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Retirement Benefits
 12 Months Ended
Dec. 31, 2019
Retirement Benefits [Abstract]  
Retirement Benefits
13. RETIREMENT BENEFITS
Plan Descriptions
U.S. Defined Benefit Pension Plans – The company sponsors several defined benefit pension plans in the U.S. Pension benefits for most participants are based on years of service, age and compensation. It is our policy 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.
U.S. Defined Contribution Plans – The company also sponsors defined contribution plans covering the majority of its employees, including certain employees covered under collective bargaining agreements. Company contributions vary depending on date of hire, with a majority of employees being eligible for employer matching of employee contributions. Based on date of hire, certain employees are eligible to receive a company non-elective contribution or an enhanced matching contribution in lieu of a defined benefit pension plan benefit. The company’s contributions
to these defined contribution plans for the years ended December 31, 2019, 2018 and 2017, were $481 million, $403 million and $344 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 separate from the company.
Medical and Life Benefits – The company funds a portion of the costs for certain health care and life insurance benefits for a substantial number of its active and retired employees. In addition to a company and employee cost-sharing feature, the health 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. The company reserves the right to amend or terminate the plans at any time.
Certain covered employees and dependents are eligible to participate in plans upon retirement if they meet specified age and years of service requirements. The company provides subsidies to reimburse certain retirees for a portion of the cost of individual Medicare-supplemental coverage purchased directly by the retiree through a private insurance exchange. The company has capped the amount of its contributions to substantially all of its remaining postretirement medical and life benefit plans. In addition, after January 1, 2005 (or earlier at some businesses), newly hired employees are not eligible for subsidized postretirement medical and life benefits.
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
 
2019
 
2018
 
2017
 
2019
 
2018
 
2017
Components of net periodic benefit cost (benefit)
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
367

 
$
404

 
$
388

 
$
16

 
$
21

 
$
20

Interest cost
 
1,360

 
1,226

 
1,250

 
80

 
76

 
85

Expected return on plan assets
 
(2,101
)
 
(2,217
)
 
(1,885
)
 
(92
)
 
(101
)
 
(89
)
Amortization of prior service credit
 
(59
)
 
(58
)
 
(57
)
 
(3
)
 
(21
)
 
(22
)
Mark-to-market expense (benefit)
 
1,783

 
699

 
(445
)
 
17

 
(44
)
 
(91
)
Other
 
—

 
—

 
(7
)
 
—

 
—

 
—

Net periodic benefit cost (benefit)
 
$
1,350

 
$
54

 
$
(756
)
 
$
18

 
$
(69
)
 
$
(97
)


The table below summarizes the components of changes in unamortized prior service credit for the years ended December 31, 2017, 2018 and 2019:
$ in millions
 
Pension Benefits
 
Medical and Life Benefits
 
Total
Changes in unamortized prior service credit
 
 
 
 
 
 
Amortization of prior service credit
 
$
57

 
$
22

 
$
79

Tax expense
 
(26
)
 
(9
)
 
(35
)
Change in unamortized prior service credit – 2017
 
31

 
13

 
44

Amortization of prior service credit
 
58

 
21

 
79

Tax expense
 
(14
)
 
(5
)
 
(19
)
Change in unamortized prior service credit – 2018
 
44

 
16

 
60

Amortization of prior service credit
 
59

 
3

 
62

Tax expense
 
(14
)
 
(1
)
 
(15
)
Change in unamortized prior service credit – 2019
 
$
45

 
$
2

 
$
47


We expect to recognize $60 million and $(4) million of prior year service credit (cost) related to our pension benefit and medical and life benefit plans, respectively, in net periodic benefit cost in 2020.
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for the company’s defined benefit retirement plans. Pension benefits data includes the qualified plans, foreign plans and U.S. 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
 
2019
 
2018
 
2019
 
2018
Plan Assets
 
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
 
$
27,150

 
$
27,226

 
$
1,247

 
$
1,338

Net gain (loss) on plan assets
 
5,025

 
(1,043
)
 
234

 
(65
)
Employer contributions
 
221

 
370

 
42

 
38

Participant contributions
 
8

 
9

 
24

 
25

Benefits paid
 
(1,763
)
 
(1,685
)
 
(156
)
 
(148
)
Acquired plan assets
 
—

 
2,293

 
—

 
58

Other
 
5

 
(20
)
 
1

 
1

Fair value of plan assets at end of year
 
30,646

 
27,150

 
1,392

 
1,247

Projected Benefit Obligation
 
 
 
 
 
 
 
 
Projected benefit obligation at beginning of year
 
32,231

 
31,967

 
1,930

 
2,110

Service cost
 
367

 
404

 
16

 
21

Interest cost
 
1,360

 
1,226

 
80

 
76

Participant contributions
 
8

 
9

 
24

 
25

Actuarial loss (gain)
 
