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
	2011			2010			2011			2010			2011			2010
Funded status
Fair value of plan assets	$	1,664		$	1,572		$	989		$	937		$	156		$	—
Benefit obligations	(2,899		)	(2,458		)	(1,505		)	(1,460		)	(853		)	(826		)
Funded status	$	(1,235	)	$	(886	)	$	(516	)	$	(523	)	$	(697	)	$	(826	)

Amounts recognized in the Consolidated Balance Sheets
Non-current assets	$	—		$	—		$	78		$	52		$	—		$	—
Current liabilities	(12		)	(9		)	(24		)	(23		)	(55		)	(83		)
Non-current liabilities	(1,223		)	(877		)	(570		)	(552		)	(642		)	(743		)
Total	$	(1,235	)	$	(886	)	$	(516	)	$	(523	)	$	(697	)	$	(826	)

Amounts recognized in Accumulated other comprehensive loss (pretax)
Net actuarial loss	$	1,601		$	1,142		$	348		$	311		$	257		$	232
Prior service cost (credit)	1			—			10			8			(9		)	(11		)
Total	$	1,602		$	1,142		$	358		$	319		$	248		$	221

Change in Benefit Obligations



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2011			2010			2011			2010			2011			2010
Balance at January 1	$	2,458		$	2,244		$	1,460		$	1,366		$	826		$	830
Service cost	93			80			48			39			15			16
Interest cost	132			131			78			69			41			46
Actuarial loss	346			133			26			94			41			15
Gross benefits paid	(131		)	(122		)	(82		)	(76		)	(101		)	(107		)
Foreign currency translation	—			—			(23		)	(53		)	(1		)	1
Other	1			(8		)	(2		)	21			32			25
Balance at December 31	$	2,899		$	2,458		$	1,505		$	1,460		$	853		$	826

Accumulated benefit obligation	$	2,762		$	2,366		$	1,364		$	1,330

Change in Plan Assets



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2011			2010			2011			2010			2011			2010
Balance at January 1	$	1,572		$	1,210		$	937		$	832		$	—		$	—
Actual return on plan assets	(41		)	182			39			96			2			—
Employer contributions	264			313			108			90			223			82
Gross benefits paid	(131		)	(122		)	(82		)	(76		)	(101		)	(107		)
Foreign currency translation	—			—			(6		)	(21		)	—			—
Other	—			(11		)	(7		)	16			32			25
Balance at December 31	$	1,664		$	1,572		$	989		$	937		$	156		$	—

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
	2011		2010		2011		2010
Projected benefit obligation	$	2,899	$	2,458	$	990	$	1,114
Accumulated benefit obligation	2,762		2,366		925		1,026
Fair value of plan assets	1,664		1,572		446		554

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
	2011			2010			2011			2010			2011			2010
Balance at January 1	$	1,142		$	1,107		$	319		$	263		$	221		$	216
Prior service cost arising during the year	1			1			4			1			—			—
Net loss arising during the year	551			107			58			60			39			15
Foreign currency translation	—			—			(5		)	(5		)	—			—
Less amounts included in expense during the year	(92		)	(69		)	(18		)	(8		)	(12		)	(10		)
Other	—			(4		)	—			8			—			—
Net change for the year	460			35			39			56			27			5
Balance at December 31	$	1,602		$	1,142		$	358		$	319		$	248		$	221

Benefits Expense



	United States pension benefit expense									Non-United States pension benefit expense									Other postretirement benefits expense
	2011			2010			2009			2011			2010			2009			2011		2010		2009
Service cost	$	93		$	80		$	76		$	48		$	39		$	34		$	15	$	16	$	15
Interest cost	132			131			133			78			69			70			41		46		49
Expected return on plan assets	(164		)	(156		)	(131		)	(70		)	(62		)	(58		)	—		—		—
Amortization	75			53			34			13			8			4			12		10		1
	136			108			112			69			54			50			68		72		65
Curtailment loss	—			1			17			1			—			5			—		—		1
Settlement loss	17			16			83			4			—			3			—		—		—
Total expense	$	153		$	125		$	212		$	74		$	54		$	58		$	68	$	72	$	66

In 2009, due to limitations imposed by the Pension Protection Act on pension lump-sum distributions, Eaton's United States Qualified Pension Plan (the Plan) became restricted from making 100% lump-sum payments. As a result, the Plan experienced a significant increase in lump-sum payments in 2009 prior to the limitation going into effect. Pension settlement expense was $86 for 2009, of which $83 was attributable to the United States pension plans. A portion of the increase in lump-sum payments was also attributable to the workforce reduction in 2009. Additionally, Eaton incurred curtailment expense related to pension plans as a result of the workforce reduction in 2009. The curtailment expense included recognition of the change in the projected benefit obligation, as well as recognition of a portion of the unrecognized prior service cost. Curtailment expense was $22 for 2009. These charges were primarily included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension and other postretirement benefits expense. See Note 14 for additional information regarding business segments.

