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Note 5 - Retirement Plans | 12 Months Ended
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Dec. 31, 2021
Notes to Financial Statements |
Retirement Benefits [Text Block] | 5. Retirement Plans Pension Benefits We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but are eligible for an enhanced 401(k) benefit as described below in other retirement programs. Funded Status We are required by GAAP to separately recognize the overfunded or underfunded status of our pension plans as an asset or liability. The funded status represents the difference between the projected benefit obligation (PBO) and the fair value of the plan assets. Our non-qualified (supplemental) pension plan is unfunded by design. The PBO of the pension plans is the present value of benefits earned to date by plan participants, including the effect of assumed future compensation increases. Plan assets are measured at fair value. We use a December 31 measurement date for plan assets and obligations for all our retirement plans. Changes in our PBO and plan assets were as follows for the years ended December 31, 2021 and 2020:
Funded Status |  |  |  |  |  |  |  |
Millions |  | 2021 |  |  | 2020 |
Projected Benefit Obligation |  |  |  |  |  |  |  |
Projected benefit obligation at beginning of year |  | $ | 5,658 |  |  | $ | 4,847 |
Service cost |  |  | 110 |  |  |  | 91 |
Interest cost |  |  | 104 |  |  |  | 137 |
Actuarial (gain)/loss |  |  | (346 | ) |  |  | 812 |
Gross benefits paid |  |  | (230 | ) |  |  | (229 | )
Projected benefit obligation at end of year |  | $ | 5,296 |  |  | $ | 5,658 |
Plan Assets |  |  |  |  |  |  |  |
Fair value of plan assets at beginning of year |  | $ | 5,016 |  |  | $ | 4,528 |
Actual (loss)/return on plan assets |  |  | 737 |  |  |  | 686 |
Non-qualified plan benefit contributions |  |  | 31 |  |  |  | 31 |
Gross benefits paid |  |  | (230 | ) |  |  | (229 | )
Fair value of plan assets at end of year |  | $ | 5,554 |  |  | $ | 5,016 |
Funded status at end of year |  | $ | 258 |  |  | $ | (642 | )
Actuarial gains that decreased the PBO were driven by an increase in 2021 discount rates from 2.42% to 2.80%. Amounts recognized in the statement of financial position as of December 31, 2021 and 2020, consist of:
Millions |  | 2021 |  |  | 2020 |
Noncurrent assets |  | $ | 807 |  |  | $ | 8 |
Current liabilities |  |  | (31 | ) |  |  | (30 | )
Noncurrent liabilities |  |  | (518 | ) |  |  | (620 | )
Net amounts recognized at end of year |  | $ | 258 |  |  | $ | (642 | )
Pre-tax amounts recognized in accumulated other comprehensive income/loss consist of $851 million and $1,805 million net actuarial loss as of December 31, 2021 and 2020, respectively. Pre-tax changes recognized in other comprehensive income/loss as of December 31, 2021, 2020, and 2019, were as follows:
Millions |  | 2021 |  |  | 2020 |  |  | 2019 |
Net actuarial (loss)/gain |  | $ | 813 |  |  | $ | (408 | ) |  | $ | (88 | )
Amortization of: |  |  |  |  |  |  |  |  |  |  |  |
Actuarial loss |  |  | 141 |  |  |  | 104 |  |  |  | 67 |
Total |  | $ | 954 |  |  | $ | (304 | ) |  | $ | (21 | )
Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated benefit obligation represents the difference between the ABO and the fair value of plan assets. The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31, 2021 and 2020:
Underfunded Accumulated Benefit Obligation |  |  |  |  |  |  |  |
Millions |  | 2021 |  |  | 2020 |
Projected benefit obligation |  | $ | 549 |  |  | $ | 605 |
Accumulated benefit obligation |  | $ | 513 |  |  | $ | 560 |
Fair value of plan assets |  |  | - |  |  |  | - |
Underfunded accumulated benefit obligation |  | $ | (513 | ) |  | $ | (560 | )
The ABO for all defined benefit pension plans was $4.9 billion and $5.2 billion at December 31, 2021 and 2020, respectively. Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31, 2021 and 2020:
Percentages |  | 2021 |  |  | 2020 |
Discount rate |  |  | 2.80 | % |  |  | 2.42 | %
Compensation increase |  |  | 4.30 | % |  |  | 4.40 | %
Expense Pension expense is determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a 5-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income/loss and, if necessary, amortized as pension expense. The components of our net periodic pension cost were as follows for the years ended December 31, 2021, 2020, and 2019:
Millions |  | 2021 |  |  | 2020 |  |  | 2019 |
Net Periodic Pension Cost: |  |  |  |  |  |  |  |  |  |  |  |
