12. Employee Benefits

Defined Contribution Savings Plans

Aon maintains defined contribution savings plans for the benefit of its U.S. and U.K. employees. The expense recognized for these plans is included in Compensation and benefits in the Consolidated Statements of Income, as follows (in millions):

Years ended December 31	2012		2011		2010


U.S.	$	115	$	104	$	65
U.K.		41		43		35

	$	156	$	147	$	100

Pension and Other Post-retirement Benefits

The Company sponsors defined benefit pension and post-retirement health and welfare plans that provide retirement, medical, and life insurance benefits. The post-retirement healthcare plans are contributory, with retiree contributions adjusted annually, and the life insurance and pension plans are generally noncontributory.

The majority of the Company's plans are closed to new entrants. Effective April 1, 2009, the Company ceased crediting future benefits relating to salary and service in its U.S. defined benefit pension plan. This change affected approximately 6,000 active employees covered by the U.S. plan. For those employees, the Company increased its contribution to the defined contribution savings plan. In 2010, the Company ceased crediting future benefits relating to service in its Canadian defined benefit pension plans. This change affected approximately 950 active employees.

Pension Plans

The following tables provide a reconciliation of the changes in the projected benefit obligations and fair value of assets for the years ended December 31, 2012 and 2011 and a statement of the funded status as of December 31, 2012 and 2011, for the U.S. plans and material U.K. and non-U.S. plans, which are located in the U.K., the Netherlands, and Canada. These plans represent approximately 94% of the Company's projected benefit obligations.

	U.K. and Non-U.S.						U.S.

(millions)	2012			2011			2012			2011

Change in projected benefit obligation
At January 1	$	5,583		$	4,812		$	2,657		$	2,376
Service cost		15			19			—			—
Interest cost		265			267			119			122
Participant contributions		1			1			—			—
Plan amendment		—			12			—			—
Plan transfer and acquisitions		—			17			—			—
Actuarial loss (gain)		(139	)		(32	)		29			51
Benefit payments		(195	)		(181	)		(123	)		(115	)
Change in discount rate		562			651			202			223
Foreign currency revaluation		175			17			—			—

At December 31	$	6,267		$	5,583		$	2,884		$	2,657

Accumulated benefit obligation at end of year	$	6,186		$	5,508		$	2,884		$	2,657

Change in fair value of plan assets
At January 1	$	5,098		$	4,288		$	1,325		$	1,244
Actual return on plan assets		392			595			203			83
Participant contributions		1			1			—			—
Employer contributions		412			364			226			113
Plan transfer and acquisitions		—			13			—			—
Benefit payments		(195	)		(181	)		(123	)		(115	)
Foreign currency revaluation		161			18			—			—

At December 31	$	5,869		$	5,098		$	1,631		$	1,325

Market related value at end of year	$	5,869		$	5,098		$	1,566		$	1,410

Amount recognized in Statement of Financial Position at December 31
Funded status	$	(398	)	$	(485	)	$	(1,253	)	$	(1,332	)
Unrecognized prior-service cost		28			28			—			—
Unrecognized loss		2,472			2,109			1,591			1,480

Net amount recognized	$	2,102		$	1,652		$	338		$	148

Amounts recognized in the Consolidated Statements of Financial Position consist of (in millions):

	U.K. and Non-U.S.						U.S.

	2012			2011			2012			2011

Prepaid benefit cost (included in Other non-current assets)	$	302		$	159		$	—		$	—
Accrued benefit liability (included in Pension, other post retirement, and post employment liabilities)		(700	)		(644	)		(1,253	)		(1,332	)
Accumulated other comprehensive loss		2,500			2,137			1,591			1,480

Net amount recognized	$	2,102		$	1,652		$	338		$	148

Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2012 and 2011 consist of (in millions):

	U.K. and Non-U.S.				U.S.

	2012		2011		2012		2011

Net loss	$	2,472	$	2,109	$	1,591	$	1,480
Prior service cost		28		28		—		—

	$	2,500	$	2,137	$	1,591	$	1,480

In 2012, U.S. plans with a projected benefit obligation ("PBO") and an accumulated benefit obligation ("ABO") in excess of the fair value of plan assets had a PBO of $2.9 billion, an ABO of $2.9 billion, and plan assets of $1.6 billion. U.K. and Non-U.S. plans with a PBO in excess of the fair value of plan assets had a PBO of $3.5 billion and plan assets with a fair value of $2.8 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $3.4 billion and plan assets with a fair value of $2.8 billion.

