17. Pension, Postretirement Health Care and Life Insurance Benefit Plans

We maintain U.S. qualified funded defined benefit pension plans in which many of our U.S. employees and agents are participants, and we retained the Lincoln UK pension plan after the sale of this business. We also maintain non-qualified, unfunded defined benefit pension plans for certain employees and agents. In addition, for certain former employees we have supplemental retirement plans that provide defined benefit pension benefits in excess of limits imposed by federal tax law. All of our defined benefit pension plans are frozen, including the defined benefit pension plan that was retained after the sale of Lincoln UK, and there are no new participants and no future accruals of benefits from the date of the freeze.

The eligibility requirements for each plan are described in each plan document and vary for each plan based on completion of a specified period of continuous service and date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional final pay or cash balance formula. Those formulas are based upon years of credited service and eligible earnings as defined in each plan document. The traditional formula provides benefits stated in terms of a single life annuity payable at age 65. The cash balance formula provides benefits stated as a lump sum hypothetical account balance. That account balance equals the sum of the employee’s accumulated annual benefit credits plus interest credits. Benefit credits, which are based on years of service and base salary plus bonus, ceased as of the date the plan was frozen. Interest credits continue until the participant’s benefit is paid.

We also sponsor a voluntary employees’ beneficiary association (“VEBA”) trust that provides postretirement medical, dental and life insurance benefits to retired full-time U.S. employees and agents who, depending on the plan, have worked for us for at least 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide benefits that are subject to preferential tax treatment under the Internal Revenue Code. Medical and dental benefits are available to spouses and other eligible dependents of retired employees and agents. Retirees may be required to contribute toward the cost of these benefits. Eligibility and the amount of required contribution for these benefits varies based upon a variety of factors including years of service and year of retirement.

Obligations, Funded Status and Assumptions

Information (in millions) with respect to our benefit plans’ assets and obligations was as follows:



	As of or For the Years Ended December 31,
	2013		2012		2013		2012		2013		2012

	U.S.				Non-U.S.				Other
	Pension Benefits				Pension Benefits				Postretirement Benefits
Change in Plan Assets
Fair value as of beginning-of-year	$	1,043	$	956	$	371	$	350	$	42	$	39
Actual return on plan assets		67		123		18		28		3		3
Company and participant contributions		6		32		6		7		13		15
Benefits paid		(69)		(68)		(16)		(14)		(16)		(17)
Medicare Part D subsidy		-		-		-		-		3		2
Fair value as of end-of-year		1,047		1,043		379		371		45		42

Change in Benefit Obligation
Balance as of beginning-of-year		1,284		1,238		364		311		139		161
Service cost (1)		5		5		-		-		3		4
Interest cost		51		53		16		15		5		7
Company and participant contributions		-		-		-		-		4		6
Amendments		-		-		-		-		(29)		-
Actuarial (gains) losses		(93)		61		9		52		(7)		(24)
Administrative expenses paid		(6)		(5)		-		-		-		-
Benefits paid		(69)		(68)		(16)		(14)		(16)		(17)
Medicare Part D subsidy		-		-		-		-		3		2
Balance as of end-of-year		1,172		1,284		373		364		102		139
Funded status of the plans	$	(125)	$	(241)	$	6	$	7	$	(57)	$	(97)

Amounts Recognized on the
Consolidated Balance Sheets
Other assets	$	14	$	21	$	6	$	7	$	-	$	-
Other liabilities		(139)		(262)		-		-		(57)		(97)
Net amount recognized	$	(125)	$	(241)	$	6	$	7	$	(57)	$	(97)

Amounts Recognized in
Accumulated OCI, Net of Tax
Net (gain) loss	$	157	$	229	$	107	$	95	$	(15)	$	(11)
Prior service credit		-		-		-		-		(18)		(3)
Net amount recognized	$	157	$	229	$	107	$	95	$	(33)	$	(14)

Rate of Increase in Compensation
Retiree Life Insurance Plan		N/A		N/A		N/A		N/A		4.00%		4.00%
All other plans		N/A		N/A		N/A		N/A		N/A		N/A

Weighted-Average Assumptions
Benefit obligations:
Weighted-average discount rate		4.70%		4.16%		4.45%		4.40%		4.50%		4.03%
Expected return on plan assets		7.82%		7.79%		5.50%		5.30%		6.50%		6.50%
Net periodic benefit cost:
Weighted-average discount rate		4.16%		4.45%		4.40%		5.00%		4.03%		4.25%
Expected return on plan assets		7.82%		7.79%		5.50%		5.30%		6.50%		6.50%

⁽¹⁾

Amounts for our U.S. pension plans represent general and administrative expenses.

