CORNING INC /NY | 2013 | FY | 3

13.      Employee Retirement Plans

Defined Benefit Plans

We have defined benefit pension plans covering certain domestic and international employees.  Our funding policy has been to contribute, as necessary, an amount in excess of the minimum requirements in order to achieve the Company’s long-term funding targets.  In 2013, we did not contribute to our domestic defined benefit pension plan and contributed $5 million to our international pension plans.  In 2012, we made voluntary cash contributions of $75 million to our domestic defined benefit pension plan and $30 million to our international pension plans.  Although we will not be subject to any mandatory contributions in 2014, we anticipate making voluntary cash contributions of up to $85 million to our U.S. pension plan and up to $8 million to our international pension plans in 2014.

As discussed in Note 1 to the financial statements, in the first quarter of 2013, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans.  We did not make this change in accounting for our OPEB plans, and continue to defer all actuarial gains and losses and amortize those amounts outside of the corridor over future periods.

Corning offers postretirement plans that provide health care and life insurance benefits for retirees and eligible dependents.  Certain employees may become eligible for such postretirement benefits upon reaching retirement age.  For current retirees (including surviving spouses) and active employees eligible for the salaried retiree medical program, we have placed a “cap” on the amount we will contribute toward retiree medical coverage in the future.  The cap is equal to 120% of our 2005 contributions toward retiree medical benefits.  Once our contributions toward salaried retiree medical costs reach this cap, impacted retirees will have to pay the excess amount in addition to their regular contributions for coverage.  This cap was attained for post-65 retirees in 2008 and has impacted their contribution rate in 2009 and going forward.  The pre-65 retirees triggered the cap in 2010, which has impacted their contribution rate in 2011 and going forward.  Furthermore, employees hired or rehired on or after January 1, 2007 will be eligible for Corning retiree medical benefits upon retirement; however, these employees will pay 100% of the cost.

Obligations and Funded Status

The change in benefit obligation and funded status of our employee retirement plans follows (in millions):

 
Pension benefits
 
Postretirement benefits
December 31,
2013
 
2012
 
2013
 
2012
                       
Change in benefit obligation
                     
Benefit obligation at beginning of year
$
3,630 
 
$
3,224 
 
$
987 
 
$
957 
Service cost
 
70 
   
62 
   
13 
   
13 
Interest cost
 
131 
   
154 
   
39 
   
45 
Plan participants’ contributions
 
1 
   
1 
   
14 
   
12 
Amendments
       
3 
   
(4)
     
Actuarial loss (gain)
 
(362)
   
409 
   
(178)
   
20 
Other
 
2 
   
5 
   
5 
   
1 
Benefits paid
 
(177)
   
(239)
   
(61)
   
(66)
Medicare subsidy received
             
1 
   
5 
Foreign currency translation
 
5 
   
11 
   
(1)
     
Benefit obligation at end of year
$
3,300 
 
$
3,630 
 
$
815 
 
$
987 
                       
Change in plan assets
                     
Fair value of plan assets at beginning of year
$
2,975 
 
$
2,770 
           
Actual gain on plan assets
 
71 
   
309 
           
Employer contributions
 
20 
   
122 
           
Plan participants’ contributions
 
1 
   
1 
           
Benefits paid
 
(177)
   
(239)
           
Foreign currency translation
 
6 
   
12 
           
Fair value of plan assets at end of year
$
2,896 
 
$
2,975 
           
                       
Funded status at end of year
                     
Fair value of plan assets
$
2,896 
 
$
2,975 
           
Benefit obligations
 
(3,300)
   
(3,630)
 
$
(815)
 
$
(987)
Funded status of plans
$
(404)
 
$
(655)
 
$
(815)
 
$
(987)
                       
Amounts recognized in the consolidated balance sheets consist of:
                     
Noncurrent asset
$
23 
 
$
14 
           
Current liability
 
(15)
   
(31)
 
$
(49)
 
$
(57)
Noncurrent liability
 
(412)
   
(638)
   
(766)
   
(930)
Recognized liability
$
(404)
 
$
(655)
 
$
(815)
 
$
(987)
                       
Amounts recognized in accumulated other comprehensive income consist of:
                     
Net actuarial loss (1)
$
132 
 
$
363 
 
$
82 
 
$
274 
Prior service cost (credit)
 
21 
   
25 
   
(29)
   
(29)
Amount recognized at end of year (1)
$
153 
 
$
388 
 
$
53 
 
$
245 

(1)
Amounts for prior years were revised for the change in our method of recognizing pension expense.  See Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the year ended December 31, 2012.

