(10) Employee Benefits

(a) The Corporation has several non-contributory defined benefit pension plans covering substantially all employees. Prior to 2001, benefits were generally based on an employee’s years of service and average compensation during the last five years of employment. Effective January 1, 2001, the Corporation changed the formula for providing pension benefits from the final average pay formula to a cash balance formula. Under the cash balance formula, a notional account is established for each employee, which is credited semi-annually with an amount equal to a percentage of eligible compensation based on age and years of service plus interest based on the account balance. Employees hired prior to 2001 will generally be eligible to receive vested benefits based on the higher of the final average pay or cash balance formulas.

The Corporation’s funding policy is to contribute amounts that meet regulatory requirements plus additional amounts determined by management based on actuarial valuations, market conditions and other factors. This may result in no contribution being made in a particular year.

The Corporation also provides certain other postretirement benefits, principally health care and life insurance, to retired employees and their beneficiaries and covered dependents. Substantially all employees hired before January 1, 1999 may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. Health care coverage is contributory. Retiree contributions vary based upon a retiree’s age, type of coverage and years of service with the Corporation. Life insurance coverage is non-contributory.

The Corporation funds a portion of the health care benefits obligation where such funding can be accomplished on a tax effective basis. Benefits are paid as covered expenses are incurred.

The funded status of the pension and other postretirement benefit plans at December 31, 2014 and 2013 was as follows:


	Pension Benefits						Other Postretirement Benefits
	2014			2013			2014			2013
	(in millions)
Benefit obligation, beginning of year	$	2,777		$	2,894		$	394		$	470
Service cost		86			95			10			13
Interest cost		140			125			19			19
Actuarial loss (gain)		536			(261	)		74			(97	)
Benefits paid		(85	)		(75	)		(10	)		(11	)
Foreign currency translation effect		(19	)		(1	)		(2	)		—

Benefit obligation, end of year		3,435			2,777			485			394


Plan assets at fair value, beginning of year		2,717			2,305			130			96
Actual return on plan assets		240			409			12			27
Employer contributions		92			82			11			18
Benefits paid		(85	)		(75	)		(10	)		(11	)
Foreign currency translation effect		(18	)		(4	)		—			—

Plan assets at fair value, end of year		2,946			2,717			143			130

Funded status at end of year, included in other liabilities	$	489		$	60		$	342		$	264

Net actuarial loss (gain) and prior service cost included in accumulated other comprehensive income that were not yet recognized as components of net benefit costs at December 31, 2014 and 2013 were as follows:


	Pension Benefits				Other Postretirement Benefits
	2014		2013		2014		2013
	(in millions)
Net actuarial loss (gain)	$	842	$	396	$	58	$	(13	)
Prior service cost		14		16		1		1

	$	856	$	412	$	59	$	(12	)

The accumulated benefit obligation for the pension plans was $2,923 million and $2,381 million at December 31, 2014 and 2013, respectively. The accumulated benefit obligation is the present value of pension benefits earned as of the measurement date based on employee service and compensation prior to that date. It differs from the pension benefit obligation in the table on the previous page in that the accumulated benefit obligation includes no assumptions regarding future compensation levels.

The weighted average assumptions used to determine the benefit obligations were as follows:


	Pension Benefits						Other Postretirement Benefits
	2014			2013			2014			2013
Discount rate		4.3	%		5.2	%		4.3	%		5.2	%
Rate of compensation increase		4.5			4.5			—			—

The components of net pension and other postretirement benefit costs reflected in net income and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2014, 2013 and 2012 were as follows:


	Pension Benefits									Other Postretirement Benefits
	2014			2013			2012			2014			2013			2012
	(in millions)
Costs reflected in net income
Service cost	$	86		$	95		$	88		$	10		$	13		$	12
Interest cost		140			125			124			19			19			20
Expected return on plan assets		(186	)		(165	)		(155	)		(9	)		(7	)		(6	)
Amortization of net actuarial loss and prior service cost and other		35			90			80			—			3			3

	$	75		$	145		$	137		$	20		$	28		$	29

Changes in plan assets and benefit obligations recognized in other comprehensive income
Net actuarial loss (gain)	$	479		$	(505	)	$	139		$	71		$	(117	)	$	(11	)
Amortization of net actuarial loss and prior service cost and other		(35	)		(90	)		(80	)		—			(3	)		(3	)

	$	444		$	(595	)	$	59		$	71		$	(120	)	$	(14	)

The estimated aggregate net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net benefit costs during 2015 for the pension and other postretirement benefit plans is $65 million.