Consistent with our benefit plans’ year end, we use December 31 as the measurement date.

The discount rate was determined based on a corporate yield curve as of December 31, 2013, and projected benefit obligation cash flows for the U.S. pension plans. We reevaluate this assumption each plan year. For 2014, our discount rate will be 4.70% for the U.S. pension plans, and 4.45% for the non-U.S. plan.

The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans’ target plan allocation. We reevaluate this assumption each plan year. For 2014, our expected return on plan assets is 7.82% for the U.S. plans and 5.50% for the non-U.S. plan.

The calculation of the accumulated other postretirement benefit obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) as follows:



	As of or For the
	Years Ended December 31,
	2013	2012	2011
Pre-65 health care cost trend rate	7.50%	8.00%	8.50%
Post-65 health care cost trend rate	7.50%	8.00%	8.50%
Ultimate trend rate	4.50%	4.50%	4.50%
Year that the rate reaches the ultimate trend rate	2020	2020	2021

We expect the health care cost trend rate for 2014 to be 7.50% for both the pre-65 and the post-65 population. A one-percentage point increase in assumed health care cost trend rates would have increased the accumulated postretirement benefit obligation by $4 million and total service and interest cost components by less than $1 million. A one-percentage point decrease in assumed health care cost trend rates would have decreased the accumulated postretirement benefit obligation by $4 million and total service and interest cost components by less than $1 million.

Information for our pension plans with an accumulated benefit obligation in excess of plan assets (in millions) was as follows:



	As of December 31,
	2013		2012
U.S. Plan
Accumulated benefit obligation	$	1,059	$	1,160
Projected benefit obligation		1,059		1,160
Fair value of plan assets		920		898

Components of Net Periodic Benefit Cost

The components of net periodic benefit cost for our pension plans’ and other postretirement plans’ expense (recovery) (in millions) were as follows:



	For the Years Ended December 31,
	2013		2012		2011		2013		2012		2011
	Pension Benefits						Other Postretirement Benefits
U.S. Plans
Service cost (1)	$	5	$	5	$	3	$	3	$	4	$	4
Interest cost		51		53		58		5		7		7
Expected return on plan assets		(78)		(72)		(71)		(3)		(3)		(2)
Amortization of prior service cost		-		-		-		(1)		(1)		(1)
Recognized net actuarial loss (gain)		24		26		13		(1)		1		1
Recognized actuarial gain due
to curtailments		-		-		-		(5)		-		-
Net periodic benefit expense (recovery)	$	2	$	12	$	3	$	(2)	$	8	$	9

Non-U.S. Plans
Interest cost	$	16	$	15	$	15
Expected return on plan assets		(19)		(17)		(16)
Recognized net actuarial loss (gain)		2		1		-
Net periodic benefit expense (recovery)	$	(1)	$	(1)	$	(1)

⁽¹⁾

Amounts for our pension plans represent general and administrative expenses.

We expect our 2014 U.S. pension plans’ expense to be approximately $1 million. In addition, we expect our non-U.S. pension plan income for 2014 to be approximately $4 million when assuming an average exchange rate of 1.66 pounds sterling to U.S. dollars.

For 2014, the estimated amount of amortization from accumulated OCI into net periodic benefit expense related to net actuarial loss or gain is expected to be a $17 million loss for our pension plans and a $2 million gain for our other postretirement plans.

Plan Assets

Our pension plans’ asset target allocations by asset category based on estimated fair values were as follows:



	For the Years Ended December 31,
	2013	2012	2013	2012	2013	2012

	U.S. Plan – Employees		U.S. Plan – Agents		Non-U.S. Plan
Asset Class
Fixed maturity securities	50%	50%	100%	80%	39%	39%
Common stock:
Domestic equity	35%	35%	0%	14%	0%	0%
International equity	15%	15%	0%	6%	0%	0%
Equity securities	0%	0%	0%	0%	58%	59%
Cash and invested cash	0%	0%	0%	0%	3%	2%

The investment objectives for the assets related to our pension plans are to:

Maintain sufficient liquidity to pay obligations of the plans as they come due;

Minimize the effect of a single investment loss and large losses to the plans through prudent risk/reward diversification consistent with sound fiduciary standards;

Maintain an appropriate asset allocation policy;

Earn a return commensurate with the level of risk assumed through the asset allocation policy; and

Control costs of administering and managing the plans' investment operations.

