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Benefit Plans
 12 Months Ended
Dec. 31, 2012
BENEFIT PLANS

15. BENEFIT PLANS

Defined Contribution Plan

The Company sponsors one defined contribution plan (“the Plan”), qualified under section 401 of the Internal Revenue Code. All U.S. employees of the Company are eligible to participate in the Plan except for those employees who are covered by a collective bargaining agreement, unless such agreement specifically provides that the employee is considered an eligible employee under the Plan. The Plan provides matching contributions in AES common stock, other contributions at the discretion of the Compensation Committee of the Board of Directors in AES common stock and discretionary tax deferred contributions from the participants. Participants are fully vested in their own contributions and the Company's matching contributions. Participants vest in other company contributions ratably over a five-year period ending on the fifth anniversary of their hire date. For the year ended December 31, 2012, the Company's contributions to the Plan were approximately $21 million, and for the years ended December 31, 2011 and 2010, contributions were $22 million per year.

Defined Benefit Plans

Certain of the Company's subsidiaries have defined benefit pension plans covering substantially all of their respective employees. Pension benefits are based on years of credited service, age of the participant and average earnings. Of the 31 active defined benefit plans as of December 31, 2012, 5 are at U.S. subsidiaries and the remaining plans are at foreign subsidiaries.

The following table reconciles the Company's funded status, both domestic and foreign, as of December 31, 2012 and 2011:

  December 31,
  2012 2011
  U.S. Foreign U.S. Foreign
             
  (in millions)
CHANGE IN PROJECTED BENEFIT OBLIGATION:            
Benefit obligation as of January 1 $ 1,044 $ 5,789 $ 608 $ 5,986
Service cost   14   19   8   19
Interest cost   48   481   33   564
Employee contributions   -   5   -   5
Plan amendments   7   1   -   -
Plan curtailments   -   -   -   5
Plan settlements   (1)   (2)   -   -
Benefits paid   (51)   (408)   (30)   (465)
Business combinations   -   -   365   -
Assumption of a plan due to the resolution of bankruptcy proceedings(1)   51   -   -   -
Actuarial loss   98   1,339   60   371
Effect of foreign currency exchange rate change   -   (415)   -   (696)
Benefit obligation as of December 31  $ 1,210 $ 6,809 $ 1,044 $ 5,789
CHANGE IN PLAN ASSETS:            
Fair value of plan assets as of January 1 $ 762 $ 4,400 $ 413 $ 4,730
Actual return on plan assets   97   888   6   486
Employer contributions   49   155   37   175
Employee contributions   -   5   -   5
Plan settlements   (1)   (2)   -   -
Benefits paid   (51)   (408)   (30)   (465)
Business combinations   -   -   336   -
Assumption of a plan due to the resolution of bankruptcy proceedings(1)   27   -   -   -
Effect of foreign currency exchange rate change   -   (326)   -   (531)
Fair value of plan assets as of December 31  $ 883 $ 4,712 $ 762 $ 4,400
RECONCILIATION OF FUNDED STATUS            
Funded status as of December 31 $ (327) $ (2,097) $ (282) $ (1,389)

  • The Company assumed the pension plan for AES Eastern Energy on December 28, 2012 as part of the settlement of the bankruptcy proceedings. See Note 23—Discontinued Operations and Held for Sale Businesses for further information.

 

The following table summarizes the amounts recognized on the Consolidated Balance Sheets related to the funded status of the plans, both domestic and foreign, as of December 31, 2012 and 2011:

  December 31,
  2012 2011
  U.S. Foreign U.S. Foreign
             
  (in millions)
AMOUNTS RECOGNIZED ON THE             
CONSOLIDATED BALANCE SHEETS            
Noncurrent assets $ - $ - $ - $ 20
Accrued benefit liability - current   -   (6)   (1)   (4)
Accrued benefit liability - noncurrent   (327)   (2,091)   (281)   (1,405)
Net amount recognized at end of year $ (327) $ (2,097) $ (282) $ (1,389)

The following table summarizes the Company's accumulated benefit obligation, both domestic and foreign, as of December 31, 2012 and 2011:

     December 31,
     2012 2011
     U.S. Foreign U.S. Foreign
                
     (in millions)
Accumulated Benefit Obligation  $ 1,180 $ 6,695 $ 1,020 $ 5,724
 Information for pension plans with an accumulated             
  benefit obligation in excess of plan assets:            
   Projected benefit obligation  $ 1,210 $ 6,438 $ 1,044 $ 5,478
   Accumulated benefit obligation    1,180   6,352   1,020   5,423
   Fair value of plan assets    883   4,360   762   4,072
 Information for pension plans with a projected             
  benefit obligation in excess of plan assets:            
   Projected benefit obligation  $ 1,210 $ 6,809(1) $ 1,044 $ 5,492
   Fair value of plan assets    883   4,712(1)   762   4,084

______________________________

  • $1.9 billion of the total net unfunded projected benefit obligation is due to Eletropaulo in Brazil.

