RETIREMENT PLANS

We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits.

Retirement Plan Summary Information

Defined-contribution Benefits. We provide eligible employees the opportunity to participate in defined-contribution savings plans (commonly known as 401(k) plans), which permit contributions on a before-tax and after-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate in the plans. Under most plans, the employee may contribute to various investment alternatives, including investment in our common stock. In some of these plans, we match a portion of the employees’ contributions. Our contributions to these plans totaled $238 in 2014, $204 in 2013 and $201 in 2012. The defined-contribution plans held approximately 25 million and 27 million shares of our common stock, representing approximately 7 percent and 8 percent of our outstanding shares on December 31, 2014 and 2013, respectively.

Pension Benefits. We have six noncontributory and six contributory trusteed, qualified defined-benefit pension plans covering eligible government business employees, and two noncontributory and four contributory plans covering eligible commercial business employees, including some employees of our international operations. The primary factors affecting the benefits earned by participants in our pension plans are employees’ years of service and compensation levels. Our primary government pension plan, which comprises the majority of our unfunded obligation, was closed to new salaried participants on January 1, 2007. Additionally, we made changes to this plan for certain participants effective in 2014 that limit or cease the benefits that accrue for future service.

We also sponsor one funded and several unfunded non-qualified supplemental executive plans, which provide participants with additional benefits, including excess benefits over limits imposed on qualified plans by federal tax law.

Other Post-retirement Benefits. We maintain plans that provide post-retirement healthcare and life insurance coverage for certain employees and retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement.

Contributions and Benefit Payments

It is our policy to fund our defined-benefit retirement plans in a manner that optimizes the tax deductibility and contract recovery of contributions, considered within our capital deployment framework. Therefore, we may make discretionary contributions in addition to the required contributions determined in accordance with IRS regulations. We contributed $513 to our pension plans in 2014 and expect to contribute approximately $185 to our pension plans in 2015.

We maintain several tax-advantaged accounts, primarily Voluntary Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations for some of our post-retirement benefit plans. For non-funded plans, claims are paid as received.

We expect the following benefits to be paid from our retirement plans over the next 10 years:



	Pension Benefits		Other Post-retirement Benefits
2015	$	538	$	70
2016	563		69
2017	589		69
2018	616		68
2019	644		68
2020-2024	3,680		337

Government Contract Considerations

Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense business groups. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent recovery of the cost is considered probable based on our backlog and probable follow-on contracts, we defer the excess in contracts in process on the Consolidated Balance Sheets until the cost is allocable to contracts. See Note G for discussion of our deferred contract costs. For other plans, the amount allocated to contracts and included in revenues has exceeded the plans’ cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenues and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.

Defined-benefit Retirement Plan Summary Financial Information

Estimating retirement plan assets, liabilities and costs requires the extensive use of actuarial assumptions. These include the long-term rate of return on plan assets, the interest rate used to discount projected benefit payments, healthcare cost trend rates and future salary increases. Given the long-term nature of the assumptions being made, actual outcomes can and often do differ from these estimates.

Our annual benefit cost consists of three primary elements: the cost of benefits earned by employees for services rendered during the year, an interest charge on our plan liabilities and an assumed return on our plan assets for the year. The annual cost also includes gains and losses resulting from changes in actuarial assumptions, differences between the actual and assumed long-term rate of return on assets and gains and losses resulting from changes we make to plan benefit terms.

We recognize an asset or liability on the Consolidated Balance Sheets equal to the funded status of each of our defined-benefit retirement plans. The funded status is the difference between the fair value of the plan’s assets and its benefit obligation. Changes in plan assets and liabilities due to differences between actuarial assumptions and the actual results of the plan are deferred in OCL rather than charged to earnings. These differences are then amortized over future years as a component of our annual benefit cost. We amortize actuarial differences under qualified plans on a straight-line basis over the average remaining service period of eligible employees. We recognize the difference between the actual and expected return on plan assets for qualified plans over five years. The deferral of these differences reduces the volatility of our annual benefit cost that can result either from year-to-year changes in the assumptions or from actual results that are not necessarily representative of the long-term financial position of these plans. We recognize differences under nonqualified plans immediately.

