20. Retirement Plans and Other Benefits

Pension and Other Postretirement Plans

The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition to providing pension benefits, the Company sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the last day of the fiscal year. The following tables set forth the plans’ changes in benefit obligations and plan assets, funded status, and amounts recognized in the Consolidated Balance Sheets, measured at January 28, 2012 and January 29, 2011:


	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
	(in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	669		$	654		$	12		$	13
Service cost		12			13			—			—
Interest cost		32			33			1			—
Plan participants’ contributions		—			—			3			3
Actuarial loss		47			24			2			—
Foreign currency translation adjustments		(1	)		6			—			—
Plan amendment		—			—			1			—
Benefits paid		(55	)		(61	)		(4	)		(4	)
Benefit obligation at end of year	$	704		$	669		$	15		$	12
Change in plan assets
Fair value of plan assets at beginning of year	$	601		$	550
Actual return on plan assets		63			70
Employer contributions		31			36
Foreign currency translation adjustments		(1	)		6
Benefits paid		(55	)		(61	)
Fair value of plan assets at end of year	$	639		$	601
Funded status	$	(65	)	$	(68	)	$	(15	)	$	(12	)
Amounts recognized on the Balance Sheet:
Other assets	$	8		$	2		$	—		$	—
Accrued and other liabilities		(3	)		(3	)		(1	)		(1	)
Other liabilities		(70	)		(67	)		(14	)		(11	)
	$	(65	)	$	(68	)	$	(15	)	$	(12	)
Amounts recognized in accumulated other comprehensive loss, pre-tax:
Net loss (gain)	$	446		$	438		$	(21	)	$	(28	)
Prior service cost (credit)		1			1			—			(2	)
	$	447		$	439		$	(21	)	$	(30	)

As of January 28, 2012 and January 29, 2011, the Canadian qualified pension plan’s assets exceeded its accumulated benefit obligation. Information for pension plans with an accumulated benefit obligation in excess of plan assets is as follows:


	2011		2010
	(in millions)
Projected benefit obligation	$	619	$	581
Accumulated benefit obligation		619		581
Fair value of plan assets		546		511

The following tables set forth the changes in accumulated other comprehensive loss (pre-tax) at January 28, 2012:


	Pension Benefits			Postretirement Benefits
	(in millions)
Net actuarial loss (gain) at beginning of year	$	438		$	(28	)
Amortization of net (loss) gain		(15	)		5
Loss arising during the year		24			2
Foreign currency translation adjustments		(1	)		—
Net actuarial loss (gain) at end of year⁽¹⁾	$	446		$	(21	)
Net prior service cost (benefit) at beginning of year	$	1		$	(2	)
Amortization of prior service cost		—			1
Loss arising during the year		—			1
Net prior service cost at end of year⁽¹⁾	$	1		$	—
Total amount recognized	$	447		$	(21	)

(1)

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (income) during the next year are approximately $16 million and $(4) million related to the pension and postretirement plans, respectively. Additionally, $(1) million is expected to be recognized representing postretirement benefits prior-service costs.

The following weighted-average assumptions were used to determine the benefit obligations under the plans:


	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
Discount rate		4.16	%		4.98	%		4.00	%		4.60	%
Rate of compensation increase		3.69	%		3.68	%

Pension expense is actuarially calculated annually based on data available at the beginning of each year. The expected return on plan assets is determined by multiplying the expected long-term rate of return on assets by the market-related value of plan assets for the U.S. qualified pension plan and market value for the Canadian qualified pension plan. The market-related value of plan assets is a calculated value that recognizes investment gains and losses in fair value related to equities over three or five years, depending on which computation results in a market-related value closer to market value. Market-related value for the U.S. qualified plan was $476 million and $493 million for 2011 and 2010, respectively. Assumptions used in the calculation of net benefit cost include the discount rate selected and disclosed at the end of the previous year as well as other assumptions detailed in the table below:


	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011			2010			2009
Discount rate		4.99	%		5.25	%		6.22	%		4.60	%		4.90	%		6.20	%
Rate of compensation increase		3.69	%		3.68	%		3.67	%
Expected long-term rate of return on assets		6.59	%		7.22	%		7.63	%

The expected long-term rate of return on invested plan assets is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce future contributions by the Company.

