PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Oct. 31, 2012

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

7. PENSION AND OTHER POSTRETIREMENT BENEFITS

The company has several defined benefit pension plans and postretirement health care and life insurance plans covering its U.S. employees and employees in certain foreign countries. 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:

	2012			2011			2010
Pensions
Service cost	$	220		$	197		$	176
Interest cost	465			492			510
Expected return on plan assets	(787		)	(793		)	(761		)
Amortization of actuarial losses	202			148			113
Amortization of prior service cost	47			46			42
Early-retirement benefits	3
Settlements/curtailments	10			1			24
Net cost	$	160		$	91		$	104
Weighted-average assumptions
Discount rates	4.4		%	5.0		%	5.5		%
Rate of compensation increase	3.9		%	3.9		%	3.9		%
Expected long-term rates of return	8.0		%	8.1		%	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:

	2012			2011			2010
Health care and life insurance
Service cost	$	49		$	44		$	44
Interest cost	281			326			337
Expected return on plan assets	(100		)	(113		)	(122		)
Amortization of actuarial losses	136			271			311
Amortization of prior service credit	(15		)	(16		)	(16		)
Net cost	$	351		$	512		$	554
Weighted-average assumptions
Discount rates	4.4		%	5.2		%	5.6		%
Expected long-term rates of return	7.7		%	7.7		%	7.8		%

For fiscal year 2012, the participants in one of the company’s postretirement health care plans became “almost all” inactive as described by the applicable accounting standards due to additional retirements. As a result, the net actuarial loss for this plan in the table above is now being amortized over the longer period for the average remaining life expectancy of the inactive participants rather than the average remaining service period of the active participants. The amortization of actuarial loss also decreased due to lower expected costs from the prescription drug plan to provide group benefits under Medicare Part D as an alternative to collecting the retiree drug subsidy.

The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

	2012			2011			2010
Pensions
Net cost	$	160		$	91		$	104
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses	999			848			227
Prior service cost	5			9			14
Amortization of actuarial losses	(202		)	(148		)	(113		)
Amortization of prior service cost	(47		)	(46		)	(42		)
Settlements/curtailments	(10		)	(1		)	(24		)
Total loss recognized in other comprehensive (income) loss	745			662			62
Total recognized in comprehensive (income) loss	$	905		$	753		$	166

The previous postretirement benefits cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

	2012			2011			2010
Health care and life insurance
Net cost	$	351		$	512		$	554
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses (gain)	335			132			(28		)
Prior service cost	2
Amortization of actuarial losses	(136		)	(271		)	(311		)
Amortization of prior service credit	15			16			16
Total (gain) loss recognized in other comprehensive (income) loss	216			(123		)	(323		)
Total recognized in comprehensive (income) loss	$	567		$	389		$	231

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 beginning 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
	2012			2011			2012			2011
Change in benefit obligations
Beginning of year balance	$	(10,925	)	$	(10,197	)	$	(6,652	)	$	(6,467	)
Service cost	(220		)	(197		)	(49		)	(44		)
Interest cost	(465		)	(492		)	(281		)	(326		)
Actuarial losses	(947		)	(656		)	(347		)	(113		)
Amendments	(5		)	(9		)	(2		)
Benefits paid	656			648			333			340
Health care subsidy receipts							(15		)	(14		)
Settlements/curtailments	10			1
Foreign exchange and other	62			(23		)	(10		)	(28		)
End of year balance	(11,834		)	(10,925		)	(7,023		)	(6,652		)
Change in plan assets (fair value)
Beginning of year balance	9,552			9,504			1,459			1,637
Actual return on plan assets	736			600			113			95
Employer contribution	441			79			37			43
Benefits paid	(656		)	(648		)	(333		)	(340		)
Settlements	(10		)	(1		)
Foreign exchange and other	(46		)	18			11			24
End of year balance	10,017			9,552			1,287			1,459
Funded status	$	(1,817	)	$	(1,373	)	$	(5,736	)	$	(5,193	)
Weighted-average assumptions
Discount rates	3.8		%	4.4		%	3.8		%	4.4		%
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
	2012			2011			2012			2011
Amounts recognized in balance sheet
Noncurrent asset	$	20		$	30
Current liability	(53		)	(60		)	$	(23	)	$	(23	)
Noncurrent liability	(1,784		)	(1,343		)	(5,713		)	(5,170		)
Total	$	(1,817	)	$	(1,373	)	$	(5,736	)	$	(5,193	)
Amounts recognized in accumulated other comprehensive income — pretax
Net actuarial losses	$	5,260		$	4,473		$	2,266		$	2,067
Prior service cost (credit)	105			147			(47		)	(64		)
Total	$	5,365		$	4,620		$	2,219		$	2,003

The total accumulated benefit obligations for all pension plans at October 31, 2012 and 2011 was $11,181 million and $10,363 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 $10,987 million and $9,787 million, respectively, at October 31, 2012 and $10,168 million and $9,321 million, respectively, at October 31, 2011. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $11,627 million and $9,790 million, respectively, at October 31, 2012 and $10,784 million and $9,381 million, respectively, at October 31, 2011.

