Employee Benefit Plans

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans [Abstract]

EMPLOYEE BENEFIT PLANS

NOTE 12. EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLANS

We have both funded and unfunded noncontributory defined benefit pension plans (“Pension Benefits”) covering certain employees primarily in the U.S., the U.K., Germany and Canada. Under the provisions of the U.S. qualified pension plan, a hypothetical cash balance account is established for each participant. Such accounts receive pay credits on a quarterly basis based on a percentage according to the employee’s age on the last day of the quarter applied to quarterly eligible compensation. In addition a cash balance account receives interest credits based on the balance in the account on the last day of the quarter. The U.S. qualified pension plan also includes frozen accrued benefits for participants in legacy defined benefit plans. For the majority of the participants in the U.K. pension plans, we do not accrue benefits as the plans are frozen; however, there are a limited number of members who still accrue future benefits on a defined benefit basis. The Germany pension plan is an unfunded plan where benefits are based on creditable years of service, creditable pay and accrual rates. The Canada pension plan was frozen as of December 31, 2010, and we no longer accrue on a defined benefit basis. We also provide certain postretirement health care benefits (“other postretirement benefits”), through an unfunded plan, to substantially all U.S. employees who retire and have met certain age and service requirements.

Funded Status

Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans. For pension plans, the benefit obligation is the projected benefit obligation (“PBO”) and for the other post-retirement benefit plan, the benefit obligation is the accumulated postretirement benefit obligation.

	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010			2011			2010
Change in benefit obligation:
Benefit obligation at beginning of year	$	444		$	375		$	593		$	327		$	166		$	157
Service cost		38			32			9			8			8			10
Interest cost		21			22			33			26			8			9
Actuarial loss		43			31			25			4			28			10
Benefits paid		(19	)		(47	)		(16	)		(12	)		(14	)		(15	)
Curtailment		-			-			(4	)		(1	)		-			-
Acquisitions of businesses		-			34			2			253			-			27
Plan amendments		-			-			-			-			-			(32	)
Other		(3	)		(3	)		1			2			-			-
Exchange rate adjustments		-			-			-			(14	)		-			-
Benefit obligation at end of year		524			444			643			593			196			166
Change in plan assets:
Fair value of plan assets at beginning of year		416			346			474			248			-			-
Actual return on plan assets		(5	)		48			38			36			-			-
Employer contributions		43			72			28			52			14			15
Benefits paid		(19	)		(47	)		(16	)		(12	)		(14	)		(15	)
Acquisitions of businesses		-			-			-			160			-			-
Other		(2	)		(3	)		1			1			-			-
Exchange rate adjustments		-			-			1			(11	)		-			-
Fair value of plan assets at end of year		433			416			526			474			-			-
Funded status - underfunded at end of year	$	(91	)	$	(28	)	$	(117	)	$	(119	)	$	(196	)	$	(166	)
Accumulated benefit obligation	$	491		$	421		$	616		$	553		$	196		$	166

The amounts recognized in the consolidated balance sheet consist of the following at December 31:

	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010			2011			2010
Noncurrent assets	$	-		$	-		$	6		$	10		$	-		$	-
Current liabilities		(3	)		(3	)		(5	)		(5	)		(16	)		(16	)
Noncurrent liabilities		(88	)		(25	)		(118	)		(124	)		(180	)		(150	)
Net amount recognized	$	(91	)	$	(28	)	$	(117	)	$	(119	)	$	(196	)	$	(166	)

The funded status position represents the difference between the benefit obligation and the plan assets. The PBO for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The accumulated benefit obligation (“ABO”) is the actuarial present value of pension benefits attributed to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels.

Information for the plans with ABOs in excess of plan assets is as follows at December 31:

	U.S. Pension Benefits				Non-U.S. Pension Benefits				Other Postretirement Benefits
	2011		2010		2011		2010		2011		2010
Projected benefit obligation	$	524	$	20	$	345	$	331		n/a		n/a
Accumulated benefit obligation	$	491	$	20	$	322	$	294	$	196	$	166
Fair value of plan assets	$	433		-	$	225	$	203		n/a		n/a

Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31:

	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010			2011			2010
Discount rate		4.2	%		4.9	%		5.0	%		5.5	%		3.8	%		4.9	%
Rate of compensation increase		5.4	%		5.4	%		4.4	%		4.3	%		n/a			n/a
Social security increase		2.8	%		2.8	%		2.1	%		2.9	%		n/a			n/a

The development of the discount rate for our U.S. plans and substantially all non-U.S. plans was based on a bond matching model, whereby a hypothetical bond portfolio of high-quality, fixed-income securities is selected that will match the cash flows underlying the projected benefit obligation.

