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Employee Benefits
12 Months Ended
Dec. 31, 2012
Defined Benefit Pension Plans and Defined Benefit Postretirement Plans Disclosure [Abstract]  
Employee Benefits
Employee Benefits
State Street Bank and certain of its U.S. subsidiaries participate in a non-contributory, tax-qualified defined benefit pension plan. Since January 1, 2008, when the plan was amended, we no longer make employer contribution credits to the plan; employee account balances earn annual interest credits until the employee’s retirement. In addition to the defined benefit pension plan, we have non-qualified unfunded supplemental retirement plans, referred to as SERPs, that provide certain officers with defined pension benefits in excess of allowable qualified plan limits. Non-U.S. employees participate in local defined benefit plans. State Street Bank and certain of its U.S. subsidiaries participate in a post-retirement plan that provides health care and insurance benefits for certain retired employees.
The following tables present combined information for the U.S. and non-U.S. defined benefit plans, and information for the post-retirement plan, as of the December 31 measurement date:
 
 
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
 
Post-Retirement
Plan
December 31,
2012
 
2011
 
2012
 
2011
(In millions)
 
 
 
 
 
 
 
Benefit obligations:
 
 
 
 
 
 
 
Beginning of year
$
1,017

 
$
905

 
$
112

 
$
114

Service cost
11

 
9

 
6

 
6

Interest cost
45

 
47

 
5

 
6

Employee contributions
1

 
1

 
—

 
—

Plan amendments
(2
)
 
(4
)
 
—

 
—

Acquisitions and transfers
—

 
30

 
—

 
—

Actuarial losses (gains)
85

 
67

 
14

 
(5
)
Benefits paid
(36
)
 
(28
)
 
(6
)
 
(9
)
Expenses paid
(1
)
 
(1
)
 
—

 
—

Settlements
(1
)
 
(1
)
 
—

 
—

Special termination benefits
—

 
—

 
1

 
—

Foreign currency translation
10

 
(8
)
 
—

 
—

End of year
$
1,129

 
$
1,017

 
$
132

 
$
112

 
 
 
 
 
 
 
 
Plan assets at fair value:
 
 
 
 
 
 
 
Beginning of year
$
928

 
$
884

 
$
—

 
$
—

Actual return on plan assets
70

 
50

 
—

 
—

Employer contributions
104

 
8

 
6

 
9

Acquisitions and transfers
—

 
21

 
—

 
—

Benefits paid
(36
)
 
(28
)
 
(6
)
 
(9
)
Expenses paid
(1
)
 
(1
)
 
—

 
—

Plan settlements
(1
)
 
(1
)
 
—

 
—

Foreign currency translation
11

 
(5
)
 
—

 
—

End of year
$
1,075

 
$
928

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Accrued benefit expense:
 
 
 
 
 
 
 
Funded status (plan assets less benefit obligations)
$
(54
)
 
$
(89
)
 
$
(132
)
 
$
(112
)
Net accrued benefit expense
$
(54
)
 
$
(89
)
 
$
(132
)
 
$
(112
)

 
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
 
Post-
Retirement
Plan
(In millions)
2012
 
2011
 
2012
 
2011
Amounts recognized in consolidated statement of condition as of December 31:
 
 
 
 
 
 
 
Non-current assets
$
40

 
$
45

 
$
—

 
$
—

Current liabilities
(1
)
 
(1
)
 
(8
)
 
(6
)
Non-current liabilities
(93
)
 
(133
)
 
(124
)
 
(106
)
Net accrued amount recognized in statement of condition
$
(54
)
 
$
(89
)
 
$
(132
)
 
$
(112
)
Amounts recognized in accumulated other comprehensive income:
 
 
 
 
 
 
 
Prior service credit
$
—

 
$
—

 
$
3

 
$
3

Net loss
(365
)
 
(307
)
 
(49
)
 
(36
)
Accumulated other comprehensive loss
(365
)
 
(307
)
 
(46
)
 
(33
)
Cumulative employer contributions in excess of net periodic benefit cost
311

 
218

 
(86
)
 
(79
)
Net obligation recognized in our consolidated statement of condition
$
(54
)
 
