13. Retirement Plans

The Corporation has funded noncontributory defined benefit pension plans for a significant portion of its employees. In addition, the Corporation has an unfunded supplemental pension plan covering certain employees, which provides incremental payments that would have been payable from the Corporation’s principal pension plans, were it not for limitations imposed by income tax regulations. The plans provide defined benefits based on years of service and final average salary. Additionally, the Corporation maintains an unfunded postretirement medical plan that provides health benefits to certain qualified retirees from ages 55 through 65. The measurement date for all retirement plans is December 31.

The following table summarizes the Corporation’s benefit obligations and the fair value of plan assets and shows the funded status of the pension and postretirement medical plans:

	Funded						Unfunded						Postretirement
	Pension Plans						Pension Plan						Medical Plan
	2014			2013			2014			2013			2014			2013
	(In millions)
Change in benefit obligation
Balance at January 1	$	1,957		$	2,110		$	253		$	234		$	97		$	134
Service cost		45			61			12			12			4			4
Interest cost		91			82			9			7			3			3
Actuarial (gain) loss (a)		470			(139	)		61			28			(4	)		(4	)
Benefit payments (b)		(77	)		(69	)		(57	)		(20	)		(6	)		(5	)
Plan curtailments (c)		(3	)		(103	)		—			(8	)		—			(35	)
Special termination benefits		2			5			—			—			—			—
Foreign currency exchange rate changes		(35	)		10			—			—			—			—
Balance at December 31		2,450			1,957			278			253			94			97
Change in fair value of plan assets
Balance at January 1		2,145			1,763			—			—			—			—
Actual return on plan assets		151			292			—			—			—			—
Employer contributions		68			146			56			20			6			5
Benefit payments (b)		(77	)		(69	)		(56	)		(20	)		(6	)		(5	)
Foreign currency exchange rate changes		(36	)		13			—			—			—			—
Balance at December 31		2,251			2,145			—			—			—			—

Funded status (plan assets greater (less) than benefit obligations) at December 31		(199	)		188			(278	)		(253	)		(94	)		(97	)
Unrecognized net actuarial (gains) losses		859			405			135			108			(5	)		(2	)

(a)	The change in discount rate and mortality assumptions in 2014 resulted in total actuarial losses of approximately $330 million and $125 million, respectively.

(b)	Benefit payments include lump-sum settlement payments of $55 million in 2014.

(c)	During the first quarter of 2013, the Corporation’s pension and other postretirement plans were impacted by a significant reduction in the expected future service from active participants due to the Corporation’s announced asset sales program.

Amounts recognized in the Consolidated Balance Sheet at December 31 consisted of the following:

	Funded Pension Plans					Unfunded Pension Plan						Postretirement Medical Plan
	2014			2013		2014			2013			2014			2013
	(In millions)
Pension asset / (accrued benefit liability)	$	(199	)	$	188	$	(278	)	$	(253	)	$	(94	)	$	(97	)
Accumulated other comprehensive loss, pre-tax*		859			405		135			108			(5	)		(2	)

*	The after‑tax deficit reflected in Accumulated other comprehensive income (loss) for these retirement plans was $652 million at December 31, 2014 and $342 million at December 31, 2013.

The accumulated benefit obligation for the funded defined benefit pension plans was $2,325 million at December 31, 2014 and $1,873 million at December 31, 2013. The accumulated benefit obligation for the unfunded defined benefit pension plan was $214 million at December 31, 2014 and $222 million at December 31, 2013.

Components of net periodic benefit cost for funded and unfunded pension plans and the postretirement medical plan consisted of the following:

	Pension Plans									Postretirement Medical Plan
	2014			2013			2012			2014		2013		2012
	(In millions)
Service cost	$	57		$	73		$	74		$	4	$	4	$	7
Interest cost		100			89			88			3		3		5
Expected return on plan assets		(161	)		(141	)		(116	)		—		—		—
Amortization of unrecognized net actuarial losses		31			61			83			—		1		2
Settlement loss		24			—			9			—		—		—
Curtailment loss		—			1			—			—		—		—
Special termination benefit recognized		1			5			—			—		—		—
Net periodic benefit cost	$	52		$	88		$	138		$	7	$	8	$	14

The Corporation’s 2015 pension and postretirement medical expense is estimated to be approximately $80 million, which includes approximately $75 million related to the amortization of unrecognized net actuarial losses.

The weighted average actuarial assumptions used by the Corporation’s funded and unfunded pension plans were as follows:

	2014			2013			2012
Weighted average assumptions used to determine benefit obligations at December 31
Discount rate		3.8	%		4.6	%		3.8	%
Rate of compensation increase		5.0			4.4			4.3
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31
Discount rate		4.6			4.0			4.3
Expected return on plan assets		7.5			7.5			7.5
Rate of compensation increase		4.4			4.3			4.3

The actuarial assumptions used by the Corporation’s postretirement medical plan were as follows:

	2014			2013			2012
Assumptions used to determine benefit obligations at December 31
Discount rate		3.1	%		3.6	%		3.1	%
Initial health care trend rate		6.8	%		7.1	%		7.3	%
Ultimate trend rate		4.5	%		4.6	%		4.8	%
Year in which ultimate trend rate is reached		2029			2027			2022

The assumptions used to determine net periodic benefit cost for each year were established at the end of each previous year while the assumptions used to determine benefit obligations were established at each year‑end. The net periodic benefit cost and the actuarial present value of benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The discount rate is developed based on a portfolio of high‑quality, fixed income debt instruments with maturities that approximate the expected payment of plan obligations. The overall expected return on plan assets is developed from the expected future returns for each asset category, weighted by the target allocation of pension assets to that asset category.