Our annual pension and other post-retirement benefit costs consisted of the following:



	Pension Benefits
Year Ended December 31	2014			2013			2012
Service cost	$	186		$	298		$	266
Interest cost	532			492			523
Expected return on plan assets	(655		)	(590		)	(588		)
Recognized net actuarial loss	320			409			287
Amortization of prior service credit	(67		)	(67		)	(42		)
Annual benefit cost	$	316		$	542		$	446



	Other Post-retirement Benefits
Year Ended December 31	2014			2013			2012
Service cost	$	12		$	15		$	12
Interest cost	52			53			59
Expected return on plan assets	(31		)	(29		)	(30		)
Recognized net actuarial loss	9			26			10
Amortization of prior service (credit) cost	(2		)	7			7
Annual benefit cost	$	40		$	72		$	58

The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined-benefit retirement plans:



	Pension Benefits						Other Post-retirement Benefits
Year Ended December 31	2014			2013			2014			2013
Change in Benefit Obligation
Benefit obligation at beginning of year	$	(11,013	)	$	(12,114	)	$	(1,183	)	$	(1,384	)
Service cost	(186		)	(298		)	(12		)	(15		)
Interest cost	(532		)	(492		)	(52		)	(53		)
Amendments	(1		)	234			55			—
Actuarial gain (loss)	(2,083		)	1,094			(30		)	177
Settlement/curtailment/other	64			2			15			11
Benefits paid	515			561			77			81
Benefit obligation at end of year	$	(13,236	)	$	(11,013	)	$	(1,130	)	$	(1,183	)
Change in Plan/Trust Assets
Fair value of assets at beginning of year	$	8,476		$	7,227		$	519		$	426
Actual return on plan assets	664			1,200			68			116
Employer contributions	513			601			6			25
Settlement/curtailment/other	(65		)	(3		)	(1		)	—
Benefits paid	(504		)	(549		)	(39		)	(48		)
Fair value of assets at end of year	$	9,084		$	8,476		$	553		$	519
Funded status at end of year	$	(4,152	)	$	(2,537	)	$	(577	)	$	(664	)

Amounts recognized on our Consolidated Balance Sheets consisted of the following:



	Pension Benefits						Other Post-retirement Benefits
December 31	2014			2013			2014			2013
Noncurrent assets	$	176		$	178		$	—		$	—
Current liabilities	(128		)	(104		)	(181		)	(199		)
Noncurrent liabilities	(4,200		)	(2,611		)	(396		)	(465		)
Net liability recognized	$	(4,152	)	$	(2,537	)	$	(577	)	$	(664	)

Amounts deferred in AOCL consisted of the following:



	Pension Benefits						Other Post-retirement Benefits
December 31	2014			2013			2014			2013
Net actuarial loss	$	5,364		$	3,618		$	89		$	109
Prior service (credit) cost	(320		)	(387		)	(38		)	10
Total amount recognized in AOCL, pretax	$	5,044		$	3,231		$	51		$	119

The following is a reconciliation of the change in AOCL for our defined-benefit retirement plans:



	Pension Benefits						Other Post-retirement Benefits
Year Ended December 31	2014			2013			2014			2013
Net actuarial loss (gain)	$	2,074		$	(1,704	)	$	(7	)	$	(264	)
Prior service cost (credit)	1			(234		)	(55		)	—
Amortization of:
Net actuarial loss from prior years	(320		)	(409		)	(9		)	(26		)
Prior service credit (cost)	67			67			2			(7		)
Other*	(9		)	(12		)	1			(6		)
Change in AOCL, pretax	$	1,813		$	(2,292	)	$	(68	)	$	(303	)

* Includes foreign exchange translation and curtailment adjustments.

The following table represents amounts deferred in AOCL on the Consolidated Balance Sheets on December 31, 2014, that we expect to recognize in our retirement benefit cost in 2015:



	Pension Benefits			Other Post-retirement Benefits
Prior service credit	$	(67	)	$	(5	)
Net actuarial loss	438			6

A pension plan’s funded status is the difference between the plan’s assets and its projected benefit obligation (PBO). The PBO is the present value of future benefits attributed to employee services rendered to date, including assumptions about future compensation levels. A pension plan’s accumulated benefit obligation (ABO) is the present value of future benefits attributed to employee services rendered to date, excluding assumptions about future compensation levels. The ABO for all defined-benefit pension plans was $12.8 billion and $10.6 billion on December 31, 2014 and 2013, respectively. On December 31, 2014 and 2013, some of our pension plans had an ABO that exceeded the plans’ assets. Summary information for those plans follows:



December 31	2014			2013
PBO	$	(12,797	)	$	(10,627	)
ABO	(12,363		)	(10,275		)
Fair value of plan assets	8,578			7,988

Retirement Plan Assumptions

We calculate the plan assets and liabilities for a given year and the net periodic benefit cost for the subsequent year using assumptions determined as of December 31 of the year in question.