$
(89
)
 
$
(132
)
 
$
(112
)
Accumulated benefit obligation
$
1,105

 
$
999

 
$
—

 
$
—

Actuarial assumptions (U.S. Plans):
 
 
 
 
 
 
 
Used to determine benefit obligations as of December 31:
 
 
 
 
 
 
 
Discount rate
3.75
%
 
4.50
%
 
3.75
%
 
4.50
%
Used to determine periodic benefit cost for the years ended December 31:
 
 
 
 
 
 
 
Discount rate
4.50
%
 
5.50
%
 
4.50
%
 
5.50
%
Rate of increase for future compensation
—

 
4.50

 
—

 
—

Expected long-term rate of return on plan assets
6.75

 
7.25

 
—

 
—

Assumed health care cost trend rates as of December 31:
 
 
 
 
 
 
 
Cost trend rate assumed for next year
—

 
—

 
8.08
%
 
7.80
%
Rate to which the cost trend rate is assumed to decline
—

 
—

 
4.50

 
4.50

Year that the rate reaches the ultimate trend rate
—

 
—

 
2029

 
2029


The following table presents expected benefit payments for the next ten years:
 
(In millions)
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
 
Non-
Qualified
SERPs
 
Post-Retirement
Plan
2013
$
33

 
$
15

 
$
8

2014
34

 
14

 
8

2015
36

 
15

 
8

2016
37

 
14

 
8

2017
27

 
13

 
8

2018-2022
183

 
59

 
43




The accumulated benefit obligation for all of our U.S. defined benefit pension plans was $947 million and $872 million as of December 31, 2012 and 2011, respectively.
To develop the assumption of the expected long-term rate of return on plan assets, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This analysis resulted in the determination of the expected long-term rate of return on plan assets of 6.75% for the year ended December 31, 2012.
Plan Assets:
The primary purpose of the investment policy and strategy is to invest plan assets in a manner that provides for sufficient resources to be available to meet the plans’ benefit and expense obligations when due. The portfolio, together with contributions, is intended to provide adequate liquidity to make benefit payments when due while preserving principal and maximizing returns, given appropriate risk constraints. A secondary but important objective is to enhance the plans’ long-term viability through the generation of competitive returns that will limit the financial burden on State Street and contribute to our ability to maintain our retirement program.
Plan assets are managed solely in the interests of the participants and consistent with generally recognized fiduciary standards, including all applicable provisions of ERISA and other applicable laws and regulations. Management believes that its investment policy satisfies the standards of prudence and diversification prescribed by ERISA. Plan assets are diversified across asset classes to achieve a balance between risk and return and between income and growth of assets through capital appreciation, to produce a prudently well-diversified portfolio.
With respect to the U.S. pension plan, the plan assets are primarily invested in pooled investment funds of State Street Bank. The measurement of the fair value of the participation units owned by the plans is based on the redemption value on the last business day of the plan year, where values are based on the fair value of the underlying assets in each fund. The net asset value of units of participation in other funds is based on the fair value of the underlying securities in each fund.
Alternative investments are composed of investments in limited liability corporations and limited liability partnerships. The fair value of these investments is measured by the fund managers, and represent the plans’ proportionate share of the estimated fair value of the underlying net assets of the limited liability corporations.
The methods described above may produce a fair-value calculation that may not be indicative of net realizable value or be reflective of future fair values. Furthermore, while management believes that its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to measure the fair value of certain financial instruments could result in a different fair-value measurement as of the reporting date.
With respect to the U.K. pension plan, the plan assets are invested in sub-funds of Managed Pension Funds Limited, a U.K.-incorporated insurance vehicle of which the ultimate parent company is State Street. The fair value of these investments is measured based on the mid-market price of the underlying investments held by Managed Pension Funds Limited. This valuation method may produce a calculation that is not indicative of net realizable value or reflective of future fair values.
The following tables present, by level within the fair value hierarchy prescribed by GAAP, the plans’ assets measured at fair value on a recurring basis, and activity related to assets categorized in level 3, as of the dates and for the periods indicated:
 
 
Fair-Value Measurements on a Recurring Basis
as of December 31, 2012
(In millions)
Quoted Market Prices in
Active Markets
(Level 1)
 