The accumulated benefit obligation for defined benefit pension plans was $3.2 billion and $3.5 billion at December 31, 2013 and 2012, respectively.

The following information is presented for pension plans where the projected benefit obligation and the accumulated benefit obligation as of December 31, 2013 and 2012 exceeded the fair value of plan assets (in millions):

 
December 31,
 
2013
 
2012
           
Projected benefit obligation
$
447
 
$
3,371
Accumulated benefit obligation
$
417
 
$
3,196
Fair value of plan assets
$
20
 
$
2,702

In 2013, the fair value of plan assets exceeded the accumulated benefit obligation for the United States and the United Kingdom pension plans.

The components of net periodic benefit expense for our employee retirement plans follow (in millions):

 
Pension benefits
 
Postretirement benefits
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
                                   
Service cost
$
70 
 
$
62 
 
$
53 
 
$
13 
 
$
13 
 
$
13 
Interest cost
 
131 
   
154 
   
156 
   
39 
   
45 
   
49 
Expected return on plan assets (1)
 
(169)
   
(161)
   
(167)
                 
Amortization of net loss (1)
                   
15 
   
15 
   
18 
Amortization of prior service cost (credit)
 
5 
   
8 
   
9 
   
(6)
   
(6)
   
(6)
Recognition of actuarial (gain) loss (1)
 
(30)
   
217 
   
64 
                 
Total net periodic benefit expense (1)
$
7 
 
$
280 
 
$
115 
 
$
61 
 
$
67 
 
$
74 
                                   
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
                                 
Current year actuarial loss (gain)
$
(264)
 
$
257 
 
$
107 
 
$
(178)
 
$
20 
 
$
(31)
Recognition of actuarial gain (loss) (1)
 
30 
   
(217)
   
(64)
                 
Amortization of actuarial loss (1)
                   
(15)
   
(16)
   
(18)
Current year prior service (credit)/loss
       
3 
   
3 
   
(5)
           
Amortization of prior service (cost) credit
 
(5)
   
(8)
   
(9)
   
6 
   
6 
   
6 
Total recognized in other comprehensive (income) loss (1)
$
(239)
 
$
35 
 
$
37 
 
$
(192)
 
$
10 
 
$
(43)
                                   
Total recognized in net periodic benefit cost and other comprehensive (income) loss (1)
$
(232)
 
$
315 
 
$
152 
 
$
(131)
 
$
77 
 
$
31 

(1)
Amounts for prior years were revised for the change in our method of recognizing pension expense.  See Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the years ended December 31, 2012 and 2011.

The Company expects to recognize $4 million of net prior service cost as components of net periodic pension cost in 2014 for its defined benefit pension plans.  The Company expects to recognize $1 million of net loss and $6 million of net prior service credit as components of net periodic postretirement benefit cost in 2014.

Corning uses a hypothetical yield curve and associated spot rate curve to discount the plan’s projected benefit payments.  Once the present value of projected benefit payments is calculated, the suggested discount rate is equal to the level rate that results in the same present value.  The yield curve is based on actual high-quality corporate bonds across the full maturity spectrum, which also includes private placements as well as Eurobonds that are denominated in U.S. currency.  The curve is developed from yields on approximately 350-375 bonds from four grading sources, Moody’s, S&P, Fitch and the Dominion Bond Rating Service.  A bond will be included if at least half of the grades from these sources are Aa, non-callable bonds.  The very highest 10% yields and the lowest 40% yields are excluded from the curve to eliminate outliers in the bond population.

Measurement of postretirement benefit expense is based on assumptions used to value the postretirement benefit obligation at the beginning of the year.