In 2011, U.S. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $2.7 billion, an ABO of $2.7 billion, and plan assets of $1.3 billion. U.K. and Non-U.S. plans with a PBO in excess of the fair value of plan assets had a PBO of $3.1 billion and plan assets with a fair value of $2.5 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $3.0 billion and plan assets with a fair value of $2.4 billion.

The following table provides the components of net periodic benefit cost for the plans (in millions):

	U.K. and Non-U.S.									U.S.

	2012			2011			2010			2012			2011			2010

Service cost	$	15		$	19		$	15		$	—		$	—		$	—
Interest cost		265			267			249			119			122			124
Expected return on plan assets		(323	)		(287	)		(240	)		(127	)		(120	)		(118	)
Amortization of prior-service cost		1			1			1			—			—			—
Amortization of net actuarial loss		60			53			54			43			31			24

Net periodic benefit cost	$	18		$	53		$	79		$	35		$	33		$	30

In addition to the net periodic benefit cost shown above in 2010, the Company recorded a non-cash charge of $49 million ($29 million after-tax) with a corresponding credit to Accumulated other comprehensive loss. This charge is included in Compensation and benefits in the Consolidated Statements of Income and represents the correction of an error in the calculation of pension expense for the Company's U.S. pension plan for the period from 1999 to the end of the first quarter of 2010.

The weighted-average assumptions used to determine future benefit obligations are as follows:

	U.K. and Non-U.S.						U.S.

	2012			2011			2012			2011

Discount rate		3.25 – 4.45	%		4.40 – 4.94	%		3.73 – 4.05	%		4.33 – 4.60	%
Rate of compensation increase		2.25 – 3.85	%		2.25 – 3.55	%		N/A			N/A
Underlying price inflation		2.00 – 2.95	%		2.00 – 3.05	%		N/A			N/A

The weighted-average assumptions used to determine the net periodic benefit cost are as follows:

	U.K. and Non-U.S.									U.S.

	2012			2011			2010			2012			2011			2010

Discount rate		4.40 – 4.94	%		4.70 – 5.50	%		4.00 – 6.19	%		4.33 – 4.60	%		4.35% – 5.34	%		5.22 – 5.98	%
Expected return on plan assets		4.90 – 6.75			3.20 – 7.20			4.70 – 7.00			8.80			8.80			8.80
Rate of compensation increase		2.25 – 3.55			2.00 – 4.00			2.50 – 3.60			N/A			N/A			N/A

The amounts in Accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2013 are $52 million in the U.S. and $75 million outside the U.S.

Expected Return on Plan Assets

To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans. The expected return on plan assets in the U.S. of 8.80% reflects a portfolio that is seeking asset growth through a higher equity allocation while maintaining prudent risk levels. The portfolio contains certain assets that have historically resulted in higher returns and other financial instruments to minimize downside risk.

No plan assets are expected to be returned to the Company during 2013.

Fair value of plan assets

The Company determined the fair value of plan assets through numerous procedures based on the asset class and available information. See Note 15 "Fair Value Measurements and Financial Instruments" for a description of the procedures performed to determine the fair value of the plan assets. The fair values of the Company's U.S. pension plan assets at December 31, 2012 and December 31, 2011, by asset category, are as follows (in millions):

			Fair Value Measurements Using

Asset Category	Balance at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents (1)	$	22	$	22	$	—	$	—
Equity investments: (2)
Large cap domestic		233		233		—		—
Small cap domestic		44		—		44		—
Large cap international		188		59		129		—
Equity derivatives		226		69		157		—
Fixed income investments: (3)
Corporate bonds		421		—		421		—
Government and agency bonds		97		—		97		—
Asset-backed securities		18		—		18		—
Fixed income derivatives		52		—		52		—
Other investments:
Alternative investments (4)		262		—		—		262
Commodity derivatives (5)		17		—		17		—
Real estate and REITS (6)		51		51		—		—

Total	$	1,631	$	434	$	935	$	262

(1): Consists of cash and institutional short-term investment funds.
(2): Consists of equity securities, equity derivatives, and pooled equity funds.
(3): Consists of corporate and government bonds, asset-backed securities, and fixed income derivatives.
(4): Consists of limited partnerships, private equity and hedge funds.
(5): Consists of long-dated options on a commodity index.
(6): Consists of exchange traded REITS.