Pricing Methods with
Significant Observable
Market Inputs
(Level 2)
 
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
 
Total Net
Carrying Value
Assets:
 
 
 
 
 
 
 
U.S. Pension Plan
 
 
 
 
 
 
 
Investments in pooled investment funds:
 
 
 
 
 
 
 
Domestic large cap equity
—

 
$
144

 
$
—

 
$
144

Domestic small cap equity
—

 
16

 
—

 
16

Developed international equities
—

 
80

 
—

 
80

Emerging markets equity
—

 
42

 
—

 
42

Investment grade fixed-income
—

 
390

 
—

 
390

High yield fixed-income
—

 
32

 
—

 
32

Real estate investment trusts
—

 
24

 
—

 
24

Alternative investments (commingled fund)
—

 
—

 
5

 
5

Alternative investments (fund of funds)
—

 
—

 
14

 
14

Private equity
—

 
—

 
2

 
2

Cash
—

 
10

 
—

 
10

Total U.S. Pension Plan
—

 
738

 
21

 
759

 
 
 
 
 
 
 
 
U.K. Pension Plan
 
 
 
 
 
 
 
Investments in pooled investment funds:
 
 
 
 
 
 
 
Developed international equity
—

 
30

 
—

 
30

U.K. fixed-income
—

 
177

 
—

 
177

Emerging market index
—

 
9

 
—

 
9

Alternative investments
—

 
—

 
39

 
39

Total U.K. Pension Plan
—

 
216

 
39

 
255

 
 
 
 
 
 
 
 
Other Non-U.S. Pension Plans (Excluding U.K.)
 
 
 
 
 
 
 
Insurance group annuity contracts
—

 
—

 
61

 
61

Total Other Non-U.S. Pension Plans (Excluding U.K.)
—

 
—

 
61

 
61

Total assets carried at fair value
—

 
$
954

 
$
121

 
$
1,075



 
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
 
U.S. Pension Plan
 
U.K. Pension Plan
 
Non-U.S. Pension Plans
(Excluding U.K.)
(In millions)
Alternative
Investments
 
Private
Equity
 
Alternative
Investments
 
Insurance group
annuity contract
Assets:
 
 
 
 
 
 
 
Fair value as of December 31, 2011
$
19

 
$
2

 
$
32

 
$
57

Purchases and sales, net
—

 
—

 
3

 
4

Unrealized gains
—

 
—

 
4

 
—

Fair value as of December 31, 2012
$
19

 
$
2

 
$
39

 
$
61


 
Fair-Value Measurements on a Recurring Basis
as of December 31, 2011
(In millions)
Quoted Market Prices in
Active Markets
(Level 1)
 
Pricing Methods with
Significant Observable
Market Inputs
(Level 2)
 
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
 
Total Net
Carrying Value
Assets:
 
 
 
 
 
 
 
U.S. Pension Plan
 
 
 
 
 
 
 
Investments in pooled investment funds:
 
 
 
 
 
 
 
Domestic large cap equity
—

 
$
129

 
$
—

 
$
129

Domestic small cap equity
—

 
14

 
—

 
14

Developed international equities
—

 
62

 
—

 
62

Emerging markets equity
—

 
28

 
—

 
28

Investment grade fixed-income
—

 
311

 
—

 
311

High yield fixed-income
—

 
26

 
—

 
26

Real estate investment trusts
—

 
23

 
—

 
23

Alternative investments (commingled fund)
—

 
—

 
5

 
5

Alternative investments (fund of funds)
—

 
—

 
14

 
14

Private equity
—

 
—

 
2

 
2

Cash
—

 
6

 
—

 
6

Total U.S. Pension Plan
—

 
599

 
21

 
620

 
 
 
 
 
 
 
 
U.K. Pension Plan
 
 
 
 
 
 
 
Investments in insurance vehicles:
 
 
 
 
 
 
 
Developed international equity
—

 
24

 
—

 
24

U.K. fixed-income
—

 
187

 
—

 
187

Emerging market index
—

 
8

 
—

 
8

Alternative investments
—

 
—

 
32

 
32

Total U.K. Pension Plan
—

 
219

 
32

 
251

 
 
 
 
 
 
 
 
Other Non-U.S. Pension Plans (Excluding U.K.)
 
