JOHNSON & JOHNSON | 2013 | FY | 3

Pensions and Other Benefit Plans
The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides post-retirement benefits, primarily health care, to all eligible U.S. retired employees and their dependents.
Many international employees are covered by government-sponsored programs and the cost to the Company is not significant.
Retirement plan benefits are primarily based on the employee’s compensation during the last three to five years before retirement and the number of years of service. International subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided.
The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future.
The Company uses the date of its consolidated financial statements (December 29, 2013 and December 30, 2012, respectively) as the measurement date for all U.S. and international retirement and other benefit plans.
Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for 2013, 2012 and 2011 include the following components:
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Service cost
 
$
906

 
722

 
638

 
196

 
175

 
149

Interest cost
 
908

 
878

 
853

 
151

 
165

 
188

Expected return on plan assets
 
(1,447
)
 
(1,236
)
 
(1,108
)
 
(6
)
 
(4
)
 
(1
)
Amortization of prior service cost (credit)
 
6

 
6

 
9

 
(2
)
 
(3
)
 
(3
)
Amortization of net transition obligation
 
1

 
1

 
1

 
—

 
—

 
—

Recognized actuarial losses
 
681

 
494

 
388

 
111

 
76

 
45

Curtailments and settlements
 
—

 
—

 
—

 
2

 
—

 
—

Net periodic benefit cost
 
$
1,055

 
865

 
781

 
452

 
409

 
378






Amounts expected to be recognized in net periodic benefit cost in the coming year for the Company’s defined benefit retirement plans and other post-retirement plans:
(Dollars in Millions)
 
Amortization of net transition obligation
$
—

Amortization of net actuarial losses
553

Amortization of prior service cost
3



Unrecognized gains and losses for the U.S. pension plans are amortized over the average remaining future service for each plan. For plans with no active employees, they are amortized over the average life expectancy. The amortization of gains and losses for the other U.S. benefit plans is determined by using a 10% corridor of the greater of the market value of assets or the projected benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized over the average remaining future service.
Prior service costs/benefits for the U.S. pension plans are amortized over the remaining future service of plan participants at the time of the plan amendment. Prior service cost/benefit for the other U.S. benefit plans is amortized over the average remaining service to full eligibility age of plan participants at the time of the plan amendment.

The weighted-average assumptions in the following table represent the rates used to develop the actuarial present value of projected benefit obligation for the year listed and also the net periodic benefit cost for the following year.
 
 
Retirement Plans
 
Other Benefit Plans
 
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Worldwide Benefit Plans
 
 
 
 
 
 
 
 
 
 
 
 
Discount rate
 
4.78
%
 
4.25
%
 
5.13
%
 
5.25
%
 
4.55
%
 
5.25
%
Expected long-term rate of return on plan assets
 
8.46
%
 
8.45
%
 
8.62
%
 
 
 
 
 
 
Rate of increase in compensation levels
 
4.08
%
 
4.08
%
 
4.19
%
 
4.29
%
 
4.28
%
 
4.28
%


The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities.
The expected rates of return on plan asset assumptions represent the Company's assessment of long-term returns on diversified investment portfolios globally. The assessment is determined using projections from external financial sources, long-term historical averages, actual returns by asset class and the various asset class allocations by market.

The following table displays the assumed health care cost trend rates, for all individuals:
Health Care Plans
 
2013
 
2012
Health care cost trend rate assumed for next year
 
6.50
%
 
6.50
%
Rate to which the cost trend rate is assumed to decline (ultimate trend)
 
4.50
%
 
4.50
%
Year the rate reaches the ultimate trend rate
 
2032

 
2032



A one-percentage-point change in assumed health care cost trend rates would have the following effect:
 
 
One-Percentage-
 
One-Percentage-
(Dollars in Millions)
 
Point Increase
 
Point Decrease
Health Care Plans
 
 

 
 

Total interest and service cost
 
$
45

 
$
(34
)
Post-retirement benefit obligation
 
432

 
(347
)


The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2013 and 2012 for the Company’s defined benefit retirement plans and other post-retirement plans:
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
2013
 
2012
 
2013
 
2012
Change in Benefit Obligation
 
 
 
 
 
 
 
 
Projected benefit obligation — beginning of year
 
$
21,829

 
17,424

 
4,159

 
3,790

Service cost
 
906

 
722

 
196

 
175

Interest cost
 
908

 
878

 
151

 
165

Plan participant contributions
 
54

 
35

 
—

 
—

Amendments
 
35

 
12

 
7

 
—

Actuarial (gains) losses
 
(1,432
)
 
2,662

 
296

 
459

Divestitures & acquisitions
 
8

 
629

 
—

 
—

Curtailments, settlements & restructuring
 
(15
)
 
(6
)
 
(11
)
 
—

Benefits paid from plan
 
(751
)
 
(697
)
 
(373
)
 
(432
)
Effect of exchange rates
 
(54
)
 
170

 
(18
)
 
2

Projected benefit obligation — end of year
 
$
21,488

 
21,829

 
4,407

 
4,159

Change in Plan Assets
 
 
 
 
 
 
 