The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2012 follow:



	United States pension liabilities		Non-United States pension liabilities		Other postretirement liabilities
Actuarial loss	$	145	$	15	$	15
Prior service cost (credit)	—		1		(2		)
Total	$	145	$	16	$	13

Retirement Benefits Plans Assumptions

Pension Plans



	United States pension plans						Non-United States pension plans
	2011		2010		2009		2011		2010		2009
Assumptions used to determine benefit obligation at year-end
Discount rate	4.70	%	5.50	%	6.00	%	5.12	%	5.40	%	5.59	%
Rate of compensation increase	3.15	%	3.61	%	3.62	%	3.62	%	3.63	%	3.58	%

Assumptions used to determine expense
Discount rate	5.50	%	6.00	%	6.30	%	5.40	%	5.59	%	6.26	%
Expected long-term return on plan assets	8.50	%	8.95	%	8.94	%	7.17	%	7.20	%	7.06	%
Rate of compensation increase	3.61	%	3.62	%	3.64	%	3.63	%	3.58	%	3.56	%

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
	2011		2010		2009
Assumptions used to determine benefit obligation at year-end
Discount rate	4.60	%	5.20	%	5.70	%
Health care cost trend rate assumed for next year	7.60	%	8.10	%	8.30	%
Ultimate health care cost trend rate	4.50	%	4.50	%	4.75	%
Year ultimate health care cost trend rate is achieved	2020		2020		2017

Assumptions used to determine expense
Discount rate	5.20	%	5.70	%	6.30	%
Initial health care cost trend rate	8.10	%	8.30	%	8.25	%
Ultimate health care cost trend rate	4.50	%	4.75	%	4.75	%
Year ultimate health care cost trend rate is achieved	2020		2017		2017

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	18		(16		)

Employer Contributions to Retirement Benefits Plans

Contributions to pension plans that Eaton expects to make in 2012, and made in 2011, 2010 and 2009, follow:



	2012		2011		2010		2009
United States plans	$	316	$	264	$	313	$	192
Non-United States plans	96		108		90		79
Total contributions	$	412	$	372	$	403	$	271

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
2012	$	143	$	86	$	91	$	(7	)
2013	148		74		92		(7		)
2014	329		75		85		(7		)
2015	205		77		81		(7		)
2016	215		80		78		(6		)
2017 - 2021	1,206		431		325		(12		)

Pension lump-sum payments in 2012 and 2013 are restricted to 50% due to limitations imposed by the Pension Protection Act.

Pension Plan Assets

Investment policies and strategies are developed on a country specific basis. The United States plan, representing 63% of worldwide pension assets, and the United Kingdom plans representing 29% of worldwide pension assets, are invested primarily for growth, as they are open 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 plan's target allocation is 35% United States equities, 35% non-United States equities, 5% 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 63% equities and the remainder in debt securities. 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 (including inflation protected securities) and corporate debt. The United States pension plan is 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 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, 2011 and 2010, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2011
Common collective trusts
Non-United States equity and global equities	$	925	$	—	$	925	$	—
United States equity	642		—		642		—
Fixed income	263		—		263		—
Long duration funds	107		—		107		—
Fixed income securities	296		—		296		—
United States treasuries	120		120		—		—
Real estate	82		82		—		—
Equity securities	79		79		—		—
Cash equivalents	67		9		58		—
Registered investment companies	35		35		—		—
Other	37		2		—		35
Total pension plan assets	$	2,653	$	327	$	2,291	$	35



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2010
Common collective trusts
Non-United States equity and global equities	$	965	$	—	$	965	$	—
United States equity	577		—		577		—
Fixed income	241		—		241		—
Long duration funds	91		—		91		—
Fixed income securities	230		—		230		—
United States treasuries	101		101		—		—
Real estate	81		81		—		—
Equity securities	78		78		—		—
Cash equivalents	77		10		67		—
Registered investment companies	32		32		—		—
Other	36		2		—		34
Total pension plan assets	$	2,509	$	304	$	2,171	$	34

Other Postretirement Benefits Plans

A summary of the fair value of other postretirement benefits plan assets at December 31, 2011, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2011
Common collective trusts
Global equities	$	52	$	—	$	52	$	—
Fixed income securities	50		—		50		—
Cash equivalents	54		54		—		—
Total other postretirement benefits plan assets	$	156	$	54	$	102	$	—

There were no other postretirement benefits plan assets at December 31, 2010.

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, 2011 and 2010.

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.

Registered investment companies - 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 Eaton Savings Plan in the United States. The total contributions related to these plans are charged to expense and were as follows:



2011	$	65
2010	33
2009	25