Retirement Plans

12 Months Ended

Dec. 31, 2011

Retirement Plans [Abstract]

Retirement Plans

14. Retirement Plans

Lorillard has defined benefit pension, postretirement benefits, profit sharing and savings plans for eligible employees.

Pension and postretirement benefits—The Salaried Pension Plan provides benefits based on employees’ compensation and service. The Hourly Pension Plan provides benefits based on fixed amounts for each year of service. Lorillard also provides medical and life insurance benefits to eligible employees. Lorillard uses a December 31 measurement date for its plans.

Lorillard also provides certain senior level management employees with nonqualified, unfunded supplemental retirement plans. While these plans are unfunded, Lorillard has certain assets invested in an executive life insurance policy that are to be used to provide for certain of these benefits.

Weighted-average assumptions used to determine benefit obligations:

	Pension Benefits		Other Postretirement  Benefits
	December 31,		December 31,
	2011	2010	2011	2010
Discount rate	4.7%-4.9%	5.4%-5.8%	4.6%-4.8%	5.3%-5.5%
Rate of compensation increase	4.8%	4.8%

Weighted-average assumptions used to determine net periodic benefit cost:

	Pension Benefits			Other Postretirement Benefits
	Year Ended December 31,			Year Ended December 31,
	2011	2010	2009	2011	2010	2009
Discount rate	5.4%-5.8%	6.0%	6.3%	5.3%-5.5%	6.0%	6.3%
Expected long-term return on plan assets	7.5%	7.5%	7.5%
Rate of compensation increase	4.8%	4.8%	5.0%

The expected long-term rate of return for Plan assets is determined based on widely-accepted capital market principles, long-term return analysis for global fixed income and equity markets and the active total return oriented portfolio management style. The methodology used to derive asset class risk/return estimates varies due to the nature of asset classes, the availability of historical data, implications from currency, and other factors. In many cases, where historical data is available, data is drawn from indices such as MSCI or G7 country data. For alternative asset classes where historical data may be insufficient or incomplete, estimates are based on long-term capital market conditions and/or asset class relationships. The expected rate of return for the Plan is based on the target asset allocation and return assumptions for each asset class. The estimated Plan return represents a nominal compound return which captures the effect of estimated asset class and market volatility.

Assumed health care cost trend rates for other postretirement benefits:

	Other Postretirement Benefits
	Year Ended December 31,
	2011			2010
Pre-65 health care cost trend rate assumed for next year		9.0	%		9.5	%
Post-65 health care cost trend rate assumed for next year		8.0	%		8.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.0	%		5.0	%
Year that the rate reaches the ultimate trend rate:
Pre-65		2020			2020
Post-65		2018			2018

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	One Percentage Point
	Increase		Decrease
	(In millions)
Effect on total of service and interest cost	$	1	$	(1	)
Effect on postretirement benefit obligations		14		(12	)

Net periodic pension and other postretirement benefit costs include the following components:

	Pension Benefits									Other Postretirement Benefits
	Year Ended December 31,									Year Ended December 31,
	2011			2010			2009			2011			2010			2009
	(In millions)
Service cost	$	18		$	17		$	17		$	4		$	4		$	4
Interest cost		56			56			56			10			12			12
Expected return on plan assets		(73	)		(68	)		(61	)		—			—			—
Amortization of unrecognized net loss (gain)		8			7			15			—			(1	)		(1	)
Amortization of unrecognized prior service cost		4			5			5			(1	)		(1	)		(1	)
Net periodic benefit cost	$	13		$	17		$	32		$	13		$	14		$	14

The following provides a reconciliation of benefit obligations, plan assets and funded status of the pension and postretirement plans:

	Pension Benefits						Other Postretirement Benefits
	December 31,						December 31,
	2011			2010			2011			2010
	(In millions)
Change in benefit obligation:
Benefit obligation at January 1	$	1,023		$	962		$	197		$	206
Service cost		18			17			4			4
Interest cost		56			56			10			12
Plan participants’ contributions		—			—			5			5
Amendments		9			—			—			—
Actuarial (gain) loss		144			48			15			(11	)
Benefits paid		(67	)		(60	)		(21	)		(20	)
Other								2			1
Benefit obligation at December 31		1,183			1,023			212			197
Change in plan assets:
Fair value of plan assets at January 1		989			921			—			—
Actual return on plan assets		48			109			—			—
Employer contributions		28			19			16			15
Plan participants’ contributions		—			—			5			5
Benefits paid from plan assets		(67	)		(60	)		(21	)		(20	)
Fair value of plan assets at December 31		998			989			—			—
Funded status		(185	)		(34	)	$	(212	)	$	(197	)
Amounts recognized in the balance sheets consist of:
Noncurrent assets		—			66		$	—		$	—
Current liabilities		—			—			(14	)		(13	)
Noncurrent liabilities		(185	)		(100	)		(198	)		(184	)
Net amount recognized	$	(185	)	$	(34	)	$	(212	)	$	(197	)
Net actuarial (gain) loss	$	168		$	7		$	15		$	(11	)
Recognized actuarial gain (loss)		(7	)		(7	)		1			1
Prior service cost		10			—			—			—
Recognized prior service (cost)		(4	)		(5	)		—			—
Total recognized in accumulated other comprehensive (income) loss	$	167		$	(5	)		16		$	(10	)
Total recognized net periodic benefit cost and other	$	180		$	12		$	29		$	5

Information for pension plans with an accumulated benefit obligation in excess of plan assets consisted of the following:

	Pension Benefits
	December 31,
	2011		2010
	(In millions)
Projected benefit obligation	$	1,183	$	558
Accumulated benefit obligation		1,111		501
Fair value of plan assets		998		459

The table below presents the estimated amounts to be recognized from accumulated other comprehensive income into net periodic benefit cost during 2012.

	Pension Benefits		Other Postretirement Benefits
	(In millions)
Amortization of actuarial (gain) loss	$	22	$	—
Amortization of prior service cost		4		—
Total estimated amounts to be recognized	$	26		—

Lorillard projects expected future minimum benefit payments as follows.

Expected future benefit payments	Pension Benefits		Other Postretirement Benefit Plans		Less Medicare Drug Subsidy		Net
	(In millions)
2012	$	68	$	15	$	1	$	14
2013		70		16		1		15
2014		72		16		1		15
2015		73		17		1		16
2016		75		17		1		16
2017 – 2021		399		86		4		82
	$	757	$	167	$	9	$	158

Lorillard expects to contribute $31 million to its pension plans and $15 million to its other postretirement benefit plans in 2012.

The general principles guiding the investment of the Plan assets are embodied in the Employee Retirement Income Security Act of 1974 (ERISA). These principles include discharging Lorillard’s investment responsibilities for the exclusive benefit of Plan participants and in accordance with the “prudent expert” standards and other ERISA rules and regulations. Investment objectives for Lorillard’s pension Plan assets are to optimize the long-term return on Plan assets while maintaining an acceptable level of risk, to diversify assets among asset classes and investment styles, and to maintain a long-term focus.

In 2009, Lorillard conducted an asset/liability study to determine the optimal strategic asset allocation to meet the Plan’s projected long-term benefit obligations and desired funding status. The Plan is managed using a Liability Driven Investment (“LDI”) framework which focuses on achieving the Plan’s return goals while assuming a reasonable level of funded status volatility.

Based on this LDI framework the asset allocation has two primary components. The first component of the asset allocation is the “hedging portfolio” which uses the Plan’s fixed income portfolio to hedge a portion of the interest rate risk associated with the Plan’s liabilities, thereby reducing the Plan’s expected funded status volatility. The second component is the “growth/equity portfolio” which is designed to enhance portfolio returns. The growth portfolio is broadly diversified across the following asset classes; Global Equities, Long Short Equities, Absolute Return Hedge Funds, Private Equity (including growth equity, buyouts, and other illiquid assets designed to enhance returns), and Private Real Assets. Alternative investments, including hedge funds, are used judiciously to enhance risk adjusted long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

The pension plans asset allocations were:

	Asset Allocation as  of 12/31/11		Asset Allocation as  of 12/31/10
	(%)		(%)
Asset Class
U.S. Equity		14.0		15.1
Global ex U.S. Equity		10.4		11.6
Emerging Markets Equity		3.6		3.5
Absolute Return Hedge Funds		11.7		11.7
Equity Hedge Funds		10.7		12.9
Private Equity		4.7		4.2
Private Real Assets		1.6		1.0
Public Real Assets		2.0		2.4
Fixed Income		40.0		36.7
Cash Equivalents		1.3		0.9
Total		100.0		100.0

Fair Value Measurements—The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs. Plan assets using the fair value hierarchy as of December 31, 2011 were as follows:

	Total		Level 1		Level 2		Level 3
	(In Millions)
Asset Class:
U.S. Equity	$	139	$	53	$	20	$	66
Global ex U.S. Equity		104		—		104		—
Emerging Markets Equity		36		—		36		—
Absolute Return Hedge Funds		117		—		37		80
Equity Hedge Funds		107		—		57		50
Private Equity		47		—		—		47
Private Real Assets		16		—		—		16
Public Real Assets		20		—		11		9
Fixed Income		399		399		—		—
Cash Equivalents		13		—		13		—
Total	$	998	$	452	$	278	$	268

Plan assets using the fair value hierarchy as of December 31, 2010 were as follows:

	Total		Level 1		Level 2		Level 3
	(In Millions)
Asset Class:
U.S. Equity	$	150	$	47	$	30	$	73
Global ex U.S. Equity		115		—		115		—
Emerging Markets Equity		35		—		35		—
Absolute Return Hedge Funds		116		—		29		87
Equity Hedge Funds		127		—		64		63
Private Equity		41		—		—		41
Private Real Assets		10		—		—		10
Public Real Assets		24		—		12		12
Fixed Income		363		363		—		—
Cash Equivalents		8		—		8		—
Total	$	989	$	410	$	293	$	286

Equity securities are primarily valued using a market approach based on the quoted market prices of identical instruments.

Hedge funds are primarily based on net asset values calculated by the fund and are not publicly available.

Private equity valuations are reported by the fund manager and are based on the valuation of underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market based comparable data.

Real estate values are reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based on comparable data.

Fixed income securities are primarily valued using a market approach with inputs that include broker quotes in a non-active market.

Cash equivalents are primarily held in registered money market funds which are valued using a market approach based on the quoted market prices of identical instruments.

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2011. For the year ended December 31, 2011, there were no significant transfers between levels 1, 2 and 3.

	January 1, 2011 Balance		Net Realized Unrealized Gains/ (Losses)			Net Purchases and Settlements			Net Transfers Into/(Out of) Level 3		December  31, 2011 Balance
US Equity	$	73	$	5		$	(12	)	$	—	$	66
Absolute Return Hedge Funds		87		1			(8	)		—		80
Equity Hedge Funds		63		(4	)		(9	)		—		50
Private Equity		41		6			—			—		47
Private Real Assets		10		1			5			—		16
Public Real Assets		12		(3	)		—			—		9

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2010.

	January 1, 2010 Balance		Net Realized Unrealized Gains/ (Losses)		Net Purchases and Settlements			Net Transfers Into/(Out of) Level 3			December  31, 2010 Balance
US Equity		31		11		7			24			73
Absolute Return Hedge Funds		81		11		(5	)		—			87
Equity Hedge Funds		58		2		3			—			63
Private Equity		62		4		(1	)		(24	)		41
Private Real Assets		7		1		2			—			10
Public Real Assets		—		2		10			—			12

Profit Sharing—Lorillard has a Profit Sharing Plan for hourly employees. Lorillard’s contributions under this plan are based on Lorillard’s performance with a maximum contribution of 15% of participants’ earnings. Contributions for 2011, 2010 and 2009 were $11 million, $10 million and $9 million, respectively.

Savings Plan—Lorillard sponsors an Employees Savings Plan for salaried employees. Lorillard provides a matching contribution of 100% of the first 3% of pay contributed and 50% of the next 2% of pay contributed by employees. Lorillard contributions for 2011, 2010 and 2009 were $5 million, $5 million and $4 million, respectively.