4,708

 
(2,561
)
 
159

 
(211
)
Benefits paid
 
(1,763
)
 
(1,685
)
 
(156
)
 
(148
)
Acquired benefit obligation
 
—

 
2,895

 
—

 
50

Other
 
3

 
(24
)
 
(5
)
 
7

Projected benefit obligation at end of year
 
36,914

 
32,231

 
2,048

 
1,930

Funded status
 
$
(6,268
)
 
$
(5,081
)
 
$
(656
)
 
$
(683
)
 
 
 
 
 
 
 
 
 
Classification of amounts recognized in the consolidated statements of financial position
 
 
 
 
 
 
 
 
Non-current assets
 
$
124

 
$
77

 
$
151

 
$
124

Current liability
 
(173
)
 
(164
)
 
(47
)
 
(46
)
Non-current liability
 
(6,219
)
 
(4,994
)
 
(760
)
 
(761
)

The accumulated benefit obligation for all defined benefit pension plans was $36.5 billion and $31.9 billion at December 31, 2019 and 2018, respectively.
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
 
 
December 31
$ in millions
 
2019
 
2018
Projected benefit obligation
 
$
34,715

 
$
30,259

Accumulated benefit obligation
 
34,305

 
29,961

Fair value of plan assets
 
28,324

 
25,101


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
  
 
2019
 
2018
 
2019
 
2018
Assumptions used to determine benefit obligation at December 31
 
 
 
 
 
 
 
 
Discount rate
 
3.39
%
 
4.31
%
 
3.35
%
 
4.30
%
Initial cash balance crediting rate assumed for the next year
 
2.39
%
 
3.00
%
 
 
 
 
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)
 
2.64
%
 
3.25
%
 
 
 
 
Year that the cash balance crediting rate reaches the ultimate rate
 
2025

 
2024

 
 
 
 
Rate of compensation increase
 
3.00
%
 
3.00
%
 
 
 
 
Initial health care cost trend rate assumed for the next year
 
 
 
 
 
5.90
%
 
6.20
%
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
 
 
 
 
 
2023

 
2023

Assumptions used to determine benefit cost for the year ended December 31
 
 
 
 
 
 
 
 
Discount rate
 
4.31
%
 
3.68
%
 
4.30
%
 
3.66
%
Initial cash balance crediting rate assumed for the next year
 
3.00
%
 
2.75
%
 
 
 
 
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)
 
3.25
%
 
3.00
%
 
 
 
 
Year that the cash balance crediting rate reaches the ultimate rate
 
2024

 
2023

 
 
 
 
Expected long-term return on plan assets
 
8.00
%
 
8.00
%
 
7.67
%
 
7.65
%
Rate of compensation increase
 
3.00
%
 
3.00
%
 
 
 
 
Initial health care cost trend rate assumed for the next year
 
 
 
 
 
6.20
%
 
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
 
 
 
 
 
2023

 
2023


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. 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 doing so, we consider a number of factors, including our historical investment performance, current market data such as yields/price-earnings ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. 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 the Employee Retirement Income Security Act (ERISA). 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, 2019:
  
 
Asset Allocation Ranges
Cash and cash equivalents
 
0% - 12%
Global public equities
 
30% - 50%
Fixed-income securities
 
20% - 40%
Alternative investments
 
18% - 38%

The table below provides the fair values of the company’s pension and Voluntary Employee Beneficiary Association (VEBA) trust plan assets at December 31, 2019 and 2018, 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 the definitions of these levels. Certain investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy table. The total fair value of these investments is included in the table below to permit reconciliation of the fair value hierarchy to amounts presented in the funded status table above. As of December 31, 2019 and 2018, there were no investments expected to be sold at a value materially different than NAV.
 
 
Level 1
 
Level 2
 
Level 3
 
Total
$ in millions
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Asset category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
233

 
$
209

 
$
2,572

 
$
2,655

 
 
 
 
 
$
2,805

 
$
2,864

U.S. equities
 
3,341

 
2,859

 
 
 
 
 
 
 
 
 
3,341

 
2,859

International equities
 
3,271

 
2,711

 
 
 
 
 
$
2

 
$
1

 
3,273

 
2,712

Fixed-income securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
 
20

 
26

 
2,716

 
1,501

 
 
 
 
 
2,736

 
1,527

U.S. Government Agency
 
 
 
 
 
297

 
322

 
 
 
 
 
297

 
322

Non-U.S. Government
 
 
 
 
 
194

 
206

 
 
 
 
 
194

 
206

Corporate debt
 
28

 
34

 
4,513

 
4,141

 
 
 
 