			Fair Value Measurements Using

Asset Category	Balance at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents (1)	$	22	$	22	$	—	$	—
Equity investments: (2)
Large cap domestic		151		151		—		—
Small cap domestic		58		—		58		—
Large cap international		97		9		88		—
Equity derivatives		173		63		110		—
Fixed income investments: (3)
Corporate bonds		355		—		355		—
Government and agency bonds		116		—		116		—
Asset-backed securities		18		—		18		—
Fixed income derivatives		83		—		83		—
Other investments:
Alternative investments (4)		191		—		—		191
Commodity derivatives (5)		19		—		19		—
Real estate and REITS (6)		42		42		—		—

Total	$	1,325	$	287	$	847	$	191

(1): Consists of cash and institutional short-term investment funds.
(2): Consists of equity securities, equity derivatives, and pooled equity funds.
(3): Consists of corporate and government bonds, asset-backed securities, and fixed income derivatives.
(4): Consists of limited partnerships, private equity and hedge funds.
(5): Consists of long-dated options on a commodity index.
(6): Consists of exchange traded REITS.

The following table presents the changes in the Level 3 fair-value category in the Company's U.S. pension plans for the years ended December 31, 2012 and December 31, 2011 (in millions):

	Fair Value Measurement Using Level 3 Inputs


Balance at January 1, 2011	$	193
Actual return on plan assets:
Relating to assets still held at December 31, 2011		(8	)
Relating to assets sold during 2011		1
Purchases, sales and settlements—net		5
Transfer in/(out) of Level 3		—

Balance at December 31, 2011		191
Actual return on plan assets:
Relating to assets still held at December 31, 2012		22
Relating to assets sold during 2012		1
Purchases, sales and settlements—net		48
Transfer in/(out) of Level 3		—

Balance at December 31, 2012	$	262

The fair values of the Company's major U.K. and non-U.S. pension plan assets at December 31, 2012 and December 31, 2011, by asset category, are as follows (in millions):

			Fair Value Measurements Using

	Balance at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents	$	303	$	303	$	—	$	—
Equity investments:
Pooled funds: (1)
Global		1,241		—		1,241		—
Europe		319		—		319		—
North America		65		—		65		—
Equity securities — global (2)		137		137		—		—
Derivatives (2)		103		—		103		—
Fixed income investments:
Pooled funds: (1)
Fixed income securities		973		—		973		—
Derivatives		23		—		23		—
Fixed income securities (3)		1,298		1,235		63		—
Annuities		568		—		—		568
Derivatives (3)		245		—		245		—
Other investments:
Pooled funds: (1)
Commodities		30		—		30		—
REITS		5		—		5		—
Real estate (4)		87		—		—		87
Derivatives		15		—		15		—
Alternative investments (5)		457		—		—		457

Total	$	5,869	$	1,675	$	3,082	$	1,112

(1): Consists of various equity, fixed income, commodity, and real estate mutual fund type investment vehicles.
(2): Consists of equity securities and equity derivatives.
(3): Consists of corporate and government bonds and fixed income derivatives.
(4): Consists of property funds and trusts holding direct real estate investments.
(5): Consists of limited partnerships, private equity and hedge funds.

			Fair Value Measurements Using

	Balance at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents	$	276	$	276	$	—	$	—
Equity investments:
Pooled funds: (1)
Global		960		—		960		—
Europe		347		—		347		—
North America		56		—		56		—
Equity securities — global (2)		128		128		—		—
Derivatives (2)		11		—		11		—
Fixed income investments:
Pooled funds: (1)
Fixed income securities		823		—		823		—
Derivatives		21		—		21		—
Fixed income securities (3)		1,355		1,299		56		—
Annuities		419		—		—		419
Derivatives (3)		178		—		178		—
Other investments:
Pooled funds: (1)
Commodities		26		—		26		—
REITS		4		—		4		—
Real estate (4)		134		—		—		134
Derivatives		14		—		14		—
Alternative investments (5)		346		—		—		346

Total	$	5,098	$	1,703	$	2,496	$	899

(1): Consists of various equity, fixed income, commodity, and real estate mutual fund type investment vehicles.
(2): Consists of equity securities and equity derivatives.
(3): Consists of corporate and government bonds and fixed income derivatives.
(4): Consists of property funds and trusts holding direct real estate investments.
(5): Consists of limited partnerships, private equity and hedge funds.

