Retirement Benefits

12 Months Ended

Dec. 31, 2020

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, 2020, 2019 and 2018, were $590 million, $481 million and $403 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	2020		2019		2018		2020		2019		2018
Components of net periodic benefit cost (benefit)
Service cost	$	409	$	367	$	404	$	17	$	16	$	21
Interest cost	1,226		1,360		1,226		67		80		76
Expected return on plan assets	(2,376)		(2,101)		(2,217)		(102)		(92)		(101)
Amortization of prior service cost (credit)	(59)		(59)		(58)		4		(3)		(21)
Mark-to-market expense (benefit)	1,034		1,783		699		—		17		(44)
Other	10		—		—		2		—		—
Net periodic benefit cost (benefit)	$	244	$	1,350	$	54	$	(12)	$	18	$	(69)

The table below summarizes the components of changes in unamortized prior service credit (cost) for the years ended December 31, 2018, 2019 and 2020:

$ in millions	Pension Benefits		Medical and Life Benefits		Total
Changes in unamortized prior service credit
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
Amortization of prior service credit (cost)	59		(4)		55
Tax expense	(15)		1		(14)
Change in unamortized prior service credit (cost) – 2020	$	44	$	(3)	$	41

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	2020		2019		2020		2019
Plan Assets
Fair value of plan assets at beginning of year	$	30,646	$	27,150	$	1,392	$	1,247
Net gain on plan assets	4,802		5,025		218		234
Employer contributions	851		221		36		42
Participant contributions	8		8		24		24
Benefits paid	(1,865)		(1,763)		(155)		(156)
Acquired plan assets	—		—		—		—
Other	10		5		—		1
Fair value of plan assets at end of year	34,452		30,646		1,515		1,392
Projected Benefit Obligation
Projected benefit obligation at beginning of year	36,914		32,231		2,048		1,930
Service cost	409		367		17		16
Interest cost	1,226		1,360		67		80
Participant contributions	8		8		24		24
Actuarial loss	3,455		4,708		115		159
Benefits paid	(1,865)		(1,763)		(155)		(156)
Acquired benefit obligation	—		—		—		—
Other	35		3		3		(5)
Projected benefit obligation at end of year	40,182		36,914		2,119		2,048
Funded status	$	(5,730)	$	(6,268)	$	(604)	$	(656)

Pension Benefits
The increase in our pension assets for the year ended December 31, 2020 was principally driven by net plan asset returns of 16.2 percent and a $750 million discretionary pension contribution. In 2019, pension assets increased primarily due to net plan asset returns of 19.1 percent.

The increase in our projected benefit obligation for the year ended December 31, 2020, was primarily driven by a 71 basis point decrease in the discount rate from year end 2019. In 2019, our projected benefit obligation increased primarily due to a 92 basis point decrease in the discount rate from year end 2018 as well as a change in our mortality assumptions.

	Pension Benefits				Medical and Life Benefits
$ in millions	2020		2019		2020		2019
Classification of amounts recognized in the consolidated statements of financial position
Non-current assets	$	211	$	124	$	179	$	151
Current liability	(180)		(173)		(46)		(47)
Non-current liability	(5,761)		(6,219)		(737)		(760)

The accumulated benefit obligation for all defined benefit pension plans was $39.6 billion and $36.5 billion at December 31, 2020 and 2019, respectively.