 
 
 
 
 
 
Insurance group annuity contracts
—

 
—

 
57

 
57

Total Other Non-U.S. Pension Plans (Excluding U.K.)
—

 
—

 
57

 
57

Total assets carried at fair value
$
—

 
$
818

 
$
110

 
$
928



 
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2011
 
U.S. Pension Plan
 
U.K. Pension Plan
 
Non-U.S. Pension Plans
(Excluding U.K.)
(In millions)
Alternative
Investments
 
Private
Equity
 
Alternative
Investments
 
Insurance group
annuity contract
Assets:
 
 
 
 
 
 
 
Fair value as of December 31, 2010
$
19

 
$
2

 
$
33

 
$
36

Purchases and sales, net
—

 
—

 
(1
)
 
24

Unrealized losses
—

 
—

 
—

 
(3
)
Fair value as of December 31, 2011
$
19

 
$
2

 
$
32

 
$
57


The plans’ investment strategy is intended to reduce the concentration risk of an adverse influence on investment values from the poor performance of a small number of individual investments through diversification of the assets. The significant holdings of the plans are reviewed quarterly so that the plans do not exceed the allowable maximum amount per issuer. The plans are re-balanced monthly so that actual weights of the plan assets are within the allowable ranges set forth in the investment policy. The plans’ operating cash flows (benefit payments, expenses, contributions) are used to bring the weights back into line on a monthly basis. If these cash flows do not provide enough benefit, additional re-balancing is effected.
Expected employer contributions to the tax-qualified U.S. and non-U.S. defined benefit pension plans, SERPs, and post-retirement plan for the year ending December 31, 2013 are $7 million, $15 million and $8 million, respectively.
State Street has unfunded SERPs that provide certain officers with defined pension benefits in excess of qualified plan limits imposed by U.S. federal tax law.
The following table presents information for the SERPs for the years ended December 31:
 
 
Non-Qualified SERPs
(In millions)
2012
 
2011
Benefit obligations:
 
 
 
Beginning of year
$
173

 
$
165

Service cost
1

 
1

Interest cost
7

 
8

Actuarial gain
13

 
23

Benefits paid
(2
)
 
(2
)
Settlements
(20
)
 
(22
)
End of year
$
172

 
$
173

 
 
 
 
Accrued benefit expense:
 
 
 
Funded status (plan assets less benefit obligations)
$
(172
)
 
$
(173
)
Net accrued benefit expense
$
(172
)
 
$
(173
)
Amounts recognized in consolidated statement of condition as of December 31:
 
 
 
Current liabilities
$
(15
)
 
$
(27
)
Non-current liabilities
(157
)
 
(146
)
Net accrued amount recognized in our consolidated statement of condition
$
(172
)
 
$
(173
)
 
 
 
 
Amounts recognized in accumulated other comprehensive income:
 
 
 
Net loss
$
(59
)
 
$
(58
)
Accumulated other comprehensive loss
(59
)
 
(58
)
Cumulative employer contributions in excess of net periodic benefit cost
(113
)
 
(115
)
Net obligation recognized in our consolidated statement of condition
$
(172
)
 
$
(173
)
 
 
 
 
Accumulated benefit obligation
$
172

 
$
173

 
 
 
 
Actuarial assumptions:
 
 
 
Assumptions used to determine benefit obligations and periodic benefit costs are consistent with those noted for the post-retirement plan, with the following exceptions:
 
 
 
