Retirement Benefits

12 Months Ended

Dec. 31, 2011

RETIREMENT BENEFITS [Abstract]

16. RETIREMENT BENEFITS

16. 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. The pension benefit for most employees is based upon criteria whereby employees earn age and service points over their employment period.

Defined Contribution Plans – The company also sponsors 401(k) defined contribution plans in which most employees are eligible to participate, as well as certain bargaining unit employees. Company contributions for most plans are based on a cash matching of employee contributions up to 4 percent of compensation. The company also participates in a multiemployer plan for certain of the company’s union employees. 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, 2011, 2010, and 2009, were $297 million, $288 million, and $291 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 contributory plans upon retirement from active service if they meet specified age and years of service requirements. Qualifying dependents are also eligible for medical coverage. Approximately 55 percent of the company’s current retirees participate in the medical plans. The company reserves the right to amend or terminate the plans at any time. In November 2006, the company adopted plan amendments and communicated to plan participants that it would cap the amount of its contributions to substantially all of its remaining post retirement medical and life benefit plans that were previously not subject to limits on the company’s contributions.

In addition to a medical inflation 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 post employment medical and life benefits.

The effect of the Medicare prescription drug subsidy from the Medicare Prescription Drug, Improvement and Modernization Act of 2003 to reduce the company’s net periodic post-retirement benefit cost and accumulated post-retirement benefit obligation for the periods presented was not material. Pursuant to the new healthcare law described below, the tax benefits related to Medicare Part D subsidies will expire on December 31, 2012.

Health Care Legislation – The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act became law during the first quarter of 2010. The provisions of these new laws affected the company’s costs of providing health care benefits to its employees beginning this year. The company participated in the Early Retiree Reinsurance Program and continues to assess the extent to which the provisions of the new laws will affect its future health care and related employee benefit plan costs.

Spin-off of Shipbuilding Business – As a result of the spin-off of HII discussed in Note 6, the company reclassified to assets and liabilities of discontinued operations, certain pension and other post-retirement benefit plan assets and liabilities related exclusively to Shipbuilding employees and the Shipbuilding portion of Northrop Grumman pension and other post-retirement benefit plans that included Shipbuilding employees.

Summary Plan Results

The cost to the company of its retirement benefit plans in each of the three years ended December 31 is shown in the following table:

	Year Ended December 31
	Pension Benefits												Medical and Life Benefits
$ in millions	2011				2010				2009				2011				2010				2009
Components of Net Periodic Benefit Cost
Service cost		$	520			$	531			$	547			$	32			$	34			$	34
Interest cost			1,223				1,212				1,180				114				117				124
Expected return on plan assets			(1,690	)			(1,517	)			(1,366	)			(62	)			(56	)			(48	)
Amortization of:
Prior service cost (credit)			23				35				34				(51	)			(51	)			(51	)
Net loss from previous years			162				206				289				17				18				19
Other											21				(6	)
Net periodic benefit cost		$	238			$	467			$	705			$	44			$	62			$	78

The table below summarizes the components of changes in unamortized benefit plan costs for the years ended December 31, 2011, 2010, and 2009:

	Pension				Medical and
$ in millions	Benefits				Life Benefits				Total
Changes in unamortized benefit plan costs
Change in net actuarial loss		$	(524	)		$	(60	)		$	(584	)
Change in prior service cost			5								5
Amortization of
Prior service (cost) credit			(50	)			59				9
Net loss from previous years			(337	)			(28	)			(365	)
Tax expense related to above items			363				11				374
Change in unamortized benefit plan costs – 2009		$	(543	)		$	(18	)		$	(561	)
Change in net actuarial loss		$	(158	)		$	(64	)		$	(222	)
Amortization of
Prior service (cost) credit			(48	)			60				12
Net loss from previous years			(244	)			(26	)			(270	)
Tax expense related to above items			171				12				183
Change in unamortized benefit plan costs – 2010		$	(279	)		$	(18	)		$	(297	)
Change in net actuarial loss		$	2,687			$	138			$	2,825
Change in prior service cost			(608	)			6				(602	)
Amortization of
Prior service (cost) credit			(23	)			51				28
Net loss from previous years			(162	)			(17	)			(179	)
Tax benefit related to above items			(752	)			(71	)			(823	)
Change in unamortized benefit plan costs – 2011		$	1,142			$	107			$	1,249

Unamortized benefit plan costs consist primarily of accumulated net after-tax actuarial losses totaling $3.9 billion and $2.8 billion as of December 31, 2011 and 2010, respectively. The change in net actuarial loss from pension benefits in 2011 was primarily due to a $1.2 billion after tax impact from the reduction in the discount rate assumption to 5.03 percent at December 31, 2011, from 5.75 percent at December 31, 2010. Net actuarial gains or losses are re-determined annually and principally arise from gains or losses on plan assets due to variations in the fair market value of the underlying assets and changes in the benefit obligation due to changes in actuarial assumptions. Net actuarial gains or losses are amortized to expense in future periods when they exceed ten percent of the greater of plan assets or projected benefit obligations by benefit plan. The excess of gains or losses over the ten percent threshold are subject to amortization over the average future service period of employees of approximately ten years.

