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Postretirement Benefit Plans | 12 Months Ended
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Dec. 31, 2011
Postretirement Benefit Plans [Abstract] |
Postretirement Benefit Plans | NOTE 17 Postretirement Benefit Plans NOTE 17 Postretirement Benefit Plans In connection with the Distribution, certain pension and other employee-related benefit plans (collectively, postretirement benefit plans) were contributed by ITT to Exelis and Xylem. Exelis and Xylem assumed all assets and liabilities of the contributed plans and became the plans’ sponsor on the date of the Distribution. Most significantly, Exelis became the plan sponsor of the former U.S. ITT Salaried Retirement Plan (SRP). ITT’s U.S salaried employees no longer accrue retirement benefits under SRP and all benefits accrued as of the Distribution date were frozen. Benefit payments to participants in the SRP that remained ITT employees following the Distribution will be made by Exelis. During 2011, 2010, and 2009, ITT recorded expenses of approximately $15, $9 and $4, respectively, related to the participation of ITT employees in the SRP. Included in the 2011 cost of ITT participation in the SRP is a curtailment charge of approximately $1 related to the reduction in benefits, including the effect of immediate recognition of prior service costs and the impact of special termination benefits. All assets and liabilities related to postretirement benefit plans that were contributed to Exelis and Xylem, including the SRP, are reflected in discontinued operations in the consolidated financial statements. Effective at the date of Distribution, the ITT Corporation Retirement Savings Plan for Salaried Employees was created, which increased company contributions from a maximum of 3.5% of base pay to 6% or 7%, depending on age and years of service, of total eligible pay which includes base pay, overtime and bonuses. Additionally, for five years subsequent to the distribution, the Company will provide transition credits to certain employees up to 5% of eligible pay. Defined Contribution Plans Substantially all of ITT’s U.S. and certain international employees are eligible to participate in a defined contribution plan. ITT sponsors numerous defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Several of the plans require us to match a percentage of the employee contributions up to certain limits. Company contributions charged to income amounted to $8, $7 and $5 for 2011, 2010 and 2009, respectively. The ITT Stock Fund, an investment option under the ITT Corporation Retirement Savings Plan for Salaried Employees and the ITT Hourly Savings Plan, is considered an employee stock ownership plan and, as a result, participants in the ITT Stock Fund may receive dividends in cash or may reinvest such dividends into the ITT Stock Fund. The ITT Stock Fund held approximately 0.5 shares of ITT common stock at December 31, 2011. At the date of distribution, for each share of ITT common stock in the ITT Stock Fund, a share of common stock of each Exelis and Xylem was received. As of December 31, 2011, there were 0.4 and 1.1 shares of Exelis and Xylem, respectively, held in the ITT Corporation Retirement Savings Plan for Salaried Employees and ITT Hourly Savings Plan. Defined Benefit Plans ITT sponsors numerous defined benefit pension plans which have approximately 2,200 active participants, however, most of these plans have been closed to new participants for several years. As of December 31, 2011, of our total projected benefit obligation, the ITT Pension Plan for Bargaining Unit Employees Seneca Falls represented 28%, the ITT Consolidated Hourly Pension Plan represented 26%, other U.S. plans represented 30% and international pension plans represented 16%. The domestic plans are generally for hourly employees with a flat dollar benefit formula based on years of service. Foreign plan benefits are primarily determined based on participant years of service, future compensation, and age at retirement or termination. ITT also provides health care and life insurance benefits for certain eligible U.S. employees upon retirement. In some cases, the plan is still open to new employees, but for the majority of our businesses these plans are closed to new participants. The majority of the liability pertains to retirees with postretirement medical insurance. Balance Sheet Information Amounts recognized as liabilities in the Consolidated Balance Sheets for postretirement benefit plans reflect the funded status. The following table provides a summary of the funded status of our postretirement benefit plans and the presentation of the funded status within our Consolidated Balance Sheet as of December 31, 2011 and 2010.