The following table summarizes the weighted average assumptions used to determine our benefit obligations:



Assumptions on December 31	2014		2013
Pension Benefits
Discount rate	4.10	%	4.95	%
Rate of increase in compensation levels	3.43	%	3.70	%
Other Post-retirement Benefits
Discount rate	4.03	%	4.74	%
Healthcare cost trend rate:
Trend rate for next year	7.00	%	8.00	%
Ultimate trend rate	5.00	%	5.00	%
Year rate reaches ultimate trend rate	2024		2019

The following table summarizes the weighted average assumptions used to determine our net periodic benefit costs:



Assumptions for Year Ended December 31	2014		2013		2012
Pension Benefits
Discount rate	4.95	%	4.22	%	5.22	%
Expected long-term rate of return on assets	8.16	%	8.14	%	8.24	%
Rate of increase in compensation levels	3.78	%	3.79	%	3.77	%
Other Post-retirement Benefits
Discount rate	4.74	%	3.97	%	5.13	%
Expected long-term rate of return on assets	8.03	%	8.03	%	8.03	%

We base the discount rate on a current yield curve developed from a portfolio of high-quality fixed-income investments with maturities consistent with the projected benefit payout period. We determine the long-term rate of return on assets based on consideration of historical and forward-looking returns and the current and expected asset allocation strategy.

In 2014, we adopted updated mortality tables published by the Society of Actuaries that predict increasing life expectancies in the United States. Additionally, we updated several other assumptions to align them with historical experience, including rates of retirement and cost of living increases. The impact of these changes was a net increase of $566 and $28 in the benefit obligations of our pension and other post-retirement benefit plans, respectively, on December 31, 2014.

Retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions. Changes in these estimates impact future pension and post-retirement benefit costs. As discussed above, we defer recognition of the cumulative benefit cost for our government plans in excess of costs allocable to contracts to provide a better matching of revenues and expenses. Therefore, the impact of annual changes in financial reporting assumptions on the cost for these plans does not affect our operating results either positively or negatively. For our domestic pension plans that represent the majority of our total obligation, the following hypothetical changes in the discount rate and expected long-term rate of return on plan assets would have had the following impact in 2014:



	Increase 25 basis points			Decrease 25 basis points
Increase (decrease) to net pension cost from:
Change in discount rate	$	(29	)	$	30
Change in long-term rate of return on plan assets	(18		)	18

A 25-basis-point change in these assumed rates would not have had a measurable impact on the benefit cost for our other post-retirement plans in 2014. For our healthcare plans, the effect of a 1 percentage point increase or decrease in the assumed healthcare cost trend rate on the net periodic benefit cost is $6 and ($5), respectively, and the effect on the accumulated post-retirement benefit obligation is $94 and ($75), respectively.

Plan Assets

A committee of our board of directors is responsible for the strategic oversight of our defined-benefit retirement plan assets held in trust. Management reports to the committee on a regular basis and is responsible for overseeing all investment decisions related to defined-benefit retirement plan assets made by a third-party investment manager in compliance with the company’s policies.

Our investment policy endeavors to strike the appropriate balance among capital preservation, asset growth and current income. The objective of our investment policy is to generate future returns consistent with our assumed long-term rate of return used to determine our benefit obligations and net periodic benefit costs. Target allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. At the end of 2014, our asset allocation policy ranges were:



Equities	48 - 68%
Fixed income	20 - 48%
Cash	0 - 5%
Other asset classes	0 - 16%

More than 90 percent of our pension plan assets are held in a single trust for our primary U.S. government and commercial pension plans. On December 31, 2014, the trust was invested largely in publicly traded equities and fixed-income securities, but may invest in other asset classes in the future consistent with our investment policy. Our investments in equity assets include U.S. and international securities and equity funds as well as futures contracts on U.S. equity indices. Our investments in fixed-income assets include U.S. Treasury and U.S. agency securities, corporate bonds, mortgage-backed securities, futures contracts and international securities. Our investment policy allows the use of derivative instruments when appropriate to reduce anticipated asset volatility, to gain exposure to an asset class or to adjust the duration of fixed-income assets.

Assets for our non-U.S. pension plans are held in trusts in the countries in which the related operations reside. Our non-U.S. operations maintain investment policies for their individual plans based on country-specific regulations. The non-U.S. plan assets are primarily invested in commingled funds comprised of non-U.S. and U.S. equities and fixed-income securities.

