Note 10 – Postretirement Plans

Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans

Most of our employees hired on or before December 31, 2005 are covered by qualified defined benefit pension plans, and we provide certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualified defined benefit pension plans to provide for benefits in excess of qualified plan limits. Non-union represented employees hired on or after January 1, 2006 do not participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. We have made contributions to trusts established to pay future benefits to eligible retirees and dependents (including Voluntary Employees' Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses of certain retiree medical plans). We use December 31 as the measurement date. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the respective preceding year.

The rules related to accounting for postretirement benefit plans under GAAP require us to recognize on a plan-by-plan basis the funded status of our postretirement benefit plans, with a corresponding noncash adjustment to accumulated other comprehensive income (loss), net of tax, in stockholders' equity. The funded status is measured as the difference between the fair value of the plan's assets and the benefit obligation of the plan.

The net periodic benefit cost recognized each year included the following components:


(In millions)	Qualified Defined Benefit Pension Plans ^(a)									Retiree Medical and Life Insurance Plans
(In millions)	*2011*			2010			2009			*2011*			2010			2009
Service cost	$	974		$	903		$	870		$	32		$	36		$	34
Interest cost		1,918			1,876			1,812			162			166			165
Expected return on plan assets		(2,033	)		(2,027	)		(2,028	)		(140	)		(129	)		(106	)
Recognized net actuarial losses		880			595			302			34			25			42
Amortization of prior service cost		82			83			80			(16	)		(16	)		(23	)
Curtailment		—			12			—			—			—			—
Total net periodic benefit cost	$	1,821		$	1,442		$	1,036		$	72		$	82		$	112

^(a)

Total net periodic benefit cost associated with our qualified defined benefit plans represents pension expense calculated in accordance with GAAP (FAS expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules, each of which results in a different calculated amount of pension expense. The CAS expense is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and services. We include the difference between FAS expense and CAS expense, referred to as the non-cash FAS/CAS pension adjustment ($922 million in 2011, $454 million in 2010, and $456 million in 2009), as a component of other unallocated corporate costs on our Statements of Earnings. The non-cash FAS/CAS pension adjustment effectively adjusts the amount of pension expense in the results of operations so that pension expense recorded on our Statements of Earnings is equal to FAS expense.

The following table provides a reconciliation of benefit obligations, plan assets, and unfunded status related to our qualified defined benefit pension plans and our retiree medical and life insurance plans:


(In millions)	Qualified Defined Benefit Pension Plans						Retiree Medical and Life Insurance Plans
(In millions)	*2011*			2010			*2011*			2010

Change in benefit obligation
Beginning balance	$	35,773		$	32,817		$	3,046		$	2,938
Service cost		974			903			32			36
Interest cost		1,918			1,876			162			166
Benefits paid		(1,685	)		(1,592	)		(363	)		(352	)
Actuarial losses (gains)		3,632			2,032			(28	)		105
Plan amendments		4			94			11			—
Divestitures/curtailments^(a)		—			(357	)		—			(10	)
Medicare Part D subsidy		—			—			2			18
Participants' contributions		—			—			161			145
Ending balance	$	40,616		$	35,773		$	3,023		$	3,046

Change in plan assets
Beginning balance at fair value	$	25,345		$	22,154		$	1,833		$	1,630
Actual return on plan assets		1,349			2,886			114			86
Benefits paid		(1,685	)		(1,592	)		(363	)		(352	)
Our contributions		2,285			2,240			—			311
Divestitures and other^(a)		(2	)		(343	)		2			(5	)
Medicare Part D subsidy		—			—			2			18
Participants' contributions		—			—			161			145
Ending balance at fair value	$	27,292		$	25,345		$	1,749		$	1,833
Unfunded status of the plans	$	(13,324	)	$	(10,428	)	$	(1,274	)	$	(1,213	)

Amounts recognized in the Balance Sheets
Prepaid pension asset	$	178		$	179		$	—		$	—
Accrued postretirement benefit liabilities		(13,502	)		(10,607	)		(1,274	)		(1,213	)
Accumulated other comprehensive loss (pre-tax) related to:
Net actuarial losses		15,698			12,263			648			684
Prior service cost (credit)		377			455			(10	)		(37	)

^(a)	Primarily reflects the transfer of assets and liabilities associated with the 2010 sale of EIG (Note 14). An expense of $109 million was recognized in connection with this settlement, which reduced the gain on sale.

