3M CO | 2013 | FY | 3


NOTE 10. Pension and Postretirement Benefit Plans

 

3M has company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. In total, 3M has over 80 defined benefit plans in 25 countries. Pension benefits associated with these plans generally are based on each participant's years of service, compensation, and age at retirement or termination. The primary U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The Company also provides certain postretirement health care and life insurance benefits for substantially all of its U.S. employees who reach retirement age while employed by the Company. Most international employees and retirees are covered by government health care programs. The cost of company-provided postretirement health care plans for international employees is not material and is combined with U.S. amounts in the tables that follow.

 

The Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code. These plans are offered to substantially all regular U.S. employees. Effective January 1, 2010, substantially all Company contributions to the plans are made in cash. For substantially all employees hired prior to January 1, 2009, employee

401(k) contributions of up to 6% of eligible compensation are matched at rates of 60% or 75%, depending on the plan the employee participated in. Employees hired on or after January 1, 2009 receive a cash match of 100% for employee 401(k) contributions of up to 6% of eligible compensation and also receive an employer retirement income account cash contribution of 3% of the participant's total eligible compensation. All contributions are invested in a number of investment funds pursuant to the employees' elections. Employer contributions to the U.S. plans were $136 million, $124 million and $109 million for 2013, 2012 and 2011, respectively. 3M subsidiaries in various international countries also participate in defined contribution plans. Employer contributions to the international plans were $71 million, $58 million and $54 million for 2013, 2012 and 2011, respectively.

 

The Company's defined benefit pension funding policy is to deposit with independent trustees amounts allowable by law. Trust funds and deposits with insurance companies are maintained to provide pension benefits to plan participants and their beneficiaries. There are no plan assets in the non-qualified plan due to its nature. For its U.S. postretirement health care and life insurance benefit plans, the Company has set aside amounts at least equal to annual benefit payments with an independent trustee.

 

In August 2006, the Pension Protection Act (PPA) was signed into law in the U.S. The PPA transition rules increased the funding target for defined benefit pension plans to 100% of the target liability by 2011. 3M's primary U.S. qualified defined benefit plan does not have a mandatory cash contribution because the Company has a significant credit balance from previous discretionary contributions that can be applied to any PPA funding requirements.

 

In the fourth quarter of 2010, the Company made further changes to its U.S. postretirement benefit plans. As a result of these changes, the Company will transition all current and future retirees to the savings account benefits-based plan announced in 2008. These changes became effective beginning January 1, 2013, for all Medicare eligible retirees and their Medicare eligible dependents and will become effective beginning January 1, 2015, for all non-Medicare eligible retirees and their eligible dependents.

In December 2011, the Company began offering a voluntary early retirement incentive program to certain eligible participants of its U.S. pension plans who meet age and years of pension service requirements. The eligible participants who accepted the offer and retired on February 1, 2012 received an enhanced pension benefit. Pension benefits were enhanced by adding one additional year of pension service and one additional year of age for certain benefit calculations. 616 participants accepted the offer and retired on February 1, 2012. As a result, the Company incurred a $26 million charge related to these special termination benefits in the first quarter of 2012.

 

Effective July 1, 2012, 3M Canada closed its pension plans for salaried employees to new participants. The change did not trigger a plan remeasurement and therefore there is no immediate impact to the liability and expense.

 

3M was informed during the first quarter of 2009 that the general partners of WG Trading Company, in which 3M's benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has insurance that it believes, based on what is currently known, will result in the probable recovery of a portion of the decrease in original asset value. As of the 2013 measurement date these holdings represented less than one percent of 3M's fair value of total plan assets. 3M currently believes that the resolution of these events will not have a material adverse effect on the consolidated financial position of the Company.

The following tables include a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets as well as a summary of the related amounts recognized in the Company's consolidated balance sheet as of December 31 of the respective years. 3M also has certain non-qualified unfunded pension and postretirement benefit plans, inclusive of plans related to supplement/excess benefits for employees impacted by particular relocations and other matters, that individually and in the aggregate are not significant and which are not included in the tables that follow. The obligations for these plans are included within other liabilities in the Company's consolidated balance sheet and aggregated less than $30 million as of December 31, 2013 and approximately $40 million as of December 30, 2012. Due to the growth in one of the U.S. non-qualified unfunded pension plans it has been added to the schedules below as of December 31, 2013.