The components of net benefit expense (income) are:


	Pension Benefits									Postretirement Benefits
	2011			2010			2009			2011			2010			2009
	(in millions)
Service cost	$	12		$	13		$	11		$	—		$	—		$	—
Interest cost		32			33			36			1			—			1
Expected return on plan assets		(40	)		(40	)		(43	)		—			—			—
Amortization of prior service cost		—			—			1			(1	)		—			—
Amortization of net loss (gain)		15			17			13			(5	)		(6	)		(7	)
Net benefit expense (income)	$	19		$	23		$	18		$	(5	)	$	(6	)	$	(6	)

Beginning with 2001, new retirees were charged the expected full cost of the medical plan and then-existing retirees will incur 100 percent of the expected future increases in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increase.

In addition, the Company maintains a Supplemental Executive Retirement Plan (“SERP”), which is an unfunded plan that includes provisions for the continuation of medical and dental insurance benefits to certain executive officers and certain other key employees of the Company (“SERP Medical Plan”). The SERP Medical Plan’s accumulated projected benefit obligation at January 28, 2012 was approximately $9 million. The assumed health care cost trend rates related to the measurement of the Company’s SERP Medical Plan obligations for the year ended January 28, 2012 are as follows:


	Medical			Dental
Initial cost trend rate		8.00	%		5.50	%
Ultimate cost trend rate		5.00	%		5.00	%
Year that the ultimate cost trend rate is reached		2018			2013

A one percentage-point change in the assumed health care cost trend rates would have the following effects:


	1% Increase		1% (Decrease)
	(in millions)
Effect on total service and interest cost components	$	—	$	—
Effect on accumulated postretirement benefit obligation		2		(2	)

Plan Assets

During 2011, the target composition of the Company’s U.S. plan assets was changed to represent 45 percent equity and 55 percent fixed-income securities. The Company may alter the targets from time to time depending on market conditions and the funding requirements of the pension plan. This current asset allocation will limit volatility with regard to the funded status of the plan, but will result in higher pension expense due to the lower long-term rate of return associated with fixed-income securities. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above. The Company believes that plan assets are invested in a prudent manner with an objective of providing a total return that, over the long term, provides sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the level of risk deemed appropriate. The Company’s investment strategy seeks to utilize asset classes with differing rates of return, volatility, and correlation in order to reduce risk by providing diversification relative to equities. Diversification within asset classes is also utilized to ensure that there are no significant concentrations of risk in plan assets and to reduce the effect that the return on any single investment may have on the entire portfolio.

The target composition of the Company’s Canadian plan assets is 95 percent debt securities and 5 percent equity. The Company believes that plan assets are invested in a prudent manner with the same overall objective and investment strategy as noted above for the U.S. pension plan. The bond portfolio is comprised of government and corporate bonds chosen to match the duration of the pension plan’s benefit payment obligations. This current asset allocation will limit future volatility with regard to the funded status of the plan. This allocation has resulted in higher pension expense due to the lower long-term rate of return associated with fixed-income securities.

Valuation of Investments

Significant portions of plan assets are invested in commingled trust funds. These funds are valued at the net asset value of units held by the plan at year end. Stocks traded on U.S. security exchanges are valued at closing market prices on the measurement date.

Investments in real estate are carried at their estimated fair value based on information supplied by independent appraisers whereby each property is independently appraised and adjusted accordingly at least once within a five-year period. The Company’s management reviews the fair value of each property during the intervening years to determine whether an impairment has occurred since receiving the latest independent appraisal and that no change is required to the fair value.

The fair values of the Company’s U.S. pension plan assets at January 28, 2012 and January 29, 2011 are as follows:


	Level 1		Level 2		Level 3		2011 Total		2010 Total*
	(in millions)
Cash and cash equivalents	$	—	$	13	$	—	$	13	$	4
Equity securities:
U.S. large-cap⁽¹⁾		—		120		—		120		137
U.S. mid-cap⁽¹⁾		—		42		—		42		40
International⁽²⁾		—		72		—		72		70
Corporate stock⁽³⁾		11		—		—		11		7
Fixed-income securities:
Long duration corporate and government bonds⁽⁴⁾		—		221		—		221		214
Intermediate duration corporate and government bonds⁽⁵⁾		—		58		—		58		29
Other types of investments:
Real estate		—		—		8		8		9
Insurance contracts		—		1		—		1		1
Total assets at fair value	$	11	$	527	$	8	$	546	$	511

Each category of plan assets is classified within the same level of the fair value hierarchy for 2011 and 2010.

