ALTRIA GROUP, INC. | 2013 | FY | 3


Benefit Plans
Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.
The plan assets and benefit obligations of Altria Group, Inc.’s pension plans and the benefit obligations of Altria Group, Inc.’s postretirement plans are measured at December 31 of each year.
Pension Plans
Obligations and Funded Status: The projected benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension plans at December 31, 2013 and 2012, were as follows:
(in millions)
2013

 
2012

Projected benefit obligation at
beginning of year
$
7,924

 
$
6,965

Service cost
86

 
79

Interest cost
314

 
344

Benefits paid
(410
)
 
(420
)
Actuarial (gains) losses
(784
)
 
956

    Other
7

 

Projected benefit obligation at end of year
7,137

 
7,924

Fair value of plan assets at
beginning of year
6,167

 
5,275

Actual return on plan assets
927

 
755

Employer contributions
393

 
557

Benefits paid
(410
)
 
(420
)
Fair value of plan assets at end of year
7,077

 
6,167

Funded status at December 31
$
(60
)
 
$
(1,757
)

Amounts recognized in Altria Group, Inc.’s consolidated balance sheets at December 31, 2013 and 2012, were as follows:
(in millions)
2013

 
2012

Other assets
$
173

 
$

Other accrued liabilities
(21
)
 
(22
)
Accrued pension costs
(212
)
 
(1,735
)
 
$
(60
)
 
$
(1,757
)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $6.8 billion and $7.5 billion at December 31, 2013 and 2012, respectively.
For plans with accumulated benefit obligations in excess of plan assets at December 31, 2013, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $299 million, $261 million and $66 million, respectively. These amounts were primarily related to plans for salaried employees that cannot be funded under IRS regulations. At December 31, 2012, the accumulated benefit obligations were in excess of plan assets for all pension plans.
The following assumptions were used to determine Altria Group, Inc.’s benefit obligations under the plans at December 31:
 
2013

 
2012

Discount rate
4.9
%
 
4.0
%
Rate of compensation increase
4.0

 
4.0


The discount rates for Altria Group, Inc.’s plans were developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the benefit obligations.
Components of Net Periodic Benefit Cost: Net periodic pension cost consisted of the following for the years ended December 31, 2013, 2012 and 2011:
(in millions)
2013

 
2012

 
2011

Service cost
$
86

 
$
79

 
$
74

Interest cost
314

 
344

 
351

Expected return on plan assets
(493
)
 
(442
)
 
(422
)
Amortization:
 
 
 
 
 
Net loss
271

 
224

 
171

Prior service cost
10

 
10

 
14

Termination, settlement and curtailment
7

 
21

 
41

Net periodic pension cost
$
195

 
$
236

 
$
229


Termination, settlement and curtailment shown in the table above primarily include charges related to the 2011 Cost Reduction Program. For more information on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.
The amounts included in termination, settlement and curtailment in the table above were comprised of the following changes:
(in millions)
2013

 
2012

 
2011

Benefit obligation
$
1

 
$

 
$
39

Other comprehensive earnings/losses:
 
 
 
 
 
Net loss
6

 
21

 

Prior service cost

 

 
2

 
$
7

 
$
21

 
$
41


For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during 2014 are $153 million and $10 million, respectively.
The following weighted-average assumptions were used to determine Altria Group, Inc.’s net pension cost for the years ended December 31:
 
2013

 
2012

 
2011

Discount rate
4.0
%
 
5.0
%
 
5.5
%
Expected rate of return on plan assets
8.0

 
8.0

 
8.0

Rate of compensation increase
4.0

 
4.0

 
4.0


Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $80 million, $81 million and $106 million in 2013, 2012 and 2011, respectively.
Plan Assets: Altria Group, Inc.’s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. The composition of Altria Group, Inc.’s plan assets at December 31, 2013 was broadly characterized as an allocation between equity securities (60%), corporate bonds (26%), U.S. Treasury and foreign government securities (7%) and all other types of investments (7%). Virtually all pension assets can be used to make monthly benefit payments.
Altria Group, Inc.’s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard & Poor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index (“RAFI”) Low Volatility U.S. Index, and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria Group, Inc.’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include corporate bonds of companies from diversified industries. The allocation to below investment grade securities represented 18% of the fixed income holdings or 7% of total plan assets at December 31, 2013. The allocation to emerging markets represented 4% of the equity holdings or 3% of total plan assets at December 31, 2013. The allocation to real estate and private equity investments was immaterial at December 31, 2013.
Altria Group, Inc.’s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and investment managers’ compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.
Altria Group, Inc.’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.
The fair values of Altria Group, Inc.’s pension plan assets by asset category were as follows:
Investments at Fair Value as of December 31, 2013
(in millions)
Level 1