    Qualified and Non-qualified      
   Pension BenefitsPostretirement
    United States International Benefits
(Millions) 2013 2012`2013 2012 2013 2012
Change in benefit obligation            
 Benefit obligation at beginning of year $ 14,830 $ 14,499 $ 6,414 $ 5,332 $ 2,205 $ 2,108
 Acquisitions/Transfers in   15   11     26    
 Service cost    258   254   147   124   80   78
 Interest cost    598   587   238   247   88   86
 Participant contributions       8   5   30   52
 Foreign exchange rate changes       (79)   83   (13)   (2)
 Plan amendments       3   (7)   (20)  
 Actuarial (gain) loss   (986)   179   (163)   882   (225)   31
 Medicare Part D Reimbursement           2   8
 Benefit payments   (747)   (726)   (222)   (278)   (130)   (156)
 Settlements, curtailments, special                  
  termination benefits and other   (1)   26        
 Benefit obligation at end of year $ 13,967 $ 14,830 $ 6,346 $ 6,414 $ 2,017 $ 2,205
Change in plan assets            
 Fair value of plan assets at                  
  beginning of year $ 13,781 $ 12,102 $ 5,222 $ 4,643 $ 1,321 $ 1,209
 Acquisitions     8        
 Actual return on plan assets   803   1,645   421   463   178   149
 Company contributions   53   752   423   327   6   67
 Participant contributions       8   5   30   52
 Foreign exchange rate changes       (94)   62    
 Benefit payments   (747)   (726)   (222)   (278)   (130)   (156)
 Settlements, curtailments, special                  
  termination benefits and other   (1)          
 Fair value of plan assets at end of year $ 13,889 $ 13,781 $ 5,758 $ 5,222 $ 1,405 $ 1,321
Funded status at end of year $ (78) $ (1,049) $ (588) $ (1,192) $ (612) $ (884)

    Qualified and Non-qualified      
   Pension BenefitsPostretirement
    United States International Benefits
(Millions) 2013 2012 2013 2012 2013 2012
Amounts recognized in the             
 Consolidated Balance Sheet as of                  
 Dec. 31,                  
 Non-current assets $ 399 $ $ 178 $ 16 $ $
 Accrued benefit cost                  
  Current liabilities   (47)   (43)   (10)   (8)   (4)   (4)
  Non-current liabilities   (430)   (1,006)   (756)   (1,200)   (608)   (880)
 Ending balance $ (78) $ (1,049) $ (588) $ (1,192) $ (612) $ (884)

Amounts recognized in accumulated            
 other comprehensive income as of                  
 Dec. 31,                  
 Net transition obligation (asset) $ $ $ (4) $ (5) $ $
 Net actuarial loss (gain)   3,537   4,679   1,949   2,458   616   1,028
 Prior service cost (credit)   20   24   (117)   (150)   (151)   (197)
 Ending balance $ 3,557 $ 4,703 $ 1,828 $ 2,303 $ 465 $ 831

The balance of amounts recognized for international plans in accumulated other comprehensive income as of December 31 in the preceding table are presented based on the foreign currency exchange rate on that date.

 

The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and compensation as of the measurement date and does not include an assumption about future compensation levels. The accumulated benefit obligation of the U.S. pension plans was $13.357 billion and $14.127 billion at December 31, 2013 and 2012, respectively. The accumulated benefit obligation of the international pension plans was $5.825 billion and $5.942 billion at December 31, 2013 and 2012, respectively.

The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of December 31:

   Qualified and Non-qualified Pension Plans
   United States International
(Millions) 2013 2012 2013 2012
Projected benefit obligation $ 486 $ 505 $ 2,198 $ 5,122
Accumulated benefit obligation   463   492   1,960   4,808
Fair value of plan assets   9   8   1,547   4,038

Components of net periodic cost and other amounts recognized in other comprehensive income
                              
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. Components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31 follow:
                              