We hold assets in VEBA trusts for some of our other post-retirement plans. These assets are generally invested in equities, corporate bonds and equity-based mutual funds. Our asset allocation strategy for the VEBA trusts considers potential fluctuations in our post-retirement liability, the taxable nature of certain VEBA trusts, tax deduction limits on contributions and the regulatory environment.

Our retirement plan assets are reported at fair value. See Note D for a discussion of the hierarchy for determining fair value. Our Level 1 assets include investments in publicly traded equity securities and commingled funds. These securities (and the underlying investments of the funds) are actively traded and valued using quoted prices for identical securities from the market exchanges. Our Level 2 assets consist of fixed-income securities and commingled funds that are not actively traded or whose underlying investments are valued using observable marketplace inputs. The fair value of plan assets invested in fixed-income securities is generally determined using valuation models that use observable inputs such as interest rates, bond yields, low-volume market quotes and quoted prices for similar assets. Our plan assets that are invested in commingled funds are valued using a unit price or net asset value (NAV) that is based on the underlying investments of the fund. We had minimal Level 3 plan assets on December 31, 2014. These investments include real estate and hedge funds, insurance deposit contracts and direct private equity investments.

The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2014
Cash	$	32	$	32	$	—	$	—
Equity securities
U.S. companies (a)	775		775		—		—
Non-U.S. companies	90		90		—		—
Private equity investments	9		—		—		9
Fixed-income securities
Treasury securities	449		—		449		—
Corporate bonds (b)	2,354		—		2,354		—
Commingled funds
Equity funds	4,272		—		4,272		—
Money market funds	49		—		49		—
Fixed-income funds	296		—		296		—
Real estate funds	139		—		—		139
Commodity funds	6		—		6		—
Hedge funds	510		—		316		194
Other investments
Insurance deposit agreements	103		—		—		103
Total pension plan assets	$	9,084	$	897	$	7,742	$	445


(a)	No single equity holding amounted to more than 1 percent of the total fair value.


(b)	Our corporate bond investments had an average rating of A-.



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2013
Cash	$	35	$	35	$	—	$	—
Equity securities
U.S. companies (a)	685		685		—		—
Non-U.S. companies	128		128		—		—
Private equity investments	10		—		—		10
Fixed-income securities
Treasury securities	428		—		428		—
Corporate bonds (b)	2,227		—		2,227		—
Commingled funds
Equity funds	3,935		—		3,935		—
Money market funds	97		—		97		—
Fixed-income funds	303		—		303		—
Real estate funds	34		—		—		34
Commodity funds	8		—		8		—
Hedge funds	471		—		288		183
Other investments
Insurance deposit agreements	115		—		—		115
Total pension plan assets	$	8,476	$	848	$	7,286	$	342


(a)	No single equity holding amounted to more than 1 percent of the total fair value.


(b)	Our corporate bond investments had an average rating of A-.

The fair value of our other post-retirement plan assets by category and the corresponding level within the fair value hierarchy were as follows:



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2014
Cash	$	3	$	3	$	—	$	—
Equity securities	167		167		—		—
Fixed-income securities	11		—		11		—
Commingled funds
Equity funds	314		5		309		—
Fixed-income funds	56		6		50		—
Hedge funds	2		—		1		1
Total other post-retirement plan assets	$	553	$	181	$	371	$	1



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Asset Category	December 31, 2013
Cash	$	6	$	6	$	—	$	—
Equity securities	154		154		—		—
Fixed-income securities	55		—		55		—
Commingled funds
Equity funds	296		—		296		—
Fixed-income funds	6		6		—		—
Hedge funds	2		—		1		1
Total other post-retirement plan assets	$	519	$	166	$	352	$	1

Changes in our Level 3 retirement plan assets during 2013 and 2014 were as follows:



	Private Equity Investments			Real Estate Funds		Hedge Funds		Insurance Deposits Agreements			Total Level 3 Assets
December 31, 2012	$	8		$	32	$	101	$	108		$	249
Unrealized gains on plan assets, net	—			—		8		9			17
Purchases, sales, and settlements, net	2			2		75		(2		)	77
December 31, 2013	10			34		184		115			343
Unrealized gains on plan assets, net	(2		)	9		11		(12		)	6
Purchases, sales, and settlements, net	1			96		—		—			97
December 31, 2014	$	9		$	139	$	195	$	103		$	446