|  | 2011 |  | 2010
|  | Pension |  | Other Benefits |  | Total |  | Pension |  | Other Benefits |  | Total
Fair value of plan assets |  |  | $ | 184 |  |  |  | $ | 8 |  |  |  | $ | 192 |  |  |  | $ | 187 |  |  |  | $ | 8 |  |  |  | $ | 195 |
Projected benefit obligation |  |  |  | 330 |  |  |  |  | 192 |  |  |  |  | 522 |  |  |  |  | 299 |  |  |  |  | 175 |  |  |  |  | 474 |
Funded status |  |  | $ | (146 | ) |  |  | $ | (184 | ) |  |  | $ | (330 | ) |  |  | $ | (112 | ) |  |  | $ | (167 | ) |  |  | $ | (279 | )
Amounts reported within: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Accrued liabilities |  |  | $ | (4 | ) |  |  | $ | (10 | ) |  |  | $ | (14 | ) |  |  | $ | (3 | ) |  |  | $ | (10 | ) |  |  | $ | (13 | )
Non-current liabilities |  |  |  | (142 | ) |  |  |  | (174 | ) |  |  |  | (316 | ) |  |  |  | (109 | ) |  |  |  | (158 | ) |  |  |  | (267 | )
A portion of our projected benefit obligation includes amounts that have not yet been recognized as expense in our results of operations. Such amounts are recorded within accumulated other comprehensive loss until they are amortized as a component of net periodic postretirement cost. The following table provides a summary of amounts recorded within accumulated other comprehensive loss at December 31, 2011 and 2010.
|  | 2011 |  | 2010
|  | Pension |  | Other Benefits |  | Total |  | Pension |  | Other Benefits |  | Total
Net actuarial loss |  |  | $ | 147 |  |  |  | $ | 58 |  |  |  | $ | 205 |  |  |  | $ | 100 |  |  |  | $ | 45 |  |  |  | $ | 145 |
Prior service cost (benefit) |  |  |  | 6 |  |  |  |  | (1 | ) |  |  |  | 5 |  |  |  |  | 9 |  |  |  |  | (1 | ) |  |  |  | 8 |
Total |  |  | $ | 153 |  |  |  | $ | 57 |  |  |  | $ | 210 |  |  |  | $ | 109 |  |  |  | $ | 44 |  |  |  | $ | 153 |
The following table provides a rollforward of the projected benefit obligations for our U.S. and international pension plans for the years ended December 31, 2011 and 2010.
|  | 2011 |  | 2010
|  | U.S. |  | Int’l |  | Total |  | U.S. |  | Int’l |  | Total
Change in benefit obligation |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Benefit obligation – January 1 |  |  | $ | 246 |  |  |  | $ | 53 |  |  |  | $ | 299 |  |  |  | $ | 229 |  |  |  | $ | 51 |  |  |  | $ | 280 |
Service cost |  |  |  | 6 |  |  |  |  | 1 |  |  |  |  | 7 |  |  |  |  | 6 |  |  |  |  | 1 |  |  |  |  | 7 |
Interest cost |  |  |  | 13 |  |  |  |  | 2 |  |  |  |  | 15 |  |  |  |  | 14 |  |  |  |  | 2 |  |  |  |  | 16 |
Amendments /other |  |  |  | (2 | ) |  |  |  | – |  |  |  |  | (2 | ) |  |  |  | (1 | ) |  |  |  | 2 |  |  |  |  | 1 |
Actuarial loss (gain) |  |  |  | 27 |  |  |  |  | (1 | ) |  |  |  | 26 |  |  |  |  | 10 |  |  |  |  | (1 | ) |  |  |  | 9 |
Benefits paid |  |  |  | (13 | ) |  |  |  | (3 | ) |  |  |  | (16 | ) |  |  |  | (12 | ) |  |  |  | (2 | ) |  |  |  | (14 | )
Curtailment / Special termination benefit |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | 1 |
Liabilities assumed through acquisition |  |  |  | – |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Foreign currency translation |  |  |  | – |  |  |  |  | (1 | ) |  |  |  | (1 | ) |  |  |  | – |  |  |  |  | (1 | ) |  |  |  | (1 | )
Benefit obligation – December 31 |  |  | $ | 278 |  |  |  | $ | 52 |  |  |  | $ | 330 |  |  |  | $ | 246 |  |  |  | $ | 53 |  |  |  | $ | 299 |
The following table provides a rollforward of the projected benefit obligations for our other employee-related defined benefit plans for the years ended December 31, 2011 and 2010.