The following table presents the changes in the Level 3 fair-value category in the Company's U.K. and non-U.S. pension plans for the years ended December 31, 2012 and December 31, 2011 (in millions):

	Fair Value Measurements Using Level 3 Inputs

	Global			Fixed			Annuities			Real Estate			Alternative Investments		Total

Balance at January 1, 2011	$	162		$	40		$	380		$	127		$	218	$	927
Actual return on plan assets:
Relating to assets still held at December 31, 2011		—			—			35			3			—		38
Relating to assets sold during 2011		—			—			—			—			1		1
Purchases, sales and settlements—net		—			—			—			2			86		88
Transfers in/(out) of Level 3 (1)		(162	)		(40	)		—			1			41		(160	)
Foreign exchange		—			—			4			1			—		5

Balance at December 31, 2011		—			—			419			134			346		899
Actual return on plan assets:
Relating to assets still held at December 31, 2012		—			—			(4	)		(1	)		19		14
Relating to assets sold during 2012		—			—			—			1			11		12
Purchases, sales and settlements—net		—			—			137			(32	)		68		173
Transfers in/(out) of Level 3		—			—			—			(18	)		—		(18	)
Foreign exchange		—			—			16			3			13		32

Balance at December 31, 2012	$	—		$	—		$	568		$	87		$	457	$	1,112

(1): During 2011, a pooled global equity fund with a fair value of $162 million was transferred from Level 3 to Level 2 due to increased observability of the inputs. Additionally, a fund of funds with a fair value of $40 million was reclassified within Level 3 to be consistent with other similar fund of funds classified as Alternative Investments within the fair value hierarchy.

Investment Policy and Strategy

The U.S. investment policy, as established by the Aon Retirement Plan Governance and Investment Committee ("RPGIC"), seeks reasonable asset growth at prudent risk levels within target allocations, which are 49% equity investments, 30% fixed income investments, and 21% other investments. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to be within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the RPGIC. The investment policies for international plans are generally established by the local pension plan trustees and seek to maintain the plans' ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At December 31, 2012, the weighted average targeted allocation for the U.K. and non-U.S. plans was 45% for equity investments and 55% for fixed income investments.

Cash Flows

Contributions

Based on current assumptions, the Company expects to contribute approximately $167 million and $381 million, respectively, to its U.S. and non-U.S. pension plans during 2013.

Estimated Future Benefit Payments

Estimated future benefit payments for plans are as follows at December 31, 2012 (in millions):

	U.K. and Non-U.S.		U.S.


2013	$	184	$	145
2014		190		141
2015		199		147
2016		213		154
2017		221		153
2018 – 2022		1,336		787

U.S. and Canadian Other Post-Retirement Benefits

The following table provides an overview of the accumulated projected benefit obligation, fair value of plan assets, funded status and net amount recognized as of December 31, 2012 and 2011 for the Company's other post-retirement benefit plans located in the U.S. and Canada (in millions):

	2012			2011


Accumulated projected benefit obligation	$	134		$	134
Fair value of plan assets		20			20

Funded status		(114	)		(114	)

Unrecognized prior-service credit		(15	)		(8	)
Unrecognized loss		37			25

Net amount recognized	$	(92	)	$	(97	)

Other information related to the Company's other post-retirement benefit plans are as follows:

	2012			2011			2010


Net periodic benefit cost recognized (millions)	$	1		$	6		$	4
Weighted-average discount rate used to determine future benefit obligations		3.67 – 4.00	%		4.33 – 5.00	%		4.92 – 6.00	%
Weighted-average discount rate used to determine net periodic benefit costs		4.33 – 5.00	%		4.92 – 6.00	%		5.90 – 6.19	%

Amounts recognized in Accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2012 are $37 million and $15 million of net loss and prior service credit, respectively. The amount in Accumulated other comprehensive income expected to be recognized as a component of net periodic benefit cost during 2013 is $1 million and $5 million of net loss and prior service credit, respectively.

Based on current assumptions, the Company expects:

•

To contribute $6 million to fund material other post-retirement benefit plans during 2013.

•

Estimated future benefit payments will be approximately $8 million each year for 2013 through 2017, and $41 million in aggregate for 2018-2022.

The accumulated post-retirement benefit obligation is increased by $3 million and decreased by $3 million by a respective 1% increase or decrease to the assumed health care trend rate. The service cost and interest cost components of net periodic benefits cost is increased by $0.2 million and decreased by $0.2 million by a respective 1% increase or decrease to the assumed healthcare trend rate.

For most of the participants in the U.S. plan, Aon's liability for future plan cost increases for pre-65 and Medical Supplement plan coverage is limited to 5% per annum. Although the net employer trend rates range from 8% to 5% per year, because of this cap, these plans are effectively limited to 5% per year in the future. During 2012, Aon recognized a plan amendment that phases out post-retirement coverage in its U.S. plan over the next two years. The amendment resulted in recognition of prior service credits of $5 million in 2012 in net periodic benefit cost. The impact of this amendment also resulted in a new prior service credit of $10 million which will impact net periodic benefit cost in future periods as it is recognized over the average remaining service life of the employees.