(1)

These categories consist of various managed funds that invest primarily in common stocks, as well as other equity securities and a combination of other funds.

(2)

This category comprises two managed funds that invest primarily in international common stocks, as well as other equity securities and a combination of other funds.

(3)

This category consists of the Company’s common stock.

(4)

This category consists of various fixed-income funds that invest primarily in long-term bonds, as well as a combination of other funds, that together are designed to exceed the performance of related long-term market indices.

(5)

This category consists of a fixed-income fund that invests primarily in intermediate duration bonds, as well as a combination of other funds, that together are designed to track the performance of the Barclays Capital U.S. Intermediate Credit Index.

The following table is a reconciliation of the fair value of the U.S. pension plan’s real estate investments classified as Level 3:


(in millions)	Level 3
Balance at January 30, 2010	$	7
Changes during the year		2
Balance at January 29, 2011	$	9
Unrealized loss on appraised value of real estate		(1	)
Balance at January 28, 2012	$	8

The fair values of the Company’s Canadian pension plan assets at January 28, 2012 and January 29, 2011 are as follows:


	Level 1		Level 2		Level 3		2011 Total		2010 Total*
	(in millions)
Cash and cash equivalents	$	—	$	5	$	—	$	5	$	1
Equity securities:
Canadian and International⁽¹⁾		—		5		—		5		6
Debt securities:
Cash matched bonds⁽²⁾		—		83		—		83		83
Total assets at fair value	$	—	$	93	$	—	$	93	$	90

Each category of plan assets is classified within the same level of the fair value hierarchy for 2011 and 2010.

(1)

In 2011, this category comprises one mutual fund that invests primarily in a diverse portfolio of Canadian securities. In 2010, this category comprised two mutual funds that invested primarily in a diverse portfolio of Canadian and international equity securities.

(2)

This category consists of fixed-income securities, including strips and coupons, issued or guaranteed by the Government of Canada, provinces or municipalities of Canada including their agencies and crown corporations, as well as other governmental bonds and corporate bonds.

No Level 3 assets were held by the Canadian pension plan during 2011.

During 2011 the Company made contributions of $25 million and $3 million to its U.S. and Canadian plans, respectively. The Company continuously evaluates the amount and timing of any future contributions. Additional contributions will depend on the plan asset performance and other factors.

Estimated future benefit payments for each of the next five years and the five years thereafter are as follows:


	Pension Benefits		Postretirement Benefits
	(in millions)
2012	$	75	$	1
2013		59		1
2014		58		1
2015		56		1
2016		54		1
2017 – 2021		249		5

In February 2007, the Company and its U.S. pension plan, the Foot Locker Retirement Plan, were named as defendants in a class action in federal court in New York. The Complaint alleged that the Company’s pension plan violated the Employee Retirement Income Security Act of 1974, including, without limitation, its age discrimination and notice provisions, as a result of the Company’s conversion of its defined benefit plan to a defined benefit pension plan with a cash balance feature in 1996. The Company is defending the action vigorously. The Company is currently unable to make an estimate of loss or range of loss. Management does not believe that the outcome of any such proceedings would have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations, taken as a whole.

Savings Plans

The Company has two qualified savings plans, a 401(k) Plan that is available to employees whose primary place of employment is the U.S., and an 1165(e) Plan that is available to employees whose primary place of employment is in Puerto Rico. Both plans require that the employees have attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. As of January 1, 2012, the savings plans allow eligible employees to contribute up to 40 percent and $10,000, for the U.S. and Puerto Rico plans, respectively, of their compensation on a pre-tax basis. The Company matches 25 percent of the first 4 percent of the employees’ contributions with Company stock and such matching Company contributions are vested incrementally over 5 years for both plans. The charge to operations for the Company’s matching contribution was $2 million in each of 2011 and 2010 and $3 million in 2009.