13. BENEFIT PLANS
Retirement Plan Amendments
Effective after June 30, 2010, the Company's domestic defined benefit pension plans were closed to new hires and employees with less than one year of service and participating employees stopped accruing additional years of service for purposes of determining the benefits provided by the plans (though crediting years of service for purposes of vesting and eligibility for early retirement benefits continues) and, effective December 31, 2013, pay increases will not be taken into consideration when determining a participating employee's benefits under the plans.
In July 2013, the Company's Board of Directors approved amendments to the Time Warner Group Health Plan. Pursuant to the amendments, (i) subsidized medical benefits provided to eligible retired employees (and their eligible dependents) were discontinued for all future retirees who were employed on December 31, 2013 and who will not meet the eligibility criteria by December 31, 2015 and (ii) effective January 1, 2014, post-65 retiree medical coverage will be discontinued and eligible retirees (and their eligible dependents) will move to coverage provided in the individual health insurance market.
Defined Benefit Pension Plans
A summary of activity for substantially all of Time Warner's domestic and international defined benefit pension plans is as follows:
Benefit Obligation (millions)
| December 31, | |||||||
| 2013 | 2012 | ||||||
| Change in benefit obligation: | |||||||
| Projected benefit obligation, beginning of year | $ | 4,224 | $ | 3,733 | |||
| Service cost | 3 | 3 | |||||
| Interest cost | 170 | 178 | |||||
| Actuarial (gain) loss | (262) | 444 | |||||
| Benefits paid | (167) | (133) | |||||
| Settlements | - | (32) | |||||
| Plan amendments | - | (1) | |||||
| Foreign currency exchange rates | 26 | 32 | |||||
| Projected benefit obligation, end of year | $ | 3,994 | $ | 4,224 | |||
| Accumulated benefit obligation, end of year | $ | 3,955 | $ | 4,171 | |||
Plan Assets (millions)
| December 31, | |||||||
| 2013 | 2012 | ||||||
| Change in plan assets: | |||||||
| Fair value of plan assets, beginning of year | $ | 3,389 | $ | 3,123 | |||
| Actual return on plan assets | 127 | 350 | |||||
| Employer contributions | 61 | 47 | |||||
| Benefits paid | (167) | (133) | |||||
| Settlements | - | (32) | |||||
| Foreign currency exchange rates | 29 | 34 | |||||
| Fair value of plan assets, end of year | $ | 3,439 | $ | 3,389 | |||
As of December 31, 2013 and December 31, 2012, the funded status recognized in the Consolidated Balance Sheet reflected a net liability position of $555 million and $835 million, respectively, primarily consisting of noncurrent liabilities of $591 million and $858 million, respectively. As of December 31, 2013 and December 31, 2012, amounts included in Accumulated other comprehensive loss, net were $1.326 billion and $1.547 billion, respectively, primarily consisting of net actuarial losses.
Certain defined benefit pension plans have projected benefit obligations and accumulated benefit obligations in excess of their plan assets. These plans are primarily unfunded. As of December 31, 2013 and December 31, 2012, the projected benefit obligations for unfunded plans were $449 million and $484 million, respectively, and the accumulated benefit obligations for unfunded plans were $443 million and $474 million, respectively. In addition, as of December 31, 2013, the projected benefit obligation and accumulated benefit obligation for certain funded plans exceeded the fair value of their assets by $176 million and $176 million, respectively.
Components of Net Periodic Benefit Costs from Continuing Operations (millions)
| December 31, | ||||||||||
| 2013 | 2012 | 2011 | ||||||||
| Service cost | $ | 3 | $ | 3 | $ | 9 | ||||
| Interest cost | 170 | 178 | 188 | |||||||
| Expected return on plan assets | (197) | (189) | (196) | |||||||
| Amortization of prior service cost | 1 | 1 | 1 | |||||||
| Amortization of net loss | 35 | 27 | 20 | |||||||
| Net periodic benefit costs | $ | 12 | $ | 20 | $ | 22 | ||||
Assumptions
Weighted-average assumptions used to determine benefit obligations and net periodic benefit costs for the years ended December 31:
| Benefit Obligations | Net Periodic Benefit Costs | ||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||
| Discount rate | 4.82% | 4.12% | 4.91% | 4.12% | 4.91% | 5.55% | |||||||||||||
| Rate of compensation increase | 4.59% | 4.40% | 4.47% | 3.85% | 4.47% | 4.76% | |||||||||||||
| Expected long-term return on | |||||||||||||||||||
| plan assets | n/a | n/a | n/a | 6.10% | 6.29% | 6.44% | |||||||||||||
The discount rates were determined by matching the plan's liability cash flows to rates derived from high-quality corporate bonds available at the measurement date.
In developing the expected long-term rate of return on plan assets, the Company considered long-term historical rates of return, the Company's plan asset allocations as well as the opinions and outlooks of investment professionals and consulting firms.
