Defined Benefit Pension and Other Postretirement Plans
We have noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans have been based primarily on age, years of service and final average pensionable earnings. The years of service component of this formula was frozen as of December 31, 2009. Benefits for service beginning January 1, 2010 are based on a cash balance formula with an annual percentage of eligible pay credited based upon age and years of service. Eligible Speedway employees accrue benefits under a defined contribution plan for service years beginning January 1, 2010.
We also have other postretirement benefits covering most employees. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions subject to various cost-sharing features. Retiree life insurance benefits are provided to a closed group of retirees. Other postretirement benefits are not funded in advance.
Due to the Galveston Bay Refinery and Related Assets acquisition during 2013, we remeasured certain pension and retiree medical plans resulting in a $122 million decrease in liabilities. The decrease in liabilities was due to a 0.2 percent increase in discount rates and an increase in pension plan asset value from December 31, 2012 to the remeasurement date. The net periodic benefit costs for 2013 reflect these remeasurements. The purchase accounting for the Galveston Bay Refinery and Related Assets acquisition includes a $43 million liability related to retiree medical assumed at the acquisition date. See Note 5.
On May 17, 2012, we communicated to our employees changes in the defined benefit pension plans for Speedway and the legacy portion of the Marathon Petroleum Retirement Plan effective January 1, 2013. Final average pensionable earnings used to calculate pension benefits under these plans were fixed as of December 31, 2012. In addition, cap protection was added to limit potential annual lump sum distribution discount rate increases. These plan amendments resulted in an overall decrease in pension liabilities of approximately $537 million, with the offset primarily to other comprehensive income, which was recorded in 2012. The benefit of this liability reduction is being amortized into income through 2024.
On August 20, 2012, we communicated, to our impacted Medicare eligible retirees, changes in the post-65 medical plan coverage of the Marathon Petroleum Health Plan and the Marathon Petroleum Retiree Health Plan. Effective January 1, 2013, these Medicare eligible participants now receive a tax free contribution to a health reimbursement account, which replaces benefits provided under the previous plans. Increases are capped at four percent per year. This plan change resulted in a reduction in retiree medical liabilities of $40 million. This was more than offset by an increase in retiree medical liabilities of approximately $57 million primarily due to a reduction in discount rates as of the remeasurement date. The overall net liability increase and the offset to other comprehensive income were recorded in 2012.
Obligations and funded status – The accumulated benefit obligation for all defined benefit pension plans was $1,912 million and $2,035 million as of December 31, 2013 and 2012.
The following summarizes our defined benefit pension plans that have accumulated benefit obligations in excess of plan assets.
|
| | | | | | | |
| December 31, |
(In millions) | 2013 | | 2012 |
Projected benefit obligations | $ | 1,927 |
| | $ | 2,192 |
|
Accumulated benefit obligations | 1,912 |
| | 2,035 |
|
Fair value of plan assets | 1,800 |
| | 1,478 |
|
The following summarizes the projected benefit obligations and funded status for our defined benefit pension and other postretirement plans:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
(In millions) | 2013 | | 2012 | | 2013 | | 2012 |
Change in benefit obligations: | | | | | | | |
Benefit obligations at January 1 | $ | 2,192 |
| | $ | 2,685 |
| | $ | 591 |
| | $ | 551 |
|
Service cost | 93 |
| | 66 |
| | 25 |
| | 20 |
|
Interest cost | 73 |
| | 94 |
| | 26 |
| | 24 |
|
Actuarial (gain) loss | (183 | ) | | 117 |
| | 17 |
| | 53 |
|
Benefits paid | (248 | ) | | (233 | ) | | (20 | ) | | (17 | ) |
Liability gain due to curtailment | — |
| | (17 | ) | | — |
| | — |
|
Other(a) | — |
| | (520 | ) | | 48 |
| | (40 | ) |
Benefit obligations at December 31 | 1,927 |
| | 2,192 |
| | 687 |
| | 591 |
|
Change in plan assets: | | | | | | | |
Fair value of plan assets at January 1 | 1,478 |
| | 1,423 |
| | — |
| | — |
|
Actual return on plan assets | 241 |
| | 157 |
| | — |
| | — |
|
Employer contributions | 329 |