|  | 2011 |  | 2010
Change in benefit obligation |  |  |  |  |  |  |  |  |  |
Benefit obligation – January 1 |  |  | $ | 175 |  |  |  | $ | 171 |
Service cost |  |  |  | 2 |  |  |  |  | 2 |
Interest cost |  |  |  | 9 |  |  |  |  | 9 |
Actuarial loss |  |  |  | 15 |  |  |  |  | 2 |
Benefits paid |  |  |  | (9 | ) |  |  |  | (9 | )
Benefit obligation – December 31 |  |  | $ | 192 |  |  |  | $ | 175 |
The following table provides a rollforward of the pension plan assets and the funded status for our U.S. and international pension plans for the years ended December 31, 2011 and 2010.
|  | 2011 |  | 2010
|  | U.S. |  | Int’l |  | Total |  | U.S. |  | Int’l |  | Total
Change in plan assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Plan assets – January 1 |  |  | $ | 185 |  |  |  | $ | 2 |  |  |  | $ | 187 |  |  |  | $ | 174 |  |  |  | $ | 2 |  |  |  | $ | 176 |
Actual return on plan assets |  |  |  | (6 | ) |  |  |  |  |  |  |  |  | (6 | ) |  |  |  | 23 |  |  |  |  | – |  |  |  |  | 23 |
Employer contributions |  |  |  | 18 |  |  |  |  | 3 |  |  |  |  | 21 |  |  |  |  | 2 |  |  |  |  | 3 |  |  |  |  | 5 |
Benefits paid |  |  |  | (13 | ) |  |  |  | (3 | ) |  |  |  | (16 | ) |  |  |  | (12 | ) |  |  |  | (3 | ) |  |  |  | (15 | )
Expenses |  |  |  | (2 | ) |  |  |  | – |  |  |  |  | (2 | ) |  |  |  | (2 | ) |  |  |  | – |  |  |  |  | (2 | )
Plan assets – December 31 |  |  | $ | 182 |  |  |  | $ | 2 |  |  |  | $ | 184 |  |  |  | $ | 185 |  |  |  | $ | 2 |  |  |  | $ | 187 |
Funded status at end of year |  |  | $ | (96 | ) |  |  | $ | (50 | ) |  |  | $ | (146 | ) |  |  | $ | (61 | ) |  |  | $ | (51 | ) |  |  | $ | (112 | )
The following table provides a rollforward of the other employee-related defined benefit plan assets and the funded status for the years ended December 31, 2011 and 2010.
|  | 2011 |  | 2010
Change in plan assets |  |  |  |  |  |  |  |  |  |
Plan assets – January 1 |  |  | $ | 8 |  |  |  | $ | 8 |
Employer contributions |  |  |  | 9 |  |  |  |  | 9 |
Benefits paid |  |  |  | (9 | ) |  |  |  | (9 | )
Plan assets – December 31 |  |  | $ | 8 |  |  |  | $ | 8 |
Funded status at end of year |  |  | $ | (184 | ) |  |  | $ | (167 | )
The accumulated benefit obligation for all defined benefit pension plans was $328 and $297 at December 31, 2011 and 2010, respectively. The following table provides information for pension plans with an accumulated benefit obligation in excess of plan assets.
|  | 2011 |  | 2010
Projected benefit obligation |  |  | $ | 328 |  |  |  | $ | 299 |
Accumulated benefit obligation |  |  |  | 327 |  |  |  |  | 297 |
Fair value of plan assets |  |  |  | 182 |  |  |  |  | 187 |
Income Statement Information The following table provides the components of net periodic benefit cost and other amounts recognized in other comprehensive income for each of the three years ended December 31, 2011, as they pertain to our defined benefit pension plans.
