Employee Benefits

12 Months Ended

Dec. 31, 2011

Employee Benefits [Abstract]

Employee Benefits

19. Employee Benefits

In accordance with the applicable accounting guidance for defined benefit and other postretirement plans, we measure plan assets and liabilities as of the end of the fiscal year.

Pension Plans

Effective December 31, 2009, we amended our cash balance pension plan to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants’ existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions after freezing the plans.

Pre-tax AOCI not yet recognized as net pension cost was $634 million at December 31, 2011, and $525 million at December 31, 2010, consisting entirely of net unrecognized losses. During 2012, we expect to recognize $16 million of net unrecognized losses in pre-tax AOCI as net pension cost.

The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:

Year ended December 31, in millions	2011			2010			2009
Service cost of benefits earned		—			—		$	50
Interest cost on PBO	$	57		$	60			58
Expected return on plan assets		(81	)		(72	)		(65	)
Amortization of prior service cost		—			—			1
Amortization of losses		11			12			42
Curtailment loss (gain)		—			—			5
Net pension cost	$	(13	)		—		$	91
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Prior service cost due to curtailment		—			—		$	(5	)
Net loss (gain)	$	120		$	54			28
Prior service cost (benefit)		—			—			(1	)
Amortization of losses		(11	)		(12	)		(42	)
Total recognized in comprehensive income	$	109		$	42		$	(20	)
Total recognized in net pension cost and comprehensive income	$	96		$	42		$	71

The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2011, and 2010.

The following table summarizes changes in the PBO related to our pension plans.

Year ended December 31, in millions	2011			2010
PBO at beginning of year	$	1,250		$	1,202
Interest cost		57			60
Actuarial losses (gains)		9			79
Benefit payments		(88	)		(91	)
PBO at end of year	$	1,228		$	1,250

The following table summarizes changes in the FVA.

Year ended December 31, in millions	2011			2010
FVA at beginning of year	$	914		$	839
Actual return on plan assets		(29	)		96
Employer contributions		121			70
Benefit payments		(88	)		(91	)
FVA at end of year	$	918		$	914

The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2011, and 2010.

December 31, in millions	2011		2010
Funded status (a)	$	(310)	$	(336)
Net prepaid pension cost recognized consists of:
Current liabilities	$	(14)	$	(14)
Noncurrent liabilities		(296)		(322)
Net prepaid pension cost recognized (b)	$	(310)	$	(336)

(a) The shortage of the FVA under the PBO.

(b) Represents the accrued benefit liability of the pension plans.

At December 31, 2011, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2012. We also do not expect to make any significant discretionary contributions during 2012.

At December 31, 2011, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2012 — $108 million; 2013 — $104 million; 2014 — $98 million; 2015 — $93 million; 2016 — $90 million; and $404 million in the aggregate from 2017 through 2021.

The ABO for all of our pension plans was $1.2 billion at December 31, 2011 and 2010. As indicated in the table below, all of our plans had an ABO in excess of plan assets as follows:

December 31,
in millions	2011		2010
PBO	$	1,228	$	1,250
ABO		1,225		1,248
Fair value of plan assets		918		914

To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.

December 31,	2011			2010
Discount rate		4.00	%		4.75	%
Compensation increase rate		N/A			N/A

To determine net pension cost, we assumed the following weighted-average rates.

Year ended December 31,	2011			2010			2009
Discount rate		4.75	%		5.25	%		5.75	%
Compensation increase rate		N/A			N/A			4.00
Expected return on plan assets		7.75			8.25			8.25

We estimate that we will recognize a $7 million credit in net pension cost for 2012, compared to a $13 million credit for 2011 and a net pension cost of zero for 2010. Costs will increase in 2012 due primarily to a 50 basis point decrease in the assumed expected return on plan assets. Costs declined in 2011 as plan assets increased due to our contributions and assumed market-related gains. Costs declined in 2010 primarily because we amended all pension plans to freeze benefits effective December 31, 2009, and as a result changed certain pension plan assumptions.

We determine the expected return on plan assets using a calculated market-related value of plan assets that smoothes what might otherwise be significant year-to-year volatility in net pension cost. Changes in the value of plan assets are not recognized in the year they occur. Rather, they are combined with any other cumulative unrecognized asset- and obligation-related gains and losses, and are reflected evenly in the market-related value during the five years after they occur as long as the market-related value does not vary more than 10% from the plan’s FVA.