Service cost |  | $ | 110 |  |  | $ | 91 |  |  | $ | 80 |
Interest cost |  |  | 104 |  |  |  | 137 |  |  |  | 160 |
Expected return on plan assets |  |  | (270 | ) |  |  | (282 | ) |  |  | (273 | )
Amortization of: |  |  |  |  |  |  |  |  |  |  |  |
Actuarial loss |  |  | 141 |  |  |  | 104 |  |  |  | 67 |
Net periodic pension cost |  | $ | 85 |  |  | $ | 50 |  |  | $ | 34 |
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:
Percentages |  | 2021 |  |  | 2020 |  |  | 2019 |
Discount rate for benefit obligations |  |  | 2.42 | % |  |  | 3.26 | % |  |  | 4.23 | %
Discount rate for interest on benefit obligations |  |  | 1.90 | % |  |  | 2.89 | % |  |  | 3.94 | %
Discount rate for service cost |  |  | 2.61 | % |  |  | 3.42 | % |  |  | 4.33 | %
Discount rate for interest on service cost |  |  | 2.53 | % |  |  | 3.36 | % |  |  | 4.30 | %
Expected return on plan assets |  |  | 6.25 | % |  |  | 7.00 | % |  |  | 7.00 | %
Compensation increase |  |  | 4.40 | % |  |  | 4.10 | % |  |  | 4.10 | %
We measure the service cost and interest cost components of our net periodic pension cost by using individual spot discount rates matched with separate cash flows for each future year. The discount rates were based on a yield curve of high-quality corporate bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual return/loss on pension plan assets, net of fees, was approximately15%in 2021, 16% in 2020, and 20% in 2019. Cash Contributions The following table details cash contributions, if any, for the qualified and non-qualified (supplemental) pension plans:
Millions |  | Qualified |  |  | Non-qualified |
2021 |  | $ | - |  |  | $ | 31 |
2020 |  |  | - |  |  |  | 31 |
Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. The non-qualified pension plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments. We anticipate our 2022 supplemental pension payments will be made from cash generated from operations. Benefit Payments The following table details expected benefit payments for the years 2022 through 2031:
Millions |  |  |  |
2022 |  | $ | 229 |
2023 |  |  | 228 |
2024 |  |  | 227 |
2025 |  |  | 227 |
2026 |  |  | 228 |
Years 2027 - 2031 |  |  | 1,170 |
Asset Allocation Strategy Our pension plan asset allocation at December 31, 2021 and 2020, and target allocation for 2022, are as follows:
|  |  | Percentage of Plan Assets |
| Target | December 31, |
| Allocation 2022 | 2021 |  |  | 2020 |
Equity securities |  |  | 45% to 55% |  |  |  | 57 | % |  |  | 63 | %
Debt securities |  |  | 45% to 55% |  |  |  | 42 |  |  |  | 34 |
Real estate |  |  | 0% to 2% |  |  |  | 1 |  |  |  | 3 |
Total |  |  |  | 100 | % |  |  | 100 | %
The pension plan investments are held in a master trust. The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target average long-term rate of return of 6.25%. While we believe we can achieve a long-term average rate of return of 6.25%, we cannot be certain that the portfolio will perform to our expectations. Assets are strategically allocated among equity, debt, and other investments in order to achieve a diversification level that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other portfolios are evaluated at least every three years with the assistance of an independent consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at least quarterly, as needed. Since 2020, the asset allocation targets for equity and debt have been adjusted annually to move from equity to debt as a de-risking measure. The current target endpoint for this de-risking is 45% equity and 55% debt in 2023. Equity risks are balanced by investing a significant portion of the plans’ assets in high-quality debt securities. The average credit rating of the debt portfolio was A+ and A at December 31, 2021 and 2020, respectively. The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury, mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 20 years and 17 years at December 31, 2021 and 2020, respectively. The investment of pension plan assets in securities issued by UPC is explicitly prohibited by the plan for both the equity and debt portfolios, other than through index fund holdings. Fair Value Measurements The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy. Temporary Cash Investments – These investments consist of U.S. dollars, foreign currencies, and commercial paper held in master trust accounts at The Northern Trust Company (the Trustee). Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. U.S. dollars and foreign currencies are classified as Level 1 investments. Commercial paper assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Commercial paper is classified as Level 2 investments. Registered Investment Companies – Registered Investment Companies are entities primarily engaged in the business of investing in securities and are registered with the SEC. The plan’s holdings of Registered Investment Companies include both public and private fund vehicles. The public vehicles are exchange-traded funds (stocks), which are classified as Level 1 investments. The private vehicles (bonds) do not have published pricing and are valued using Net Asset Value (NAV). Federal Government Securities – Federal Government Securities consist of bills, notes, bonds, and other fixed income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Federal Government Securities are classified as Level 2 investments. Bonds and Debentures – Bonds and debentures consist of debt securities issued by U.S. and non-U.S. corporations as well as state and local governments. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Corporate, state, and municipal bonds and debentures are classified as Level 2 investments. Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and non-U.S. corporations. Most common shares are traded actively on exchanges and price quotes for these shares are readily available. Common stock is classified as a Level 1 investment. Preferred shares included in this category are valued using a bid evaluation process with bid data provided by independent pricing sources. Preferred stock is classified as a Level 2 investment. Venture Capital and Buyout Partnerships – This investment category is comprised of interests in limited partnerships that invest primarily in privately-held companies. Due to the private nature of the partnership investments, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on the application of public market multiples to private company cash flows, market transactions that provide valuation information for comparable companies, and other methods. The fair value recorded by the plan is calculated using each partnership’s NAV. Real Estate Funds – Most of the plan’s real estate investments are primarily interests in private real estate investment trusts, partnerships, limited liability companies, and similar structures. Valuations for the holdings in this category are not based on readily observable inputs and are primarily derived from property appraisals. The fair value recorded by the plan is calculated using the NAV for each investment. Collective Trust and Other Funds – Collective trust and other funds are comprised of shares or units in commingled funds and limited liability companies that are not publicly traded. The underlying assets in these entities (U.S. stock funds, non-U.S. stock funds, commodity funds, hedge funds, and short-term investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. The fair value recorded by the plan is calculated using NAV for each investment. As of December 31, 2021, the pension plan assets measured at fair value on a recurring basis were as follows:
|  | Quoted Prices |  |  | Significant |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Other |  |  | Significant |  |  |  |  |
|  | Markets for |  |  | Observable |  |  | Unobservable |  |  |  |  |
|  | Identical Inputs |  |  | Inputs |  |  | Inputs |  |  |  |  |
Millions |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Plan assets at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Temporary cash investments |  | $ | 9 |  |  | $ | - |  |  | $ | - |  |  | $ | 9 |
Registered investment companies [a] |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | 10 |
Federal government securities |  |  | - |  |  |  | 742 |  |  |  | - |  |  |  | 742 |
Bonds and debentures |  |  | - |  |  |  | 1,116 |  |  |  | - |  |  |  | 1,116 |
Corporate stock |  |  | 1,980 |  |  |  | 10 |  |  |  | - |  |  |  | 1,990 |
Total plan assets at fair value |  | $ | 1,999 |  |  | $ | 1,868 |  |  | $ | - |  |  | $ | 3,867 |
Plan assets at NAV: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Registered investment companies [b] |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 185 |
Venture capital and buyout partnerships |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 710 |
Real estate funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 48 |
Collective trust and other funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 756 |
Total plan assets at NAV |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 1,699 |