Accumulated Other Comprehensive Loss

The amount recorded before-tax in accumulated other comprehensive loss related to employee benefit plans consists of the following at December 31:

	U.S. Pension Benefits				Non-U.S. Pension Benefits				Other Postretirement Benefits
	2011		2010		2011		2010		2011			2010
Net loss	$	219	$	149	$	130	$	114	$	38		$	10
Net prior service cost (credit)		2		3		-		-		(28	)		(31	)
Total	$	221	$	152	$	130	$	114	$	10		$	(21	)

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2012 are $22 million and less than one million, respectively. The estimated net loss and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2012 are $1 million and $2 million, respectively.

Net Periodic Benefit Cost

The components of net periodic cost (benefit) are as follows for the years ended December 31:

	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
	2011			2010			2009			2011			2010			2009			2011			2010		2009
Service cost	$	38		$	32		$	29		$	9		$	8		$	3		$	8		$	10	$	8
Interest cost		21			22			20			33			26			15			8			9		10
Expected return on plan assets		(31	)		(28	)		(25	)		(33	)		(23	)		(15	)		-			-		-
Amortization of prior service cost		-			-			1			-			-			-			(2	)		1		1
Amortization of net loss		10			11			14			4			4			2			-			-		-
Curtailment		-			-			1			(4	)		(1	)		-			-			-		-
Other		-			-			3			-			-			(1	)		-			-		-
Net periodic cost (benefit)	$	38		$	37		$	43		$	9		$	14		$	4		$	14		$	20	$	19

Weighted average assumptions used to determine net periodic cost (benefit) for these plans are as follows for the years ended December 31:

	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
	2011			2010			2009			2011			2010			2009			2011			2010			2009
Discount rate		4.9	%		5.9	%		6.3	%		5.5	%		5.6	%		6.4	%		4.9	%		5.9	%		6.3	%
Expected long-term return on plan assets		7.8	%		7.8	%		8.5	%		6.7	%		6.6	%		7.2	%		n/a			n/a			n/a
Rate of compensation increase		5.4	%		4.0	%		4.0	%		4.3	%		4.2	%		4.0	%		n/a			n/a			n/a
Social security increase		2.8	%		3.5	%		3.5	%		2.9	%		3.2	%		3.1	%		n/a			n/a			n/a

In selecting the expected rate of return on plan assets, we consider the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of these plans. This includes considering the trusts’ asset allocation and the expected returns likely to be earned over the life of the plans.

Health Care Cost Trend Rates

Assumed health care cost trend rates have a significant effect on the amounts reported for other postretirement benefits. As of December 31, 2011, the health care cost trend rate was 8.5% for employees under age 65 and 7.0% for participants over age 65, with each declining gradually each successive year until it reaches 4.5% for both employees under age 65 and over age 65 in 2022. A one percentage point change in assumed health care cost trend rates would have had the following effects on 2011:

	One Percentage Point Increase		One Percentage Point Decrease
Effect on total of service and interest cost components	$	0.3	$	(0.3	)
Effect on postretirement welfare benefit obligation	$	6.7	$	(6.3	)

Plan Assets

We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist us in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.

All investments are held in the form of units of funds. The funds hold underlying securities and are redeemable at the measurement date. Investments in equities and fixed-income funds are generally measured at fair value based on daily closing prices provided by active exchanges or on the basis of observable, market-based inputs. Investments in hedge funds are generally measured at fair value on the basis of their net asset values, which are provided by the investment sponsor or third party administrator. The fair values of investments in real estate funds are based on appraised values developed using comparable market transactions or discounted cash flows.

U.S. Qualified Pension Plan

The investment policy of the U.S. qualified pension plan (the “U.S. Plan”) was developed after examining the historical relationships of risk and return among asset classes and the relationship between the expected behavior of the U.S. Plan’s assets and liabilities. The investment policy of the U.S. Plan is designed to provide the greatest probability of meeting or exceeding the U.S. Plan’s objectives at the lowest possible risk.