The weighted average assumptions used to determine net pension and other postretirement benefit costs were as follows:


	Pension Benefits						Other Postretirement Benefits
	2014		2013		2012		2014		2013		2012
Discount rate		5.2%		4.4%		5.0%		5.2%		4.4%		5.0%
Rate of compensation increase		4.5		4.5		4.5		—		—		—
Expected long term rate of return on plan assets		7.5		7.5		7.75		7.5		7.5		7.75

The weighted average health care cost trend rate assumptions used to measure the expected cost of medical benefits were as follows:


	December 31
	2014			2013
Health care cost trend rate for next year		7.3	%		7.6	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.5			4.5
Year that the rate reaches the ultimate trend rate		2028			2028

The health care cost trend rate assumption has a significant effect on the amount of the accumulated other postretirement benefit obligation and the net other postretirement benefit cost reported. To illustrate, a one percent increase in the trend rate for each year would increase the accumulated other postretirement benefit obligation at December 31, 2014 by approximately $92 million and the aggregate of the service and interest cost components of net other postretirement benefit cost for the year ended December 31, 2014 by approximately $5 million. A one percent decrease in the trend rate for each year would decrease the accumulated other postretirement benefit obligation at December 31, 2014 by approximately $73 million and the aggregate of the service and interest cost components of net other postretirement benefit cost for the year ended December 31, 2014 by approximately $4 million.

The long term objective of the pension plan is to provide sufficient funding to cover expected benefit obligations, while assuming a prudent level of portfolio risk. The assets of the pension plan are invested, either directly or through pooled funds, in a diversified portfolio of predominately U.S. equity securities and fixed maturities. The Corporation seeks to obtain a rate of return that over time equals or exceeds the returns of the broad markets in which the plan assets are invested. The target allocation of plan assets is 55% to 65% invested in equity securities, with the remainder primarily invested in fixed maturities. The Corporation rebalances its pension assets to the target allocation as market conditions permit. The Corporation determined the expected long term rate of return assumption for each asset class based on an analysis of the historical returns and the expectations for future returns. The expected long term rate of return for the portfolio is a weighted aggregation of the expected returns for each asset class.

The fair values of the pension plan assets were as follows:


	December 31
	2014		2013
	(in millions)
Short term investments	$	48	$	37

Fixed maturities
U.S. government and government agency and authority obligations		209		224
Corporate bonds		419		371
Foreign government and government agency obligations		137		104
Mortgage-backed securities		228		217

Total fixed maturities		993		916

Equity securities		1,850		1,718

Other assets		55		46

	$	2,946	$	2,717

At December 31, 2014 and 2013, pension plan assets invested in pooled funds had a fair value of $1,556 million and $1,425 million, respectively.

At December 31, 2014 and 2013, other postretirement benefit plan assets were invested in pooled funds and had a fair value of $143 million and $130 million, respectively.

The estimated benefits expected to be paid in each of the next five years and in the aggregate for the following five years are as follows:


Years Ending December 31	Pension Benefits		Other Postretirement Benefits
	(in millions)
2015	$	105	$	12
2016		115		14
2017		151		15
2018		132		17
2019		143		18
2020-2024		868		117

(b) The Corporation has a defined contribution benefit plan, the Capital Accumulation Plan, in which substantially all employees are eligible to participate. Under this plan, the employer makes matching contributions equal to 100% of each eligible employee’s pre-tax elective contributions, up to 4% of the employee’s eligible compensation. Contributions are invested at the election of the employee in Chubb’s common stock or in various other investment funds. The expense recognized with respect to the plan was $30 million, $29 million and $26 million in 2014, 2013 and 2012, respectively.