	3,639		$	2,003		$	1,885

Change in Plan Assets



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2013			2012			2013			2012			2013			2012
Balance at January 1	$	2,607		$	1,664		$	1,248		$	989		$	146		$	156
Actual return on plan assets	383			293			118			86			15			13
Employer contributions	196			311			145			102			59			43
Gross benefits paid	(246		)	(132		)	(90		)	(78		)	(103		)	(94		)
Currency translation	—			—			15			39			—			—
Acquisitions	—			471			—			128			—			—
Other	—			—			(4		)	(18		)	21			28
Balance at December 31	$	2,940		$	2,607		$	1,432		$	1,248		$	138		$	146

The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:



	United States pension liabilities				Non-United States pension liabilities
	2013		2012		2013		2012
Projected benefit obligation	$	3,166	$	3,817	$	1,411	$	1,412
Accumulated benefit obligation	2,999		3,639		1,349		1,307
Fair value of plan assets	2,437		2,607		635		657

Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss follow:



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2013			2012			2013			2012			2013			2012
Balance at January 1	$	1,621		$	1,602		$	559		$	358		$	262		$	248
Prior service cost arising during the year	2			1			4			—			—			—
Net (gain) loss arising during the year	(381		)	154			(12		)	205			(63		)	27
Currency translation	—			—			6			15			(1		)	—
Less amounts included in expense during the year	(186		)	(138		)	(29		)	(19		)	(14		)	(13		)
Other	(2		)	2			—			—			—			—
Net change for the year	(567		)	19			(31		)	201			(78		)	14
Balance at December 31	$	1,054		$	1,621		$	528		$	559		$	184		$	262

Benefits Expense



	United States pension benefit expense									Non-United States pension benefit expense									Other postretirement benefits expense
	2013			2012			2011			2013			2012			2011			2013			2012			2011
Service cost	$	128		$	115		$	93		$	62		$	50		$	48		$	20		$	17		$	15
Interest cost	147			134			132			80			77			78			35			38			41
Expected return on plan assets	(226		)	(183		)	(164		)	(85		)	(77		)	(70		)	(6		)	(6		)	—
Amortization	133			118			75			27			15			13			14			13			12
	182			184			136			84			65			69			63			62			68
Curtailment loss	—			—			—			1			1			1			—			—			—
Settlement loss	53			20			17			1			3			4			—			—			—
Total expense	$	235		$	204		$	153		$	86		$	69		$	74		$	63		$	62		$	68

The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2014 follow:



	United States pension liabilities		Non-United States pension liabilities		Other postretirement liabilities
Actuarial loss	$	155	$	26	$	9
Prior service cost (credit)	—		1		(2		)
Total	$	155	$	27	$	7

Retirement Benefits Plans Assumptions

Pension Plans



	United States pension plans						Non-United States pension plans
	2013		2012		2011		2013		2012		2011
Assumptions used to determine benefit obligation at year-end
Discount rate	4.67	%	3.97	%	4.70	%	4.20	%	4.17	%	5.12	%
Rate of compensation increase	3.16	%	3.16	%	3.15	%	3.12	%	3.09	%	3.62	%

Assumptions used to determine expense
Discount rate	3.97	%	4.70	%	5.50	%	4.17	%	5.12	%	5.40	%
Expected long-term return on plan assets	8.45	%	8.50	%	8.50	%	6.92	%	7.10	%	7.17	%
Rate of compensation increase	3.16	%	3.15	%	3.61	%	3.09	%	3.62	%	3.63	%

The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The discount rate was determined using appropriate bond data for each country.

Other Postretirement Benefits Plans

Substantially all of the obligation for other postretirement benefits plans relates to United States plans. Assumptions used to determine other postretirement benefits obligations and expense follow:



	Other postretirement benefits plans
	2013		2012		2011
Assumptions used to determine benefit obligation at year-end
Discount rate	4.48	%	3.79	%	4.60	%
Health care cost trend rate assumed for next year	6.64	%	6.96	%	7.60	%
Ultimate health care cost trend rate	4.77	%	4.53	%	4.50	%
Year ultimate health care cost trend rate is achieved	2023		2022		2020

Assumptions used to determine expense
Discount rate	3.79	%	4.60	%	5.20	%
Initial health care cost trend rate	6.96	%	7.60	%	8.10	%
Ultimate health care cost trend rate	4.53	%	4.50	%	4.50	%
Year ultimate health care cost trend rate is achieved	2022		2020		2020

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1-percentage point change in the assumed health care cost trend rates would have the following effects:



	1% increase		1% decrease
Effect on total service and interest cost	$	1	$	(1	)
Effect on other postretirement liabilities	21		(19		)

Employer Contributions to Retirement Benefits Plans

Contributions to pension plans that Eaton expects to make in 2014, and made in 2013, 2012 and 2011, follow:



	2014		2013		2012		2011
United States plans	$	254	$	196	$	311	$	264
Non-United States plans	108		145		102		108
Total contributions	$	362	$	341	$	413	$	372

During 2011, Eaton contributed $154 into a Voluntary Employee Benefit Association (VEBA) trust for the pre-funding of postretirement Medicare Part D prescription drug benefits for the Company's eligible United States employees and retirees.