We estimate that a 25 basis point increase or decrease in the expected return on plan assets would either decrease or increase, respectively, our net pension cost for 2012 by approximately $2 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2012 by approximately $1 million.

We determine the assumed discount rate based on the rate of return on a hypothetical portfolio of high quality corporate bonds with interest rates and maturities that provide the necessary cash flows to pay benefits when due.

The expected return on plan assets is determined by considering a number of factors, the most significant of which are:

¿ Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible and other securities, and forecasted returns that are modeled under various economic scenarios.

¿ Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 7.75% for 2011 and 8.25% for 2010 and 2009. However, as part of an annual reassessment of current and expected future capital market returns, we deemed a rate of 7.25% to be more appropriate in estimating 2012 pension cost. This change will increase 2012 net pension cost by approximately $5 million.

The investment objectives of the pension funds are developed to reflect the characteristics of the plans, such as pension formulas and cash lump sum distribution features, and the liability profiles created by the plans’ participants. An executive oversight committee reviews the plans’ investment performance at least quarterly, and compares performance against appropriate market indices. The pension funds’ investment objectives are to achieve an annualized rate of return equal to or greater than our expected return on plan assets over ten to twenty-year periods; to realize annual and three- and five-year annualized rates of return consistent with specific market benchmarks at the individual asset class level; and to maximize ten to twenty-year annualized rates of return while maintaining prudent levels of risk, consistent with our asset allocation policy. The following table shows the asset target allocations prescribed by the pension funds’ investment policies.

Asset Class	Target   Allocation   2011
Equity securities		46	%
Fixed income securities		28
Convertible securities		5
Other assets		21
Total		100	%

Equity securities include common stocks of domestic and foreign companies, as well as foreign company stocks traded as American Depositary Shares on U.S. stock exchanges. Fixed income securities include investments in domestic- and foreign-issued corporate bonds, U.S. government and agency bonds, international government bonds, and mutual funds. Convertible securities include investments in convertible bonds. Other assets include deposits under insurance company contracts and an investment in a multi-manager, multi-strategy investment fund.

Although the pension funds’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.

The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”

Equity securities. Equity securities traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 since quoted prices for identical securities in active markets are available.

Debt securities. Substantially all debt securities are investment grade and include domestic- and foreign-issued corporate bonds and U.S. government and agency bonds. These securities are valued using evaluated prices based on observable inputs, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves and interest rate movements, and are classified as Level 2.

Mutual funds. Investments in mutual funds are valued at their closing net asset values. Exchange-traded mutual funds are valued at the closing price on the exchange or system where the security is principally traded. These securities generally are classified as Level 1 since quoted prices for identical securities in active markets are available.

Common trust funds. Investments in common trust funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices of similar assets, these investments are classified as Level 2.

Insurance company contracts. Deposits under insurance company contracts are valued by the insurance companies. Because these valuations are determined using a significant number of unobservable inputs, these investments are classified as Level 3.

Multi-strategy investment funds. Investments in investment funds are valued by the investment managers of the funds based on the fair value of a fund’s underlying investments. Because this valuation is determined using a significant number of unobservable inputs, investments in investment funds are classified as Level 3.

The following tables show the fair values of our pension plan assets by asset category at December 31, 2011 and 2010.

December 31, 2011
in millions	Level 1		Level 2		Level 3		Total
ASSET CATEGORY
Equity securities:
U.S.	$	336		—		—	$	336
International		39		—		—		39
Emerging markets		1		—		—		1
Fixed income securities:
Corporate bonds — U.S.		—	$	70		—		70
Corporate bonds — International		—		7		—		7
Government and agency bonds — U.S.		—		73		—		73
Government bonds — International		—		3		—		3
Convertible bonds — U.S.		—		1		—		1
Mutual funds:
U.S. equity		11		—		—		11
International equity		149		1		—		150
Fixed income — U.S.		4		—		—		4
Fixed income — International		2		—		—		2
Government and agency bonds — U.S.		72		—		—		72
Common trust funds:
U.S. equity		—		21		—		21
Fixed income securities		—		4		—		4
Convertible securities		—		44		—		44
Short-term investments		—		40		—		40
Emerging markets		—		24		—		24
Insurance company contracts		—		—	$	12		12
Multi-strategy investment funds		—		—		4		4
Total net assets at fair value	$	614	$	288	$	16	$	918