|  | 2011 |  | 2010 |  | 2009
|  | U.S. |  | Int’l |  | Total |  | U.S. |  | Int’l |  | Total |  | U.S. |  | Int’l |  | Total
Net periodic benefit cost |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service cost |  |  | $ | 6 |  |  |  | $ | 1 |  |  |  | $ | 7 |  |  |  | $ | 6 |  |  |  | $ | 1 |  |  |  | $ | 7 |  |  |  | $ | 4 |  |  |  | $ | 1 |  |  |  | $ | 5 |
Interest cost |  |  |  | 13 |  |  |  |  | 2 |  |  |  |  | 15 |  |  |  |  | 14 |  |  |  |  | 2 |  |  |  |  | 16 |  |  |  |  | 13 |  |  |  |  | 3 |  |  |  |  | 16 |
Expected return on plan assets |  |  |  | (19 | ) |  |  |  | – |  |  |  |  | (19 | ) |  |  |  | (18 | ) |  |  |  | – |  |  |  |  | (18 | ) |  |  |  | (18 | ) |  |  |  | – |  |  |  |  | (18 | )
Amortization of net actuarial loss |  |  |  | 4 |  |  |  |  | – |  |  |  |  | 4 |  |  |  |  | 2 |  |  |  |  | – |  |  |  |  | 2 |  |  |  |  | 2 |  |  |  |  | – |  |  |  |  | 2 |
Amortization of prior service cost |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |
Net periodic benefit cost (income) |  |  |  | 5 |  |  |  |  | 3 |  |  |  |  | 8 |  |  |  |  | 5 |  |  |  |  | 3 |  |  |  |  | 8 |  |  |  |  | 2 |  |  |  |  | 4 |  |  |  |  | 6 |
Effect of curtailment / Special termination benefit |  |  |  | 3 |  |  |  |  | – |  |  |  |  | 3 |  |  |  |  | – |  |  |  |  | 2 |  |  |  |  | 2 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Total net periodic benefit cost (income) |  |  |  | 8 |  |  |  |  | 3 |  |  |  |  | 11 |  |  |  |  | 5 |  |  |  |  | 5 |  |  |  |  | 10 |  |  |  |  | 2 |  |  |  |  | 4 |  |  |  |  | 6 |
Other changes in plan assets and benefit obligations recognized in other comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net loss (gain) |  |  |  | 52 |  |  |  |  | (1 | ) |  |  |  | 51 |  |  |  |  | 5 |  |  |  |  | – |  |  |  |  | 5 |  |  |  |  | (10 | ) |  |  |  | – |  |  |  |  | (10 | )
Prior service cost |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Amortization of net actuarial loss |  |  |  | (4 | ) |  |  |  | – |  |  |  |  | (4 | ) |  |  |  | (2 | ) |  |  |  | – |  |  |  |  | (2 | ) |  |  |  | (2 | ) |  |  |  | – |  |  |  |  | (2 | )
Amortization of prior service cost |  |  |  | (3 | ) |  |  |  | – |  |  |  |  | (3 | ) |  |  |  | (1 | ) |  |  |  | – |  |  |  |  | (1 | ) |  |  |  | (1 | ) |  |  |  | – |  |  |  |  | (1 | )
Total change recognized in other comprehensive (loss) income |  |  |  | 45 |  |  |  |  | (1 | ) |  |  |  | 44 |  |  |  |  | 3 |  |  |  |  | – |  |  |  |  | 3 |  |  |  |  | (13 | ) |  |  |  | – |  |  |  |  | (13 | )
Total impact from net periodic benefit cost and changes in other comprehensive (loss) income |  |  | $ | 53 |  |  |  | $ | 2 |  |  |  | $ | 55 |  |  |  | $ | 8 |  |  |  | $ | 5 |  |  |  | $ | 13 |  |  |  | $ | (11 | ) |  |  | $ | 4 |  |  |  | $ | (7 | )
The following table provides the components of net periodic benefit cost and other amounts recognized in other comprehensive (loss) income for each of the three years ended December 31, 2011, as they pertain to other employee-related defined benefit plans.