 
Level 2

 
Level 3

 
Total

Common/collective trusts:
 
 
 
 
 
 
 
U.S. large cap
$

 
$
1,971

 
$

 
$
1,971

U.S. small cap

 
546

 

 
546

International developed markets

 
159

 

 
159

U.S. and foreign government securities or their agencies:
 
 
 
 
 
 
 
U.S. government and agencies

 
226

 

 
226

U.S. municipal bonds

 
127

 

 
127

Foreign government and agencies

 
275

 

 
275

Corporate debt instruments:
 
 
 
 
 
 
 
Above investment grade

 
1,371

 
1

 
1,372

Below investment grade and no rating

 
380

 

 
380

Common stock:
 
 
 
 
 
 
 
International equities
1,050

 

 
1

 
1,051

U.S. equities
506

 

 

 
506

Registered investment companies
159

 
137

 

 
296

Other, net
108

 
47

 
13

 
168

Total investments at fair value, net
$
1,823

 
$
5,239

 
$
15

 
$
7,077

 
Investments at Fair Value as of December 31, 2012
(in millions)
Level 1

 
Level 2

 
Level 3

 
Total

Common/collective trusts:
 
 
 
 
 
 
 
U.S. large cap
$

 
$
1,566

 
$

 
$
1,566

U.S. small cap

 
499

 

 
499

International developed markets

 
179

 

 
179

Long duration fixed income

 
494

 

 
494

U.S. and foreign government securities or their agencies:
 
 
 
 
 
 
 
U.S. government and agencies

 
625

 

 
625

U.S. municipal bonds

 
71

 

 
71

Foreign government and agencies

 
311

 

 
311

Corporate debt instruments:
 
 
 
 
 
 
 
Above investment grade

 
714

 

 
714

Below investment grade and no rating

 
391

 

 
391

Common stock:
 
 
 
 
 
 
 
International equities
759

 

 

 
759

U.S. equities
300

 

 

 
300

Registered investment companies
128

 
50

 

 
178

Other, net
25

 
41

 
14

 
80

Total investments at fair value, net
$
1,212

 
$
4,941

 
$
14

 
$
6,167


Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2013 and 2012.
For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.
Following is a description of the valuation methodologies used for investments measured at fair value.
Common/Collective Trusts: Common/collective trusts consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index, Russell Small Cap Completeness Index, State Street Global Advisor’s Fundamental Index and MSCI EAFE Index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value (“NAV”) as provided by the investment account manager.
U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities, investment grade municipal securities and unrated or non-investment grade municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. In addition, matrix pricing, yield curves and indices are used when broker quotes are not available.
Corporate Debt Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. In addition, matrix pricing, yield curves and indices are used when broker quotes are not available.
Common Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date.
Registered Investment Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in Level 1. Registered investment company funds that are designed specifically to meet Altria Group, Inc.’s pension plans investment strategies, but are not traded on an active market, are valued based on the NAV of the underlying securities as provided by the investment account manager and are classified in Level 2.
Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $20 million to $50 million in 2014 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.
The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, 2013, were as follows:
(in millions)
 
2014
$
414

2015
416

2016
421

2017
429

2018
434

2019-2023
2,257



Postretirement Benefit Plans
Net postretirement health care costs consisted of the following for the years ended December 31, 2013, 2012 and 2011:
(in millions)
2013

 
2012

 
2011

Service cost
$
18

 
$
18

 
$
34

Interest cost
99

 
115

 
139

Amortization:
 
 
 
 
 
Net loss
51

 
40

 
39

Prior service credit
(45
)
 