The weighted-average assumptions used to determine benefit obligations at December 31 follow:

 
Pension benefits
 
Postretirement benefits
 
Domestic
 
International
 
Domestic
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Discount rate
4.75%
 
3.75%
 
4.75%
 
4.08%
 
4.48%
 
4.40%
 
4.75%
 
4.00%
 
4.75%
Rate of compensation increase
4.00%
 
4.00%
 
4.25%
 
3.85%
 
3.45%
 
3.44%
           

The weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 follow:

 
Pension benefits
 
Postretirement benefits
 
Domestic
 
International
 
Domestic
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Discount rate
3.75%
 
4.75%
 
5.25%
 
4.48%
 
4.40%
 
4.75%
 
4.00%
 
4.75%
 
5.25%
Expected return on plan assets
6.00%
 
6.00%
 
6.50%
 
3.73%
 
6.01%
 
5.59%
           
Rate of compensation increase
4.00%
 
4.25%
 
4.25%
 
3.45%
 
3.44%
 
4.35%
           

The assumed rate of return was determined based on the current interest rate environment and historical market premiums relative to fixed income rates of equities and other asset classes.  Reasonableness of the results is tested using models provided by the plan actuaries.

Assumed health care trend rates at December 31
2013
 
2012
Health care cost trend rate assumed for next year
7%
 
7.5%
Rate that the cost trend rate gradually declines to
5%
 
5%
Year that the rate reaches the ultimate trend rate
2020
 
2018

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):

 
One-percentage-point
increase
 
One-percentage-point
decrease
Effect on annual total of service and interest cost
$  3
 
$  (3)
Effect on postretirement benefit obligation
$54
 
$(45)

Plan Assets

Corning’s expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested to provide for the benefits included in the projected benefit obligation.  We based this rate on asset/liability forecast modeling, which is based on our current asset allocation, the return and standard deviation for each asset class, current market conditions and transitions from current conditions to long-term returns.

The Company’s overall investment strategy is to obtain sufficient return to offset or exceed inflation and provide adequate liquidity to meet the benefit obligations of the pension plan.  Investments are made in public securities to ensure adequate liquidity to support benefit payments.  Domestic and international stocks and bonds provide diversification to the portfolio.  The target allocation range for domestic equity investment is 10.0%-12.5% which includes large, mid and small cap companies.  The target allocation range of international equities is 10.0%-12.5%, which includes investments in both developed and emerging markets.  The target allocation for bond investments is 60%, which predominately includes both government and corporate bonds.  Long duration fixed income assets are utilized to mitigate the sensitivity of funding ratios to changes in interest rates.  The target allocation range for non-public investments in private equity and real estate is 5%-15%, and is used to enhance returns and offer additional asset diversification.  The target allocation range for commodities is 0%-5%, which provides some inflation protection to the portfolio.

The following tables provide fair value measurement information for the Company’s major categories of defined benefit plan assets:

     
Fair value measurements at reporting date using
(in millions)
December 31,
2013
 
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
Equity securities:
                     
U.S. companies
$
331
 
$
216
 
$
115
     
International companies
 
316
   
118
   
198
     
                       
Fixed income:
                     
U.S. corporate bonds
 
1,538
   
142
   
1,396
     
International fixed income
 
245
   
185
   
60
     
Other fixed income
                     
                       
Private equity (1)
 
207
             
$
207
Real estate (2)
 
93
               
93
Insurance contracts
 
6
               
6
Cash equivalents
 
60
   
60
           
Commodities (3)
 
100
         
100
     
Total
$
2,896
 
$
721
 
$
1,869
 
$
306

(1)  
This category includes venture capital, leverage buyouts and distressed debt limited partnerships invested primarily in U.S. companies.  The inputs are valued by internally generated Discounted Cash Flow Analysis and comparable sale analysis.

(2)  
This category includes industrial, office, apartments, hotels, infrastructure, and retail investments which are limited partnerships predominately in the U.S.  The inputs are valued by internally generated Discounted Cash Flow Analysis; comparable sale analysis and periodic external appraisals.

(3)  
This category includes investments in energy, industrial metals, precious metals, agricultural and livestock primarily through futures, options, swaps, and exchange traded funds.

