PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Oct. 31, 2011

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

7. PENSION AND OTHER POSTRETIREMENT BENEFITS

The company has several defined benefit pension plans covering its U.S. employees and employees in certain foreign countries. The company has several postretirement health care and life insurance plans for retired employees in the U.S. and Canada. The company uses an October 31 measurement date for these plans.

The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:

	2011			2010			2009
Pensions
Service cost	$	197		$	176		$	124
Interest cost	492			510			563
Expected return on plan assets	(793		)	(761		)	(739		)
Amortization of actuarial losses	148			113			1
Amortization of prior service cost	46			42			25
Early-retirement benefits							4
Settlements/curtailments	1			24			27
Net cost	$	91		$	104		$	5
Weighted-average assumptions
Discount rates	5.0		%	5.5		%	8.1		%
Rate of compensation increase	3.9		%	3.9		%	3.9		%
Expected long-term rates of return	8.1		%	8.3		%	8.3		%

The components of net periodic postretirement benefits cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:

	2011			2010			2009
Health care and life insurance
Service cost	$	44		$	44		$	28
Interest cost	326			337			344
Expected return on plan assets	(113		)	(122		)	(118		)
Amortization of actuarial losses	271			311			65
Amortization of prior service credit	(16		)	(16		)	(12		)
Early-retirement benefits							1
Settlements/curtailments							(1		)
Net cost	$	512		$	554		$	307
Weighted-average assumptions
Discount rates	5.2		%	5.6		%	8.2		%
Expected long-term rates of return	7.7		%	7.8		%	7.8		%

The above benefit plan costs in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

										Health Care and
	Pensions									Life Insurance
	2011			2010			2009			2011			2010			2009
Net costs	$	91		$	104		$	5		$	512		$	554		$	307
Retirement benefits adjustments included in other comprehensive (income) loss:
Net actuarial losses (gains)	848			227			2,087			132			(28		)	2,024
Prior service cost (credit)	9			14			147									(60		)
Amortization of actuarial losses	(148		)	(113		)	(1		)	(271		)	(311		)	(65		)
Amortization of prior service (cost) credit	(46		)	(42		)	(25		)	16			16			12
Settlements/curtailments	(1		)	(24		)	(27		)							1
Total (gain) loss recognized in other comprehensive (income) loss	662			62			2,181			(123		)	(323		)	1,912
Total recognized in comprehensive (income) loss	$	753		$	166		$	2,186		$	389		$	231		$	2,219

In 2011, the company decided to participate in a prescription drug plan to provide group benefits under Medicare Part D as an alternative to collecting the retiree drug subsidy. This change, which will take effect in 2013, is expected to result in future cost savings to the company greater than the Medicare retiree drug subsidies over time. The change is included in the health care postretirement benefit obligation in 2011. The participants’ level of benefits will not be affected.

The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:

							Health Care and
	Pensions						Life Insurance
	2011			2010			2011			2010
Change in benefit obligations
Beginning of year balance	$	(10,197	)	$	(9,708	)	$	(6,467	)	$	(6,318	)
Service cost	(197		)	(176		)	(44		)	(44		)
Interest cost	(492		)	(510		)	(326		)	(337		)
Actuarial losses	(656		)	(517		)	(113		)	(69		)
Amendments	(9		)	(14		)
Benefits paid	648			681			340			325
Health care subsidy receipts							(14		)	(15		)
Settlements/curtailments	1			17
Foreign exchange and other	(23		)	30			(28		)	(9		)
End of year balance		(10,925	)		(10,197	)		(6,652	)		(6,467	)
Change in plan assets (fair value)
Beginning of year balance		9,504			8,401			1,637			1,666
Actual return on plan assets	600			1,054			95			219
Employer contribution	79			763			43			73
Benefits paid	(648		)	(681		)	(340		)	(325		)
Settlements	(1		)	(17		)
Foreign exchange and other	18			(16		)	24			4
End of year balance	9,552			9,504			1,459			1,637
Funded status	$	(1,373	)	$	(693	)	$	(5,193	)	$	(4,830	)
Weighted-average assumptions
Discount rates	4.4		%	5.0		%	4.4		%	5.2		%
Rate of compensation increase	3.9		%	3.9		%

The amounts recognized at October 31 in millions of dollars consist of the following:

							Health Care and
	Pensions						Life Insurance
	2011			2010			2011			2010
Amounts recognized in balance sheet
Noncurrent asset	$	30		$	147
Current liability	(60		)	(55		)	$	(23	)	$	(27	)
Noncurrent liability	(1,343		)	(785		)	(5,170		)	(4,803		)
Total	$	(1,373	)	$	(693	)	$	(5,193	)	$	(4,830	)
Amounts recognized in accumulated other comprehensive income — pretax
Net actuarial losses	$	4,473		$	3,774		$	2,067		$	2,206
Prior service cost (credit)	147			184			(64		)	(80		)
Total	$	4,620		$	3,958		$	2,003		$	2,126

The total accumulated benefit obligations for all pension plans at October 31, 2011 and 2010 was $10,363 million and $9,734 million, respectively.