(45
)
 
(21
)
Termination and curtailment

 
(26
)
 
(4
)
Net postretirement health
care costs
$
123

 
$
102

 
$
187


Termination and curtailment shown in the table above are related to the 2011 Cost Reduction Program. For further information on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.
The amounts included in termination and curtailment shown in the table above were comprised of the following changes:
(in millions)
 
2012

 
2011

Accrued postretirement health care costs
 
$

 
$
11

Other comprehensive earnings/losses:
 
 
 
 
Prior service credit
 
(26
)
 
(15
)
 
 
$
(26
)
 
$
(4
)

For the postretirement benefit plans, the estimated net loss and prior service credit that are expected to be amortized from accumulated other comprehensive losses into net postretirement health care costs during 2014 are $29 million and $(43) million, respectively.
The following assumptions were used to determine Altria Group, Inc.’s net postretirement cost for the years ended December 31:
 
2013

 
2012

 
2011

Discount rate
3.9
%
 
4.9
%
 
5.5
%
Health care cost trend rate
7.5

 
8.0

 
8.0


Altria Group, Inc.’s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, 2013 and 2012, were as follows:
(in millions)
2013

 
2012

Accrued postretirement health care costs at beginning of year
$
2,663

 
$
2,505

Service cost
18

 
18

Interest cost
99

 
115

Benefits paid
(138
)
 
(135
)
Actuarial (gains) losses
(327
)
 
160

Other
2

 

Accrued postretirement health care costs at end of year
$
2,317

 
$
2,663


The current portion of Altria Group, Inc.’s accrued postretirement health care costs of $162 million and $159 million at December 31, 2013 and 2012, respectively, is included in other accrued liabilities on the consolidated balance sheets.
The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2018, including the imposition of an excise tax on high cost health care plans effective in 2018. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.’s accumulated postretirement benefit obligation at December 31, 2013 and 2012. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.
The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31:
 
2013

 
2012

Discount rate
4.8
%
 
3.9
%
Health care cost trend rate assumed for next year
7.0

 
7.5

Ultimate trend rate
5.0

 
5.0

Year that the rate reaches the ultimate trend rate
2018

 
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 as of December 31, 2013:
 
One-Percentage-Point
Increase

 
One-Percentage-Point
Decrease

Effect on total of service and interest cost
6.8
%
 
(6.0
)%
Effect on postretirement benefit obligation
6.7

 
(5.8
)

Altria Group, Inc.’s estimated future benefit payments for its postretirement health care plans at December 31, 2013, were as follows:
(in millions)
 
2014
$
162

2015
168

2016
171

2017
171

2018
169

2019-2023
774


Postemployment Benefit Plans
Altria Group, Inc. sponsors postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2013, 2012 and 2011:
(in millions)
2013

 
2012

 
2011

Service cost
$
1

 
$
1

 
$
1

Interest cost
1

 
1

 
2

Amortization of net loss
18

 
17

 
16

Other
(17
)
 
(7
)
 
121

Net postemployment costs
$
3

 
$
12

 
$
140


For the year ended December 31, 2011, “other” postemployment cost shown in the table above primarily reflects incremental severance costs related to the 2011 Cost Reduction Program. For further information on the 2011 Cost Reduction Program, see Note 4. Asset Impairment, Exit, Implementation and Integration Costs.
For the postemployment benefit plans, the estimated net loss that is expected to be amortized from accumulated other comprehensive losses into net postemployment costs during 2014 is approximately $16 million.
Altria Group, Inc.’s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at December 31, 2013 and 2012, were as follows:
(in millions)
2013

 
2012

Accrued postemployment costs at beginning of year
$
149

 
$
270

Service cost
1

 
1

Interest cost
1

 
1

Benefits paid
(65
)
 
(143
)
Actuarial (gains) losses and
assumption changes
(4
)
 
27

Other
(17
)
 
(7
)
Accrued postemployment costs at
end of year
$
65

 
$
149


The accrued postemployment costs were determined using a weighted-average discount rate of 3.7% and 2.4% in 2013 and 2012, respectively, an assumed weighted-average ultimate annual turnover rate of 0.5% in 2013 and 2012, assumed compensation cost increases of 4.0% in 2013 and 2012, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.
Comprehensive Earnings/Losses
The amounts recorded in accumulated other comprehensive losses at December 31, 2013 consisted of the following:
(in millions)
Pensions