| | 131 |
| | — |
| | — |
|
Benefits paid from plan assets | (248 | ) | | (233 | ) | | — |
| | — |
|
Fair value of plan assets at December 31 | 1,800 |
| | 1,478 |
| | — |
| | — |
|
Funded status of plans at December 31 | $ | (127 | ) | | $ | (714 | ) | | $ | (687 | ) | | $ | (591 | ) |
Amounts recognized in the consolidated balance sheets: | | | | | | | |
Current liabilities | $ | (18 | ) | | $ | (18 | ) | | $ | (25 | ) | | $ | (21 | ) |
Noncurrent liabilities | (109 | ) | | (696 | ) | | (662 | ) | | (570 | ) |
Accrued benefit cost | $ | (127 | ) | | $ | (714 | ) | | $ | (687 | ) | | $ | (591 | ) |
Pretax amounts recognized in accumulated other comprehensive loss:(b) | | | | | | | |
Net loss | $ | 668 |
| | $ | 1,147 |
| | $ | 107 |
| | $ | 93 |
|
Prior service credit | (415 | ) | | (460 | ) | | (30 | ) | | (38 | ) |
| |
(a) | Includes adjustments related to plan amendments in 2013 and 2012. Also, includes adjustments related to the Galveston Bay Refinery and Related Assets acquisition in 2013. |
| |
(b) | Amounts exclude those related to LOOP, an equity method investee with defined benefit pension and postretirement plans for which net losses of $16 million and $2 million were recorded in accumulated other comprehensive loss in 2013, reflecting our 51 percent share. |
Components of net periodic benefit cost and other comprehensive loss – The following summarizes the net periodic benefit costs and the amounts recognized as other comprehensive loss for our defined benefit pension and other postretirement plans.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
(In millions) | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 93 |
| | $ | 66 |
| | $ | 65 |
| | $ | 25 |
| | $ | 20 |
| | $ | 19 |
|
Interest cost | 73 |
| | 94 |
| | 110 |
| | 26 |
| | 24 |
| | 27 |
|
Expected return on plan assets | (107 | ) | | (104 | ) | | (97 | ) | | — |
| | — |
| | — |
|
Amortization – prior service cost (credit) | (45 | ) | | (18 | ) | | 6 |
| | (4 | ) | | (2 | ) | | — |
|
– actuarial loss | 66 |
| | 93 |
| | 71 |
| | 3 |
| | 2 |
| | — |
|
– net settlement/curtailment loss(a) | 95 |
| | 125 |
| | 8 |
| | — |
| | — |
| | — |
|
Net periodic benefit cost(b) | $ | 175 |
| | $ | 256 |
| | $ | 163 |
| | $ | 50 |
| | $ | 44 |
| | $ | 46 |
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss (pretax): | | | | | | | | | | | |
Actuarial (gain) loss | $ | (317 | ) | | $ | 46 |
| | $ | 427 |
| | $ | 17 |
| | $ | 53 |
| | $ | 39 |
|
Prior service cost (credit)(c) | — |
| | (520 | ) | | — |
| | 4 |
| | (40 | ) | | — |
|
Amortization of actuarial loss | (161 | ) | | (218 | ) | | (79 | ) | | (3 | ) | | (2 | ) | | — |
|
Amortization of prior service cost (credit) | 45 |
| | 18 |
| | (6 | ) | | 4 |
| | 2 |
| | — |
|
Other(d) | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Total recognized in other comprehensive loss | $ | (433 | ) | | $ | (674 | ) | | $ | 348 |
| | $ | 22 |
| | $ | 13 |
| | $ | 39 |
|
Total recognized in net periodic benefit cost and other comprehensive loss | $ | (258 | ) | | $ | (418 | ) | | $ | 511 |
| | $ | 72 |
| | $ | 57 |
| | $ | 85 |
|
| |
(a) | A curtailment gain was recorded in 2011 on the Speedway pension plan at the end of the transition services period related to the sale of most of our Minnesota Assets in 2010. See Note 6. |
| |
(b) | Net periodic benefit cost reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years. |
| |
(c) | Includes adjustments due to plan amendments approved in 2013 and adjustments due to changes made to the defined pension plans and the post-65 medical plan coverage effective January 1, 2013. |
| |
(d) | Includes adjustments related to the Spinoff in 2011. |
Lump sum payments to employees retiring in 2013, 2012 and 2011 exceeded the plan’s total service and interest costs expected for those years. Settlement losses are required to be recorded when lump sum payments exceed total service and interest costs. As a result, pension settlement expenses were recorded in 2013, 2012 and 2011 related to our cumulative lump sum payments made during those years.
The estimated net gain/loss and prior service credit for our defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 are $52 million and $46 million. The 2014 net loss amortization is expected to be lower than the 2013 actual amortization primarily as a result of adjustments made to the net loss balance due to settlement accounting in 2013. The estimated net loss and prior service credit for our other defined benefit postretirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 is $3 million and $4 million, respectively.