    Qualified and Non-qualified         
   Pension BenefitsPostretirement
    United States International Benefits
(Millions) 2013 2012 2011 2013 2012 2011 2013 2012 2011
Net periodic benefit cost (benefit)                     
 Service cost  $ 258 $ 254 $ 206 $ 147 $ 124 $ 124 $ 80 $ 78 $ 61
 Interest cost    598   587   626   238   247   261   88   86   92
 Expected return on plan assets    (1,046)   (992)   (927)   (291)   (295)   (289)   (90)   (84)   (77)
 Amortization of transition                           
  (asset) obligation          (1)   (1)   (2)      
 Amortization of prior service                           
  cost (benefit)    5   5   11   (16)   (17)   (14)   (66)   (72)   (72)
 Amortization of net actuarial (gain)                           
  loss    399   470   334   153   122   116   95   108   102
Net periodic benefit cost (benefit)  $ 214 $ 324 $ 250 $ 230 $ 180 $ 196 $ 107 $ 116 $ 106
Settlements, curtailments, special                           
 termination benefits and other      26   1   2   4   2      
Net periodic benefit cost (benefit)                           
 after settlements, curtailments,                            
 special termination benefits                           
 and other $ 214 $ 350 $ 251 $ 232 $ 184 $ 198 $ 107 $ 116 $ 106
Other changes in plan assets and                           
 benefit obligations recognized in                          
 other comprehensive (income)                           
 loss                           
 Transition (asset) obligation $ $ $ $ $ $ (2) $ $ $
 Amortization of transition (asset)                           
  obligation         1   1   2      
 Prior service cost (benefit)       8   3   (7)   (32)   (20)    
 Amortization of prior service cost                           
  (benefit)   (5)   (5)   (11)   16   17   14   66   72   72
 Net actuarial (gain) loss   (743)   (470)   1,976   (294)   707   315   (313)   (33)   212
 Amortization of net actuarial (gain)                           
  loss    (399)   (470)   (334)   (153)   (122)   (116)   (95)   (108)   (102)
 Foreign currency         (47)   24   (17)   (2)   (1)   (2)
Total recognized in other                           
 comprehensive (income) loss $ (1,147) $ (945) $ 1,639 $ (474) $ 620 $ 164 $ (364) $ (70) $ 180
Total recognized in net periodic                           
 benefit cost (benefit) and other                           
 comprehensive (income) loss $ (933) $ (595) $ 1,890 $ (242) $ 804 $ 362 $ (257) $ 46 $ 286

Amounts expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year
          
   Qualified and Non-qualified Pension Benefits   
        Postretirement
(Millions) United States International Benefits
Amortization of transition (asset) obligation $ 1 $ (1) $
Amortization of prior service cost (benefit)   4   (16)   (48)
Amortization of net actuarial (gain) loss   242   123   57
Total amortization expected over the next fiscal year $ 247 $ 106 $ 9

Weighted-average assumptions used to determine benefit obligations 
                              
                              
                              
    Qualified and Non-qualified Pension Benefits  Postretirement 
    United States  International  Benefits 
  2013  2012  2011  2013  2012  2011  2013  2012  2011 
                              
Discount rate  4.98%  4.14%  4.15%  4.02%  3.78%  4.58%  4.83%  4.00%  4.04%
Compensation rate                           
 increase  4.00%  4.00%  4.00%  3.35%  3.31%  3.52% N/A  N/A  N/A 

The Company is in the process of transitioning all current and future retirees to the savings account benefits-based plan announced in 2008. The contributions provided by the Company to the health savings accounts increase three percent per year. Therefore, the Company no longer has material exposure to health care cost inflation.

 

Weighted-average assumptions used to determine net cost for years ended 
                              
                              
                              
    Qualified and Non-qualified Pension Benefits  Postretirement 
    United States  International  Benefits 
  2013  2012  2011  2013  2012  2011  2013  2012  2011 
                              
Discount rate  4.14%  4.15%  5.23%  3.78%  4.58%  5.04%  4.00%  4.04%  5.09%
Expected return                            
 on assets  8.00%  8.25%  8.50%  5.87%  6.38%  6.58%  7.19%  7.30%  7.38%
Compensation rate                           
 increase  4.00%  4.00%  4.00%  3.31%  3.52%  3.59% N/A  N/A  N/A 

The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the pension and postretirement benefit plans, which is also the date used for the related annual measurement assumptions. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of 4.98% for pension and 4.83% for postretirement benefits to be appropriate for its U.S. plans as of December 31, 2013, which is an increase of 0.84 percentage points and 0.83 percentage points, respectively, from the rates used as of December 31, 2012. For the international pension and postretirement plans the discount rates also reflect the current rate at which the associated liabilities could be effectively settled at the end of the year. If the country has a deep market in corporate bonds the Company matches the expected cash flows from the plan either to a portfolio of bonds that generate sufficient cash flow or a notional yield curve generated from available bond information. In countries that do not have a deep market in corporate bonds, government bonds are considered with a risk premium to approximate corporate bond yields.