Fair Value of Plan Assets
The following table sets forth by level, within the fair value hierarchy described in Note 5, the assets held by the Company's defined benefit pension plans, including those assets related to The CW sub-plan, as of December 31, 2013 and December 31, 2012 (millions):
| December 31, 2013 | December 31, 2012 | ||||||||||||||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
| Cash and cash equivalents | $ | 155 | $ | - | $ | - | $ | 155 | $ | 113 | $ | - | $ | - | $ | 113 | |||||||||
| Insurance contracts | - | 18 | - | 18 | - | 16 | - | 16 | |||||||||||||||||
| Equity securities: | |||||||||||||||||||||||||
| Domestic equities | 204 | - | - | 204 | 176 | - | - | 176 | |||||||||||||||||
| International equities | 56 | - | - | 56 | 45 | - | - | 45 | |||||||||||||||||
| Fixed income securities: | |||||||||||||||||||||||||
| U.S. government and | |||||||||||||||||||||||||
| agency securities(c) | 239 | 19 | - | 258 | 286 | 16 | - | 302 | |||||||||||||||||
| Non-U.S. government and | |||||||||||||||||||||||||
| agency securities | 61 | - | - | 61 | - | - | - | - | |||||||||||||||||
| Municipal bonds | - | 23 | - | 23 | - | 27 | - | 27 | |||||||||||||||||
| Investment grade | |||||||||||||||||||||||||
| corporate bonds(a) | - | 1,048 | - | 1,048 | - | 1,212 | - | 1,212 | |||||||||||||||||
| Non-investment grade | |||||||||||||||||||||||||
| corporate bonds(a) | - | 23 | - | 23 | - | 25 | - | 25 | |||||||||||||||||
| Other investments: | |||||||||||||||||||||||||
| Pooled investments(b) | - | 1,120 | - | 1,120 | - | 1,042 | - | 1,042 | |||||||||||||||||
| Commingled trust funds(c) | - | 391 | - | 391 | - | 307 | - | 307 | |||||||||||||||||
| Hedge funds | - | - | 36 | 36 | - | - | 63 | 63 | |||||||||||||||||
| Other (d) | 15 | 10 | 40 | 65 | 41 | 2 | 41 | 84 | |||||||||||||||||
| Total(e) | $ | 730 | $ | 2,652 | $ | 76 | $ | 3,458 | $ | 661 | $ | 2,647 | $ | 104 | $ | 3,412 | |||||||||
| ___________ | |||||||||||||||||||||||||
(a) Investment grade corporate bonds have an S&P rating of BBB- or higher and non-investment grade corporate bonds have an S&P rating of BB+ or below.
(b) Pooled investments primarily consist of interests in unitized investment pools of which underlying securities primarily consist of equity and fixed income securities.
(c) As of December 31, 2013, commingled trust funds include $11 million of cash collateral for securities on loan, and U.S. government and agency securities include $5 million of securities collateral for securities on loan. As of December 31, 2012, commingled trust funds included $18 million of cash collateral for securities on loan, and U.S. government and agency securities included $1 million of securities collateral for securities on loan.
(d) Other investments primarily include limited partnerships, 103-12 investments, derivative contracts, exchange-traded funds and mutual funds.
(e) At December 31, 2013 and December 31, 2012, total assets include $15 million and $19 million, respectively, of securities on loan.
The table below sets forth a summary of changes in the fair value of the defined benefit pension plans' Level 3 assets for the years ended December 31, 2013 and December 31, 2012 (millions):
| December 31, 2013 | December 31, 2012 | ||||||||||||||||||
| Hedge Funds | Other | Total | Hedge Funds | Other | Total | ||||||||||||||
| Balance at beginning of period | $ | 63 | $ | 41 | $ | 104 | $ | 77 | $ | 36 | $ | 113 | |||||||
| Actual return on plan assets and | |||||||||||||||||||
| liabilities: | |||||||||||||||||||
| Relating to securities still held at | |||||||||||||||||||
| end of period | (5) | 1 | (4) | 7 | 2 | 9 | |||||||||||||
| Relating to securities disposed | |||||||||||||||||||
| of during the period | 10 | 4 | 14 | (1) | - | (1) | |||||||||||||
| Purchases | 1 | 9 | 10 | - | 12 | 12 | |||||||||||||
| Sales | (33) | (15) | (48) | (20) | (9) | (29) | |||||||||||||
| Transfers in and/or out of Level 3 | - | - | - | - | - | - | |||||||||||||
| Balance at end of period | $ | 36 | $ | 40 | $ | 76 | $ | 63 | $ | 41 | $ | 104 | |||||||
The Company primarily utilizes the market approach for determining recurring fair value measurements.
The Company's investment policy for its defined benefit pension plans is to minimize the volatility of the plans' funded status and to achieve and maintain fully funded status in order to pay current and future participant benefits from plan assets. The Company determines and periodically reviews asset allocation policies consistent with its investment policy. In addition, the Company continuously monitors the performance of the pension investment portfolios, and the performance of the investment advisers, sub-advisers and asset managers thereof, and makes adjustments and changes as required. The Company does not manage any pension assets internally. The investment guidelines set by the Company for the investment advisers, sub-advisers and asset managers permit the use of index funds, futures, options, and other hedging strategies as components of portfolio management strategies.