Plan assumptions – The following summarizes the assumptions used to determine the benefit obligations at December 31, and net periodic benefit cost for the defined benefit pension and other postretirement plans for 2013, 2012 and 2011.
|
| | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Weighted-average assumptions used to determine benefit obligation: | | | | | | | | | | | |
Discount rate | 4.30 | % | | 3.45 | % | | 4.30 | % | | 4.95 | % | | 4.05 | % | | 4.65 | % |
Rate of compensation increase | 3.70 | % | | 5.00 | % | | 5.00 | % | | 3.70 | % | | 5.00 | % | | 5.00 | % |
Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | |
Discount rate | 3.88 | % | | 4.06 | % | | 4.98 | % | | 4.11 | % | | 4.54 | % | | 5.55 | % |
Expected long-term return on plan assets(a) | 7.50 | % | | 7.50 | % | | 8.50 | % | | — | % | | — | % | | — | % |
Rate of compensation increase | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % |
| |
(a) | Effective January 1, 2014, the expected long-term rate of return on plan assets changed from 7.50 percent to 7.00 percent due to a change in our plan investment strategy. |
Expected long-term return on plan assets
The overall expected long-term return on plan assets assumption is determined based on an asset rate-of-return modeling tool developed by a third-party investment group. The tool utilizes underlying assumptions based on actual returns by asset category and inflation and takes into account our asset allocation to derive an expected long-term rate of return on those assets. Capital market assumptions reflect the long-term capital market outlook. The assumptions for equity and fixed income investments are developed using a building-block approach, reflecting observable inflation information and interest rate information available in the fixed income markets. Long-term assumptions for other asset categories are based on historical results, current market characteristics and the professional judgment of our internal and external investment teams.
Assumed health care cost trend
The following summarizes the assumed health care cost trend rates. |
| | | | | | | | |
| December 31, |
| 2013 | | 2012 | | 2011 |
Health care cost trend rate assumed for the following year: | | | | | |
Medical: | | | | | |
Pre-65 | 8.00 | % | | 8.00 | % | | 7.50 | % |
Post-65(a) | N/A |
| | N/A |
| | 7.00 | % |
Prescription drugs | 7.00 | % | | 7.00 | % | | 7.50 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate): | | | | | |
Medical: | | | | | |
Pre-65 | 5.00 | % | | 5.00 | % | | 5.00 | % |
Post-65(a) | N/A |
| | N/A |
| | 5.00 | % |
Prescription drugs | 5.00 | % | | 5.00 | % | | 5.00 | % |
Year that the rate reaches the ultimate trend rate: | | | | | |
Medical: | | | | | |
Pre-65 | 2020 |
| | 2020 |
| | 2018 |
|
Post-65(a) | N/A |
| | N/A |
| | 2017 |
|
Prescription drugs | 2018 |
| | 2018 |
| | 2018 |
|
| |
(a) | Effective 2013, as a result of changes in the post-65 medical plan coverage of the Marathon Petroleum Health Plan and the Marathon Petroleum Retiree Health Plan, increases are the lower of the trend rate or 4 percent. |
Assumed health care cost trend rates have a significant effect on the amounts reported for defined benefit retiree health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
| | | | | | | |
| 1-Percentage- | | 1-Percentage- |
(In millions) | Point Increase | | Point Decrease |
Effect on total of service and interest cost components | $ | 5 |
| | $ | (4 | ) |
Effect on other postretirement benefit obligations | 39 |
| | (34 | ) |
Plan investment policies and strategies
The investment policies for our pension plan assets reflect the funded status of the plans and expectations regarding our future ability to make further contributions. Long-term investment goals are to: (1) manage the assets in accordance with the legal requirements of all applicable laws; (2) diversify plan investments across asset classes to achieve an optimal balance between risk and return and between income and growth of assets through capital appreciation; and (3) source benefit payments primarily through existing plan assets and anticipated future returns.
The investment goals are implemented to manage the plans' funded status volatility and minimize future cash contributions. The asset allocation strategy will change over time in response to changes primarily in funded status, which is dictated by current and anticipated market conditions, the independent actions of our investment committee, required cash flows to and from the plans and other factors deemed appropriate. Such changes in asset allocation are intended to allocate additional assets to the fixed income asset class should the funded status improve. The fixed income asset class shall be invested in such a manner that its interest rate sensitivity correlates highly with that of the plans' liabilities. Other asset classes are intended to provide additional return with associated higher levels of risk. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment meetings and periodic asset and liability studies. At December 31, 2013, the plans’ targeted asset allocation was 62 percent equity, private equity, real estate, and timber securities and 38 percent fixed income securities.