 

For the primary U.S. qualified pension plan, the Company's assumption for the expected return on plan assets was 8.00% in 2013. The Company is lowering the 2014 expected return on plan assets for its U.S. pension plan by 0.25 percentage points to 7.75%. This will increase the 2014 expected pension expense by approximately $34 million. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking estimates of active portfolio and investment management. As of December 31, 2013, the Company's 2014 expected long-term rate of return on U.S. plan assets is based on an asset allocation assumption of 21% global equities, with an expected long-term rate of return of 7.5%; 16% private equities, with an expected long-term rate of return of 12.5%; 47% fixed-income securities, with an expected long-term rate of return of 4.5%; and 16% absolute return investments independent of traditional performance benchmarks, with an expected long term return of 6.00%. The Company expects additional positive return from active investment management. These assumptions result in an 7.75% expected rate of return on an annualized basis in 2014. The actual rate of return on plan assets in 2013 was 6.02%. In 2012 the plan earned a rate of return of 13.6% and in 2011 earned a return of 8.7%. The average annual actual return on the plan assets over the past 10 and 25 years has been 8.7% and 10.3%, respectively. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions.

 

During 2013, the Company contributed $476 million to its U.S. and international pension plans and $6 million to its postretirement plans. During 2012, the Company contributed $1.079 billion to its U.S. and international pension plans and $67 million to its postretirement plans. In 2014, the Company expects to contribute an amount in the range of $100 million to $200 million of cash to its U.S. and international retirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2014. Therefore, the amount of the anticipated discretionary contribution could vary significantly depending on the U.S. plans' funded status and the anticipated tax deductibility of the contribution. Future contributions will also depend on market conditions, interest rates and other factors.

Future Pension and Postretirement Benefit Payments         
              
The following table provides the estimated pension and postretirement benefit payments that are payable from the plans to participants.
             
              
   Qualified and Non-qualified     
   Pension Benefits Postretirement  
(Millions) United States International Benefits  
2014 Benefit Payments $ 782 $ 225 $ 125   
2015 Benefit Payments   810   236   135   
2016 Benefit Payments   837   254   151   
2017 Benefit Payments   861   259   151   
2018 Benefit Payments   884   284   151   
Following five years   4,729   1,658   775   

Plan Asset Management

 

3M's investment strategy for its pension and postretirement plans is to manage the funds on a going-concern basis. The primary goal of the funds is to meet the obligations as required. The secondary goal is to earn the highest rate of return possible, without jeopardizing its primary goal, and without subjecting the Company to an undue amount of contribution rate volatility. Fund returns are used to help finance present and future obligations to the extent possible within actuarially determined funding limits and tax-determined asset limits, thus reducing the level of contributions 3M must make. The investment strategy has used long duration cash and derivative instruments to offset a significant portion of the interest rate sensitivity of U.S. pension liabilities. In addition, credit risk is managed through mandates for public securities and maximum issuer limits that are established and monitored on a regular basis.

 

Normally, 3M does not buy or sell any of its own stock as a direct investment for its pension and other postretirement benefit funds. However, due to external investment management of the funds, the plans may indirectly buy, sell or hold 3M stock. The aggregate amount of shares are not considered to be material relative to the aggregate fund percentages.

 

The discussion that follows references the fair value measurements of certain assets in terms of levels 1, 2 and 3. See Note 12 for descriptions of these levels. While the company believes the 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.

 

U.S. Pension Plans Assets

 

In order to achieve the investment objectives in the U.S. pension plans, the investment policy includes a target strategic asset allocation. The investment policy allows some tolerance around the target in recognition that market fluctuations and illiquidity of some investments may cause the allocation to a specific asset class to stray from the target allocation, potentially for long periods of time. Acceptable ranges have been designed to allow for deviation from long-term targets and to allow for the opportunity for tactical over- and under-weights. The portfolio will normally be rebalanced when the quarter-end asset allocation deviates from acceptable ranges. The allocation is reviewed regularly by the named fiduciary of the plans.