In establishing its risk tolerance, the investment committee for the U.S. Plan (“U.S. Committee”) considers its ability to withstand short-term and intermediate-term volatility in market conditions. The U.S. Committee also reviews the long-term characteristics of various asset classes, focusing on balancing risk with expected return. Accordingly, the U.S. Committee selected the following five asset classes as allowable investments for the assets of the U.S. Plan: U.S. equities, U.S. fixed-income securities, non-U.S. equities, real estate and hedge funds.

The table below presents the fair values of the assets in our U.S. Plan by asset category and by levels of fair value at December 31:

	2011								2010
Asset Category	Total Asset Value		Level One		Level Two		Level Three		Total Asset Value		Level One		Level Two		Level Three
Cash and Cash Equivalents	$	6	$	-	$	6	$	-	$	95	$	-	$	95	$	-
Fixed Income (1)		96		-		96		-		99		-		99		-
Non-U.S. Equity (2)		104		-		104		-		93		-		93		-
U.S. Equity (3)		104		-		104		-		61		-		61		-
Hedge Funds (4)		110		-		-		110		-		-		-		-
Real Estate Funds (5)		5		-		-		5		14		-		-		14
Real Estate Investment Trust Equity		8		-		8		-		4		-		4		-
U.S. Small Cap Equity (6)		-		-		-		-		50		-		50		-
Total	$	433	$	-	$	318	$	115	$	416	$	-	$	402	$	14

⁽¹⁾  A multi-manager strategy investing in fixed income securities. The current allocation includes: 22% in corporate bonds; 17% in mutual funds (corporate bonds); 16% in government mortgage-backed securities; 14% in mutual funds (non-U.S. government bonds); 10% in government bonds; 6% in mutual funds (government bonds); 5% in asset-backed securities; 4% in municipal bonds and 6% in cash and other securities.

⁽²⁾  Multi-manager strategy investing in common stocks of non-U.S. listed companies using both value and growth approaches.

⁽³⁾  Multi-manager strategy investing in common stocks of U.S. listed companies using value and growth approaches.

⁽⁴⁾  Strategies taking long and short positions in equities, fixed income securities, currencies and derivative contracts.

⁽⁵⁾  Strategy investing in the global private real estate secondary market using a value-based investment approach.

⁽⁶⁾  Multi-manager strategy investing in common stocks of smaller U.S. listed companies using both value and growth approaches.

Non-U.S. Pension Plans

The investment policies of our pension plans with plan assets, which are primarily in Canada and the U.K., (the “Non-U.S. Plans”), cover the asset allocations that the governing boards believe are the most appropriate for these Non-U.S. Plans in the long term, taking into account the nature of the liabilities they expect to incur. The suitability of asset allocations and investment policies are reviewed periodically to ensure alignment with plan liabilities.

The table below presents the fair values of the assets in our Non-U.S. Plans by asset category and by levels of fair value at December 31:

	2011								2010
Asset Category	Total Asset Value		Level One		Level Two		Level Three		Total Asset Value		Level One		Level Two		Level Three
Cash and Cash Equivalents	$	1	$	-	$	1	$	-	$	31	$	-	$	31	$	-
Asset Allocation (1)		102		-		102		-		80		-		80		-
Bonds - U.K. - Corporate (2)		56		-		56		-		40		-		40		-
Bonds - U.K. - Government (3)		154		-		154		-		114		-		114		-
Equities (4)		179		-		179		-		174		-		174		-
Real Estate Funds (5)		19		-		-		19		19		-		-		19
Insurance contracts		15		-		-		15		16		-		-		16
Total	$	526	$	-	$	492	$	34	$	474	$	-	$	439	$	35

⁽¹⁾  Invests in mixes of global common stocks and bonds to achieve broad diversification.

⁽²⁾  Invests passively in Sterling-denominated investment grade corporate bonds.

⁽³⁾  Invests passively in Sterling-denominated government issued bonds.

⁽⁴⁾  Invests in broad equity funds based on securities offered in various regions or countries. Equity funds are allocated by region as follows: 48% Global, 28% U.K., 8% North America, 8% Asia Pacific, and 8% Europe.