In December 2011, the company adopted certain changes in its defined benefit pension plans designed to enable the company to remain competitive within its marketplace and provide the affordability its customers require. These changes represent modifications to the defined benefits available to employees hired prior to July 1, 2008 who retire beginning after December 31, 2012. As a result of these changes, the company recognized a reduction of approximately $640 million in its projected benefit obligations for the affected employee groups as of December 31, 2011. Due to these changes, certain nonqualified benefit plans experienced curtailments, however the net impact of these curtailment events was not material.

	Pension								Medical and Life
	Benefits								Benefits
$ in millions	2011				2010				2011				2010
Amounts Recorded in Accumulated Other Comprehensive Loss
Net actuarial loss		$	(6,131	)		$	(4,246	)		$	(331	)		$	(361	)
Prior service (cost) credit			537				(194	)			149				238
Income tax benefits related to above items			2,215				1,752				74				49
Unamortized benefit plan costs		$	(3,379	)		$	(2,688	)		$	(108	)		$	(74	)

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 as well as 11 domestic unfunded non-qualified plans for benefits provided to directors, officers, and certain employees. The company uses a December 31 measurement date for all of its plans.

	Pension Benefits								Medical and Life Benefits
$ in millions	2011				2010				2011				2010
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year		$	21,820			$	20,661			$	2,104			$	2,104
Service cost			520				531				32				34
Interest cost			1,223				1,212				114				117
Plan participants’ contributions			14				10				82				82
Plan amendments			(608	)							6
Actuarial loss (gain)			2,379				633				107				(27	)
Benefits paid			(1,197	)			(1,176	)			(224	)			(222	)
Other			(22	)			(51	)			14				16
Projected benefit obligation at end of year		$	24,129			$	21,820			$	2,235			$	2,104

	Pension Benefits								Medical and Life Benefits
$ in millions	2011				2010				2011				2010
Change in Plan Assets
Fair value of plan assets at beginning of year		$	20,081			$	18,184			$	932			$	843
Gain on plan assets			1,342				2,320				31				108
Employer contributions			1,084				789				111				105
Plan participants’ contributions			14				10				82				82
Benefits paid			(1,197	)			(1,176	)			(224	)			(222	)
Other			16				(46	)			14				16
Fair value of plan assets at end of year			21,340				20,081				946				932
Funded status		$	(2,789	)		$	(1,739	)		$	(1,289	)		$	(1,172	)
Amounts Recognized in the Consolidated Statements of Financial Position
Non-current assets		$	112			$	275			$	41			$	45
Current liability			(104	)			(94	)			(48	)			(48	)
Non-current liability			(2,797	)			(1,920	)			(1,282	)			(1,169	)

The following table shows those amounts expected to be recognized in net periodic benefit cost in 2012:

$ in millions	Pension Benefits				Medical and Life Benefits
Amounts Expected to be Recognized in 2012 Net Periodic Benefit Cost
Net actuarial loss		$	427			$	21
Prior service cost (credit)			(58	)			(51	)

The accumulated benefit obligation for all defined benefit pension plans was $23.6 billion and $20.5 billion at December 31, 2011 and 2010, respectively.

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

	December 31
$ in millions	2011			2010
Projected benefit obligation		$	22,451		$	5,897
Accumulated benefit obligation			21,949			5,314
Fair value of plan assets			19,550			4,447

Plan Assumptions

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

	Pension Benefits						Medical and     Life Benefits
	2011			2010			2011			2010
Assumptions Used to Determine Benefit Obligation at December 31
Discount rate		5.03	%		5.75	%		5.02	%		5.62	%
Rate of compensation increase		2.75	%		3.50	%
Initial health care cost trend rate assumed for the next year								7.50	%		8.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)								5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate								2017			2017
Assumptions Used to Determine Benefit Cost for the Year Ended December 31
Discount rate		5.75	%		6.03	%		5.62	%		5.77	%
Expected long-term return on plan assets		8.50	%		8.50	%		6.86	%		6.90	%
Rate of compensation increase		3.50	%		3.75	%
Initial health care cost trend rate assumed for the next year								8.00	%		7.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)								5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate								2017			2014

The discount rate is generally based on the yield on high-quality corporate fixed-income investments. At the end of each year, the discount rate is primarily determined using a portfolio of high quality bonds matching the notional cash inflows with the expected benefit payments for each significant benefit plan.