The fair values of the assets held by the U.S. pension plans by asset class are as follows:
                           
    Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2013 2012 2013 2012 2013 2012 2013 2012
Equities                   
 U.S. equities $ 1,595 $ 1,662 $ 3 $ 11 $ 3 $ 5 $ 1,601 $ 1,678
 Non-U.S. equities   1,324   1,332   1         1,325   1,332
 Derivatives         5         5
 EAFE index funds         250         250
 Index funds       151   156   1   1   152   157
 Long/short equity           460   477   460   477
Total Equities $ 2,919 $ 2,994 $ 155 $ 422 $ 464 $ 483 $ 3,538 $ 3,899
Fixed Income                        
 U.S. government securities $ 908 $ 844 $ 601 $ 796 $ $ $ 1,509 $ 1,640
 Non-U.S. government                        
  securities   20     316   378       336   378
 Preferred and convertible                        
  securities     4   4         4   4
 U.S. corporate bonds   14   196   2,046   1,249       2,060   1,445
 Non-U.S. corporate bonds      412  286       412   286
 Asset-backed securities      26  21       26   21
 Collateralized mortgage                        
  obligations       28   43       28   43
 Private placements      251  164  2  2   253   166
 Derivative instruments   (1)     6   76       5   76
 Other       37   29       37   29
Total Fixed Income $ 941 $ 1,044 $ 3,727 $ 3,042 $ 2 $ 2 $ 4,670 $ 4,088
Private Equity                        
 Buyouts $ $ $ $ $ 737 $ 662 $ 737 $ 662
 Derivative instruments           (97)   (51)   (97)   (51)
 Direct investments           467   129   467   129
 Distressed debt           211   301   211   301
 Growth equity   21   7       170   84   191   91
 Mezzanine           83   82   83   82
 Real estate           156   136   156   136
 Secondary           152   166   152   166
 Venture capital           548   627   548   627
Total Private Equity $ 21 $ 7 $ $ $ 2,427 $ 2,136 $ 2,448 $ 2,143
Absolute Return                        
 Hedge funds and hedge fund of                        
  funds $ $ $ 176 $ 833 $ 21 $ 664 $ 197 $ 1,497
 Bank loan and other fixed                        
  income funds       899     737   201   1,636   201
Total Absolute Return $ $ $ 1,075 $ 833 $ 758 $ 865 $ 1,833 $ 1,698
Commodities $ $ $ 88 $ 102 $ $ 107 $ 88 $ 209
Cash and Cash Equivalents $ 301 $ 429 $ 1,017 $ 1,547 $ $ $ 1,318 $ 1,976
Total $ 4,182 $ 4,474 $ 6,062 $ 5,946 $ 3,651 $ 3,593 $ 13,895 $ 14,013
Other items to reconcile to fair                        
 value of plan assets                   $ (6) $ (232)
Fair value of plan assets                   $ 13,889 $ 13,781

Publicly traded equities are valued at the closing price reported in the active market in which the individual securities are traded. Index funds, including Europe, Australasia, and Far East (EAFE) funds, are valued at the net asset value (NAV) as determined by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units outstanding. Long/short equity interests are valued using the NAV as determined by the administrator or custodian of the fund.

       

Fixed income includes derivative instruments such as credit default swaps, interest rate swaps and futures contracts that are used to help manage risks. U.S. government and government agency bonds and notes are valued at the closing price reported in the active market in which the individual security is traded. Corporate bonds and notes, asset backed securities and collateralized mortgage obligations are valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks. Private placements are valued by the custodian using recognized pricing services and sources. Swaps and derivative instruments are valued by the custodian using closing market swap curves and market derived inputs.

 

The private equity portfolio is a diversified mix of direct investments, derivative instruments and partnership interests including buyouts, distressed debt, growth equity, mezzanine, real estate and venture capital investments. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interests' cash flows or expected changes in fair value. Direct investments are equity co-investments in private companies and projects, the majority of which are power infrastructure investments, which are valued by an independent valuation agent.

Absolute return consists primarily of private partnership interests in hedge funds, hedge fund of funds and bank loan funds. Partnership interests are valued using the NAV as determined by the administrator or custodian of the fund. Hedge fund partnership interests, which have a redemption right and are past any lock-up redemption period, are classified as level 2. A hedge fund was restructured during 2012, extending the lock-up redemption period, and therefore was moved to level 3 during 2012.