The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $35.7 billion and $31.4 billion at December 31, 2011 and 2010. Certain key information related to those plans where ABO was in excess of plan assets as of December 31, 2011 and 2010 is as follows:


(In millions)	*2011*		2010
Projected benefit obligation	$	40,478	$	35,640
Accumulated benefit obligation		35,516		31,291
Fair value of plan assets		26,976		25,033

We also sponsor nonqualified defined benefit plans to provide benefits in excess of qualified plan limits. The aggregate liabilities for these plans at December 31, 2011 and 2010 were $907 million and $850 million, which also represent the plans' unfunded status. We have set aside certain assets totaling $283 million and $338 million as of December 31, 2011 and 2010 in a Rabbi Trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance with GAAP, those assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit plans in the table above. The unrecognized net actuarial losses at December 31, 2011 and 2010 were $476 million and $447 million, and the unrecognized prior service costs were not material. The expense associated with these plans totaled $104 million in 2011, $85 million in 2010, and $76 million in 2009. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $107 million and $93 million as of December 31, 2011 and 2010. The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit plans, was not material to our results of operations, financial position, or cash flows.

The amounts recognized in other comprehensive loss related to our postretirement benefit plans, net of tax, for the years ended December 31, 2011, 2010, and 2009 are shown in the following table, which also shows the amounts related to our postretirement benefit plans included in accumulated other comprehensive loss at the end of 2011 and expected to be recognized in net periodic benefit cost, net of tax, during 2012.


	Incurred but Not Yet Recognized in Net Periodic Benefit Cost									Recognition of Previously Deferred Amounts									Expected to be Recognized in Net Periodic Benefit Cost in 2012
(In millions)	*2011*			2010			2009			*2011*			2010			2009
	Gains (losses)									(Gains) losses									(Gains) losses
Actuarial gains and losses
Qualified defined benefit pension plans	$	(2,793	)	$	(763	)	$	298		$	568		$	464		$	195		$	721
Retiree medical and life insurance plans		1			(95	)		77			22			17			27			21
Other plans		(56	)		(63	)		(110	)		34			20			22			31
		(2,848	)		(921	)		265			624			501			244			773

	Credit (cost)									(Credit) cost									(Credit) cost
Prior service credit and cost
Qualified defined benefit pension plans		(3	)		(61	)		(45	)		53			62			52			47
Retiree medical and life insurance plans		(7	)		—			(6	)		(11	)		(10	)		(15	)		(8	)
Other plans		—			(1	)		—			—			—			—			—
		(10	)		(62	)		(51	)		42			52			37			39
	$	(2,858	)	$	(983	)	$	214		$	666		$	553		$	281		$	812

Actuarial Assumptions

The actuarial assumptions used to determine the benefit obligations at December 31 of each year, and to determine the net periodic benefit cost for each subsequent year, were as follows:


	Qualified Defined Benefit Pension Plans									Retiree Medical and Life Insurance Plans
	*2011*			2010			2009			*2011*			2010			2009
Discount rate		4.750	%		5.500	%		5.875	%		4.500	%		5.500	%		5.875	%
Expected long-term rate of return on assets		8.000	%		8.500	%		8.500	%		8.000	%		8.500	%		8.500	%
Rate of increase in future compensation levels		4.300	%		4.400	%		4.500	%
Health care trend rate assumed for next year											9.500	%		10.000	%
Ultimate trend rate											5.000	%		5.000	%
Year that the ultimate trend rate is reached											2021			2021

The decrease in the discount rate from December 31, 2010 to December 31, 2011 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $3.8 billion at December 31, 2011. The decrease in the discount rate from December 31, 2009 to December 31, 2010 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $1.7 billion at December 31, 2010.

The assumed health care cost trend rates have a significant effect on the amounts reported for the retiree medical plans. A one-percentage-point increase or decrease in assumed health care cost trend rates would result in a change in the postretirement benefit obligation of 4.4% and (3.8)% at December 31, 2011, and a change in the 2011 total service and interest cost of 4.8% and (3.7)%.

The long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligations. That assumption is based on several factors including historical market index returns, the anticipated long-term asset allocation of plan assets, the historical return data, plan expenses, and the potential to outperform market index returns.

Plan Assets

Investment policies and strategies – Lockheed Martin Investment Management Company (LMIMCo), our wholly-owned subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCo's investment objectives for the assets of these plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.

Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach, and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.

LMIMCo's investment policies require that asset allocations of postretirement benefit plans be maintained within the following approximate ranges:


*Asset Class*		Asset Allocation Ranges
Cash and cash equivalents		0 – 30%
Equity		10 – 55%
Fixed income		10 – 60%
Alternative investments:
Private equity funds		0 – 15%
Real estate funds		0 – 10%
Hedge funds		0 – 20%
Commodities		0 – 25%

Fair value measurements – The rules related to accounting for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not included on our Balance Sheets. The following table presents the fair value of the assets of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy, which has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant unobservable inputs.