 

The table below summarizes the significant weighted average assumptions used in the calculation of benefit obligation and net periodic benefit cost, both domestic and foreign, as of December 31, 2012 and 2011:

   December 31,
   2012 2011
   U.S. Foreign U.S. Foreign
Benefit Obligation:        
 Discount rates  3.86% 8.25%(2) 4.67% 9.52%(2)
 Rates of compensation increase 3.94%(1) 6.45% 3.94%(1) 5.98%
Periodic Benefit Cost:        
 Discount rate 4.67% 9.52% 5.38% 9.82%
 Expected long-term rate of return on plan assets 7.28% 10.81% 7.49% 11.08%
 Rate of compensation increase  3.94%(1) 5.98% 3.94%(1) 5.98%

  • A U.S. subsidiary of the Company has a defined benefit obligation of $764 million and $679 million as of December 31, 2012 and 2011, respectively, and uses salary bands to determine future benefit costs rather than rates of compensation increases. Rates of compensation increases in the table above do not include amounts related to this specific defined benefit plan.
  • Includes an inflation factor that is used to calculate future periodic benefit cost, but is not used to calculate the benefit obligation.

The Company establishes its estimated long-term return on plan assets considering various factors, which include the targeted asset allocation percentages, historic returns and expected future returns.  

The measurement of pension obligations, costs and liabilities is dependent on a variety of assumptions. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors:

•       discount rates;

•       salary growth;

•       retirement rates;

•       inflation;

•       expected return on plan assets; and

•       mortality rates.

The effects of actual results differing from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect the Company's recognized expense in such future periods.

Sensitivity of the Company's pension funded status to the indicated increase or decrease in the discount rate and long-term rate of return on plan assets assumptions is shown below. Note that these sensitivities may be asymmetric and are specific to the base conditions at year-end 2012. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The funded status as of December 31, 2012 is affected by the assumptions as of that date. Pension expense for 2012 is affected by the December 31, 2011 assumptions. The impact on pension expense from a one percentage point change in these assumptions is shown in the table below (in millions):

 Increase of 1% in the discount rate $ (48)
 Decrease of 1% in the discount rate   38
 Increase of 1% in the long-term rate of return on plan assets   (47)
 Decrease of 1% in the long-term rate of return on plan assets   47

The following table summarizes the components of the net periodic benefit cost, both domestic and foreign, for the years ended December 31, 2012 through 2010:

  December 31,
Components of Net Periodic Benefit Cost: 2012 2011 2010
 U.S. Foreign U.S. Foreign U.S. Foreign
                   
  (in millions)
Service cost $ 14 $ 19 $ 8 $ 19 $ 7 $ 16
Interest cost   48   481   33   564   32   510
Expected return on plan assets   (55)   (418)   (33)   (508)   (30)   (427)
Amortization of initial net asset   -   -   -   -   -   (1)
Amortization of prior service cost   4   -   4   -   3   -
Amortization of net loss   19   37   13   23   12   38
Loss on curtailment   -   -   -   5   -   -
Settlement gain recognized   -   1   -   -   -   1
Total pension cost $ 30 $ 120 $ 25 $ 103 $ 24 $ 137

The following table summarizes the amounts reflected in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheet as of December 31, 2012, that have not yet been recognized as components of net periodic benefit cost and amounts expected to be reclassified to earnings in the next fiscal year:

  December 31, 2012
  Accumulated Other Comprehensive Loss Amounts expected to be reclassified to earnings in next fiscal year
  U.S. Foreign U.S. Foreign
             
  (in millions)
             
Prior service cost $ - $ (2) $ - $ -
Unrecognized net actuarial loss   -   (1,873)   -   (83)
Total $ - $ (1,875) $ - $ (83)

The following table summarizes the Company's target allocation for 2012 and pension plan asset allocation, both domestic and foreign, as of December 31, 2012 and 2011:

      Percentage of Plan Assets as of December 31,
  Target Allocations 2012 2011
Asset Category U.S. Foreign U.S. Foreign U.S. Foreign
           
