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:


	2013		2012		2011

Pensions
Service cost	$	273	$	220	$	197
Interest cost	439		465		492
Expected return on plan assets	(778)		(787)		(793)
Amortization of actuarial losses	265		202		148
Amortization of prior service cost	12		47		46
Early-retirement benefits			3
Settlements/curtailments	2		10		1
Net cost	$	213	$	160	$	91
Weighted-average assumptions
Discount rates	3.8%		4.4%		5.0%
Rate of compensation increase	3.9%		3.9%		3.9%
Expected long-term rates of return	7.8%		8.0%		8.1%

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:


	2013		2012		2011

Health care and life insurance
Service cost	$	58	$	49	$	44
Interest cost	255		281		326
Expected return on plan assets	(84)		(100)		(113)
Amortization of actuarial loss	141		136		271
Amortization of prior service credit	(8)		(15)		(16)
Net cost	$	362	$	351	$	512
Weighted-average assumptions
Discount rates	3.8%		4.4%		5.2%
Expected long-term rates of return	7.5%		7.7%		7.7%

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, beginning in 2012, the net actuarial loss for this plan in the table above is 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 in 2012 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:


	2013		2012		2011

Pensions
Net cost	$	213	$	160	$	91
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss	(1,481)		999		848
Prior service (credit) cost	(26)		5		9
Amortization of actuarial loss	(265)		(202)		(148)
Amortization of prior service cost	(12)		(47)		(46)
Settlements/curtailments	(2)		(10)		(1)
Total (gain) loss recognized in other comprehensive (income) loss	(1,786)		745		662
Total recognized in comprehensive (income) loss	$	(1,573)	$	905	$	753

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:


	2013		2012		2011

Health care and life insurance
Net cost	$	362	$	351	$	512
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss	(1,165)		335		132
Prior service (credit) cost	(2)		2
Amortization of actuarial loss	(141)		(136)		(271)
Amortization of prior service credit	8		15		16
Total (gain) loss recognized in other comprehensive (income) loss	(1,300)		216		(123)
Total recognized in comprehensive (income) loss	$	(938)	$	567	$	389

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


	Pensions				Health Care and Life Insurance
	2013		2012		2013		2012

Change in benefit obligations
Beginning of year balance	$	(11,834)	$	(10,925)	$	(7,023)	$	(6,652)
Service cost	(273)		(220)		(58)		(49)
Interest cost	(439)		(465)		(255)		(281)
Actuarial gain (loss)	951		(947)		1,092		(347)
Amendments	26		(5)		2		(2)
Benefits paid	655		656		329		333
Health care subsidies					(16)		(15)
Settlements/curtailments	3		10
Foreign exchange and other	(57)		62		3		(10)
End of year balance	(10,968)		(11,834)		(5,926)		(7,023)

Change in plan assets (fair value)
Beginning of year balance	10,017		9,552		1,287		1,459
Actual return on plan assets	1,312		736		158		113
Employer contribution	301		441		37		37
Benefits paid	(655)		(656)		(329)		(333)
Settlements	(3)		(10)
Foreign exchange and other	36		(46)		4		11
End of year balance	11,008		10,017		1,157		1,287
Funded status	$	40	$	(1,817)	$	(4,769)	$	(5,736)

Weighted-average assumptions
Discount rates	4.5%		3.8%		4.7%		3.8%
Rate of compensation increase	3.8%		3.9%

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


	Pensions				Health Care and Life Insurance
	2013		2012		2013		2012

Amounts recognized in balance sheet
Noncurrent asset	$	551	$	20
Current liability	(58)		(53)		$	(21)	$	(23)
Noncurrent liability	(453)		(1,784)		(4,748)		(5,713)
Total	$	40	$	(1,817)	$	(4,769)	$	(5,736)
Amounts recognized in accumulated other comprehensive income – pretax
Net actuarial loss	$	3,512	$	5,260	$	960	$	2,266
Prior service cost (credit)	67		105		(41)		(47)
Total	$	3,579	$	5,365	$	919	$	2,219

The total accumulated benefit obligations for all pension plans at October 31, 2013 and 2012 was $10,352 million and $11,181 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 $680 million and $267 million, respectively, at October 31, 2013 and $10,987 million and $9,787 million, respectively, at October 31, 2012. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $1,340 million and $829 million, respectively, at October 31, 2013 and $11,627 million and $9,790 million, respectively, at October 31, 2012.