The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2013 in millions of dollars follow:

			Health Care
			and
	Pensions		Life Insurance
Net actuarial losses	$	263	$	147
Prior service cost (credit)	33		(6		)
Total	$	296	$	141

The company expects to contribute approximately $527 million to its pension plans and approximately $27 million to its health care and life insurance plans in 2013, 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*
2013	$	682	$	338	$	4
2014	683		345
2015	680		356
2016	683		366
2017	689		384
2018 to 2022	3,490		1,947

* 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, 2012, the weighted-average composite trend rates for these obligations were assumed to be a 7.1 percent increase from 2012 to 2013, gradually decreasing to 5.0 percent from 2018 to 2019 and all future years. The obligations at October 31, 2011 and the cost in 2012 assumed a 7.3 percent increase from 2011 to 2012, gradually decreasing to 5.0 percent from 2017 to 2018 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 $955 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $50 million. A decrease of one percentage point would decrease the obligations by $723 million and the cost by $38 million.

The discount rate assumptions used to determine the postretirement obligations at October 31, 2012 and 2011 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 at October 31, 2012 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	1,166		$	287		$	879
Equity:
U.S. equity securities	2,481			2,481
U.S. equity funds	43			8			35
International equity securities	1,477			1,477
International equity funds	411			49			362
Fixed Income:
Government and agency securities	404			379			25
Corporate debt securities	220						220
Mortgage-backed securities	126						126
Fixed income funds	853			92			761
Real estate	537			104			14			$	419
Private equity/venture capital	1,319									1,319
Hedge funds	578			2			422			154
Other investments	508			1			507
Derivative contracts - assets*	721			1			720
Derivative contracts - liabilities**	(454		)	(20		)	(434		)
Receivables, payables and other	(41		)	(41		)
Securities lending collateral	223						223
Securities lending liability	(223		)				(223		)
Securities sold short	(332		)	(332		)
Total net assets	$	10,017		$	4,488		$	3,637		$	1,892

*Includes contracts for interest rates of $707 million, foreign currency of $8 million and other of $6 million.

**Includes contracts for interest rates of $418 million, foreign currency of $12 million and other of $24 million.

The fair values of the health care assets at October 31, 2012 follow in millions of dollars:

	Total			Level 1			Level 2			Level 3
Cash and short-term investments	$	78		$	11		$	67
Equity:
U.S. equity securities	319			319
U.S. equity funds	67			67
International equity securities	69			69
International equity funds	200						200
Fixed Income:
Government and agency securities	218			215			3
Corporate debt securities	35						35
Mortgage-backed securities	15						15
Fixed income funds	72						72
Real estate	53			7			29			$	17
Private equity/venture capital	54									54
Hedge funds	85						79			6
Other investments	21						21
Derivative contracts - assets*	8						8
Derivative contracts - liabilities**	(1		)				(1		)
Receivables, payables and other	8			8
Securities lending collateral	38						38
Securities lending liability	(38		)				(38		)
Securities sold short	(14		)	(14		)
Total net assets	$	1,287		$	682		$	528		$	77

*Includes contracts for interest rates of $7 million and foreign currency of $1 million.

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

The fair values of the pension plan assets 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
Mortgage-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 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
Mortgage-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.

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, 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
Realized gain	18					18
Change in unrealized gain (loss)	74		(4		)	65		13
Purchases, sales and settlements - net	112		3			112		(3		)
October 31, 2012*	$	1,969	$	436		$	1,373	$	160

* Health care Level 3 assets represent approximately 4 percent to 5 percent of the reconciliation amounts for 2012, 2011 and 2010.

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 42 percent for equity securities, 31 percent for debt securities, 5 percent for real estate and 22 percent for other investments. The target allocations for health care assets are approximately 51 percent for equity securities, 31 percent for debt securities, 3 percent for real estate and 15 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 9.3 percent during the past ten years and approximately 9.7 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 $155 million in 2012, $108 million in 2011 and $85 million in 2010. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.