Equity securities 41% 15% - 30% 32.28% 19.76% 34.12% 23.48%
Debt securities 49% 59% - 85% 46.66% 76.21% 38.58% 72.55%
Real estate 2% 0% - 4% 0.00% 2.57% 0.00% 2.34%
Other 8% 0% - 6% 21.06% 1.46% 27.30% 1.63%
Total pension assets     100.00% 100.00% 100.00% 100.00%

The U.S. plans seek to achieve the following long-term investment objectives:

•       maintenance of sufficient income and liquidity to pay retirement benefits and other lump sum payments;

•       long-term rate of return in excess of the annualized inflation rate;

•       long-term rate of return, net of relevant fees, that meet or exceed the assumed actuarial rate; and

•       long-term competitive rate of return on investments, net of expenses, that is equal to or exceeds various benchmark rates.

The asset allocation is reviewed periodically to determine a suitable asset allocation which seeks to manage risk through portfolio diversification and takes into account, among other possible factors, the above-stated objectives, in conjunction with current funding levels, cash flow conditions and economic and industry trends. The following table summarizes the Company's U.S. plan assets by category of investment and level within the fair value hierarchy as of December 31, 2012 and 2011:

    December 31, 2012 December 31, 2011 
U.S. Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 
                            
    (in millions) 
Equity securities:                         
 Common stock $ 134 $ - $ - $ 134 $ 120 $ - $ - $ 120 
 Mutual funds   151   -   -   151   140   -   -   140 
Debt securities:                         
 Government debt securities   32   -   -   32   31   -   -   31 
 Corporate debt securities   4   149   -   153   -   78   -   78 
 Mutual funds(1)   227   -   -   227   135   -   -   135 
 Other debt securities   -   -   -   -   -   50   -   50 
Other:                         
 Cash and cash equivalents   43   -   -   43   43   -   -   43 
 Other investments   38   105   -   143   72   93   -   165 
  Total plan assets $ 629 $ 254 $ - $ 883 $ 541 $ 221 $ - $ 762 

(1)       Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.

The investment strategy of the foreign plans seeks to maximize return on investment while minimizing risk. The assumed asset allocation has less exposure to equities in order to closely match market conditions and near term forecasts. The following table summarizes the Company's foreign plan assets by category of investment and level within the fair value hierarchy as of December 31, 2012 and 2011:

    December 31, 2012 December 31, 2011
Foreign Plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
                           
    (in millions)
Equity securities:                        
 Common stock $ 28 $ - $ - $ 28 $ 26 $ - $ - $ 26
 Mutual funds   457   -   -   457   427   -   -   427
 Private equity(1)   -   -   446   446   -   -   580   580
Debt securities:                        
 Certificates of deposit   -   3   -   3   -   5   -   5
 Unsecured debentures   -   16   -   16   -   20   -   20
 Government debt securities   9   206   -   215   6   221   -   227
 Mutual funds(2)   139   3,208   -   3,347   125   2,805   -   2,930
 Other debt securities   -   10   -   10   -   10   -   10
Real estate:                        
 Real estate(1)   -   -   121   121   -   -   103   103
Other:                        
 Cash and cash equivalents   1   -   -   1   -   -   -   -
 Participant loans(3)   -   -   68   68   -   -   72   72
  Total plan assets $ 634 $ 3,443 $ 635 $ 4,712 $ 584 $ 3,061 $ 755 $ 4,400

  • Plan assets of our Brazilian subsidiaries are invested in private equities and commercial real estate through the plan administrator in Brazil. The fair value of these assets is determined using the income approach through annual appraisals based on a discounted cash flow analysis.
  • Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.
  • Loans to participants are stated at cost, which approximates fair value.

The following table presents a reconciliation of all plan assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:

     Year Ended December 31,
     2012 2011
      
     (in millions)
          
 Balance at January 1 $ 755 $ 703
  Actual return on plan assets:      
   Returns relating to assets still held at reporting date   (60)   167
   Returns relating to assets sold during the period   -   28
  Purchases, sales and settlements, net   3   (48)
  Change due to exchange rate changes   (63)   (95)
 Balance at December 31 $ 635 $ 755

The following table summarizes the scheduled cash flows for U.S. and foreign expected employer contributions and expected future benefit payments, both domestic and foreign:

    U.S. Foreign
    (in millions)
Expected employer contribution in 2013 $ 53 $ 165
Expected benefit payments for fiscal year ending:      
2013    58   425
2014    60   439
2015    62   457
2016    64   474
2017    66   492
2018 - 2022   354   2,739