The Corporation’s investment strategy is to maximize long‑term returns at an acceptable level of risk through broad diversification of plan assets in a variety of asset classes. Asset classes and target allocations are determined by the Corporation’s investment committee and include domestic and foreign equities, fixed income, and other investments, including hedge funds, real estate and private equity. Investment managers are prohibited from investing in securities issued by the Corporation unless indirectly held as part of an index strategy. The majority of plan assets are highly liquid, providing ample liquidity for benefit payment requirements. The current target allocations for plan assets are 50% equity securities, 25% fixed income securities (including cash and short‑term investment funds) and 25% to all other types of investments. Asset allocations are rebalanced on a periodic basis throughout the year to bring assets to within an acceptable range of target levels.

The following tables provide the fair value of the financial assets of the funded pension plans as of December 31, 2014 and 2013 in accordance with the fair value measurement hierarchy described in Note 1, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements:

	Level 1		Level 2		Level 3		Total
	(In millions)
December 31, 2014
Cash and short-term investment funds	$	6	$	47	$	—	$	53
Equities:
U.S. equities (domestic)		719		—		—		719
International equities (non-U.S.)		72		177		—		249
Global equities (domestic and non-U.S.)		10		218		—		228
Fixed income:
Treasury and government issued (a)		—		222				222
Government related (b)		—		7		1		8
Mortgage-backed securities (c)		—		147		1		148
Corporate		3		137				140
Other:
Hedge funds		—		—		302		302
Private equity funds		—		—		105		105
Real estate funds		12		—		48		60
Diversified commodities funds		—		17		—		17
	$	822	$	972	$	457	$	2,251

December 31, 2013
Cash and short-term investment funds	$	3	$	72	$	—	$	75
Equities:
U.S. equities (domestic)		729		—		—		729
International equities (non-U.S.)		81		171		—		252
Global equities (domestic and non-U.S.)		8		208		—		216
Fixed income:
Treasury and government issued (a)		—		169		1		170
Government related (b)		—		9		—		9
Mortgage-backed securities (c)		—		109		1		110
Corporate		2		124		1		127
Other:
Hedge funds		—		—		291		291
Private equity funds		—		—		89		89
Real estate funds		10		—		47		57
Diversified commodities funds		—		20		—		20
	$	833	$	882	$	430	$	2,145

(a)	Includes securities issued and guaranteed by U.S. and non‑U.S. governments.

(b)	Primarily consists of securities issued by governmental agencies and municipalities.

(c)	Comprised of U.S. residential and commercial mortgage-backed securities.

Cash and short‑term investment funds consist of cash on hand and short-term investment funds that provide for daily investments and redemptions and are valued and carried at a $1 net asset value (NAV) per fund share. Cash on hand is classified as Level 1 and short‑term investment funds are classified as Level 2.

Equities consist of equity securities issued by U.S. and non‑U.S. corporations as well as commingled investment funds that invest in equity securities. Individually held equity securities, which are traded actively on exchanges and have readily available price quotes, are classified as Level 1. Commingled fund values, which are valued at the NAV per fund share derived from the quoted prices in active markets of the underlying securities, are classified as Level 2.

Fixed income investments consist of securities issued by the U.S. government, non‑U.S. governments, governmental agencies, municipalities and corporations, and agency and non-agency mortgage‑backed securities. This investment category also includes commingled investment funds that invest in fixed income securities. Individual fixed income securities are generally priced on the basis of evaluated prices from independent pricing services, which are monitored and provided by the third-party custodial firm responsible for safekeeping plan assets. Individual fixed income securities are classified as Level 2 or 3. Fixed income commingled fund values, which reflect the NAV per fund share derived indirectly from observable inputs or from quoted prices in less liquid markets of the underlying securities, are classified as Level 2.

Other investments consist of exchange‑traded real estate investment trust securities, as well as commingled fund and limited partnership investments in hedge funds, private equity, real estate and diversified commodities. Exchange‑traded securities are classified as Level 1. Commingled fund values reflect the NAV per fund share and are classified as Level 2 or 3. Private equity and real estate limited partnership values reflect information reported by the fund managers, which include inputs such as cost, operating results, discounted future cash flows, market based comparable data and independent appraisals from third‑party sources with professional qualifications. Hedge funds, private equity and non‑exchange‑traded real estate investments are classified as Level 3.

The following tables provide changes in financial assets that are measured at fair value based on Level 3 inputs that are held by institutional funds classified as:

						Private		Real
	Fixed			Hedge		Equity		Estate
	Income*			Funds		Funds		Funds		Total
	(In millions)
Balance at January 1, 2013	$	2		$	255	$	75	$	45	$	377
Actual return on plan assets		—			26		11		2		39
Purchases, sales or other settlements		1			10		3		—		14
Net transfers in (out) of Level 3		—			—		—		—		—
Balance at December 31, 2013		3			291		89		47		430
Actual return on plan assets		—			9		15		—		24
Purchases, sales or other settlements		(1	)		2		1		1		3
Net transfers in (out) of Level 3		—			—		—		—		—
Balance at December 31, 2014	$	2		$	302	$	105	$	48	$	457

*	Fixed Income includes treasury and government issued, government related, mortgage‑backed and corporate securities.

The Corporation has budgeted contributions of approximately $55 million to its funded pension plans in 2015.

Estimated future benefit payments by the funded and unfunded pension plans and the postretirement medical plan, which reflect expected future service, are as follows (in millions):

2015	$	157
2016		112
2017		118
2018		121
2019		129
Years 2020 to 2024		694

The Corporation also contributes to several defined contribution plans for eligible employees. Employees may contribute a portion of their compensation to the plans and the Corporation matches a portion of the employee contributions. The Corporation recorded expense of $32 million in 2014, $41 million in 2013 and $40 million in 2012 for contributions to these plans.