[an error occurred while processing this directive] P&G 2009 AR – Benefits: Assets, Defined, U.S. DC Plan, ESOP, Trust
[an error occurred while processing this directive] [an error occurred while processing this directive]

Note 8: Postretirement Benefits and Employee Stock Ownership Plan

We offer various postretirement benefits to our employees.

Defined Contribution Retirement Plans

We have defined contribution plans which cover the majority of our U.S. employees, as well as employees in certain other countries. These plans are fully funded. We generally make contributions to participants’ accounts based on individual base salaries and years of service. Total global defined contribution expense was $364, $290, and $273 in 2009, 2008 and 2007, respectively.

The primary U.S. defined contribution plan (the U.S. DC plan) comprises the majority of the balances and expense for the Company’s defined contribution plans. For the U.S. DC plan, the contribution rate is set annually. Total contributions for this plan approximated 15% of total participants’ annual wages and salaries in 2009, 2008 and 2007.

We maintain The Procter & Gamble Profit Sharing Trust (Trust) and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. DC plan, as well as other retiree benefits. Operating details of the ESOP are provided at the end of this Note. The fair value of the ESOP Series A shares allocated to participants reduces our cash contribution required to fund the U.S. DC plan.

Defined Benefit Retirement Plans and Other Retiree Benefits

We offer defined benefit retirement pension plans to certain employees. These benefits relate primarily to local plans outside the U.S. and, to a lesser extent, plans assumed in the Gillette acquisition covering U.S. employees.

We also provide certain other retiree benefits, primarily health care and life insurance, for the majority of our U.S. employees who become eligible for these benefits when they meet minimum age and service requirements. Generally, the health care plans require cost sharing with retirees and pay a stated percentage of expenses, reduced by deductibles and other coverages. These benefits are primarily funded by ESOP Series B shares, as well as certain other assets contributed by the Company.

Obligation and Funded Status. We use a June 30 measurement date for our defined benefit retirement plans and other retiree benefit plans. The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans:

 
Pension Benefits (1)
Other Retiree Benefits (2)
Years ended June 30 2009 2008 2009 2008

(1) Primarily non-U.S.-based defined benefit retirement plans.

(2) Primarily U.S.-based other postretirement benefit plans.

(3) For the pension benefit plans, the benefit obligation is the projected benefit obligation. For other retiree benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.

(4) Represents the net impact of ESOP debt service requirements, which is netted against plan assets for Other Retiree Benefits.

Change in Benefit Obligation    
Benefit obligation at beginning of year (3) $10,095 $ 9,819 $ 3,553 $ 3,558
Service cost 214 263 91 95
Interest cost 551 539 243 226
Participants’ contributions 15 14 55 58
Amendments 47 52 (11)
Actuarial (gain) loss 456 (655) 186 (232)
Acquisitions (divestitures) (3) (7) (17) 2
Curtailments and settlements 3 (68) (3)
Special termination benefits 3 1 16 2
Currency translation and other (867) 642 27 67
Benefit payments (498) (505) (226) (209)
Benefit Obligation at End of Year (3) 10,016 10,095 3,928 3,553
Change in Plan Assets    
Fair value of plan assets at beginning of year 7,225 7,350 3,225 3,390
Actual return on plan assets (401) (459) (678) (29)
Acquisitions (divestitures)
Employer contributions 657 507 18 21
Participants’ contributions 15 14 55 58
Currency translation and other (688) 318 (4) 1
ESOP debt impacts (4) 4 (7)
Benefit payments (498) (505) (226) (209)
Fair Value of Plan Assets at End of Year 6,310 7,225 2,394 3,225
Funded Status (3,706) (2,870) (1,534) (328)
 
Pension Benefits
Other Retiree Benefits
Years ended June 30 2009 2008 2009 2008
Classification of Net Amount Recognized    
Noncurrent assets $ 133 $ 321 $  $ 200
Current liability (41) (45) (18) (16)
Noncurrent liability (3,798) (3,146) (1,516) (512)
Net Amount Recognized (3,706) (2,870) (1,534) (328)
Amounts Recognized In Accumulated Other Comprehensive Income (AOCI)    
Net actuarial loss 1,976 715 1,860 578
Prior service cost (credit) 227 213 (152) (175)
Net Amounts Recognized in AOCI 2,203 928 1,708 403
Change in Plan Assets and Benefit Obligations Recognized in Accumulated
Other Comprehensive Income (AOCI)
       
Net actuarial loss — current year 1,335 361 1,309 226
Prior service cost (credit) — current year 47 52 (11)
Amortization of net actuarial loss (29) (9) (2) (7)
Amortization of prior service (cost) credit (14) (14) 23 21
Settlement/Curtailment cost (32) (2)
Currency translation and other (64) 19 (25) 24
Total Change in AOCI 1,275 377 1,305 251
Net Amounts Recognized in Periodic Benefit Cost and AOCI 1,616 609 1,088 33

The underfunding of pension benefits is primarily a function of the different funding incentives that exist outside of the U.S. In certain countries, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations. In these instances, benefit payments are typically paid directly from the Company’s cash as they become due.