The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2014 in millions of dollars follow:


	Pensions			Health Care and Life Insurance

Net actuarial loss		$	174		$	37
Prior service cost (credit)			25			(3)
Total		$	199		$	34

The company expects to contribute approximately $88 million to its pension plans and approximately $27 million to its health care and life insurance plans in 2014, which are primarily direct benefit payments for unfunded plans.

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


	Pensions		Health Care and Life Insurance*

2014	$	690	$	321
2015	673		331
2016	672		339
2017	679		357
2018	682		362
2019 to 2023	3,467		1,831

* Net of prescription drug group benefit subsidy under Medicare Part D.

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, 2013, the weighted-average composite trend rates for these obligations were assumed to be a 6.5 percent increase from 2013 to 2014, gradually decreasing to 5.0 percent from 2021 to 2022 and all future years. The obligations at October 31, 2012 and the cost in 2013 assumed a 7.1 percent increase from 2012 to 2013, gradually decreasing to 5.0 percent from 2018 to 2019 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 $717 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $43 million. A decrease of one percentage point would decrease the obligations by $570 million and the cost by $34 million.

The discount rate assumptions used to determine the postretirement obligations at October 31, 2013 and 2012 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, 2013 follow in millions of dollars:


	Total		Level 1		Level 2		Level 3

Cash and short-term investments	$	1,190	$	317	$	873
Equity:
U.S. equity securities	3,321		3,321
U.S. equity funds	47		5		42
International equity securities	1,953		1,953
International equity funds	481		68		413
Fixed Income:
Government and agency securities	391		370		21
Corporate debt securities	278				278
Mortgage-backed securities	106		14		92
Fixed income funds	601		91		510
Real estate	550		110		12		$	428
Private equity/venture capital	1,416						1,416
Hedge funds	529				379		150
Other investments	389		3		386
Derivative contracts - assets*	769		10		759
Derivative contracts - liabilities**	(591)		(6)		(585)
Receivables, payables and other	14		14
Securities lending collateral	716				716
Securities lending liability	(716)				(716)
Securities sold short	(436)		(436)
Total net assets	$	11,008	$	5,834	$	3,180	$	1,994

* Includes contracts for interest rates of $749 million, foreign currency of $10 million, equity of $9 million and other of $1 million.

** Includes contracts for interest rates of $563 million, foreign currency of $22 million and other of $6 million.

The fair values of the health care assets at October 31, 2013 follow in millions of dollars:


	Total		Level 1		Level 2		Level 3

Cash and short-term investments	$	58	$	29	$	29
Equity:
U.S. equity securities	298		298
U.S. equity funds	84		84
International equity securities	71		71
International equity funds	187				187
Fixed Income:
Government and agency securities	184		180		4
Corporate debt securities	33				33
Mortgage-backed securities	11				11
Fixed income funds	58				58
Real estate	52		6		31		$	15
Private equity/venture capital	48						48
Hedge funds	71				66		5
Other investments	13				13
Derivative contracts - assets*	4				4
Derivative contracts - liabilities**	(1)				(1)
Receivables, payables and other	1		1
Securities lending collateral	109				109
Securities lending liability	(109)				(109)
Securities sold short	(15)		(15)
Total net assets	$	1,157	$	654	$	435	$	68

* Includes contracts for interest rates of $3 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, 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.

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


	Total		Real Estate		Private Equity/ Venture Capital		Hedge Funds

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
Realized gain	58				51		7
Change in unrealized gain	220		68		142		10
Purchases, sales and settlements - net	(185)		(61)		(102)		(22)
October 31, 2013*	$	2,062	$	443	$	1,464	$	155

* Health care Level 3 assets represent approximately 3 percent to 5 percent of the reconciliation amounts for 2013, 2012 and 2011.

Fair values are determined as follows:

Cash and Short-Term Investments – Includes accounts that are valued based on the account value, which approximates fair value, and investment funds that are valued 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 47 percent for equity securities, 24 percent for debt securities, 5 percent for real estate and 24 percent for other investments. The target allocations for health care assets are approximately 53 percent for equity securities, 29 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 significantly 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 8.8 percent during the past ten years and approximately 9.4 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 $178 million in 2013, $155 million in 2012 and $108 million in 2011. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.