 

Commodities consist of commodity-linked notes and commodity-linked derivative contracts designed to deliver investment returns similar to the Goldman Sachs Commodities Index (GSCI) or Dow Jones UBS Commodity index returns. Commodities are valued at closing prices determined by calculation agents for outstanding transactions.

 

Other items to reconcile to fair value of plan assets include the net of insurance receivables for WG Trading Company, interest receivables, amounts due for securities sold, amounts payable for securities purchased and interest payable.

The following table sets forth a summary of changes in the fair values of the U.S. pension plans' level 3 assets for the years ended December 31, 2013 and 2012:

   Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
   Equities Fixed Income Private Equity Absolute Return Commodities Total
(Millions)            
Beginning balance at Jan. 1, 2012 $ 442 $ 74 $ 2,062 $ 520 $ 105 $ 3,203
Net transfers into / (out of) level 3     (5)     472     467
Purchases, sales, issuances, and                  
 settlements, net   (1)   (73)   (108)   (225)     (407)
Realized gain / (loss)     25   120   76     221
Change in unrealized gains / (losses)                  
 relating to instruments sold during                  
 the period   (1)   (19)   (3)   (49)   (1)   (73)
Change in unrealized gains / (losses)                  
 relating to instruments still held at                  
 the reporting date   43     65   71   3   182
Ending balance at Dec. 31, 2012   483   2   2,136   865   107   3,593
Net transfers into / (out of) level 3            
Purchases, sales, issuances, and                  
 settlements, net   (92)     54   (104)   (96)   (238)
Realized gain / (loss)   10     126   45   (1)   180
Change in unrealized gains / (losses)                  
 relating to instruments sold during                  
 the period   (5)     3   (30)   (10)   (42)
Change in unrealized gains / (losses)                  
 relating to instruments still held at                  
 the reporting date   68     108   (18)     158
Ending balance at Dec. 31, 2013 $ 464 $ 2 $ 2,427 $ 758 $ $ 3,651

International Pension Plans Assets

 

Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. The disclosure below of asset categories is presented in aggregate for over 70 defined benefit plans in 24 countries; however, there is significant variation in policy asset allocation from country to country. Local regulations, local funding rules, and local financial and tax considerations are part of the funding and investment allocation process in each country. 3M's Treasury group provides standard funding and investment guidance to all international plans with more focused guidance to the larger plans.

 

Each plan has its own strategic asset allocation. The asset allocations are reviewed periodically and rebalanced when necessary.

The fair values of the assets held by the international pension plans by asset class are as follows:
                           
    Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2013 2012 2013 2012 2013 2012 2013 2012
Equities                   
 Growth equities $ 733 $ 628 $ 190 $ 133 $ $ $ 923 $ 761
 Value equities   653   468   14   23       667   491
 Core equities   19   88   668   376   5   5   692   469
Total Equities $ 1,405 $ 1,184 $ 872 $ 532 $ 5 $ 5 $ 2,282 $ 1,721
Fixed Income                        
 Domestic government debt $ 199 $ 297 $ 539 $ 694 $ 3 $ $ 741 $ 991
 Foreign government debt   28   170   657   445   1   2   686   617
 Corporate debt securities   1     638   630   20   18   659   648
 Mortgage backed debt       75   31       75   31
 Other debt obligations       391   268   13   16   404   284
Total Fixed Income $ 228 $ 467 $ 2,300 $ 2,068 $ 37 $ 36 $ 2,565 $ 2,571
Private Equity                        
 Private equity funds $ $ $ $ $ 22 $ 22 $ 22 $ 22
 Real estate   3   3   87   42   53   49   143   94
Total Private Equity $ 3 $ 3 $ 87 $ 42 $ 75 $ 71 $ 165 $ 116
Absolute Return                        
 Hedge funds $ $ $ 62 $ 75 $ 56 $ 50 $ 118 $ 125
 Insurance           492   433   492   433
 Derivatives   2     3   20       5   20
 Other       2   24   2   2   4   26
Total Absolute Return $ 2 $ $ 67 $ 119 $ 550 $ 485 $ 619 $ 604
Cash and Cash Equivalents $ 112 $ 211 $ 14 $ 21 $ $ $ 126 $ 232
Total $ 1,750 $ 1,865 $ 3,340 $ 2,782 $ 667 $ 597 $ 5,757 $ 5,244
Other items to reconcile to fair                        
 value of plan assets                   $ 1 $ (22)
Fair value of plan assets                   $ 5,758 $ 5,222

Equities consist primarily of mandates in public equity securities managed to the Morgan Stanley Capital All Country World Index. Publicly traded equities are valued at the closing price reported in the active market in which the individual securities are traded.