December 31, 2010
in millions	Level 1		Level 2		Level 3		Total
ASSET CATEGORY
Equity securities:
U.S.	$	376		—		—	$	376
International		42		—		—		42
Emerging markets		1		—		—		1
Fixed income securities:
Corporate bonds — U.S.		—	$	58		—		58
Corporate bonds — International		—		5		—		5
Government and agency bonds — U.S.		—		75		—		75
Government bonds — International		—		2		—		2
Convertible bonds — U.S.		—		2		—		2
Mutual funds:
International equity		133		—		—		133
Government and agency bonds — U.S.		53		—		—		53
Common trust funds:
U.S. equity		—		27		—		27
Fixed income securities		—		11		—		11
Convertible securities		—		45		—		45
Short-term investments		—		43		—		43
Emerging markets		—		24		—		24
Insurance company contracts		—		—	$	11		11
Multi-strategy investment funds		—		—		6		6
Total net assets at fair value	$	605	$	292	$	17	$	914

The following table shows the changes in the fair values of our Level 3 plan assets for the years ended December 31, 2011, and 2010.

in millions	Insurance Company Contracts		Multi- Strategy Investment Funds		Total
Balance at December 31, 2009	$	11	$	26	$	37
Purchases, sales and settlements, net		—		(20)		(20)
Balance at December 31, 2010	$	11	$	6	$	17
Actual return on plan assets:
Relating to assets held at reporting date		1		3		4
Relating to assets sold during the period		—		(4)		(4)
Sales		—		(1)		(1)
Balance at December 31, 2011	$	12	$	4	$	16

Other Postretirement Benefit Plans

We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy towards the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We also maintain a death benefit plan that provides a death benefit for a very limited number of (i) former Key employees who retired from their employment with Key prior to 1994, (ii) former Key employees who elect a grandfathered pension benefit under the KeyCorp Cash Balance Pension Plan, and (iii) Key employees who otherwise were provided a historical death benefit at the time of their termination. The death benefit plan is noncontributory. We use separate VEBA trusts to fund the healthcare plan and the death benefit plan.

The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.

December 31,
in millions	2011			2010
Net unrecognized losses (gains)	$	8			—
Net unrecognized prior service benefit		(8	)	$	(9)
Total unrecognized AOCI		—		$	(9)

During 2012, we expect to recognize $1 million of pre-tax AOCI resulting from prior service benefits as a reduction of other postretirement benefit cost.

The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:

December 31,
in millions	2011			2010			2009
Service cost of benefits earned	$	1		$	1		$	1
Interest cost on APBO		3			3			4
Expected return on plan assets		(3	)		(3	)		(3)
Amortization of prior service cost		(1	)		(1	)		(1)
Net postretirement benefit cost		—			—		$	1
Other changes in plan assets and benefit obligations recognized in OCI:
Net (gain) loss	$	8		$	1		$	(4)
Prior service cost (benefit)		—			—			2
Amortization of prior service cost		1			1			1
Total recognized in comprehensive income	$	9		$	2		$	(1)
Total recognized in net postretirement benefit cost and comprehensive income	$	9		$	2			—

The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2011, and 2010.

The following table summarizes changes in the APBO.

Year ended December 31,
in millions	2011		2010
APBO at beginning of year	$	75	$	72
Service cost		1		1
Interest cost		3		3
Plan participants’ contributions		5		5
Actuarial losses (gains)		3		5
Benefit payments		(8)		(11)
Medicare retiree drug subsidy		2		—
APBO at end of year	$	81	$	75

The following table summarizes changes in FVA.

Year ended December 31,
in millions	2011		2010
FVA at beginning of year	$	61	$	58
Employer contributions		1		1
Plan participants’ contributions		5		5
Benefit payments		(8)		(11)
Actual return on plan assets		(2)		8
FVA at end of year	$	57	$	61

The following table summarizes the funded status of the postretirement plans, which equals the amounts recognized in the balance sheets at December 31, 2011, and 2010.

December 31,
in millions	2011			2010
Funded status (a)	$	(24	)	$	(14	)
Accrued postretirement benefit cost recognized (b)		(24	)		(14	)

(a) The shortage of the FVA under the APBO.