 
Plan assets at fair value — beginning of year
 
$
17,536

 
13,736

 
122

 
8

Actual return on plan assets
 
3,573

 
1,926

 
15

 
3

Company contributions
 
565

 
1,838

 
323

 
543

Plan participant contributions
 
54

 
35

 
—

 
—

Settlements
 
(4
)
 
(2
)
 
—

 
—

Divestitures & acquisitions
 
9

 
593

 
—

 
—

Benefits paid from plan assets
 
(751
)
 
(697
)
 
(373
)
 
(432
)
Effect of exchange rates
 
(81
)
 
107

 
—

 
—

Plan assets at fair value — end of year
 
$
20,901

 
17,536

 
87

 
122

Funded status — end of year
 
$
(587
)
 
(4,293
)
 
(4,320
)
 
(4,037
)
Amounts Recognized in the Company’s Balance Sheet consist of the following:
 
 
 
 
 
 
 
 
Non-current assets
 
$
2,363

 
194

 
$
—

 
—

Current liabilities
 
(71
)
 
(65
)
 
(302
)
 
(307
)
Non-current liabilities
 
(2,879
)
 
(4,422
)
 
(4,018
)
 
(3,730
)
Total recognized in the consolidated balance sheet — end of year
 
$
(587
)
 
(4,293
)
 
$
(4,320
)
 
(4,037
)
Amounts Recognized in Accumulated Other Comprehensive Income consist of the following:
 
 
 
 
 
 
 
 
Net actuarial loss
 
$
3,344

 
7,586

 
$
1,732

 
1,601

Prior service cost (credit)
 
26

 
9

 
(6
)
 
(14
)
Unrecognized net transition obligation
 
2

 
2

 
—

 
—

Total before tax effects
 
$
3,372

 
7,597

 
$
1,726

 
1,587

 
 
 
 
 
 
 
 
 
Accumulated Benefit Obligations — end of year
 
$
19,203

 
19,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
2013
 
2012
 
2013
 
2012
Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
$
1,055

 
865

 
$
452

 
409

Net actuarial (gain) loss
 
(3,559
)
 
2,007

 
248

 
458

Amortization of net actuarial loss
 
(681
)
 
(494
)
 
(111
)
 
(76
)
Prior service cost
 
34

 
12

 
8

 
—

Amortization of prior service (cost) credit
 
(13
)
 
(6
)
 
—

 
3

Effect of exchange rates
 
(6
)
 
79

 
(6
)
 
1

Total recognized in other comprehensive income, before tax
 
$
(4,225
)
 
1,598

 
$
139

 
386

Total recognized in net periodic benefit cost and other comprehensive income
 
$
(3,170
)
 
2,463

 
$
591

 
795



The Company plans to continue to fund its U.S. Qualified Plans to comply with the Pension Protection Act of 2006. International Plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently, the Company has several pension plans that are not funded.
In 2013, the Company contributed $58 million and $507 million to its U.S. and international pension plans, respectively.
The following table displays the funded status of the Company's U.S. Qualified & Non-Qualified pension plans and international funded and unfunded pension plans at December 29, 2013 and December 30, 2012, respectively:

 
U.S. Plans
International Plans
 
Qualified Plans
Non-Qualified Plans
Funded Plans
Unfunded Plans
(Dollars in Millions)
2013
2012
2013
2012
2013
2012
2013
2012
Plan Assets
$
13,990

11,464

—

—

6,911

6,072

—

—

Projected Benefit Obligation
11,921

12,420

1,296

1,343

7,797

7,586

474

480

Accumulated Benefit Obligation
10,745

11,001

1,065

1,070

6,974

6,774

419

422

Over (Under) Funded Status
 
 
 
 
 
 
 
 
Projected Benefit Obligation
$
2,069

(956
)
(1,296
)
(1,343
)
(886
)
(1,514
)
(474
)
(480
)
Accumulated Benefit Obligation
3,245

463

(1,065
)
(1,070
)
(63
)
(702
)
(419
)
(422
)

Plans with accumulated benefit obligations in excess of plan assets have an accumulated benefit obligation, projected benefit obligation and plan assets of $5.4 billion, $5.8 billion and $3.3 billion, respectively, at the end of 2013, and $6.5 billion, $7.4 billion and $4.0 billion, respectively, at the end of 2012.

The following table displays the projected future benefit payments from the Company’s retirement and other benefit plans:
(Dollars in Millions)
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019-2023
Projected future benefit payments
 
 
 
 
 
 
 
 
 
 
 
 
Retirement plans
 
$
778

 
794

 
840

 
890

 
933

 
6,071

Other benefit plans 
 
$
313

 
309

 
305

 
302

 
299

 
1,469



The following table displays the projected future minimum contributions to the unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future.
(Dollars in Millions)
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019-2023
Projected future contributions
 