The assumptions used for pension benefits are consistent with those used for retiree medical and life insurance benefits. The long-term rate of return on plan assets used for the medical and life benefits are reduced to allow for the impact of tax on expected returns as, unlike the pension trust, the earnings of certain Voluntary Employee Beneficiary Association (VEBA) trusts are taxable.

Through consultation with investment advisors, expected long-term returns for each of the plans’ strategic asset classes were developed. Several factors were considered, including survey of investment managers’ expectations, current market data such as yields/price-earnings ratios, and historical market returns over long periods. Using policy target allocation percentages and the asset class expected returns, a weighted-average expected return was calculated. A one-percentage-point change in the initial through the ultimate health care cost trend rates would have the following effects:

$ in millions	1-Percentage- Point Increase			1-Percentage- Point Decrease
Increase (Decrease) From Change In Health Care Cost Trend Rates To
Post-retirement benefit expense		$	5		$	(6	)
Post-retirement benefit liability			64			(75	)

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 actuarial rate of return over the long term within reasonable and prudent levels of risk. 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.

All investment policies and procedures are designed to ensure that the plans’ investments are in compliance with 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, 2011:

	Asset Allocation Ranges
Domestic equities	10% -30%
International equities	5% - 25%
Fixed income securities	30% -50%
Real estate and other	15% -30%

The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31, 2011, and 2010, 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 that are valued using model based pricing services.

	Level 1						Level 2						Level 3						Total
$ in millions	2011			2010			2011			2010			2011			2010			2011			2010
Asset Category
Domestic equities		$	3,849		$	3,948		$	1		$	3		$	2		$	2		$	3,852		$	3,953
International equities			1,266			1,406			1,716		$	1,868									2,982			3,274
Fixed income securities
Cash and cash equivalents (1)			75			92			1,528			1,111									1,603			1,203
U.S. Treasuries									1,872			1,381									1,872			1,381
Other U.S. Government Agency Securities									965			715									965			715
Non-U.S. Government Securities									324			224									324			224
Corporate debt									3,686			3,512									3,686			3,512
Asset backed									525			758			4			4			529			762
High yield debt									977			992			41			78			1,018			1,070
Bank loans									150			115									150			115
Real estate and other
Hedge funds															1,405			1,521			1,405			1,521
Private equities															2,098			1,945			2,098			1,945
Real estate															1,788			1,402			1,788			1,402
Other (2)							14			(64)									14			(64)
Fair value of plan assets at the end of the year		$	5,190		$	5,446		$	11,758		$	10,615		$	5,338		$	4,952		$	22,286		$	21,013

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

(2) Other includes futures, swaps, options, and insurance contracts in place year end.

The changes in the fair value of the pension and VEBA plan trust assets measured using Level 3 significant unobservable inputs during 2011 and 2010, are as follows:

$ in millions	Domestic equities				Asset Backed			High yield debt				Hedge funds				Private equities				Real Estate				Total
Balance as of December 31, 2009		$	2			$	4		$	59			$	1,282			$	1,651			$	870			$	3,868
Actual return on plan assets:
Assets still held at reporting date			2							18				120				200				103				443
Assets sold during the period																						(9	)			(9	)
Purchases, sales, and settlements			(2	)										89				63				405				555
Changes in asset allocation mix										1				30				31				33				95
Balance as of December 31, 2010		$	2			$	4		$	78			$	1,521			$	1,945			$	1,402			$	4,952
Actual return on plan assets:
Assets still held at reporting date										(2	)			(43	)			19				198				172
Assets sold during the period														25				(13	)			(4	)			8
Purchases										10				413				503				460				1,386
Sales										(45	)			(511	)			(356	)			(268	)			(1,180	)
Balance as of December 31, 2011		$	2			$	4		$	41			$	1,405			$	2,098			$	1,788			$	5,338

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 162 and the unfunded commitments are $882 million and $1.2 billion as of December 31, 2011, and 2010, 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. In 2011, the asset allocation policy for certain plans was changed, and on a consolidated basis, this change had no impact on overall trust assets.

At December 31, 2011, and 2010, 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, based upon the same assumptions used to measure the benefit obligation, and includes expected future employee service, as of December 31, 2011:

$ in millions	Pension Plans			Medical and Life Plans
Year Ending December 31
2012		$	1,179		$	148
2013			1,243			153
2014			1,317			157
2015			1,383			161
2016			1,443			164
2017 through 2021			8,147			845

In 2012, the company expects to contribute the required minimum funding level of approximately $65 million to its pension plans and approximately $120 million to its other post-retirement benefit plans with no expected additional voluntary pension contributions. During the years ended December 31, 2011 and 2010, the company made voluntary pension contributions of $1 billion and $728 million, respectively.