 
Post-
retirement

 
Post-
employment

 
Total

Net loss
$
(1,691
)
 
$
(539
)
 
$
(128
)
 
$
(2,358
)
Prior service (cost) credit
(33
)
 
307

 

 
274

Deferred income taxes
673

 
90

 
48

 
811

Amounts recorded in accumulated other comprehensive losses
$
(1,051
)
 
$
(142
)
 
$
(80
)
 
$
(1,273
)

The amounts recorded in accumulated other comprehensive losses at December 31, 2012 consisted of the following:
(in millions)
Pensions

 
Post-
retirement

 
Post-
employment

 
Total

Net loss
$
(3,186
)
 
$
(917
)
 
$
(169
)
 
$
(4,272
)
Prior service (cost) credit
(36
)
 
354

 

 
318

Deferred income taxes
1,254

 
221

 
65

 
1,540

Amounts recorded in accumulated other comprehensive losses
$
(1,968
)
 
$
(342
)
 
$
(104
)
 
$
(2,414
)


The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:
(in millions)
Pensions

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
271

 
$
51

 
$
18

 
$
340

Prior service cost/credit
10

 
(45
)
 

 
(35
)
Other expense:
 
 
 
 
 
 
 
Net loss
6

 

 

 
6

Deferred income taxes
(111
)
 
(2
)
 
(7
)
 
(120
)
 
176

 
4

 
11

 
191

Other movements during the year:
 
 
 
 
 
 
 
Net loss
1,218

 
327

 
23

 
1,568

Prior service cost/credit
(7
)
 
(2
)
 

 
(9
)
Deferred income taxes
(470
)
 
(129
)
 
(10
)
 
(609
)
 
741

 
196

 
13

 
950

Total movements in other comprehensive earnings/losses
$
917

 
$
200

 
$
24

 
$
1,141


The movements in other comprehensive earnings/losses during the year ended December 31, 2012 were as follows:
(in millions)
Pensions

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
224

 
$
40

 
$
17

 
$
281

Prior service cost/credit
10

 
(45
)
 

 
(35
)
Other expense (income):
 
 
 
 
 
 
 
Net loss
21

 

 

 
21

Prior service cost/credit

 
(26
)
 

 
(26
)
Deferred income taxes
(99
)
 
12

 
(6
)
 
(93
)
 
156

 
(19
)
 
11

 
148

Other movements during the year:
 
 
 
 
 
 
 
Net loss
(643
)
 
(161
)
 
(11
)
 
(815
)
Deferred income taxes
249

 
63

 
3

 
315

 
(394
)
 
(98
)
 
(8
)
 
(500
)
Total movements in other comprehensive earnings/losses
$
(238
)
 
$
(117
)
 
$
3

 
$
(352
)

The movements in other comprehensive earnings/losses during the year ended December 31, 2011 were as follows:
(in millions)
Pensions

 
Post-
retirement

 
Post-
employment

 
Total

Amounts reclassified to net earnings as components of net periodic benefit cost:
 
 
 
 
 
 
 
Amortization:
 
 
 
 
 
 
 
Net loss
$
171

 
$
39

 
$
16

 
$
226

Prior service cost/credit
14

 
(21
)
 

 
(7
)
Deferred income taxes
(72
)
 
(7
)
 
(6
)
 
(85
)
 
113

 
11

 
10

 
134

Other movements during the year:
 
 
 
 
 
 
 
Net loss
(672
)
 
(188
)
 
(40
)
 
(900
)
Prior service cost/credit
2

 
264

 

 
266

Deferred income taxes
262

 
(27
)
 
14

 
249

 
(408
)
 
49

 
(26
)
 
(385
)
Total movements in other comprehensive earnings/losses
$
(295
)
 
$
60

 
$
(16
)
 
$
(251
)

us-gaap:CompensationAndEmployeeBenefitPlansOtherThanShareBasedCompensationTextBlock