	Balance as of December 31, 2011								Balance as of December 31, 2010
(In millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2,886	$	—	$	—	$	2,886	$	1,726	$	—	$	—	$	1,726
Equity^(a):
U.S. equity securities		3,834		37		7		3,878		4,548		44		—		4,592
International equity securities		3,750		11		15		3,776		5,008		6		16		5,030
Commingled equity funds		1,016		1,127		—		2,143		1,287		1,056		—		2,343
Fixed income^(a):
Corporate debt securities		—		946		98		1,044		—		1,351		63		1,414
U.S. Government securities		—		10,040		—		10,040		—		7,262		—		7,262
Other fixed income securities		—		508		45		553		—		584		47		631
Alternative investments:
Private equity funds		—		—		2,286		2,286		—		—		2,085		2,085
Real estate funds		—		—		278		278		—		—		164		164
Hedge funds		—		—		825		825		—		—		1,025		1,025
Commodities^(a)		992		277		—		1,269		343		516		—		859
Total	$	12,478	$	12,946	$	3,554	$	28,978	$	12,912	$	10,819	$	3,400	$	27,131
Receivables, net								63								47
Total							$	29,041							$	27,178

^(a)

Equity securities, fixed income securities, and commodities included derivative assets and liabilities whose fair values were not material as of December 31, 2011 and 2010. LMIMCo's investment policies restrict the use of derivatives to either establish long exposures for purposes of expediency or capital efficiency, or to hedge risks to the extent of a plan's current exposure to such risks. Most derivative transactions are settled on a daily basis.

As of December 31, 2011 and 2010, the assets associated with our foreign defined benefit pension plans were not material and have not been included in the table above.

The following table presents the changes during 2011 and 2010 in the fair value of plan assets categorized as Level 3 in the preceding table:


(In millions)	Private Equity Funds		Real Estate Funds		Hedge Funds			Other			Total
Balance at January 1, 2010	$	1,730	$	125	$	750		$	58		$	2,663
Actual return on plan assets:
Realized gains, net		123		—		1			2			126
Unrealized gains, net		103		7		13			—			123
Purchases, sales, and settlements, net		129		32		261			65			487
Transfers into (out of) Level 3		—		—		—			1			1
Balance at December 31, 2010	$	2,085	$	164	$	1,025		$	126		$	3,400
Actual return on plan assets:
Realized gains (losses), net		171		25		(4	)		2			194
Unrealized gains (losses), net		7		22		(11	)		(9	)		9
Purchases, sales, and settlements, net		23		67		(183	)		21			(72	)
Transfers into (out of) Level 3		—		—		(2	)		25			23
Balance at December 31, 2011	$	2,286	$	278	$	825		$	165		$	3,554

Valuation techniques – Cash equivalents are mostly comprised of short-term money-market instruments and are valued at cost, which approximates fair value.

U.S. equity securities and international equity securities categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker, or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.

Commingled equity funds are public investment vehicles valued using the Net Asset Value ("NAV") provided by the fund manager. The NAV is the total value of the fund divided by the number of shares outstanding. Commingled equity funds are categorized as Level 1 if traded at their NAV on a nationally recognized securities exchange or categorized as Level 2 if the NAV is corroborated by observable market data (e.g., purchases or sales activity).

Fixed income securities categorized as Level 2 are valued by the trustee using pricing models that use verifiable observable market data (e.g. interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers, or quoted prices of securities with similar characteristics.

Private equity funds, real estate funds, hedge funds, and fixed income securities categorized as Level 3 are valued based on valuation models that include significant unobservable inputs and cannot be corroborated using verifiable observable market data. Valuations for private equity funds and real estate funds are determined by the general partners, while hedge funds are valued by independent administrators. Depending on the nature of the assets, the general partners or independent administrators use both the income and market approaches in their models. The market approach consists of analyzing market transactions for comparable assets while the income approach uses earnings or the net present value of estimated future cash flows adjusted for liquidity and other risk factors.

Commodities categorized as Level 1 are traded on an active commodity exchange and are valued at their closing prices on the last trading day of the year. Commodities categorized as Level 2 represent shares in a commingled commodity fund valued using the NAV, which is corroborated by observable market data.

Contributions and Expected Benefit Payments

We generally determine funding requirements for our defined benefit pension plans in a manner consistent with CAS and Internal Revenue Code rules. In 2011, we made contributions of $2.3 billion related to our qualified defined benefit pension plans. We plan to make contributions of approximately $1.1 billion related to the qualified defined benefit pension plans in 2012. We also may review options for further contributions in 2012. We expect to make required contributions of $112 million related to the retiree medical and life insurance plans in 2012.

The following table presents estimated future benefit payments, which reflect expected future employee service, as of December 31, 2011:


(In millions)	2012		2013		2014		2015		2016		2017 - 2021
Qualified defined benefit pension plans	$	1,760	$	1,830	$	1,910	$	1,990	$	2,080		$12,120
Retiree medical and life insurance plans		240		250		260		260		270		1,240

Defined Contribution Plans

We maintain a number of defined contribution plans, most with 401(k) features, that cover substantially all of our employees. Under the provisions of our 401(k) plans, we match most employees' eligible contributions at rates specified in the plan documents. Our contributions were $378 million in 2011, $379 million in 2010, and $364 million in 2009, the majority of which were funded in our common stock. Our defined contribution plans held approximately 52.1 million and 60.7 million shares of our common stock as of December 31, 2011 and 2010.