|  | 2011 |  | 2010 |  | 2009
Net periodic benefit cost |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Service cost |  |  | $ | 2 |  |  |  | $ | 2 |  |  |  | $ | 2 |
Interest cost |  |  |  | 9 |  |  |  |  | 9 |  |  |  |  | 10 |
Expected return on plan assets |  |  |  | (1 | ) |  |  |  | (1 | ) |  |  |  | (1 | )
Amortization of net actuarial loss |  |  |  | 3 |  |  |  |  | 1 |  |  |  |  | 2 |
Total net periodic benefit cost |  |  |  | 13 |  |  |  |  | 11 |  |  |  |  | 13 |
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net loss |  |  |  | 15 |  |  |  |  | 2 |  |  |  |  | 7 |
Amortization of net actuarial loss |  |  |  | (3 | ) |  |  |  | (1 | ) |  |  |  | (2 | )
Total changes recognized in other comprehensive (loss) income |  |  |  | 12 |  |  |  |  | 1 |  |  |  |  | 5 |
Total impact from net periodic benefit cost and changes in other comprehensive (loss) income |  |  | $ | 25 |  |  |  | $ | 12 |  |  |  | $ | 18 |
The following table provides the estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2012.
|  | Pension |  | Other Benefits |  | Total
Net actuarial loss |  |  | $ | 6 |  |  |  | $ | 4 |  |  |  | $ | 10 |
Prior service cost |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 1 |
Total |  |  | $ | 7 |  |  |  | $ | 4 |  |  |  | $ | 11 |
Postretirement Plan Assumptions The determination of projected benefit obligations and the recognition of expenses related to postretirement benefit plans are dependent on various assumptions that are judgmental and developed in consultation with external advisors. Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country in which such plans exist. Assumptions are reviewed annually and adjusted as necessary. The actuarial assumptions are based on the provisions of the applicable accounting pronouncements, review of various market data and discussion with our external advisors. Changes in these assumptions could materially affect our financial position and results of operations. The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic postretirement cost, as they pertain to our defined benefit pension plans.
|  | 2011 |  | 2010
|  | U.S. |  | Int’l |  | U.S. |  | Int’l
Obligation Assumptions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate |  |  |  | 4.79 | % |  |  |  | 4.85 | % |  |  |  | 5.69 | % |  |  |  | 5.03 | %
Rate of future compensation increase |  |  |  | N/A |  |  |  |  | 2.46 | % |  |  |  | N/A |  |  |  |  | 2.42 | %
Cost Assumptions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rate |  |  |  | 5.69 | % |  |  |  | 5.03 | % |  |  |  | 6.00 | % |  |  |  | 5.09 | %
Expected return on plan assets |  |  |  | 9.00 | % |  |  |  | 4.75 | % |  |  |  | 9.00 | % |  |  |  | 4.75 | %
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic postretirement cost, as they pertain to other employee-related defined benefit plans.
|  | 2011 |  | 2010
Obligation Assumptions: |  |  |  |  |  |  |  |  |  |
Discount rate |  |  |  | 4.80 | % |  |  |  | 5.50 | %
Cost Assumptions: |  |  |  |  |  |  |  |  |  |
Discount rate |  |  |  | 5.50 | % |  |  |  | 6.00 | %
Expected return on plan assets |  |  |  | 9.00 | % |  |  |  | 9.00 | %
The assumed discount rates reflect our expectation of the present value of expected future cash payments for benefits at the measurement date. We base the discount rate assumption on current investment yields of high-quality fixed income securities during the retirement benefits maturity period. The discount rates were determined by considering an interest rate yield curve comprising high quality corporate bonds, with maturities between zero and thirty years. Annual benefit payments are then discounted to present value using this yield curve to develop a single-point discount rate matching the plan’s characteristics. The rate of future compensation increase assumption for foreign plans reflects our long-term actual experience and future and near-term outlook. The expected long-term rate of return on assets reflects the expected returns for each major asset class in which the plans invest, the weight of each asset class in the target mix, the correlations among asset classes and their expected volatilities. Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future returns based on our targeted asset allocation. Specifically, we estimate future returns based on independent estimates of asset class returns weighted by the targeted investment allocation. Prior to the Distribution of Exelis and Xylem, the Company’s U.S. postretirement plans participated in a master trust that invested in asset classes that historically generated asset returns in excess of the expected long-term rate of return on plan assets. With the distribution of certain postretirement benefit plans and their respective plan assets to Exelis and Xylem, we developed a new targeted asset allocation that is expected to generate a lower level of returns on plan assets than were realized in the past. Based on this approach, our weighted average estimate of the long-term annual rate of return on assets for pension plans beginning in 2012 will be reduced to 8%. For postretirement plans that participated in the master trust distributed to Exelis, the chart below shows actual returns compared to the expected long-term returns for our postretirement plans that were utilized in the calculation of the net periodic postretirement cost for each respective year.