Fair value measurements
Plan assets are measured at fair value. The following provides a description of the valuation techniques employed for each major plan asset category at December 31, 2013 and 2012.
Cash and cash equivalents - For 2013, cash and cash equivalents included a collective fund serving as the investment vehicle for the cash reserves and cash held by third-party investment managers. The collective fund was valued at net asset value ("NAV") on a scheduled basis using a cost approach, and was considered a Level 2 asset. Cash and cash equivalents held by third-party investment managers were valued using a cost approach and were considered Level 2. For 2012, cash and cash equivalents included cash on deposit and an investment in a money market mutual fund that invested mainly in short-term instruments and cash, both of which were valued using a market approach and were considered Level 1. The money market mutual fund was valued at the NAV of shares held.
Equity - Equity investments includes common stock, mutual and pooled funds, public and non-public investment trusts and S&P 500 exchange-traded funds. Common stock investments are valued using a market approach, which are priced daily in active markets and are considered Level 1. Mutual and pooled equity funds are well diversified portfolios, representing a mix of strategies in domestic, international and emerging market strategies. Mutual funds are publicly registered, valued at NAV on a daily basis using a market approach and are considered Level 1 assets. Pooled funds are valued at NAV using a market approach and are considered Level 2 assets. Investments in public trusts and S&P 500 exchange-traded funds are valued using a market approach at the closing price reported in an active market and therefore are considered Level 1. Non-public investment trusts are considered Level 2 and are valued using a market approach based on the underlying investments in the trust, which are publicly traded securities.
Fixed Income - Fixed income investments include corporate bonds, U.S. dollar treasury bonds and municipal bonds. These securities are priced on observable inputs using a combination of market, income and cost approaches. These securities are considered Level 2 assets. Fixed income also includes a well diversified bond portfolio structured as a pooled fund. This fund is valued at NAV on a daily basis using a combination of market, income and cost approaches. It is considered a Level 2 asset.
Private Equity - Private equity investments include interests in limited partnerships which are valued using information provided by external managers for each individual investment held in the fund. These holdings are considered Level 3.
Real Estate - Real estate investments consist of interests in limited partnerships. These holdings are either appraised or valued using investment manager’s assessment of assets held. These holdings are considered Level 3.
Other - Other investments include two limited liability companies (“LLCs”) with no public market. The LLCs were formed to acquire timberland in the northwest United States. These holdings are either appraised or valued using investment manager’s assessment of assets held. These holdings are considered Level 3.
The following tables present the fair values of our defined benefit pension plans’ assets, by level within the fair value hierarchy, as of December 31, 2013 and 2012.
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | — |
| | $ | 189 |
| | $ | — |
| | $ | 189 |
|
Equity: | | | | | | | |
Common stocks | 69 |
| | — |
| | — |
| | 69 |
|
Mutual funds | 217 |
| | — |
| | — |
| | 217 |
|
Pooled funds | — |
| | 590 |
| | — |
| | 590 |
|
Fixed income: | | | | | | | |
Corporate | — |
| | 356 |
| | — |
| | 356 |
|
Government | — |
| | 22 |
| | — |
| | 22 |
|
Pooled funds | — |
| | 218 |
| | — |
| | 218 |
|
Private equity | — |
| | — |
| | 57 |
| | 57 |
|
Real estate | — |
| | — |
| | 60 |
| | 60 |
|
Other | 2 |
| | — |
| | 20 |
| | 22 |
|
Total investments, at fair value | $ | 288 |
| | $ | 1,375 |
| | $ | 137 |
| | $ | 1,800 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2012 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 107 |
| | $ | — |
| | $ | — |
| | $ | 107 |
|
Equity: | | | | | | | |
Exchange-traded funds | 166 |
| | — |
| | — |
| | 166 |
|
Investment trusts | 17 |
| | 94 |
| | — |
| | 111 |
|
Pooled funds | — |
| | 709 |
| | — |
| | 709 |
|
Fixed income: | | | | | | | |
Pooled funds | — |
| | 258 |
| | — |
| | 258 |
|
Private equity | — |
| | — |
| | 56 |
| | 56 |
|
Real estate | — |
| | — |
| | 54 |
| | 54 |
|
Other | — |
| | — |
| | 17 |
| | 17 |
|
Total investments, at fair value | $ | 290 |
| | $ | 1,061 |
| | $ | 127 |
| | $ | 1,478 |
|
The following is a reconciliation of the beginning and ending balances recorded for plan assets classified as Level 3 in the fair value hierarchy:
|
| | | | | | | | | | | | | | | |
| 2013 |
(In millions) | Private Equity | | Real Estate | | Other | | Total |
Beginning balance | $ | 56 |
| | $ | 54 |
| | $ | 17 |
| | $ | 127 |
|
Actual return on plan assets: | | | | | | |
|
|
Realized | 13 |
| | 3 |
| | — |
| | 16 |
|
Unrealized | 3 |
| | 10 |
| | 3 |
| | 16 |
|
Purchases | 7 |
| | 5 |
| | — |
| | 12 |
|
Sales | (22 | ) | | (12 | ) | | — |
| | (34 | ) |
Ending balance | $ | 57 |
| | $ | 60 |
| | $ | 20 |
| | $ | 137 |
|
|
| | | | | | | | | | | | | | | |
| 2012 |
(In millions) | Private Equity | | Real Estate | | Other | | Total |
Beginning balance | $ | 55 |
| | $ | 49 |
| | $ | 17 |
| | $ | 121 |
|
Actual return on plan assets: | | | | | | |
|
|
Realized | 5 |
| | (2 | ) | | — |
| | 3 |
|
Unrealized | (3 | ) | | 2 |
| | — |
| | (1 | ) |
Purchases | 12 |
| | 10 |
| | — |
| | 22 |
|
Sales | (13 | ) | | (5 | ) | | — |
| | (18 | ) |
Ending balance | $ | 56 |
| | $ | 54 |
| | $ | 17 |
| | $ | 127 |
|
Cash Flows
Contributions to defined benefit plans – Our funding policy with respect to the pension plans is to contribute amounts necessary to satisfy minimum pension funding requirements, including requirements of the Pension Protection Act of 2006, plus such additional, discretionary, amounts from time to time as determined appropriate by management. In late 2013, we made pension contributions totaling $161 million. Therefore, we do not anticipate additional contributions will be made in 2014. Cash contributions to be paid from our general assets for the unfunded pension and postretirement plans are estimated to be approximately $18 million and $26 million in 2014.
Estimated future benefit payments – The following gross benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated.
|
| | | | | | | |
(In millions) | Pension Benefits | | Other Benefits(a) |
2014 | $ | 186 |
| | $ | 26 |
|
2015 | 181 |
| | 29 |
|
2016 | 177 |
| | 32 |
|
2017 | 178 |
| | 34 |
|
2018 | 175 |
| | 38 |
|
2019 through 2023 | 814 |
| | 231 |
|
| |
(a) | Effective 2013, as a result of the Patient Protection and Affordable Care Act, future Medicare reimbursements will no longer be tax deductible and must be used to reduce the costs of providing Medicare part D equivalent prescription drug benefits to retirees. |
Contributions to defined contribution plans – We also contribute to several defined contribution plans for eligible employees. Contributions to these plans totaled $76 million, $60 million and $60 million in 2013, 2012 and 2011.
Multiemployer Pension Plan
We contribute to one multiemployer defined benefit pension plan under the terms of a collective-bargaining agreement that covers some of our union-represented employees. The risks of participating in this multiemployer plan are different from single-employer plans in the following aspects:
| |
• | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
| |
• | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
| |
• | If we choose to stop participating in the multiemployer plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
Our participation in this plan for 2013, 2012 and 2011 is outlined in the table below. The “EIN” column provides the Employee Identification Number for the plan. The most recent Pension Protection Act zone status available in 2013 and 2012 is for the plan’s year ended December 31, 2012 and December 31, 2011, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally less than 65 percent funded. The “FIP/RP Status Pending/Implemented” column indicates a financial improvement plan or a rehabilitation plan has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. There have been no significant changes that affect the comparability of 2013, 2012 and 2011 contributions. Our portion of the contributions does not make up more than 5 percent of total contributions to the plan.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension Protection Act Zone Status | | FIP/RP Status Pending/Implemented | | MPC Contributions (In millions) | | Surcharge
Imposed | | Expiration Date of Collective - Bargaining
Agreement |
Pension Fund | | EIN | | 2013 | | 2012 | | | 2013 | | 2012 | | 2011 | | |
Central States, Southeast and Southwest Areas Pension Plan(a) | | 36-6044243 | | Red | | Red | | Implemented | | $ | 3 |
| | $ | 4 |
| | $ | 3 |
| | No | | January 31, 2019 |
| |
(a) | This agreement has a minimum contribution requirement of $269 per week per employee for 2014. A total of 257 employees participated in the plan as of December 31, 2013. |
Multiemployer Health and Welfare Plan
We contribute to one multiemployer health and welfare plan that covers both active employees and retirees. Through the health and welfare plan employees receive medical, dental, vision, prescription and disability coverage. Our contributions to this plan totaled $5 million, $5 million and $4 million for 2013, 2012 and 2011.