Other assets/(liabilities) [c] |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (12 | )
Total plan assets |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 5,554 |
As of December 31, 2020, the pension plan assets measured at fair value on a recurring basis were as follows:
|  | Quoted Prices |  |  | Significant |  |  |  |  |  |  |  |  |
|  | in Active |  |  | Other |  |  | Significant |  |  |  |  |
|  | Markets for |  |  | Observable |  |  | Unobservable |  |  |  |  |
|  | Identical Inputs |  |  | Inputs |  |  | Inputs |  |  |  |  |
Millions |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Total |
Plan assets at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Temporary cash investments |  | $ | 9 |  |  | $ | - |  |  | $ | - |  |  | $ | 9 |
Registered investment companies [a] |  |  | 252 |  |  |  | - |  |  |  | - |  |  |  | 252 |
Federal government securities |  |  | - |  |  |  | 150 |  |  |  | - |  |  |  | 150 |
Bonds and debentures |  |  | - |  |  |  | 831 |  |  |  | - |  |  |  | 831 |
Corporate stock |  |  | 2,209 |  |  |  | 8 |  |  |  | - |  |  |  | 2,217 |
Total plan assets at fair value |  | $ | 2,470 |  |  | $ | 989 |  |  | $ | - |  |  | $ | 3,459 |
Plan assets at NAV: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Registered investment companies [b] |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 312 |
Venture capital and buyout partnerships |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 585 |
Real estate funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 161 |
Collective trust and other funds |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 498 |
Total plan assets at NAV |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 1,556 |
Other assets/(liabilities) [c] |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1 |
Total plan assets |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 5,016 |
[a] | Registered investment companies measured at fair value are stock investments.
[b] | Registered investment companies measured at NAV include bond investments.
[c] | Includes accrued receivables, net payables, and pending broker settlements.
The master trust’s investments in limited partnerships and similar structures (used to invest in private equity and real estate) are valued at fair value based on their proportionate share of the partnerships’ fair value as recorded in the limited partnerships’ audited financial statements. The limited partnerships allocate gains, losses, and expenses to the partners based on the ownership percentage as described in the partnership agreements. At December 31, 2021 and 2020, the master trust had future commitments for additional contributions to private equity partnerships totaling $115 million and $147 million, respectively, and to real estate partnerships and funds totaling $7 million and $7 million, respectively. Other Retirement Programs Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums are paid. OPEB expense is determined based upon the annual service cost of benefits and the interest cost on those liabilities, less the expected return on plan assets. Our OPEB liability was $165 million and $190 million at December 31, 2021 and 2020, respectively. OPEB net periodic benefit cost/(benefit) was ($3) million in 2021, ($1) million in 2020, and $10 million in 2019. 401(k)/Thrift Plan – For non-union employees hired prior to January 1, 2018, and eligible union employees for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan). We match 50% for each dollar contributed by employees up to the first 6% of compensation contributed. For non-union employees hired on or after January 1, 2018, we match 100% for each dollar, up to the first 6% of compensation contributed, in addition to contributing an annual amount of 3% of the employee’s annual base salary. Our plan contributions were $21 million in 2021, $19 million in 2020, and $20 million in 2019. Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System (the System). Contributions made to the System are expensed as incurred and amounted to approximately $550 million in 2021, $569 million in 2020, and $654 million in 2019. Collective Bargaining Agreements – Under collective bargaining agreements, we participate in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees. Premiums paid under these plans are expensed as incurred and amounted to $30 million in 2021, $30 million in 2020, and $42 million in 2019.

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