|  | 2011 |  | 2010 |  | 2009
Expected rate of return on plan assets |  |  |  | 9.00 | % |  |  |  | 9.00 | % |  |  |  | 9.00 | %
Actual rate of return on plan assets |  |  |  | (3.2 | )% |  |  |  | 14.1 | % |  |  |  | 24.1 | %
For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets is generally derived using a market-related value of plan assets based on average asset values at the measurement date over the last five years. The use of fair value, rather than a market-related value, of plan assets could materially affect net periodic postretirement cost. The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 7.3% for 2012, decreasing ratably to 5.0% in 2019. Increasing the health care trend rates by one percent per year would have the effect of increasing the benefit obligation by $23 and the aggregate annual service and interest cost components by $2. A decrease of one percent in the health care trend rate would reduce the benefit obligation by $19 and the aggregate annual service and interest cost components by $1. To the extent that actual experience differs from these assumptions, the effect will be amortized over the average future service of the covered active employees. Investment Policy The investment strategy for managing worldwide postretirement benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk for each plan. Investment strategies vary by plan, depending on the specific characteristics of the plan, such as plan size and design, funded status, liability profile and legal requirements. Substantially all of the postretirement benefit plan assets are managed on a commingled basis in a master investment trust. With respect to the master investment trust, the Company allows itself broad discretion to invest tactically to respond to changing market conditions, while staying reasonably within the targeted asset allocation ranges prescribed by its investment guidelines. In making these asset allocation decisions, the Company takes into account recent and expected returns and volatility of returns for each asset class, the expected correlation of returns among the different investments, as well as anticipated funding and cash flows. To enhance returns and mitigate risk, the Company diversifies its investments by strategy, asset class, geography and sector. Prior to the Distribution, the domestic postretirement benefit plan assets were included in the master investment trust that also included assets of plans contributed to Exelis and Xylem. At the distribution date, the master trust and all of its investments were transferred to Exelis and ITT received a cash contribution from Exelis proportionate to its share of investments in the master trust which was subsequently invested through a newly established master trust. At December 31, 2011, the plan assets have been invested on a temporary basis. As a result of these developments, the actual asset allocation, targeted asset allocation and mix of investments in the master trust has changed from the prior year. The following table provides the allocation of plan assets held in the master investment trust by asset category, as of December 31, 2011 and 2010, and the related targeted asset allocation ranges by asset category.
|  | 2011 |  | Targeted Allocation Range |  | 2010 |  | Targeted Allocation Range
Domestic equities |  |  |  | 33 | % |  |  |  | 30-40 | % |  |  |  | 25 | % |  |  |  | 25-75 | %
Alternative investments |  |  |  | 0 | % |  |  |  | 0 | % |  |  |  | 47 | % |  |  |  | 20-45 | %
International equities |  |  |  | 27 | % |  |  |  | 20-40 | % |  |  |  | 18 | % |  |  |  | 10-45 | %
Fixed income |  |  |  | 35 | % |  |  |  | 25-45 | % |  |  |  | 2 | % |  |  |  | 0-60 | %
Cash and other |  |  |  | 5 | % |  |  |  | 0-5 | % |  |  |  | 8 | % |  |  |  | 0-30 | %
The strategies and allocations of plan assets outside of the U.S. are managed locally and may differ significantly from those in the U.S. In general and as of December 31, 2011, non-U.S. plan assets of approximately $2 million are managed closely to their strategic allocations. Fair Value of Plan Assets In measuring plan assets at fair value, a fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. The fair value hierarchy is based on maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Classification within the fair value hierarchy is based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy are defined as follows:
| n |  | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
| n |  | Level 2 inputs are other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| n |  | Level 3 inputs are unobservable inputs for the assets or liabilities.