⁽⁵⁾  Invests in a diversified range of property throughout the U.K., principally in the retail, office and industrial/warehouse sectors.

The following table presents the changes in the fair value of assets using level 3 unobservable inputs:

	U.S. Property Fund			U.S. Hedge Fund			Non-U.S. Property Fund		Non-U.S. Insurance Contracts			Total
Beginning balance at December 31, 2008	$	19		$	-		$	18	$	7		$	44
Unrealized gains		-			-			1		1			2
Unrealized losses		(6	)		-			-		-			(6	)
Sales		-			-			-		(1	)		(1	)
Ending balance at December 31, 2009		13			-			19		7			39
Unrealized gains		1			-			-		-			1
Purchases		-			-			-		9			9
Ending balance at December 31, 2010		14			-			19		16			49
Unrealized gains		2			5			-		-			7
Unrealized losses		-			(5	)		-		-			(5	)
Sales		(15	)		-			-		(2	)		(17	)
Purchases		4			110			-		1			115
Ending balance at December 31, 2011	$	5		$	110		$	19	$	15		$	149

Expected Cash Flows

For all pension plans, we make annual contributions to the plans in amounts equal to or greater than amounts necessary to meet minimum governmental funding requirements. In 2012, we expect to contribute between $60 million and $65 million to our U.S. pension plans and between $20 million and $30 million to the non-U.S. pension plans. In 2012, we also expect to make benefit payments related to other postretirement benefits of between $16 million and $18 million.

The following table presents the expected benefit payments over the next ten years. The U.S. and non-U.S. pension benefit payments are made by the respective pension trust funds. The other postretirement benefits are net of expected Medicare subsidies of approximately $2 million per year and are payments that are expected to be made by us.

Year	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
2012	$	28	$	16	$	17
2013	$	31	$	17	$	17
2014	$	35	$	20	$	17
2015	$	39	$	22	$	18
2016	$	42	$	25	$	19
2017-2021	$	263	$	157	$	106

DEFINED CONTRIBUTION PLANS

During the periods reported, generally all of our U.S. employees were eligible to participate in our sponsored 401(k) plans under the Internal Revenue Code of 1986, as amended (“Thrift Plans”). The Thrift Plans allow eligible employees to elect to contribute portions of their salaries to an investment trust. Employee contributions are matched by the Company in cash at the rate of $1.00 per $1.00 employee contribution for the first 5% to 6% of the employee’s salary and such contributions vest immediately. In addition, we make cash contributions for all eligible employees between 2% and 5% of their salary depending on the employee’s age. Such contributions are fully vested to the employee after three years of employment. The Thrift Plans provide several investment options, for which the employee has sole investment discretion. The Thrift Plans do not offer Baker Hughes common stock as an investment option. Our contributions to the Thrift Plans and several other non-U.S. defined contribution plans amounted to $189 million, $169 million and $129 million in 2011, 2010 and 2009, respectively.

For certain non-U.S. employees who are not eligible to participate in the Thrift Plans, we provide a non-qualified defined contribution plan that provides basically the same benefits as those provided in the Thrift Plans. In addition, we provide a non-qualified supplemental retirement plan (“SRP”) for certain officers and employees whose benefits under the Thrift Plans and/or the U.S. qualified pension plan are limited by federal tax law. The SRP also allows the eligible employees to defer a portion of their eligible compensation and provides for employer matching and base contributions pursuant to limitations. Both non-qualified plans are invested through trusts, and the assets and corresponding liabilities are included in our consolidated balance sheet. Our contributions to these non-qualified plans were $11 million for each of the three years in the period ended December 31, 2011.

In 2012, we estimate we will contribute between $263 million and $286 million to our defined contribution plans.

POSTEMPLOYMENT BENEFITS

We provide certain postemployment disability income, medical and other benefits to substantially all qualifying former or inactive U.S. employees. Income benefits for long-term disability are provided through a fully-insured plan. The continuation of medical and other benefits while on disability (“Continuation Benefits”) are provided through a qualified self-insured plan. The accrued postemployment liability for Continuation Benefits at December 31, 2011 and 2010 was $23 million and $15 million, respectively, and is included in other liabilities in our consolidated balance sheet.