(b) Consists entirely of noncurrent liabilities.

There are no regulations that require contributions to the VEBA trusts that fund some of our benefit plans. Consequently, there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trusts, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2012, if any, will be minimal.

At December 31, 2011, we expect to pay the benefits from all funded and unfunded other postretirement plans as follows: 2012 — $6 million; 2013 — $6 million; 2014 — $6 million; 2015 — $6 million; 2016 — $6 million; and $27 million in the aggregate from 2017 through 2021.

To determine the APBO, we assumed weighted-average discount rates of 4.00% at December 31, 2011, and 4.75% at December 31, 2010.

To determine net postretirement benefit cost, we assumed the following weighted-average rates.

Year ended December 31,	2011			2010			2009
Discount rate		4.75	%		5.25	%		5.75	%
Expected return on plan assets		5.45			5.46			5.48

The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.

Our assumptions regarding healthcare cost trend rates are as follows:

December 31,	2011			2010
Healthcare cost trend rate assumed for the next year:
Under age 65		8.50	%		8.00	%
Age 65 and over		N/A			N/A
Rate to which the cost trend rate is assumed to decline		5.00			5.00
Year that the rate reaches the ultimate trend rate		2019			2019

Increasing or decreasing the assumed healthcare cost trend rate by one percentage point each future year would not have a material impact on net postretirement benefit cost or obligations since the postretirement plans have cost-sharing provisions and benefit limitations.

We estimate that our net postretirement benefit cost for 2012 will amount to less than $1 million, compared to a cost of less than $1 million for both 2011 and 2010.

We estimate the expected returns on plan assets for VEBA trusts much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trusts are to obtain a market rate of return and to diversify the portfolios so they can satisfy the trusts’ anticipated liquidity requirements. The following table shows the asset target allocation ranges prescribed by the trusts’ investment policies.

Asset Class	Target Allocation             Range             2011
Equity securities		70 - 90	%
Fixed income securities		0 - 10
Convertible securities		0 - 10
Cash equivalents and other assets		10 - 30

Investments consist of common trust funds that invest in underlying assets in accordance with the target asset allocation ranges shown above. These investments are valued at their closing net asset value. Because net asset values are based primarily on observable inputs, most notably quoted prices for similar assets, these investments are classified as Level 2.

Although the VEBA trusts’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.

The following tables show the fair values of our postretirement plan assets by asset category at December 31, 2011, and 2010.

December 31, 2011
in millions	Level 1		Level 2		Level 3		Total
ASSET CATEGORY
Common trust funds:
U.S. equities		—	$	36		—	$	36
International equities		—		8		—		8
Convertible securities		—		4		—		4
Short-term investments		—		8		—		8
Fixed income		—		1		—		1
Total net assets at fair value		—	$	57		—	$	57

December 31, 2010
in millions	Level 1		Level 2		Level 3		Total
ASSET CATEGORY
Common trust funds:
U.S. equities		—	$	45		—	$	45
International equities		—		9		—		9
Convertible securities		—		4		—		4
Short-term investments		—		2		—		2
Fixed income		—		1		—		1
Total net assets at fair value		—	$	61		—	$	61

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare, and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer “actuarially equivalent” prescription drug coverage to retirees. Based on our application of the relevant regulatory formula, we expect that the prescription drug coverage related to our retiree healthcare benefit plan will not be actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2011, 2010, and 2009, federal subsidies received did not have a material effect on our APBO and net postretirement benefit cost.

The “Patient Protection and Affordable Care Act” and “Education Reconciliation Act of 2010,” which were both signed into law in March 2010 changed the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least “actuarially equivalent” to the benefits under Medicare Part D. As a result of these laws, these subsidy payments become taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes requires the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. The changes to the tax law regarding these subsidies did not affect us as we did not have a deferred tax asset recorded for Medicare Part D subsidies received.

Employee 401(k) Savings Plan

A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1% to 25% of eligible compensation, with up to 6% being eligible for matching contributions in the form of KeyCorp Common Shares. The plan also permits us to provide a discretionary profit-sharing contribution. A 3% contribution was made for the 2011 and 2010 plan years for eligible employees on December 31 of the respective plan year. We also maintain a deferred savings plan that provides certain employees with benefits that they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $79 million in 2011, $75 million in 2010 and $44 million in 2009.