The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $10,168 million and $9,321 million, respectively, at October 31, 2011 and $1,039 million and $583 million, respectively, at October 31, 2010. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $10,784 million and $9,381 million, respectively, at October 31, 2011 and $6,407 million and $5,567 million, respectively, at October 31, 2010.

The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2012 in millions of dollars follow:

			Health Care
			and
	Pensions		Life Insurance
Net actuarial losses	$	201	$	239
Prior service cost (credit)	42		(15		)
Total	$	243	$	224

The company expects to contribute approximately $439 million to its pension plans and approximately $27 million to its health care and life insurance plans in 2012, which include direct benefit payments on unfunded plans.

The benefits expected to be paid from the benefit plans, which reflect expected future years of service, and the Medicare subsidy expected to be received are as follows in millions of dollars:

			Health Care		Health Care
			and		Subsidy
	Pensions		Life Insurance		Receipts*
2012	$	680	$	360	$	17
2013	677		375		3
2014	684		391
2015	680		406
2016	684		418
2017 to 2021	3,723		2,244

* Medicare Part D subsidy.

The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. At October 31, 2011, the weighted-average composite trend rates for these obligations were assumed to be a 7.3 percent increase from 2011 to 2012, gradually decreasing to 5.0 percent from 2017 to 2018 and all future years. The obligations at October 31, 2010 and the cost in 2011 assumed a 7.7 percent increase from 2010 to 2011, gradually decreasing to 5.0 percent from 2016 to 2017 and all future years. An increase of one percentage point in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligations by $900 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $55 million. A decrease of one percentage point would decrease the obligations by $695 million and the cost by $43 million.

The discount rate assumptions used to determine the postretirement obligations at October 31, 2011 and 2010 were based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company’s benefit obligations could effectively be settled at the October 31 measurement dates.

Fair value measurement levels in the following tables are defined in Note 26.

The fair values of the pension plan assets by category at October 31, 2011 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	1,074		$	179		$	895
Equity:
U.S. equity securities	2,070			2,070
U.S. equity funds	49			11			38
International equity securities	1,086			1,086
International equity funds	319			29			290
Fixed Income:
Government and agency securities	543			516			27
Corporate debt securities	196						196
Residential mortgage-backed and asset-backed securities	180						180
Fixed income funds	1,077			54			1,023
Real estate	505			75			14			$	416
Private equity/venture capital	1,123									1,123
Hedge funds	608			3			462			143
Other investments	448						448
Derivative contracts - assets*	787			21			766
Derivative contracts - liabilities**	(473		)	(15		)	(458		)
Receivables, payables and other	(40		)	(40		)
Securities lending collateral	750						750
Securities lending liability	(750		)				(750		)
Total net assets	$	9,552		$	3,989		$	3,881		$	1,682

* Includes contracts for interest rates of $742 million, foreign currency of $19 million and other of $26 million.

**Includes contracts for interest rates of $442 million, foreign currency of $17 million and other of $14 million.

The fair values of the health care assets by category at October 31, 2011 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	58		$	7		$	51
Equity:
U.S. equity securities	372			372
U.S. equity funds	84			84
International equity securities	64			64
International equity funds	210						210
Fixed Income:
Government and agency securities	250			246			4
Corporate debt securities	39						39
Residential mortgage-backed and asset-backed securities	22						22
Fixed income funds	107						107
Real estate	57			4			32			$	21
Private equity/venture capital	55									55
Hedge funds	110						103			7
Other investments	22						22
Derivative contracts - assets*	12			1			11
Derivative contracts - liabilities**	(2		)	(1		)	(1		)
Receivables, payables and other	(1		)	(1		)
Securities lending collateral	215						215
Securities lending liability	(215		)				(215		)
Total net assets	$	1,459		$	776		$	600		$	83

* Includes contracts for interest rates of $10 million, foreign currency of $1 million and other of $1 million.

**Includes contracts for foreign currency of $1 million and other of $1 million.

The fair values of the pension plan assets by category at October 31, 2010 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	1,782		$	347		$	1,435
Equity:
U.S. equity securities	1,991			1,985			6
U.S. equity funds	40			4			36
International equity securities	1,208			1,205			3
International equity funds	381			52			329
Fixed Income:
Government and agency securities	792			363			429
Corporate debt securities	263			1			262
Residential mortgage-backed and asset-backed securities	197						197
Fixed income funds	350			39			311
Real estate	459			87			14			$	358
Private equity/venture capital	864									864
Hedge funds	499			3			351			145
Other investments	436						436
Derivative contracts - assets*	900			30			870
Derivative contracts - liabilities**	(588		)	(7		)	(581		)
Receivables, payables and other	(70		)	(70		)
Securities lending collateral	665						665
Securities lending liability	(665		)				(665		)
Total net assets	$	9,504		$	4,039		$	4,098		$	1,367

* Includes contracts for interest rates of $820 million, foreign currency of $52 million and other of $28 million.