Investments can be made in various asset classes and styles, including, but not limited to: domestic and international equity, fixed-income securities, derivatives and other asset classes the investment managers deem prudent. Our plans follow a strategic asset allocation policy that strives to systemically increase the percentage of assets in liability-matching fixed-income investments as funding levels increase.

We currently target asset weightings as follows: for the U.S. Plan – Employees, domestic equity allocations (35%) are split into large cap (25%), small cap (5%) and hedge funds (5%). Fixed maturity securities represent core fixed-income investments. The performance of the pension trust assets is monitored on a quarterly basis relative to the plans’ objectives.

Our U.S. pension plans’ assets have been combined into a master retirement trust where a variety of qualified managers, including manager of managers, are expected to have returns that exceed the median of similar funds over three-year periods, above an appropriate index over five-year periods and meet real return standards over ten-year periods. Managers are monitored for adherence to approved investment policy guidelines and managers not meeting these criteria are subject to additional due diligence review, corrective action or possible termination.

Fair Value of Plan Assets

See “Fair Value Measurement” in Note 1 for discussion of how we categorize our pension plans’ assets into the three-level fair value hierarchy. See “Financial Instruments Carried at Fair Value” in Note 21 for a summary of our fair value measurements of our pension plans’ assets by the three-level fair value hierarchy.

The following summarizes our fair value measurements of benefit plans’ assets (in millions) on a recurring basis by asset category:



	As of December 31,
	2013		2012		2013		2012		2013		2012

	U.S.				Non-U.S.				Other
	Pension Plans				Pension Plans				Postretirement Benefits
Fixed maturity securities:
Corporate bonds	$	374	$	343	$	40	$	35	$	-	$	-
U.S. government bonds		133		145		4		4		-		-
Foreign government bonds		-		15		174		179		-		-
RMBS		-		1		-		-		-		-
CMBS		-		3		-		-		-		-
CDOs		-		1		4		4		-		-
State and municipal bonds		37		42		-		-		-		-
Common and preferred stock		463		475		83		96		-		-
Cash and invested cash		40		18		74		53		-		-
Other investments		-		-		-		-		45		42
Total	$	1,047	$	1,043	$	379	$	371	$	45	$	42

Valuation Methodologies and Associated Inputs for Pension Plans’ Assets

The fair value measurements of our pension plans’ assets are based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the security, and the valuation methodology is consistently applied to measure the security’s fair value. The fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations or pricing matrices. Both observable and unobservable inputs are used in the valuation methodologies. Observable inputs include benchmark yields, reported trades, broker quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker quotes, procedures are employed, where possible, that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with brokers and observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, unobservable inputs are used in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity.

Prices received from third parties are not adjusted; however, the third-party pricing services’ valuation methodologies and related inputs are evaluated and additional evaluation is performed to determine the appropriate level within the fair value hierarchy.

The observable and unobservable inputs to the valuation methodologies are based on general standard inputs. The standard inputs used in order of priority are benchmark yields, reported trades, broker quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all securities on any given day.

Cash and invested cash is carried at cost, which approximates fair value. This category includes highly liquid debt instruments purchased with a maturity of three months or less. Due to the nature of these assets, we believe these assets should be classified as Level 2.

Plan Cash Flows

It is our practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended and with guidance issued there under. In accordance with such practice, no contributions were required for the years ended December 31, 2013 or 2012 however, we elected to contribute $25 million on December 20, 2012. Based on our calculations, we do not expect to be required to make any contributions to our qualified pension plans in 2014 under applicable pension law.

For our nonqualified pension plans, we fund the benefits as they become due to retirees. The amount expected to be contributed to the nonqualified pension plans during 2014 is approximately $10 million.

We expect the following benefit payments (in millions):



	Pension Plans
	Qualified		Nonqualified			Qualified
	U.S.			U.S.		Non-U.S.		U.S.
	Defined			Defined		Defined		Other
	Benefit			Benefit		Benefit		Post-
	Pension			Pension		Pension		retirement
	Plans			Plans		Plans		Plans
2014	$	73		$	10	$	14	$	9
2015		73			10		14		9
2016		74			10		15		9
2017		71			10		16		9
2018		71			9		17		8
Following five years thereafter		343			44		94		35