 
4,541

 
4,175

Asset backed
 
 
 
 
 
892

 
297

 
 
 
 
 
892

 
297

High yield debt
 
30

 
11

 
104

 
153

 
 
 
 
 
134

 
164

Bank loans
 
 
 
 
 
33

 
20

 
 
 
 
 
33

 
20

Other assets
 
(9
)
 
15

 
59

 
51

 
2

 
2

 
52

 
68

Investments valued using NAV as a practical expedient
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
 
 
 
 
 
 
 
 
 
 
 
 
1,131

 
1,170

International equities
 
 
 
 
 
 
 
 
 
 
 
 
 
5,636

 
4,017

Fixed-income funds
 
 
 
 
 
 
 
 
 
 
 
 
 
438

 
1,386

Hedge funds
 
 
 
 
 
 
 
 
 
 
 
 
 
246

 
351

Opportunistic investments
 
 
 
 
 
 
 
 
 
 
 
 
 
1,459

 
1,367

Private equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
2,454

 
2,510

Real estate funds
 
 
 
 
 
 
 
 
 
 
 
 
 
2,376

 
2,382

Fair value of plan assets at the end of the year
 
$
6,914

 
$
5,865

 
$
11,380

 
$
9,346

 
$
4

 
$
3

 
$
32,038

 
$
28,397


There were no transfers of plan assets between the three levels of the fair value hierarchy during the years ended December 31, 2019 and 2018.
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. Cash and cash equivalents are predominantly held in money market or short-term investment funds. U.S. and international equities consist primarily of common stocks and institutional common trust funds. Investments in certain equity securities, which include domestic and international securities and registered investment companies, and exchange-traded funds with fixed income strategies are valued at the last reported sales or quoted price on the last business day of the reporting period. Fair values for certain fixed-income securities, which are not exchange-traded, are valued using third-party pricing services.
Other assets include derivative assets with a fair value of $49 million and $76 million, derivative liabilities with a fair value of $53 million and $52 million, and net notional amounts of $3.6 billion and $3.2 billion, as of December 31, 2019 and 2018, respectively. Derivative instruments may include exchange traded futures contracts, interest rate swaps, options on futures and swaps, currency contracts, total return swaps and credit default swaps. Notional amounts do not quantify risk or represent assets or liabilities of the pension and VEBA trusts, but are used in the calculation of cash settlement under the contracts. The volume of derivative activity is commensurate with the
amounts disclosed at year-end. Certain derivative financial instruments within the pension trust are subject to master netting agreements with certain counterparties.
Investments in certain equity and fixed-income funds, which include common/collective trust funds, and alternative investments, including hedge funds, opportunistic investments, private equity funds and real estate funds, are valued based on the NAV derived by the investment managers, as a practical expedient, and are described further below.
U.S. and International equities: Generally, redemption periods are daily or monthly with a notice requirement less than 30 days. As of December 31, 2019 and 2018, there were no unfunded commitments.
Fixed-income funds: Redemption periods are daily, monthly or quarterly with various notice requirements but generally are less than 30 days. As of December 31, 2019 and 2018, there were no unfunded commitments.
Hedge funds: Generally, redemption periods are monthly or quarterly with notice requirements from 30 to 95 days. As of December 31, 2019, unfunded commitments were $8 million. There were no unfunded commitments as of December 31, 2018.
Opportunistic investments: Opportunistic investments are primarily held in partnerships with a 5-10 year life. As of December 31, 2019 and 2018, unfunded commitments were $1.3 billion and $1.1 billion, respectively.
Private equity funds: The term of each fund is typically 10 or more years and the fund’s investors do not have an option to redeem their interest in the fund. As of December 31, 2019 and 2018, unfunded commitments were $1.9 billion and $1.8 billion, respectively.
Real estate funds: Consists of closed-end real estate funds and infrastructure funds with terms that are typically 10 or more years. This class also contains open-end funds that generally allow investors to redeem their interests in the fund. As of December 31, 2019 and 2018, unfunded commitments were $60 million and $73 million, respectively.
For the years ended December 31, 2019 and 2018, 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, 2019:
$ in millions
 
Pension Plans
 
Medical and Life Plans
 
Total
Year Ending December 31
 
 
 
 
 
 
2020
 
$
1,849

 
$
151

 
$
2,000

2021
 
1,898

 
150

 
2,048

2022
 
1,947

 
139

 
2,086

2023
 
1,991

 
138

 
2,129

2024
 
2,039

 
136

 
2,175

2025 through 2029
 
10,702

 
630

 
11,332


In 2020, the company expects to contribute the required minimum funding of approximately $96 million to its pension plans and approximately $44 million to its medical and life benefit plans. During the year ended December 31, 2019, the company made voluntary pension contributions of $120 million.