RETIREMENT BENEFITS

Plan Descriptions

Defined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S. covering the majority of its employees. Pension benefits for most employees are based on the employee’s years of service, age and compensation. It is the policy of the company to fund at least the minimum amount required for all qualified plans, using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making payments into benefit trusts separate from the company.

Defined Contribution Plans – The company also sponsors 401(k) defined contribution plans in which most employees are eligible to participate, including certain employees covered under collective bargaining agreements. Company contributions for most plans are based on a cash matching of employee contributions up to four percent of compensation. In addition to the 401(k) defined contribution benefit, certain employees hired after June 30, 2008, are eligible to participate in a defined contribution program in lieu of a defined benefit pension plan. The company’s contributions to these defined contribution plans for the years ended December 31, 2014, 2013 and 2012, were $282 million, $285 million and $293 million, respectively.

Non-U.S. Benefit Plans – The company sponsors several benefit plans for non-U.S. employees. These plans are designed to provide benefits appropriate to local practice and in accordance with local regulations. Some of these plans are funded using benefit trusts that are separate from the company.

Medical and Life Benefits – The company provides a portion of the costs for certain health care and life insurance benefits for a substantial number of its active and retired employees. Certain covered employees achieve eligibility to participate in these plans upon retirement from active service if they meet specified age and years of service requirements. Qualifying dependents are also eligible for plan benefits in certain circumstances. The company reserves the right to amend or terminate the plans at any time. The company has capped the amount of its contributions to substantially all of its remaining post retirement medical and life benefit plans.

In addition to a company and employee cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, conformance to a schedule of reasonable fees, the use of managed care providers and coordination of benefits with other plans. The plans also provide for a Medicare carve-out. Subsequent to January 1, 2005 (or earlier at some segments), newly hired employees are not eligible for subsidized post retirement medical and life benefits.

In the first quarter of 2014, we communicated an amendment to most of our Medicare-eligible retirees, that beginning in the third quarter of 2014, in lieu of the benefits previously provided under the plans, the company will provide subsidies to reimburse retirees for a portion of the cost of individual Medicare-supplemental coverage purchased directly by the retiree through a private insurance exchange. The amendment did not affect Pre-Medicare retirees. We expect that the cost of retiree medical coverage in 2015 will be comparable to 2014.

Summary Plan Results

The cost to the company of its retirement benefit plans is shown in the following table:



	Year Ended December 31
	Pension Benefits									Medical and Life Benefits
$ in millions	2014			2013			2012			2014			2013			2012
Components of net periodic benefit cost
Service cost	$	457		$	516		$	522		$	34		$	36		$	34
Interest cost	1,260			1,117			1,184			99			96			109
Expected return on plan assets	(1,871		)	(1,809		)	(1,708		)	(83		)	(75		)	(68		)
Amortization of:
Prior service credit	(59		)	(58		)	(58		)	(45		)	(51		)	(51		)
Net loss from previous years	327			608			427			13			30			21
Other	1			—			7			—			—			—
Net periodic benefit cost	$	115		$	374		$	374		$	18		$	36		$	45

The table below summarizes the components of changes in unamortized benefit plan costs for the years ended December 31, 2014, 2013 and 2012:



$ in millions	Pension Benefits			Medical and Life Benefits			Total
Changes in unamortized benefit plan costs
Change in net actuarial loss	$	2,353		$	151		$	2,504
Change in prior service cost	(2		)	—			(2		)
Amortization of:
Prior service credit	58			51			109
Net loss from previous years	(427		)	(21		)	(448		)
Tax benefit related to above items	(788		)	(72		)	(860		)
Change in unamortized benefit plan costs – 2012	$	1,194		$	109		$	1,303
Change in net actuarial loss	$	(2,158	)	$	(280	)	$	(2,438	)
Amortization of:
Prior service credit	58			51			109
Net loss from previous years	(608		)	(30		)	(638		)
Tax expense related to above items	1,075			102			1,177
Change in unamortized benefit plan costs – 2013	$	(1,633	)	$	(157	)	$	(1,790	)
Change in net actuarial loss	$	3,833		$	234		$	4,067
Change in prior service cost	—			(92		)	(92		)
Amortization of:
Prior service credit	59			45			104
Net loss from previous years	(327		)	(13		)	(340		)
Tax benefit related to above items	(1,357		)	(66		)	(1,423		)
Change in unamortized benefit plan costs – 2014	$	2,208		$	108		$	2,316



	Pension Benefits						Medical and Life Benefits
$ in millions	2014			2013			2014			2013
Amounts recorded in accumulated other comprehensive loss
Net actuarial loss	$	(8,797	)	$	(5,291	)	$	(372	)	$	(151	)
Prior service credit	364			423			94			47
Income tax benefits related to above items	3,285			1,928			110			44
Unamortized benefit plan costs	$	(5,148	)	$	(2,940	)	$	(168	)	$	(60	)

The following tables set forth the funded status and amounts recognized in the consolidated statements of financial position for the company’s defined benefit pension and retiree health care and life insurance benefit plans. Pension benefits data includes the qualified plans, foreign plans and domestic unfunded non-qualified plans for benefits provided to directors, officers and certain employees. The company uses a December 31 measurement date for its plans.