**Includes contracts for interest rates of $511 million, foreign currency of $72 million and other of $5 million.

The fair values of the health care assets by category at October 31, 2010 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	146		$	23		$	123
Equity:
U.S. equity securities	515			515
International equity securities	75			75
International equity funds	247			1			246
Fixed Income:
Government and agency securities	283			255			28
Corporate debt securities	43						43
Residential mortgage-backed and asset-backed securities	28						28
Fixed income funds	74						74
Real estate	58			5			33			$	20
Private equity/venture capital	48									48
Hedge funds	86						78			8
Other investments	24						24
Derivative contracts - assets*	17			2			15
Derivative contracts - liabilities**	(4		)				(4		)
Receivables, payables and other	(3		)	(3		)
Securities lending collateral	263						263
Securities lending liability	(263		)				(263		)
Total net assets	$	1,637		$	873		$	688		$	76

* Includes contracts for interest rates of $12 million, foreign currency of $3 million and other of $2 million.

**Includes contracts for foreign currency of $4 million.

A reconciliation of Level 3 pension and health care asset fair value measurements in millions of dollars follows:

						Private Equity/
			Real			Venture		Hedge
	Total		Estate			Capital		Funds
October 31, 2009*	$	1,233	$	336		$	716	$	181
Realized gain	21		16			4		1
Change in unrealized gain (loss)	90		(13		)	97		6
Purchases, sales and settlements - net	99		39			95		(35		)
October 31, 2010*	1,443		378			912		153
Realized gain	33					32		1
Change in unrealized gain	192		48			141		3
Purchases, sales and settlements - net	97		11			93		(7		)
October 31, 2011*	$	1,765	$	437		$	1,178	$	150

* Health care Level 3 assets represent approximately 5 percent of the reconciliation amounts.

Fair values are determined as follows:

Cash and Short-Term Investments — Includes accounts and cash funds that are valued based on the account value, which approximates fair value, or on the fund’s net asset value (NAV) based on the fair value of the underlying securities. Also included are securities that are valued using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data.

Equity Securities and Funds — The values are determined primarily by closing prices in the active market in which the equity investment trades, or the fund’s NAV, based on the fair value of the underlying securities.

Fixed Income Securities and Funds — The securities are valued using either a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk and prepayment speeds, or they are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the NAV, based on the fair value of the underlying securities.

Real Estate, Venture Capital and Private Equity — The investments, which are structured as limited partnerships, are valued using an income approach (estimated cash flows discounted over the expected holding period), as well as a market approach (the valuation of similar securities and properties). These investments are valued at estimated fair value based on their proportionate share of the limited partnership’s fair value that is determined by the general partner. Real estate investment trusts are valued at the closing prices in the active markets in which the investment trades. Real estate investment funds are valued at the NAV, based on the fair value of the underlying securities.

Hedge Funds and Other Investments — The investments are valued using the NAV provided by the administrator of the fund, which is based on the fair value of the underlying securities.

Interest Rate, Foreign Currency and Other Derivative Instruments — The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (closing prices in the active market in which the derivative instrument trades).

The primary investment objective for the pension plan assets is to maximize the growth of these assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s earnings strength and risk tolerance. The primary investment objective for the health care plan assets is to provide the company with the financial flexibility to pay the projected obligations to beneficiaries over a long period of time. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the company’s financial strength and long-term asset class risk/return expectations since the obligations are long-term in nature. The current target allocations for pension assets are approximately 37 percent for equity securities, 39 percent for debt securities, 5 percent for real estate and 19 percent for other investments. The target allocations for health care assets are approximately 50 percent for equity securities, 33 percent for debt securities, 3 percent for real estate and 14 percent for other investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company’s diversified investment policy, there were no significant concentrations of risk.

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed unless there are fundamental changes in capital markets that affect the company’s expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company’s U.S. pension fund was approximately 7.6 percent during the past ten years and approximately 9.6 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not necessarily indicative of long-term future expected returns. The company’s systematic methodology for determining the long-term rate of return for the company’s investment strategies supports the long-term expected return assumptions.

The company has created certain Voluntary Employees’ Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company’s pension plan trust.

The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company’s contributions and costs under these plans were $108 million in 2011, $85 million in 2010 and $131 million in 2009. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.