Note 18. 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
(In millions)	2011			2010			2011			2010
Benefit obligations:
Beginning of year	$	905		$	808		$	114		$	112
Service cost		9			11			6			5
Interest cost		47			44			6			6
Employee contributions		1			1			—			—
Plan amendments		(4	)		—			—			—
Acquisitions and transfers		30			3			—			—
Actuarial losses (gains)		67			72			(5	)		(4	)
Benefits paid		(28	)		(28	)		(9	)		(7	)
Expenses paid		(1	)		—			—			—
Settlements		(1	)		(2	)		—			—
Foreign currency translation		(8	)		(4	)		—			—
Adjustment for rounding		—			—			—			2


End of year	$	1,017		$	905		$	112		$	114


Plan assets at fair value:
Beginning of year	$	884		$	828
Actual return on plan assets		50			84
Employer contributions		8			8		$	9		$	7
Acquisitions and transfers		21			(2	)		—			—
Benefits paid		(28	)		(28	)		(9	)		(7	)
Expenses paid		(1	)		—			—			—
Plan settlements		(1	)		(2	)		—			—
Foreign currency translation		(5	)		(4	)		—			—


End of year	$	928		$	884		$	—		$	—


Accrued benefit expense:
Funded status (plan assets less benefit obligations)	$	(89	)	$	(21	)	$	(112	)	$	(114	)


Net accrued benefit expense	$	(89	)	$	(21	)	$	(112	)	$	(114	)


	Primary U.S. and Non-U.S. Defined Benefit Plans						Post- Retirement Plan
(In millions)	2011			2010			2011			2010
Amounts recognized in our consolidated statement of condition as of December 31:
Non-current assets	$	45		$	26
Current liabilities		(1	)		(2	)	$	(6	)	$	(9	)
Non-current liabilities		(133	)		(45	)		(106	)		(105	)

Net accrued amount recognized in statement of condition	$	(89	)	$	(21	)	$	(112	)	$	(114	)

Amounts recognized in accumulated other comprehensive income:
Prior service credit				$	(4	)	$	3		$	4
Net loss	$	(307	)		(242	)		(36	)		(43	)

Accumulated other comprehensive loss		(307	)		(246	)		(33	)		(39	)
Cumulative employer contributions in excess of net periodic benefit cost		218			225			(79	)		(75	)

Net obligation recognized in our consolidated statement of condition	$	(89	)	$	(21	)	$	(112	)	$	(114	)

Accumulated benefit obligation	$	999		$	887

Actuarial assumptions (U.S. Plans):
Used to determine benefit obligations as of December 31:
Discount rate		4.50	%		5.50	%		4.50	%		5.50	%
Rate of increase for future compensation		—			4.50			—			—
Used to determine periodic benefit cost for the years ended December 31:
Discount rate		5.50	%		6.00	%		5.50	%		6.00	%
Rate of increase for future compensation		4.50			4.50			—			—
Expected long-term rate of return on plan assets		7.25			7.25			—			—
Assumed health care cost trend rates as of December 31:
Cost trend rate assumed for next year		—			—			7.80	%		7.62	%
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			2026

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
2012	$	33	$	27	$	6
2013		33		13		6
2014		34		12		7
2015		35		14		7
2016		27		13		7
2017-2021		169		59		35

The accumulated benefit obligation for all of our U.S. defined benefit pension plans was $872 million and $784 million at December 31, 2011, and 2010, 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 assumed long-term rate of return on plan assets of 7.25% for the year ended December 31, 2011.

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 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. These investments are valued at fair value as determined 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 determine 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. These investments are valued 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, 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 pooled investment funds:
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 Plans				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 at December 31, 2010	$	19	$	2	$	33		$	36
Purchases and sales, net		—		—		(1	)		24
Unrealized losses		—		—		—			(3	)

Fair value at December 31, 2011	$	19	$	2	$	32		$	57



	Fair Value Measurements on a Recurring Basis as of December 31, 2010
(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			$	120			$	120
Domestic small cap equity				15				15
Developed international equities				67				67
Emerging markets equity				38				38
Investment grade fixed-income				308				308
High yield fixed-income				31				31
Real estate investment trusts				21				21
Alternative investments (commingled fund)				—	$	5		5
Alternative investments (fund of funds)				—		14		14
Private equity				—		2		2
Cash				9		—		9

Total U.S. Pension Plan		—		609		21		630


U.K. Pension Plan
Investments in insurance vehicles:
Developed international equity				33		—		33
U.K. fixed-income				144		—		144
Emerging market index				8		—		8
Alternative investments				—		33		33