	Pension Benefits						Medical and Life Benefits
$ in millions	2014			2013			2014			2013
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	25,972		$	27,746		$	2,224		$	2,448
Service cost	457			516			34			36
Interest cost	1,260			1,117			99			96
Participant contributions	19			12			50			77
Plan amendments	—			—			(92		)	—
Actuarial (gain) loss	4,273			(2,063		)	258			(219		)
Benefits paid	(1,409		)	(1,365		)	(186		)	(227		)
Other	(47		)	9			11			13
Projected benefit obligation at end of year	$	30,525		$	25,972		$	2,398		$	2,224



	Pension Benefits						Medical and Life Benefits
$ in millions	2014			2013			2014			2013
Change in plan assets
Fair value of plan assets at beginning of year	$	24,098		$	22,962		$	1,175			$1,062
Net gain on plan assets	2,298			1,907			108			137
Employer contributions	78			579			57			114
Participant contributions	19			12			50			77
Benefits paid	(1,409		)	(1,365		)	(186		)	(227		)
Other	(21		)	3			12			12
Fair value of plan assets at end of year	25,063			24,098			1,216			1,175
Funded status	$	(5,462	)	$	(1,874	)	$	(1,182	)	$	(1,049	)
Amounts recognized in the Consolidated Statements of Financial Position
Non-current assets	$	3		$	117		$	80		$	72
Current liability	(133		)	(122		)	(39		)	(36		)
Non-current liability	(5,332		)	(1,869		)	(1,223		)	(1,085		)

The following table shows those amounts expected to be recognized in net periodic benefit cost in 2015:



$ in millions	Pension Benefits				Medical and Life Benefits
Amounts expected to be recognized in 2015 net periodic benefit cost
Net actuarial loss		$	682			$	27
Prior service credit		(60		)		(28		)

The accumulated benefit obligation for all defined benefit pension plans was $30.3 billion and $25.7 billion at December 31, 2014 and 2013, respectively.

Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:



	December 31
$ in millions	2014		2013
Projected benefit obligation	$	30,405	$	24,129
Accumulated benefit obligation	30,172		23,830
Fair value of plan assets	24,940		22,138

Plan Assumptions

On a weighted-average basis, the following assumptions were used to determine benefit obligations and net periodic benefit cost:



	Pension Benefits				Medical and Life Benefits
	2014		2013		2014		2013
Assumptions used to determine benefit obligation at December 31
Discount rate	4.12	%	4.99	%	4.04	%	4.90	%
Initial cash balance crediting rate assumed for the next year	2.75	%	3.90	%
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)	3.50	%	4.70	%
Year that the cash balance crediting rate reaches the ultimate rate	2020		2019
Rate of compensation increase	3.00	%	3.00	%
Initial health care cost trend rate assumed for the next year					6.50	%	6.50	%
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate)					5.00	%	5.00	%
Year that the health care cost trend rate reaches the ultimate trend rate					2019		2017
Assumptions used to determine benefit cost for the year ended December 31
Discount rate	4.99	%	4.12	%	4.90	%	4.02	%
Initial cash balance crediting rate assumed for the next year	3.90	%	3.00	%
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)	4.70	%	4.25	%
Year that the cash balance crediting rate reaches the ultimate rate	2019		2018
Expected long-term return on plan assets	8.00	%	8.00	%	7.45	%	7.33	%
Rate of compensation increase	3.00	%	2.75	%
Initial health care cost trend rate assumed for the next year					6.50	%	7.00	%
Rate to which the health care cost trend rate is assumed to decline (the ultimate trend rate)					5.00	%	5.00	%
Year that the health care cost trend rate reaches the ultimate trend rate					2017		2017

Plan Assets and Investment Policy

Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and investment return over the long term. The investment goal is to exceed the assumed rate of return over the long term within reasonable and prudent levels of risk. Through consultation with our investment management team and outside investment advisers, management develops expected long-term returns for each of the plans’ strategic asset classes. In addition to our historical investment performance, we consider several factors, including current market data such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. Using policy target allocation percentages and the asset class expected returns, a weighted-average expected return is calculated. Liability studies are conducted on a regular basis to provide guidance in setting investment goals with an objective to balance risk. Risk targets are established and monitored against acceptable ranges.

Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with ERISA (Employee Retirement Income Security Act). Guidelines are established defining permitted investments within each asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for management of fixed income and alternative investments.