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, the Company has evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value (NAV). Additionally, in certain circumstances, the Company may adjust NAV reported by an asset manager when sufficient evidence indicates NAV is not representative of fair value. The following is a description of the valuation methodologies and inputs used to measure fair value for major categories of investments.
| n |  | Equity securities – Equities (including common and preferred shares, domestic listed and foreign listed, closed end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. As all equity securities held by the Company are publicly traded in active markets, the securities are classified within Level 1 of the fair value hierarchy.
| n |  | Open ended mutual funds, collective trusts and commingled funds – Open ended mutual funds, collective trusts and commingled funds are measured at NAV. These funds are generally classified within Level 2 of the fair value hierarchy.
| n |  | Private equity – The valuation of limited partnership interests in private equity funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. These funds are generally classified within Level 3 of the fair value hierarchy.
| n |  | Absolute return (hedge funds) – The valuation of limited partnership interests in hedge funds may require significant management judgment. The NAV reported by the asset manager is adjusted when management determines that NAV is not representative of fair value. In making such an assessment, a variety of factors are reviewed by management, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. Depending on how quickly ITT can redeem these investments and the extent of any adjustments to NAV, hedge funds are classified within either Level 2 (redeemable within 90 days) or Level 3 (redeemable beyond 90 days) of the fair value hierarchy.
| n |  | Fixed income – U.S. government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g. discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities are generally classified in Level 2 of the fair value hierarchy. Other employee benefit plan assets include an investment in a structured security valued using broker quotes. Due to the significance of unobservable inputs involved in the broker quote, the investment is classified within Level 3 of the fair value hierarchy.
The following table provides the fair value of plan assets held by our postretirement benefit plans, at December 31, 2011 and 2010, by asset class.
|  | Pension |  | Other Benefits
2011 |  | Total |  | Level 2 |  | Total |  | Level 3
Asset Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic |  |  | $ | 60 |  |  |  | $ | 60 |  |  |  | $ | – |  |  |  | $ | – |
International |  |  |  | 33 |  |  |  |  | 33 |  |  |  |  | – |  |  |  |  | – |
Emerging Markets |  |  |  | 16 |  |  |  |  | 16 |  |  |  |  | – |  |  |  |  | – |
Fixed income |  |  |  | 63 |  |  |  |  | 63 |  |  |  |  | – |  |  |  |  | – |
Cash and other |  |  |  | 12 |  |  |  |  | 12 |  |  |  |  | 8 |  |  |  |  | 8 |
Total |  |  | $ | 184 |  |  |  | $ | 184 |  |  |  | $ | 8 |  |  |  | $ | 8 |
|  | Pension |  | Other Benefits
2010 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 3
Asset Category |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Domestic |  |  | $ | 47 |  |  |  | $ | 36 |  |  |  | $ | 7 |  |  |  | $ | 4 |  |  |  | $ | – |  |  |  | $ | – |
International |  |  |  | 15 |  |  |  |  | 10 |  |  |  |  | – |  |  |  |  | 5 |  |  |  |  | – |  |  |  |  | – |
Emerging Markets |  |  |  | 19 |  |  |  |  | 8 |  |  |  |  | 9 |  |  |  |  | 2 |  |  |  |  | – |  |  |  |  | – |
Private equity(a) |  |  |  | 55 |  |  |  |  | – |  |  |  |  | 7 |  |  |  |  | 48 |  |  |  |  | – |  |  |  |  | – |
Absolute return (hedge funds) (b) |  |  |  | 32 |  |  |  |  | – |  |  |  |  | 12 |  |  |  |  | 20 |  |  |  |  | – |  |  |  |  | – |
Commodities, fixed income and other |  |  |  | 19 |  |  |  |  | – |  |  |  |  | 16 |  |  |  |  | 3 |  |  |  |  | 8 |  |  |  |  | 8 |
Total |  |  | $ | 187 |  |  |  | $ | 54 |  |  |  | $ | 51 |  |  |  | $ | 82 |  |  |  | $ | 8 |  |  |  | $ | 8 |
(a) | Private equity includes a diversified range of strategies, including buyout funds, distressed funds, venture and growth equity funds and mezzanine funds.