$
74

 
73

 
78

 
95

 
89

 
524



Each pension plan is overseen by a local committee or board that is responsible for the overall administration and investment of the pension plans. In determining investment policies, strategies and goals, each committee or board considers factors including, local pension rules and regulations; local tax regulations; availability of investment vehicles (separate accounts, commingled accounts, insurance funds, etc.); funded status of the plans; ratio of actives to retirees; duration of liabilities; and other relevant factors including: diversification, liquidity of local markets and liquidity of base currency. A majority of the Company’s pension funds are open to new entrants and are expected to be on-going plans. Permitted investments are primarily liquid and/or listed, with little reliance on illiquid and non-traditional investments such as hedge funds.
The Company’s retirement plan asset allocation at the end of 2013 and 2012 and target allocations for 2014 are as follows:
 
 
Percent of
Plan Assets
 
Target
Allocation
 
 
2013
 
2012
 
2014
Worldwide Retirement Plans
 
 
 
 
 
 
Equity securities
 
76
%
 
75
%
 
71
%
Debt securities
 
24

 
25

 
29

Total plan assets
 
100
%
 
100
%
 
100
%

Determination of Fair Value of Plan Assets
The Plan has an established and well-documented process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves.
While the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Valuation Hierarchy
The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described in the table below with Level 1 having the highest priority and Level 3 having the lowest.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for the investments measured at fair value.
•
Short-term investments — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. Other investments are through investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in a market that is not active and classified as Level 2.
•
Government and agency securities — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. When quoted market prices for a security are not available in an active market, they are classified as Level 2.
•
Debt instruments — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified as Level 1. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. Level 3 debt instruments are priced based on unobservable inputs.
•
Equity securities — Common stocks are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all common stock is classified within Level 1 of the valuation hierarchy.
•
Commingled funds — These investment vehicles are valued using the NAV provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Assets in the Level 2 category have a quoted market price in a market that is not active.
•
Insurance contracts — The instruments are issued by insurance companies. The fair value is based on negotiated value and the underlying investments held in separate account portfolios as well as considering the credit worthiness of the issuer. The underlying investments are government, asset-backed and fixed income securities. In general, insurance contracts are classified as Level 3 as there are no quoted prices nor other observable inputs for pricing.
•
Other assets — Other assets are represented primarily by limited partnerships and real estate investments, as well as commercial loans and commercial mortgages that are not classified as corporate debt. Other assets that are exchange listed and actively traded are classified as Level 1, while inactively traded assets are classified as Level 2. Most limited partnerships represent investments in private equity and similar funds that are valued by the general partners. Certain of these limited partnerships, as well as any other assets valued using unobservable inputs, are classified as Level 3.

The following table sets forth the Retirement Plans' trust investments measured at fair value as of December 29, 2013 and December 30, 2012:
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
 
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total Assets
(Dollars in Millions)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Short-term investment funds
 
$
304

 
155

 
561

 
627

 
—

 
—

 
865

 
782

Government and agency securities
 
—

 
53

 
1,965

 
1,706

 
—

 
—

 
1,965

 
1,759

Debt instruments
 
—

 
2

 
1,215

 
1,641

 
1

 
3

 
1,216

 
1,646

Equity securities
 
10,526

 
8,104

 
23

 
1

 
4

 
4

 
10,553

 
8,109

Commingled funds
 
—

 
11

 
5,846

 
4,985

 
44

 
50

 
5,890

 
5,046

Insurance contracts
 
—

 
—

 
2

 
—

 
23

 
24

 
25

 
24

Other assets
 
4

 
—

 
314

 
101

 
69

 
69

 
387

 
170

Trust investments at fair value
 
$
10,834

 
8,325

 
9,926

 
9,061

 
141

 
150

 
20,901

 
17,536



The Company's Other Benefit Plans are unfunded except for U.S. commingled funds (Level 2) of $76 million and $67 million at December 29, 2013 and December 30, 2012, respectively, and $11 million and $55 million of U.S. short-term-investment funds (Level 2) at December 29, 2013 and December 30, 2012, respectively.
The fair value of Johnson & Johnson Common Stock directly held in plan assets was $671 million (3.2% of total plan assets) at December 29, 2013 and $512 million (2.9% of total plan assets) at December 30, 2012.
Level 3 Gains and Losses
The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the years ended December 29, 2013 and December 30, 2012:
(Dollars in Millions)
 
Debt Instruments
 
Equity Securities
 
Commingled Funds
 
Insurance Contracts
 
Other Assets
 
Total Level 3
Balance January 1, 2012
 
$
9

 
16

 
33

 
25

 
65

 
148

Realized gains (losses)
 
—

 
(1
)
 
—

 
—

 
(5
)
 
(6
)
Unrealized gains (losses)
 
—

 
—

 
—

 
—

 
—

 
—

Purchases, sales, issuances and settlements, net
 
(6
)
 
(11
)
 
17

 
(1
)
 
9

 
8

Balance December 30, 2012
 
3

 
4

 
50

 
24

 
69

 
150

Realized gains (losses)
 
—

 
—

 
—

 
—

 
(5
)
 
(5
)
Unrealized gains (losses)
 
—

 
(1
)
 
—

 
(1
)
 
—

 
(2
)
Purchases, sales, issuances and settlements, net
 
(2
)
 
1

 
(6
)
 
—

 
5

 
(2
)
Balance December 29, 2013
 
$
1

 
4

 
44

 
23

 
69

 
141

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