For the majority of the plans’ assets, the investment policies require that the asset allocation be maintained within the following ranges as of December 31, 2014:



		Asset Allocation Ranges
Domestic equities		13% - 33%
International equities		7% - 27%
Fixed income securities		30% - 50%
Alternative investments		10% - 30%

The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31, 2014, and 2013, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in each category (see Note 1 for definition of levels). The significant amount of Level 2 investments in the table results from including in this category investments in pooled funds that contain investments with values based on quoted market prices, but for which the funds are not valued on a quoted market basis, and fixed income securities valued using model-based pricing services.



	Level 1				Level 2					Level 3				Total
$ in millions	2014		2013		2014			2013		2014		2013		2014		2013
Asset category
Cash and cash equivalents ⁽¹⁾		$ 38		$ 32		$ 1,737			$ 1,467						$ 1,775		$ 1,499
Domestic equities	4,729		4,163		147			287		$	2		$ 2	4,878		4,452
International equities	2,675		2,473		2,062			1,741						4,737		4,214
Fixed income securities
U.S. Treasuries					957			1,602						957		1,602
U.S. Government Agency					909			974						909		974
Non-U.S. Government					440			422						440		422
Corporate debt					5,710			4,744						5,710		4,744
Asset backed					604			545		4		4		608		549
High yield debt					586			922		—		1		586		923
Bank loans					228			185						228		185
Alternative Investments
Hedge funds										632		821		632		821
Private equities										2,030		2,075		2,030		2,075
Real estate										2,759		2,767		2,759		2,767
Other	32		26		(2		)	20						30		46
Fair value of plan assets at the end of the year		$7,474		$6,694		$13,378			$12,909		$5,427		$5,670		$26,279		$25,273


(1)	Cash and cash equivalents are predominantly held in money market funds.

The changes in the fair value of the pension and VEBA plan trust assets measured using Level 3 significant unobservable inputs during 2014 and 2013, are as follows:



$ in millions	Hedge funds and High-yield debt			Private equities			Real Estate			Other		Total
Balance as of December 31, 2012	$	786		$	1,980		$	2,256		$	6	$	5,028
Actual return on plan assets:
Unrealized (losses) gains, net	(16		)	112			262			—		358
Realized gains, net	43			—			—			—		43
Purchases	200			666			763			—		1,629
Sales	(191		)	(683		)	(514		)	—		(1,388		)
Balance as of December 31, 2013	$	822		$	2,075		$	2,767		$	6	$	5,670
Actual return on plan assets:
Unrealized gains (losses), net	(46		)	(60		)	173			—		67
Realized gains (losses), net	89			10			71			—		170
Purchases	21			431			61			—		513
Sales	(254		)	(426		)	(313		)	—		(993		)
Balance as of December 31, 2014	$	632		$	2,030		$	2,759		$	6	$	5,427

Generally, investments are valued based on information in financial publications of general circulation, statistical and valuation services, records of security exchanges, appraisal by qualified persons, transactions and bona fide offers. Domestic and international equities consist primarily of common stocks and institutional common trust funds. Investments in common and preferred shares are valued at the last reported sales price of the stock on the last business day of the reporting period. Units in common trust funds and hedge funds are valued based on the redemption price of units owned by the trusts at year-end. Fair value for real estate and private equity partnerships is primarily based on valuation methodologies that include third party appraisals, comparable transactions, discounted cash flow valuation models and public market data.

Non-government fixed income securities are invested across various industry sectors and credit quality ratings. Generally, investment guidelines are written to limit securities, for example, to no more than 5 percent of each trust account, and to exclude the purchase of securities issued by the company. The number of real estate and private equity partnerships is 164 and the unfunded commitments are $833 million and $899 million as of December 31, 2014 and 2013, respectively. For alternative investments that cannot be redeemed, such as limited partnerships, the typical investment term is ten years. For alternative investments that permit redemptions, such redemptions are generally made quarterly and require a 90-day notice. The company is generally unable to determine the final redemption date and amount until the request is processed by the investment fund and therefore categorizes such alternative investments as Level 3 assets.

For the years ended December 31, 2014 and 2013, the defined benefit pension and VEBA trusts did not hold any Northrop Grumman common stock.

Benefit Payments

The following table reflects estimated future benefit payments for the next ten years, based upon the same assumptions used to measure the benefit obligation, and includes expected future employee service, as of December 31, 2014:



$ in millions	Pension Plans		Medical and Life Plans
Year Ending December 31
2015	$	1,395	$	154
2016	1,452		158
2017	1,506		161
2018	1,565		164
2019	1,623		166
2020 through 2024	8,975		828

In 2015, the company expects to contribute the required minimum funding level of approximately $77 million to its pension plans and approximately $68 million to its other post-retirement benefit plans. The company also expects to make additional voluntary pension contributions of approximately $500 million in 2015.