(b) | Absolute return hedge funds primarily include fund of funds that invest in a diversified portfolio of other hedge funds that employ a range of investment strategies and fixed income/multi-strategy absolute return funds, which invest in multiple investment strategies with the intent of diversifying risk and reducing volatility.
The following table presents a reconciliation of the beginning and ending balances of fair value measurement within our pension plans using significant unobservable inputs (Level 3).
|  | Equity Securities |  | Private Equity |  | Absolute Returns |  | Commodities, Fixed Income and Other |  | Total
Level 3 balance – December 31, 2009 |  |  | $ | 9 |  |  |  | $ | 47 |  |  |  | $ | 21 |  |  |  | $ | 2 |  |  |  | $ | 79 |
Realized gains (losses), net |  |  |  | – |  |  |  |  | 4 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | 4 |
Unrealized gains (losses), net |  |  |  | 2 |  |  |  |  | 2 |  |  |  |  | 1 |  |  |  |  | – |  |  |  |  | 5 |
Purchases/(sales), net |  |  |  | – |  |  |  |  | – |  |  |  |  | (2 | ) |  |  |  | 1 |  |  |  |  | (1 | )
Transfers in (out), net |  |  |  | – |  |  |  |  | (5 | ) |  |  |  | – |  |  |  |  | – |  |  |  |  | (5 | )
Level 3 balance – December 31, 2010 |  |  |  | 11 |  |  |  |  | 48 |  |  |  |  | 20 |  |  |  |  | 3 |  |  |  |  | 82 |
Realized gains (losses), net |  |  |  | (1 | ) |  |  |  | 3 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | 2 |
Unrealized gains (losses), net |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Purchases/(sales) and settlements, net |  |  |  | (10 | ) |  |  |  | (51 | ) |  |  |  | (20 | ) |  |  |  | (3 | ) |  |  |  | (84 | )
Transfers in (out), net |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Level 3 balance – December 31, 2011 |  |  | $ | – |  |  |  | $ | – |  |  |  | $ | – |  |  |  | $ | – |  |  |  | $ | – |
There have been no significant realized or unrealized gains and losses, purchases, sales or transfers of assets within our other employee-related benefit plans measured using significant unobservable inputs (Level 3). Contributions Funding requirements under IRS rules are a major consideration in making contributions to our post-retirement plans. With respect to qualified pension plans, we intend to contribute annually not less than the minimum required by applicable law and regulations. In addition, we fund certain of our international pension plans in countries where funding is allowable and tax-efficient. We made contributions of $21 and $5 to pension plans during 2011 and 2010, respectively. We anticipate making contributions to our global pension plans of $20 to $25 during 2012, of which $2 has been made in the first quarter. Estimated Future Benefit Payments The following table provides the projected timing of payments for benefits earned to date and the expectation that certain future service will be earned by current active employees for our pension and other employee-related benefit plans.
|  | U.S. Pension |  | Int’l Pension |  | Other Benefits
2012 |  |  | $ | 15 |  |  |  | $ | 3 |  |  |  | $ | 11 |
2013 |  |  |  | 15 |  |  |  |  | 3 |  |  |  |  | 11 |
2014 |  |  |  | 16 |  |  |  |  | 4 |  |  |  |  | 11 |
2015 |  |  |  | 16 |  |  |  |  | 4 |  |  |  |  | 12 |
2016 |  |  |  | 17 |  |  |  |  | 4 |  |  |  |  | 12 |
2017 – 2021 |  |  | $ | 93 |  |  |  | $ | 17 |  |  |  | $ | 61 |

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