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

	December 31
$ in millions	2020		2019
Projected benefit obligation	$	37,681	$	34,715
Accumulated benefit obligation	37,135		34,305
Fair value of plan assets	31,741		28,324

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
	2020		2019		2020		2019
Assumptions used to determine benefit obligation at December 31
Discount rate	2.68	%	3.39	%	2.58	%	3.35	%
Initial cash balance crediting rate assumed for the next year	2.25	%	2.39	%
Rate to which the cash balance crediting rate is assumed to increase (the ultimate rate)	2.25	%	2.64	%
Year that the cash balance crediting rate reaches the ultimate rate	2026		2025
Rate of compensation increase	3.00	%	3.00	%
Initial health care cost trend rate assumed for the next year					5.60	%	5.90	%
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	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
Expected long-term return on plan assets	8.00	%	8.00	%	7.66	%	7.67	%
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

For 2021 FAS expense, we have assumed an expected long-term rate of return on pension plan assets of 7.5 percent and 7.22 percent on OPB plans. We decreased the EROA assumption for 2021 FAS expense following an assessment of the historical and anticipated long-term returns of various asset classes, including consideration of recent Federal Reserve policy changes that are expected to extend the duration of the current low interest rate environment.

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, 2020:

	Asset Allocation Ranges
Cash and cash equivalents	—% - 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, 2020 and 2019, 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. As of December 31, 2020 and 2019, there were no investments expected to be sold at a value materially different than NAV.

	Level 1				Level 2				Level 3				Total
$ in millions	2020		2019		2020		2019		2020		2019		2020		2019
Asset category
Cash and cash equivalents	$	120	$	233	$	1,238	$	2,572					$	1,358	$	2,805
U.S. equities	2,981		3,341										2,981		3,341
International equities	3,354		3,271						$	2	$	2	3,356		3,273
Fixed-income securities
U.S. Treasuries	22		20		2,273		2,716						2,295		2,736
U.S. Government Agency					258		297						258		297
Non-U.S. Government					332		194						332		194
Corporate debt	31		28		6,228		4,513						6,259		4,541
Asset backed					1,080		892						1,080		892
High yield debt	24		30		48		104						72		134
Bank loans					59		33						59		33
Other assets	(2)		(9)		59		59		2		2		59		52
Investments valued using NAV as a practical expedient
U.S. equities													1,567		1,131
International equities													7,193		5,636
Fixed-income funds													1,959		438
Hedge funds													65		246
Opportunistic investments													2,499		1,459
Private equity funds													2,627		2,454
Real estate funds													2,180		2,376
Payables, net													(232)		—
Fair value of plan assets at the end of the year	$	6,530	$	6,914	$	11,575	$	11,380	$	4	$	4	$	35,967	$	32,038

There were no transfers of plan assets into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2020 and 2019.

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 $29 million and $49 million, derivative liabilities with a fair value of $27 million and $53 million, and net notional amounts of $2.3 billion and $3.6 billion, as of December 31, 2020 and 2019, 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, monthly or quarterly with a notice requirement less than 90 days. As of December 31, 2020 and 2019, 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, 2020, unfunded commitments were $2 million. There were no unfunded commitments as of December 31, 2019.

Hedge funds: Consist of closed-end funds with a 5-10 year life as well as funds that allow redemption requests subject to the liquidity limitations of the underlying investments. As of December 31, 2020 and 2019, unfunded commitments were $9 million and $8 million, respectively.

Opportunistic investments: Opportunistic investments are primarily held in partnerships with a 5-10 year life. As of December 31, 2020 and 2019, unfunded commitments were $1.9 billion and $1.3 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, 2020 and 2019, unfunded commitments were $2.3 billion and $1.9 billion, respectively.

Real estate funds: Consist 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. Unfunded commitments were $60 million as of December 31, 2020 and 2019.

For the years ended December 31, 2020 and 2019, 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, 2020:

$ in millions	Pension Plans		Medical and Life Plans		Total
Year Ending December 31
2021	$	1,884	$	152	$	2,036
2022	1,930		153		2,083
2023	1,973		135		2,108
2024	2,017		133		2,150
2025	2,057		130		2,187
2026 through 2030	10,599		556		11,155

In 2021, the company expects to contribute the required minimum funding of approximately $98 million to its pension plans and approximately $43 million to its medical and life benefit plans. During the year ended December 31, 2020, the company made discretionary pension contributions of $750 million.