Prudential 2012 Annual Report Download - page 171

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. SHARE-BASED PAYMENTS (continued)
Settlement of Awards
The Company’s policy is to issue shares from Common Stock held in treasury upon exercise of stock options, the release of restricted
stock units and performance shares, as well as for purchases under the stock purchase plan. The Company has not settled any equity
instruments granted under share-based payment arrangements in cash. Performance units will be settled in cash beginning in 2013.
18. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded and non-funded non-contributory defined benefit pension plans, which cover substantially all of its
employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are
based on an account balance that takes into consideration age, service and earnings during their career.
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered
dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially
all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after age 55 with at least 10
years of service or under certain circumstances after age 50 with at least 20 years of continuous service. The Company has elected to
amortize its transition obligation for other postretirement benefits over 20 years.
Effective December 2012, the Company adopted retrospectively a change in method of applying an accounting principle for the
Company’s pension plans. The new accounting method changes the calculation of market related value of pension plan assets used to
determine net periodic benefit cost but has no impact on the funded status of the plans. The Company previously calculated market related
value for pensions by recognizing changes in fair value of plan assets over a period of five years on all classes of assets (U.S Equities,
International Equities, Fixed Maturities (including short term investments) Real Estate and Other). As a result of the change in accounting
method the Company will no longer recognize changes in fair value of fixed maturity assets over a period of five years. Instead, changes in
fair value for fixed maturity assets, including short term investments, will be recognized immediately for purposes of the market-related
value. However, the Company will continue to recognize changes in fair value of all other classes of its plan assets including U.S. Equities,
International Equities, Real Estate and Other Assets over a five year period.
The Company’s investment philosophy for pension plan assets uses a cash flow matching approach relative to the pension plan’s
Projected Benefit Obligation (“PBO”). Under the matching approach cash flows from fixed maturity investments (including short term
investments) are expected to match cash flows used to pay the plans’ benefits, in both amount and timing. Immediately recognizing
changes in fair value for fixed maturity investments better aligns the value of these assets for purpose of calculating net periodic benefit
cost under the new accounting method with this investment philosophy as well as with the recognition of changes in the PBO in the
calculation of net periodic benefit cost.
The Company views the periodic benefit cost determined under the new method of accounting as providing improved transparency
and better reflecting the ongoing economics of the plans, which is why the Company considers it a preferable method of calculating net
periodic benefit cost. All of the other asset classes of plan assets including US Equities, International Equities, Real Estate and Other Assets
will continue to be recognized over five years to reduce the volatility in the unrecognized gains and losses of these investments. See Note 2,
Significant Accounting Policies and Pronouncements, for the impact of the change on amounts previously reported for 2011 and 2010.
Prepaid benefits costs and accrued benefit liabilities are included in “Other assets” and “Other liabilities,” respectively, in the
Company’s Consolidated Statements of Financial Position. The status of these plans as of December 31, 2012 and 2011, is summarized
below:
Pension Benefits
Other
Postretirement
Benefits
2012 2011 2012 2011
(in millions)
Change in benefit obligation
Benefit obligation at the beginning of period ...................................... $(11,113) $ (9,198) $(2,277) $(2,129)
Acquisition/Divestiture ....................................................... 0 (800) 0 3
Service cost ................................................................ (243) (218) (14) (11)
Interest cost ................................................................ (474) (486) (101) (110)
Plan participants’ contributions ................................................. 0 0 (27) (26)
Medicare Part D subsidy receipts ............................................... 0 0 (18) (11)
Early retirement reinsurance program receipts. ..................................... 0 0 0 (14)
Amendments ............................................................... 62 72 0 0
Annuity purchase ............................................................ 1 0 0 0
Actuarial gains/(losses), net .................................................... (1,098) (1,047) (134) (184)
Settlements ................................................................. 120 30 0 0
Curtailments ................................................................ 0 22 0 0
Special termination benefits ................................................... (8) (4) 0 0
Benefits paid ............................................................... 599 612 200 210
Foreign currency changes and other ............................................. 112 (96) (1) (5)
Benefit obligation at end of period .............................................. $(12,042) $(11,113) $(2,372) $(2,277)
Prudential Financial, Inc. 2012 Annual Report 169