 

Fixed Income investments include domestic and foreign government, corporate, mortgage backed and other debt. Governments, corporate bonds and notes and mortgage backed securities are valued at the closing price reported if traded on an active market or at yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks.

 

Private equity funds consist of both active and passive mandates. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interests' cash flows or expected changes in fair value. Real estate consists of property funds and REITS (Real Estate Investment Trusts). Property funds are valued using the most recent partnership statement of fair value, updated for any subsequent partnership interests' cash flows. REITS are valued at the closing price reported in the active market in which it is traded.

 

Absolute return consists of private partnership interests in hedge funds, insurance contracts, derivative instruments, hedge fund of funds, and bank loan funds. Insurance consists of insurance contracts, which are valued using cash surrender values which is the amount the plan would receive if the contract was cashed out at year end. Derivative instruments consist of interest rate swaps that are used to help manage risks. Hedge funds are valued at the NAV as determined by the independent administrator or custodian of the fund.

 

Other items to reconcile to fair value of plan assets include the net of interest receivables, amounts due for securities sold, amounts payable for securities purchased and interest payable.

 

The following table sets forth a summary of changes in the fair values of the international pension plans' level 3 assets for the years ended December 31, 2013 and 2012:

   Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
   Equities Fixed Income Private Equity Absolute Return Total
(Millions)          
Beginning balance at Jan. 1, 2012 $ 5 $ 39 $ 67 $ 370 $ 481
Net transfers into / (out of) level 3          
Foreign currency exchange     2   (4)   2  
Purchases, sales, issuances, and               
 settlements, net     (2)   11   92   101
Realized gain / (loss)          
Change in unrealized gains / (losses)               
 relating to instruments sold during               
 the period          
Change in unrealized gains / (losses)               
 relating to instruments still held at               
 the reporting date     (3)   (3)   21   15
Ending balance at Dec. 31, 2012   5   36   71   485   597
Net transfers into / (out of) level 3          
Foreign currency exchange     (2)   (1)   9   6
Purchases, sales, issuances, and               
 settlements, net     (2)   1   50   49
Realized gain / (loss)       2     2
Change in unrealized gains / (losses)               
 relating to instruments sold during               
 the period         1   1
Change in unrealized gains / (losses)               
 relating to instruments still held at               
 the reporting date     5   2   5   12
Ending balance at Dec. 31, 2013 $ 5 $ 37 $ 75 $ 550 $ 667

Postretirement Benefit Plans Assets

 

In order to achieve the investment objectives in the U.S. postretirement plan, the investment policy includes a target strategic asset allocation. The investment policy allows some tolerance around the target in recognition that market fluctuations and illiquidity of some investments may cause the allocation to a specific asset class to stray from the target allocation, potentially for long periods of time. Acceptable ranges have been designed to allow for deviation from long-term targets and to allow for the opportunity for tactical over- and under-weights. The portfolio will normally be rebalanced when the quarter-end asset allocation deviates from acceptable ranges. The allocation is reviewed regularly by the named fiduciary of the plan.

The fair values of the assets held by the postretirement benefit plans by asset class are as follows:
                           