Total U.K. pension plan		—		185		33		218


Other Non-U.S. Pension Plans (Excluding U.K.)
Insurance group annuity contracts				—		36		36

Total Other Non-U.S. Pension Plans (Excluding U.K.)		—		—		36		36

Total assets carried at fair value		—	$	794	$	90	$	884



	Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2010
	U.S. Pension Plans				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 at December 31, 2009	$	13	$	2	$	24	$	31
Purchases and sales, net		4		—		7		1
Unrealized gains		2		—		2		4

Fair value at December 31, 2010	$	19	$	2	$	33	$	36

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 monitored each quarter so that the plans do not fall outside of the allowable maximum amount per issuer. The plans are re-balanced on a monthly basis 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, 2012 are $7 million, $27 million and $6 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. Information for the SERPs was as follows for the years ended December 31:


	Non-Qualified SERPs
(In millions)	2011			2010
Benefit obligations:
Beginning of year	$	165		$	182
Service cost		1			1
Interest cost		8			10
Actuarial gain (losses)		23			(2	)
Benefits paid		(2	)		(2	)
Settlements		(22	)		(24	)

End of year	$	173		$	165

Accrued benefit expense:
Funded status (plan assets less benefit obligations)	$	(173	)	$	(165	)

Net accrued benefit expense	$	(173	)	$	(165	)

Amounts recognized in our consolidated statement of condition as of December 31:
Current liabilities	$	(27	)	$	(27	)
Non-current liabilities		(146	)		(138	)

Net accrued amount recognized in our consolidated statement of condition	$	(173	)	$	(165	)

Amounts recognized in accumulated other comprehensive income:
Net loss	$	(58	)	$	(45	)

Accumulated other comprehensive loss		(58	)		(45	)
Cumulative employer contributions in excess of net periodic benefit cost		(115	)		(120	)

Net obligation recognized in our consolidated statement of condition	$	(173	)	$	(165	)

Accumulated benefit obligation	$	173		$	165

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		—			4.75	%
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, 2011 and 2010, the accumulated benefit obligations are $960 million and $231 million, respectively, and the plan assets are $671 million and $36 million, respectively.

For those defined benefit plans that have projected benefit obligations in excess of plan assets as of December 31, 2011 and 2010, the projected benefit obligations are $981 million and $263 million, respectively, and the plan assets are $674 million and $50 million, respectively.

If trend rates for health care costs were increased by 1%, the post-retirement benefit obligation as of December 31, 2011 would have increased 7%, and the aggregate expense for service and interest costs for 2011 would have increased 10%. Conversely, if trend rates for health care costs were decreased by 1%, the post-retirement benefit obligation as of December 31, 2011 would have decreased 6%, and the aggregate expense for service and interest costs for 2011 would have decreased 9%.

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.									Post-Retirement
	Defined Benefit Plans									Plan
(In millions)	2011			2010			2009			2011			2010			2009
Components of net periodic benefit cost:
Service cost	$	9		$	11		$	13		$	6		$	5		$	4
Interest cost		47			44			45			6			6			6
Assumed return on plan assets		(58	)		(55	)		(56	)		—			—			—
Amortization of net loss		12			7			6			1			2			1


Net periodic benefit cost		10			7			8			13			13			11
Settlements		—			—			(1	)		—			—			—
Curtailments		—			—			(1	)		—			—			—
Special termination benefits		—			—			—			—			—			1


Total expense	$	10		$	7		$	6		$	13		$	13		$	12

Estimated amounts that will be amortized from accumulated other comprehensive income over the next fiscal year:
Net loss	$	(17	)	$	(13	)	$	(7	)	$	(1	)	$	(2	)	$	(2	)


Estimated amortization	$	(17	)	$	(13	)	$	(7	)	$	(1	)	$	(2	)	$	(2	)


	Non-Qualified SERPs
(In millions)	2011			2010			2009
Components of net periodic benefit cost:
Service cost	$	1		$	1		$	2
Interest cost		8			10			10
Amortization of net loss		3			5			3

Net periodic benefit cost		12			16			15
Settlements		7			8			4

Total expense	$	19		$	24		$	19

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

Estimated amortization	$	(5	)	$	(3	)	$	(5	)

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 $77 million, $71 million and $73 million for the years ended December 31, 2011, 2010 and 2009, respectively. In addition, employees in certain non-U.S. offices participate in other local plans. Expenses related to these plans were $65 million for the year ended December 31, 2011 and $45 million for each of the years ended December 31, 2010, and 2009.

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 $10 million for each of the years ended December 31, 2011, 2010, and 2009 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 called for 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.