The accumulated benefit obligation for all defined benefit retirement pension plans was $8,637 and $8,750 at June 30, 2009 and June 30, 2008, respectively. Pension plans with accumulated benefit obligations in excess of plan assets and plans with projected benefit obligations in excess of plan assets consist of the following:

 
Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
Projected Benefit Obligation Exceeds the Fair Value of Plan Assets
Years ended June 30 2009 2008 2009 2008
Projected benefit obligation $6,509 $5,277 $9,033 $7,987
Accumulated benefit obligation 5,808 4,658 7,703 6,737
Fair value of plan assets 3,135 2,153 5,194 4,792

Net Periodic Benefit Cost. Components of the net periodic benefit cost were as follows:

 
Pension Benefits
Other Retiree Benefits
Years ended June 30 2009 2008 2007 2009 2008 2007
Service cost $ 214 $ 263 $ 279 $ 91 $ 95 $ 85
Interest cost 551 539 476 243 226 206
Expected return on plan assets (473) (557) (454) (444) (429) (407)
Prior service cost (credit) amortization 14 14 13 (23) (21) (22)
Net actuarial loss amortization 29 9 45 2 7 2
Curtailment and settlement gain 6 (36) (176) (1) (1)
Gross Benefit Cost (Credit) 341 232 183 (131) (123) (137)
Dividends on ESOP preferred stock (86) (95) (85)
Net Periodic Benefit Cost (Credit) 341 232 183 (217) (218) (222)

Pursuant to plan revisions adopted during 2007, Gillette’s U.S. defined benefit retirement pension plans were frozen effective January 1, 2008, at which time Gillette employees in the U.S. moved into the Trust and ESOP. This revision resulted in a $154 curtailment gain for the year ended June 30, 2007.

Amounts expected to be amortized from accumulated other comprehensive income into net period benefit cost during the year ending June 30, 2010, are as follows:

  Pension Benefits Other Retiree Benefits
Net actuarial loss $92 $ 19
Prior service cost (credit) 15 (21)

Assumptions. We determine our actuarial assumptions on an annual basis. These assumptions are weighted to reflect each country that may have an impact on the cost of providing retirement benefits. The weighted average assumptions for the defined benefit and other retiree benefit calculations, as well as assumed health care trend rates, were as follows:

 
Pension Benefits
Other Retiree Benefits
Years ended June 30 2009 2008 2009 2008

(1) Determined as of end of year.

(2) Determined as of beginning of year and adjusted for acquisitions.

Assumptions Used to Determine Benefit Obligations (1)    
Discount rate 6.0% 6.3% 6.4% 6.9%
Rate of compensation increase 3.7% 3.7%
Assumptions Used to Determine Net Periodic Benefit Cost (2)    
Discount rate 6.3% 5.5% 6.9% 6.3%
Expected return on plan assets 7.4% 7.4% 9.3% 9.3%
Rate of compensation increase 3.7% 3.1%
Assumed Health Care Cost Trend Rates    
Health care cost trend rates assumed for next year 8.5% 8.6%
Rate to which the health care cost trend rate is assumed to decline (ultimate trend rate) 5.0% 5.1%
Year that the rate reaches the ultimate trend rate 2016 2015

Several factors are considered in developing the estimate for the long-term expected rate of return on plan assets. For the defined benefit retirement plans, these include historical rates of return of broad equity and bond indices and projected long-term rates of return obtained from pension investment consultants. The expected long-term rates of return for plan assets are 8%–9% for equities and 5%–6% for bonds. For other retiree benefit plans, the expected long-term rate of return reflects the fact that the assets are comprised primarily of Company stock. The expected rate of return on Company stock is based on the long-term projected return of 9.5% and reflects the historical pattern of favorable returns.

Assumed health care cost trend rates could have a significant effect on the amounts reported for the other retiree benefit plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:

  One-Percentage Point Increase One-Percentage Point Decrease
Effect on total of service and interest cost components $ 58 $ (46)
Effect on postretirement benefit obligation 549 (447)

Plan Assets. Our target asset allocation for the year ended June 30, 2009, and actual asset allocation by asset category as of June 30, 2009 and 2008, were as follows:

 
Target Asset Allocation
Asset Category Pension Benefits Other Retiree Benefits

(1) Equity securities for other retiree plan assets include Company stock, net of Series B ESOP debt, of $2,084 and $2,809 as of June 30, 2009 and 2008, respectively.