Rate of increase for future compensation—SERPs
—
%
 
—
%
Rate of increase for future compensation—Executive SERPs
10.00

 
10.00


For those defined benefit plans that have accumulated benefit obligations in excess of plan assets as of December 31, 2012 and 2011, the accumulated benefit obligations were $1.1 billion and $960 million, respectively, and the plan assets were $810 million and $671 million, respectively. For those defined benefit plans that have projected benefit obligations in excess of plan assets as of December 31, 2012 and 2011, the projected benefit obligations were $1.1 billion and $981 million, respectively, and the plan assets were $814 million and $674 million, respectively.
If trend rates for health care costs were increased by 1%, the post-retirement benefit obligation as of December 31, 2012 would have increased 7%, and the aggregate expense for service and interest costs for 2012 would have increased 11%. Conversely, if trend rates for health care costs were decreased by 1%, the post-retirement benefit obligation as of December 31, 2012 would have decreased 6%, and the aggregate expense for service and interest costs for 2012 would have decreased 9%. In addition, as part of recent corporate actions, a special termination benefit was provided to affected participants who were eligible for optional post-retirement medical coverage.
The following table presents the actuarially determined expense for our U.S. and non-U.S. defined benefit plans, post-retirement plan and SERPs for the years ended December 31:

  
Primary U.S. and Non-U.S.
Defined Benefit Plans
 
Post-Retirement
Plan
Years Ended December 31,
2012
 
2011
 
2010
 
2012
 
2011
 
2010
(In millions)
 
 
 
 
 
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
11

 
$
9

 
$
11

 
$
6

 
$
6

 
$
5

Interest cost
45

 
47

 
44

 
5

 
6

 
6

Assumed return on plan assets
(59
)
 
(58
)
 
(55
)
 
—

 
—

 
—

Amortization of prior service cost
(2
)
 
—

 
—

 
—

 
—

 
—

Amortization of net loss
17

 
12

 
7

 
1

 
1

 
2

Net periodic benefit cost
12

 
10

 
7

 
12

 
13

 
13

Special termination benefits
—

 
—

 
—

 
1

 
—

 
—

Total expense
$
12

 
$
10

 
$
7

 
$
13

 
$
13

 
$
13

Estimated amounts that will be amortized from accumulated other comprehensive income over the next fiscal year:
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(24
)
 
$
(17
)
 
$
(13
)
 
$
(2
)
 
$
(1
)
 
$
(2
)
Estimated amortization
$
(24
)
 
$
(17
)
 
$
(13
)
 
$
(2
)
 
$
(1
)
 
$
(2
)

 
Non-Qualified SERPs
Years Ended December 31,
2012
 
2011
 
2010
(In millions)
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
1

Interest cost
7

 
8

 
10

Amortization of net loss
5

 
3

 
5

Net periodic benefit cost
13

 
12

 
16

Settlements
6

 
7

 
8

Total expense
$
19

 
$
19

 
$
24

Estimated amounts that will be amortized from accumulated other comprehensive income over the next fiscal year:
 
 
 
 
 
Net loss
$
(6
)
 
$
(5
)
 
$
(3
)
Estimated amortization
$
(6
)
 
$
(5
)
 
$
(3
)

Certain of our U.S. employees are eligible to contribute a portion of their pre-tax salary to a 401(k) savings plan, or post-tax Roth contributions, or both, up to the annual IRS limit. Our matching portion of these contributions is paid in cash, and the related compensation and employee benefits expense recorded in our consolidated statement of income was $70 million, $77 million, and $71 million for the years ended December 31, 2012, 2011 and 2010, respectively. Effective April 1, 2012, the matching contribution in the U.S. was changed from 6% to 5%. In addition, employees in certain non-U.S. offices participate in other local plans. Expenses related to these plans were $65 million, $65 million, and $45 million for the years ended December 31, 2012, 2011 and 2010.
We have a defined contribution supplemental executive retirement plan, referred to as a DC SERP, which provides for a discretionary contribution of cash and/or equity to certain executive officers. The amount is subject to certain vesting requirements as provided in the plan. We recorded compensation and employee benefits expense of $11 million, $10 million, and $10 million for the years ended December 31, 2012, 2011, and 2010, respectively, in our consolidated statement of income related to this DC SERP.
Shares of common stock and interest in the savings plan may be acquired by eligible employees through the Employee Stock Ownership Plan, referred to as an ESOP. The ESOP is a non-leveraged plan. Employee benefits expense is equal to the contribution specified by the plan formula and is composed of the cash contributed for the purchase of common stock on the open market or the fair value of the shares contributed from treasury stock. Dividends on shares held by the ESOP are charged to retained earnings, and shares are treated as outstanding for the calculation of earnings per common share.