    Fair Value Measurements Using Inputs Considered as Fair Value at
(Millions) Level 1 Level 2 Level 3 Dec. 31,
Asset Class 2013 2012 2013 2012 2013 2012 2013 2012
Equities                   
 U.S. equities $ 552 $ 466 $ $ $ $ $ 552 $ 466
 Non-U.S. equities   58   54           58   54
 EAFE index funds         8         8
 Index funds       44   42       44   42
 Long/short equity           16   16   16   16
Total Equities $ 610 $ 520 $ 44 $ 50 $ 16 $ 16 $ 670 $ 586
Fixed Income                        
 U.S. government securities $ 62 $ 63 $ 202 $ 217 $ $ $ 264 $ 280
 Non-U.S. government                        
  securities   1     14   16       15   16
 U.S. corporate bonds     6   96   68       96   74
 Non-U.S. corporate bonds       21   16       21   16
 Asset-backed securities       9   6       9   6
 Collateralized mortgage                        
  obligations       5   4       5   4
 Private placements       16   11       16   11
 Derivative instruments         2         2
 Other       1   1       1   1
Total Fixed Income $ 63 $ 69 $ 364 $ 341 $ $ $ 427 $ 410
Private Equity                        
 Buyouts $ $ $ $ $ 58 $ 51 $ 58 $ 51
 Derivative instruments           (3)   (2)   (3)   (2)
 Direct investments           16   4   16   4
 Distressed debt           7   11   7   11
 Growth equity   1         6   3   7   3
 Mezzanine           3   3   3   3
 Real estate           5   4   5   4
 Secondary           5   5   5   5
 Venture capital           64   91   64   91
Total Private Equity $ 1 $ $ $ $ 161 $ 170 $ 162 $ 170
Absolute Return                        
 Hedge funds and hedge fund of                        
  funds $ $ $ 6 $ 27 $ 1 $ 21 $ 7 $ 48
 Bank loan and other fixed                        
  income funds       31     25   7   56   7
Total Absolute Return $ $ $ 37 $ 27 $ 26 $ 28 $ 63 $ 55
Commodities $ $ $ 3 $ 3 $ $ 4 $ 3 $ 7
Cash and Cash Equivalents $ 35 $ 51 $ 34 $ 50 $ $ $ 69 $ 101
Total $ 709 $ 640 $ 482 $ 471 $ 203 $ 218 $ 1,394 $ 1,329
Other items to reconcile to fair                        
 value of plan assets                   $ 11 $ (8)
Fair value of plan assets                   $ 1,405 $ 1,321

Publicly traded equities are valued at the closing price reported in the active market in which the individual securities are traded. Index funds are valued at the NAV as determined by the custodian of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, minus its liabilities then divided by the number of units outstanding. Long/short equity interests are valued using the NAV as determined by the administrator or custodian of the fund.

 

Fixed income includes derivative investments such as credit default swaps, interest rate swaps and futures contracts that are used to help manage risks. U.S. government and government agency bonds and notes are valued at the closing price reported in the active market in which the individual security is traded. Corporate bonds and notes, asset backed securities and collateralized mortgage obligations are valued at either the yields currently available on comparable securities of issuers with similar credit ratings or valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable such as credit and liquidity risks. Swaps and derivative instruments are valued by the custodian using market swap curves and market derived inputs.

 

The private equity portfolio is a diversified mix of direct investments, derivative instruments and partnership interests including buyouts, distressed debt, growth equity, mezzanine, real estate and venture capital investments. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interests' cash flows or expected changes in fair value. Direct investments are equity co-investments in private companies and projects, the majority of which are power infrastructure investments, which are valued by an independent valuation agent.

Absolute return primarily consists of private partnership interests in hedge funds, hedge fund of funds and bank loan funds. Partnership interests are valued using the NAV as determined by the independent administrator or custodian of the fund.

 

Commodities consist of commodity-linked notes and commodity-linked derivative contracts designed to deliver investment returns similar to the GSCI or Dow Jones UBS Commodity index returns. Commodities are valued at closing prices determined by calculation agents for outstanding transactions.

 

Other items to reconcile to fair value of plan assets include the net of interest receivables, amounts due for securities sold, foreign currency fluctuations, amounts payable for securities purchased and interest payable.

 

The following table sets forth a summary of changes in the fair values of the postretirement plans' level 3 assets for the years ended December 31, 2013 and 2012:

 

   Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
   Equities Fixed Income Private Equity Absolute Return Commodities Total
(Millions)            
Beginning balance at Jan. 1, 2012 $ 14 $ 2 $ 187 $ 17 $ 4 $ 224
Net transfers into / (out of) level 3         15     15
Purchases, sales, issuances, and                  
 settlements, net     (2)   (27)   (7)     (36)
Realized gain / (loss)     1   11   2     14
Change in unrealized gains / (losses)                  
 relating to instruments sold during                  
 the period     (1)   (4)   (1)     (6)
Change in unrealized gains / (losses)                  
 relating to instruments still held at                  
 the reporting date   2     3   2     7
Ending balance at Dec. 31, 2012   16     170   28   4   218
Net transfers into / (out of) level 3            
Purchases, sales, issuances, and                  
 settlements, net   (3)