Equity securities (1) 45% 93%
Debt securities 55% 7%
Total 100% 100%
 
Asset Allocation at June 30
 
Pension Benefits
Other Retiree Benefits
Asset Category 2009 2008 2009 2008

(1) Equity securities for other retiree plan assets include Company stock, net of Series B ESOP debt, of $2,084 and $2,809 as of June 30, 2009 and 2008, respectively.

Equity securities (1) 42% 45% 93% 96%
Debt securities 51% 50% 7% 4%
Cash 6% 3%
Real estate 1% 2%
Total 100% 100% 100% 100%

Our investment objective for defined benefit retirement plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required Company plan contributions. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and continual monitoring of investment managers’ performance relative to the investment guidelines established with each investment manager.

Cash Flows. Management’s best estimate of cash requirements for the defined benefit retirement plans and other retiree benefit plans for the year ending June 30, 2010, is approximately $616 and $24, respectively. For the defined benefit retirement plans, this is comprised of $178 in expected benefit payments from the Company directly to participants of unfunded plans and $438 of expected contributions to funded plans. For other retiree benefit plans, this is comprised of expected contributions that will be used directly for benefit payments. Expected contributions are dependent on many variables, including the variability of the market value of the plan assets as compared to the benefit obligation and other market or regulatory conditions. In addition, we take into consideration our business investment opportunities and resulting cash requirements. Accordingly, actual funding may differ significantly from current estimates.

Total benefit payments expected to be paid to participants, which include payments funded from the Company’s assets, as discussed above, as well as payments from the plans, are as follows:

Years ended June 30 Pension Benefits Other Retiree Benefits
Expected Benefit Payments  
2010 $ 499 $ 184
2011 496 201
2012 507 217
2013 525 232
2014 552 247
2015–2019 3,096 1,453

Employee Stock Ownership Plan

We maintain the ESOP to provide funding for certain employee benefits discussed in the preceding paragraphs.

The ESOP borrowed $1.0 billion in 1989 and the proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock to fund a portion of the U.S. DC plan. Principal and interest requirements of the borrowing were paid by the Trust from dividends on the preferred shares and from advances provided by the Company. The original borrowing of $1.0 billion has been repaid in full, and advances from the Company of $178 remain outstanding at June 30, 2009. Each share is convertible at the option of the holder into one share of the Company’s common stock. The dividend for the current year was equal to the common stock dividend of $1.64 per share. The liquidation value is $6.82 per share.

In 1991, the ESOP borrowed an additional $1.0 billion. The proceeds were used to purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of retiree health care benefits. These shares, net of the ESOP’s debt, are considered plan assets of the Other Retiree Benefits plan discussed above. Debt service requirements are funded by preferred stock dividends, cash contributions and advances provided by the Company, of which $266 is outstanding at June 30, 2009. Each share is convertible at the option of the holder into one share of the Company’s common stock. The dividend for the current year was equal to the common stock dividend of $1.64 per share. The liquidation value is $12.96 per share.

Our ESOP accounting practices are consistent with current ESOP accounting guidance, including the permissible continuation of certain provisions from prior accounting guidance. ESOP debt, which is guaranteed by the Company, is recorded as debt (see Note 4) with an offset to the Reserve for ESOP Debt Retirement, which is presented within Shareholders’ Equity. Advances to the ESOP by the Company are recorded as an increase in the Reserve for ESOP Debt Retirement. Interest incurred on the ESOP debt is recorded as interest expense. Dividends on all preferred shares, net of related tax benefits, are charged to retained earnings.

The series A and B preferred shares of the ESOP are allocated to employees based on debt service requirements, net of advances made by the Company to the Trust. The number of preferred shares outstanding at June 30 was as follows:

Shares in thousands 2009 2008 2007
Allocated 56,818 58,557 60,402
Unallocated 16,651 18,665 20,807
Total Series A 73,469 77,222 81,209
Allocated 20,991 21,134 21,105
Unallocated 42,522 43,618 44,642
Total Series B 63,513 64,752 65,747

For purposes of calculating diluted net earnings per common share, the preferred shares held by the ESOP are considered converted from inception.

In connection with the Gillette acquisition, we assumed the Gillette ESOP, which was established to assist Gillette employees in financing retiree medical costs. These ESOP accounts are held by participants and must be used to reduce the Company’s other retiree benefit obligations. Such accounts reduced our obligation by $171 at June 30, 2009.

Amounts in millions of dollars except per share amounts or as otherwise specified.

[an error occurred while processing this directive] [an error occurred while processing this directive]
 
[an error occurred while processing this directive]
Our Billion-Dollar and Half-Billion-Dollar Brands:: Discover
Back to top