     
Fair value measurements at reporting date using
(in millions)
December 31,
2012
 
Quoted prices in
active markets
for identical
assets (Level 1)
 
Significant
other
observable
inputs (Level 2)
 
Significant
unobservable
inputs
(Level 3)
Equity securities:
                     
U.S. companies
$
313
 
$
185
 
$
128
     
International companies
 
314
   
96
   
218
     
                       
Fixed income:
                     
U.S. corporate bonds
 
1,624
   
151
   
1,473
     
International fixed income
 
245
   
182
   
63
     
Other fixed income
                     
                       
Private equity (1)
 
221
             
$
221
Real estate (2)
 
103
               
103
Insurance contracts
 
6
               
6
Cash equivalents
 
57
   
57
           
Commodities (3)
 
92
         
92
     
Total
$
2,975
 
$
671
 
$
1,974
 
$
330

(1)
This category includes venture capital, leverage buyouts and distressed debt limited partnerships invested primarily in U.S. companies.  The inputs are valued by internally generated Discounted Cash Flow Analysis and comparable sale analysis.

(2)
This category includes industrial, office, apartments, hotels, infrastructure, and retail investments which are limited partnerships predominately in the U.S.  The inputs are valued by internally generated Discounted Cash Flow Analysis; comparable sale analysis and periodic external appraisals.

(3)
This category includes investments in energy, industrial metals, precious metals, agricultural and livestock primarily through futures, options, swaps, and exchange traded funds.

The tables below set forth a summary of changes in the fair value of the defined benefit plans Level 3 assets for the years ended December 31, 2013 and 2012:

 
Level 3 assets
 
Year ended December 2013
(in millions)
Private
equity
 
Real
estate
 
Insurance
contracts
                 
Beginning balance at December 31, 2012
$
221 
 
$
103 
 
$
6
                 
Actual return on plan assets relating to assets still held at the reporting date
 
25 
   
9 
     
Transfers in and/or out of level 3
 
(39)
   
(19)
     
Ending balance at December 31, 2013
$
207 
 
$
93 
 
$
6

 
Level 3 assets
 
Year ended December 2012
(in millions)
Private
equity
 
Real
estate
 
Insurance
contracts
                 
Beginning balance at December 31, 2011
$
241 
 
$
91
 
$
5
                 
Actual return on plan assets relating to assets still held at the reporting date
 
26 
   
11
     
Transfers in and/or out of level 3
 
(46)
   
1
   
1
Ending balance at December 31, 2012
$
221 
 
$
103
 
$
6

Credit Risk

59% of plan assets are invested in long duration bonds.  The average rating for these bonds is A.  These bonds are subject to credit risk, such that a decline in credit ratings for the underlying companies, countries or assets (for asset-backed securities) would result in a decline in the value of the bonds.  These bonds are also subject to default risk.

Currency Risk

11% of assets are valued in non-U.S. dollar denominated investments that are subject to currency fluctuations.  The value of these securities will decline if the U.S. dollar increases in value relative to the value of the currencies in which these investments are denominated.

Liquidity Risk

12% of the securities are invested in Level 3 securities.  These are long-term investments in private equity and private real estate investments that may not mature or be sellable in the near-term without significant loss.

At December 31, 2013 and 2012, the amount of Corning common stock included in equity securities was not significant.

Cash Flow Data

We anticipate making voluntary cash contributions of approximately $93 million to our domestic and international defined benefit plans in 2014.

The following reflects the gross benefit payments that are expected to be paid for the domestic and international plans and the gross amount of annual Medicare Part D federal subsidy expected to be received (in millions):

 
Expected benefit payments
   
 
Pension
benefits
 
Postretirement
benefits
 
Expected federal subsidy payments
postretirement benefits
2014
$   193
 
$  48
 
$  3
2015
$   214
 
$  50
 
$  3
2016
$   199
 
$  50
 
$  3
2017
$   203
 
$  50
 
$  3
2018
$   207
 
$  50
 
$  3
2019-2023
$1,138
 
$245
 
$19

Other Benefit Plans

We offer defined contribution plans covering employees meeting certain eligibility requirements.  Total consolidated defined contribution plan expense was $63 million, $50 million and $44 million for the years ended December 31, 2013, 2012 and 2011, respectively.

us-gaap:PensionAndOtherPostretirementBenefitsDisclosureTextBlock