Under the Company's investment policy, the asset allocation target for the domestic defined benefit pension plans is 35% equity investments and 65% fixed income investments. As and when funded status and market conditions permit, the Company intends to transition this asset allocation target toward a target of 20% equity investments and 80% fixed income investments to further minimize funded status volatility. Target asset allocations for the international defined benefit pension plans as of December 31, 2013 are approximately 55% equity investments, 30% fixed income investments and 15% other investments.
At both December 31, 2013 and December 31, 2012, the defined benefit pension plans' assets did not include any securities issued by Time Warner.
Expected cash flows
After considering the funded status of the Company's defined benefit pension plans, movements in the discount rate, investment performance and related tax consequences, the Company may choose to make contributions to its pension plans in any given year. The Company made discretionary cash contributions totaling $20 million to its funded defined benefit pension plans during the year ended December 31, 2013. For the Company's unfunded plans, contributions will continue to be made to the extent benefits are paid. In addition, the Company currently anticipates that it will make contributions to certain international defined benefit pension plans of $14 million in 2014, pursuant principally to UK regulatory funding requirements.
Information about the expected benefit payments for the Company's defined benefit plans is as follows (millions):
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019-2023 | ||||||||||||||
| Expected benefit payments | $ | 191 | $ | 194 | $ | 203 | $ | 206 | $ | 213 | $ | 1,111 | |||||||
Defined Contribution Plans
Time Warner has certain domestic and international defined contribution plans, including savings and profit sharing plans, for which the expense amounted to $195 million in 2013, $188 million in 2012 and $184 million in 2011. The Company's contributions to the savings plans are primarily based on a percentage of the employees' elected contributions and are subject to plan provisions.
Other Postretirement Benefit Plans
Time Warner also sponsors several unfunded domestic postretirement benefit plans covering certain retirees and their dependents. As previously noted, during 2013 the Company's Board of Directors approved amendments to the Time Warner Group Health Plan. In connection with these amendments, the Company recognized a curtailment gain of $38 million. For substantially all of Time Warner's domestic postretirement benefit plans, the unfunded benefit obligation as of December 31, 2013 and December 31, 2012 was $126 million and $179 million, respectively, and the amount recognized in Accumulated other comprehensive loss, net was a $3 million gain and a $10 million loss, respectively. For the years ended December 31, 2013, 2012 and 2011, the net periodic benefit (income)/costs were $(28) million, $11 million and $11 million, respectively.
Multiemployer Benefit Plans
The Company contributes to various multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of its union-represented employees, primarily at the Warner Bros. segment. The risks of participating in these multiemployer pension plans are different from single-employer pension plans in that (i) contributions made by the Company to the multiemployer pension plans may be used to provide benefits to employees of other participating employers; (ii) if the Company chooses to stop participating in certain of these multiemployer pension plans, it may be required to pay those plans an amount based on the underfunded status of the plan, which is referred to as a withdrawal liability; and (iii) actions taken by a participating employer that lead to a deterioration of the financial health of a multiemployer pension plan may result in the unfunded obligations of the multiemployer pension plan to be borne by its remaining participating employers. While no multiemployer pension plan contributed to by the Company is individually significant, the Pension Protection Act of 2006 zone status as of December 31, 2013 (i.e., for the multiemployer plan's 2012 plan year) of all of the largest multiemployer pension plans in which the Company participates was green, which implies that such plans are funded at a level of 80 percent or greater. Total contributions made by the Company to multiemployer pension plans for the years ended December 31, 2013, 2012 and 2011 were $113 million, $93 million and $109 million, respectively. Included in these amounts are contributions that Home Box Office periodically makes to the Radio Television & Recording Artists Pension Plan (“RT&RA Plan”) under a collective bargaining agreement that expires in October 2015. The RT&RA Plan is not one of the five largest multiemployer pension plans in which the Company participates. The RT&RA Plan's most recently filed Form 5500 was for its plan year ended December 31, 2012. Pursuant to that filing, Home Box Office is one of eight employers obligated to contribute to the RT&RA Plan. The RT&RA Plan is operating under a rehabilitation plan, the Pension Protection Act of 2006 zone status as of December 31, 2012 was red (i.e., critical) and it was less than 65% funded. Home Box Office's contributions to this plan were less than $1 million in each of the years ended December 31, 2013, 2012 and 2011. Based on contributions reported in the most recent Form 5500, Home Box Office's contributions represented greater than 5% of the plan's total contributions. Home Box Office's future contributions to this plan are determined pursuant to the collective bargaining agreement, which imposes no minimum contributions requirement, but incorporates a contribution surcharge for years the plan is in critical status. If Home Box Office had elected to withdraw from the RT&RA Plan during the 2012 plan year, its estimated withdrawal liability would have been approximately $20 million.
The Company also contributes to various other multiemployer benefit plans that provide health and welfare benefits to active and retired participants, primarily at the Warner Bros. segment. Total contributions made by the Company to these other multiemployer benefit plans for the years ended December 31, 2013, 2012 and 2011 were $193 million, $167 million and $157 million, respectively.