The following table provides the estimated pension and other postretirement benefit payments for each of the next five years, and the five years thereafter in the aggregate. For other postretirement benefits liabilities, the expected subsidy receipts relate to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which would reduce the gross payments listed below.



	Estimated United States pension payments		Estimated non-United States pension payments		Estimated other postretirement benefit payments
	Estimated United States pension payments		Estimated non-United States pension payments		Gross		Medicare prescription drug subsidy
2014	$	314	$	91	$	93	$	(6	)
2015	256		92		86		(6		)
2016	273		94		82		(6		)
2017	277		99		78		(5		)
2018	283		101		74		(4		)
2019 - 2023	1,499		545		316		(13		)

Pension Plan Assets

Investment policies and strategies are developed on a country specific basis. The United States plans, representing 67% of worldwide pension assets, and the United Kingdom plans representing 26% of worldwide pension assets, are invested primarily for growth, as the majority of the assets are in plans with active participants and ongoing accruals. In general, the plans have their primary allocation to diversified, global equities, primarily through index funds in the form of common collective trusts. The United States plans' target allocation is 36% United States equities, 32% non-United States equities, 7% real estate (primarily equity of real estate investment trusts) and 25% debt securities and other, including cash equivalents. The United Kingdom plans' target asset allocations are 57% equities and the remainder in debt securities and real estate investments. The equity risk for the plans is managed through broad geographic diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for these plans are longer duration government and corporate debt. The United States pension plans are authorized to use derivatives to achieve more economically desired market exposures and to use futures, swaps and options to gain or hedge exposures.

Other Postretirement Benefits Plan Assets

The VEBA trust which holds U.S. other postretirement benefits plan assets has investment guidelines that include allocations to global equities and fixed income investments. The trust's target investment allocation is 50% diversified global equities and 50% fixed income securities. The fixed income securities are primarily comprised of intermediate term, high quality, dollar denominated, fixed income instruments. The equity allocation is invested in a diversified global equity index fund in the form of a collective trust.

Fair Value Measurements

Financial instruments included in pension and other postretirement benefits plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:


Level 1 -	Quoted prices (unadjusted) for identical assets in active markets.


Level 2 -	Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.


Level 3 -	Unobservable prices or inputs.

Pension Plans

A summary of the fair value of pension plan assets at December 31, 2013 and 2012, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2013
Common collective trusts
Non-United States equity and global equities	$	1,453	$	—	$	1,453	$	—
United States equity	1,153		—		1,153		—
Fixed income	609		—		609		—
Long duration funds	63		—		63		—
Exchange traded funds	64		—		64		—
Fixed income securities	274		—		274		—
United States treasuries	63		63		—		—
Real estate securities	220		214		—		6
Equity securities	141		141		—		—
Cash equivalents	187		6		181		—
Exchange traded funds	47		47		—		—
Other	98		—		4		94
Total pension plan assets	$	4,372	$	471	$	3,801	$	100



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2012
Common collective trusts
Non-United States equity and global equities	$	1,313	$	—	$	1,313	$	—
United States equity	978		—		978		—
Fixed income	538		—		538		—
Long duration funds	61		—		61		—
Exchange traded funds	43		—		43		—
Fixed income securities	331		—		331		—
United States treasuries	143		143		—		—
Real estate securities	124		119		—		5
Equity securities	104		104		—		—
Cash equivalents	140		7		133		—
Exchange traded funds	40		40		—		—
Other	40		3		1		36
Total pension plan assets	$	3,855	$	416	$	3,398	$	41

Other Postretirement Benefits Plans

A summary of the fair value of other postretirement benefits plan assets at December 31, 2013 and 2012, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2013
Common collective trusts
Global equities	$	70	$	—	$	70	$	—
Fixed income securities	29		—		29		—
United States treasuries	38		38		—		—
Cash equivalents	1		1		—		—
Total other postretirement benefits plan assets	$	138	$	39	$	99	$	—



2012
Common collective trusts
Global equities	$	75	$	—	$	75	$	—
Fixed income securities	29		—		29		—
United States treasuries	38		38		—		—
Cash equivalents	4		4		—		—
Total other postretirement benefits plan assets	$	146	$	42	$	104	$	—

Valuation Methodologies

Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012.

Common collective trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices.

Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt securities is determined through third-party pricing models that consider various assumptions, including time value, yield curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.

United States treasuries - Valued at the closing price of each security.

Real estate and equity securities - These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.

Cash equivalents - Primarily certificates of deposit, commercial paper, and repurchase agreements.

Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.

Other - Primarily insurance contracts for international plans and also futures contracts and over-the-counter options. These investments are valued based on the closing prices of future contracts or indices as available on the Bloomberg or similar service, and private equity investments.

For additional information regarding fair value measurements, see Note 11.

Defined Contribution Plans

The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The total contributions related to these plans are charged to expense and were as follows:



2013	$	121
2012	74
2011	65