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Note 5 — Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution and medical and dental plans. Information for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:
| (dollars in millions) | Defined Benefit Plans | Medical and Dental Plans | ||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |
| Projected benefit obligations, January 1 | $ 5,783 | $5,614 | $5,041 | $ 1,514 | $ 1,520 | $ 1,292 |
| Service cost — benefits earned during the year | 233 | 249 | 219 | 43 | 58 | 56 |
| Interest cost on projected benefit obligations | 353 | 316 | 275 | 92 | 97 | 80 |
| Losses (gains), primarily changes in discount and medical cost trend rates, plan design changes, law changes and differences between actual and estimated health care costs | (278) | (309) | 64 | (158) | (100) | 134 |
| Benefits paid | (241) | (228) | (213) | (68) | (61) | (68) |
| Other, primarily foreign currency translation | (309) | 141 | 228 | 20 | — | 26 |
| Projected benefit obligations, December 31 | $5,541 | $5,783 | $5,614 | $1,443 | $1,514 | $1,520 |
| Plans' assets at fair value, January 1 | $ 5,667 | $5,086 | $4,349 | $ 307 | $ 212 | $ 149 |
| Actual return on plans' assets | (1,568) | 442 | 508 | (106) | 20 | 23 |
| Company contributions | 285 | 283 | 266 | 133 | 136 | 108 |
| Benefits paid | (241) | (228) | (213) | (68) | (61) | (68) |
| Other, primarily foreign currency translation | (146) | 84 | 176 | — | — | — |
| Plans' assets at fair value, December 31 | $3,997 | $5,667 | $5,086 | $ 266 | $ 307 | $ 212 |
| Projected benefit obligations greater than plans' assets, December 31 | $(1,544) | $ (116) | $ (528) | $(1,177) | $(1,207) | $(1,308) |
| Long-term assets | $ 16 | $ 576 | $84 | $ — | $ — | $ — |
| Short-term liabilities | (24) | (27) | (23) | — | — | — |
| Long-term liabilities | (1,536) | (665) | (589) | (1,177) | (1,207) | (1,308) |
| Net liability | $(1,544) | $ (116) | $ (528) | $(1,177) | $(1,207) | $(1,308) |
| Amounts Recognized in Accumulated Other | ||||||
| Comprehensive Income (loss): | ||||||
| Actuarial losses, net | $ 2,554 | $ 920 | $1,343 | $ 587 | $ 635 | $ 786 |
| Prior service cost (credits) | 38 | 40 | 43 | (206) | (227) | (249) |
| Total | $ 2,592 | $ 960 | $1,386 | $ 381 | $ 408 | $ 537 |
The projected benefit obligations for non-U.S. defined benefit plans was $1.3 billion, $1.8 billion and $1.5 billion at December 31, 2008, 2007 and 2006, respectively. The accumulated benefit obligations for all defined benefit plans was $4.7 billion, $4.9 billion and $4.7 billion at December 31, 2008, 2007 and 2006, respectively. For plans where the accumulated benefit obligations exceeded plan assets at December 31, 2008, 2007 and 2006, the aggregate accumulated benefit obligations were $4.2 billion, $697 million and $544 million, respectively; the projected benefit obligations were $4.8 billion, $770 million and $592 million, respectively; and the aggregate plan assets were $3.3 billion, $84 million and $22 million, respectively.
| (dollars in millions) | Defined Benefit Plans | Medical and Dental Plans | ||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |
| Service cost — benefits earned during the year | $ 233 | $ 249 | $ 219 | $ 43 | $ 58 | $ 56 |
| Interest cost on projected benefit obligations | 353 | 316 | 275 | 92 | 97 | 80 |
| Expected return on plans' assets | (487) | (426) | (382) | (33) | (24) | (16) |
| Amortization of actuarial losses | 34 | 81 | 78 | 29 | 55 | 44 |
| Amortization of prior service cost (credits) | 4 | 4 | — | (21) | (22) | (21) |
| Total cost | $ 137 | $ 224 | $ 190 | $110 | $164 | $143 |
Other comprehensive income (loss) for 2008 includes amortization of actuarial losses and prior service cost of $34 million and $4 million, respectively, and net actuarial losses of $1.6 billion for defined benefit plans and amortization of actuarial losses and prior service credits of $29 million and $21 million, respectively, and net actuarial gains of $19 million for medical and dental plans. Other comprehensive income (loss) for 2007 includes amortization of actuarial losses and prior service cost of $81 million and $4 million, respectively, and net actuarial gains of $341 million for defined benefit plans and amortization of actuarial losses and prior service credits of $55 million and $22 million, respectively, and net actuarial gains of $96 million for medical and dental plans. The pretax amount of actuarial losses and prior service cost (credits) included in Accumulated other comprehensive income (loss) at December 31, 2008 that is expected to be recognized in the net periodic benefit cost in 2009 is $61 million and $4 million, respectively, for defined benefit pension plans and $32 million and $(22) million, respectively, for medical and dental plans.
The weighted average assumptions used to determine benefit obligations for defined benefit plans and medical and dental plans are as follows:
| 2008 | 2007 | 2006 | |
| Discount rate | 6.7% | 6.2% | 5.7% |
| Expected aggregate average long-term change in compensation | 4.3% | 4.2% | 4.2% |
The weighted average assumptions used to determine the net cost for defined benefit plans and medical and dental plans are as follows:
| 2008 | 2007 | 2006 | |
| Discount rate | 6.2% | 5.7% | 5.5% |
| Expected return on plan assets | 8.4% | 8.3% | 8.5% |
| Expected aggregate average long-term change in compensation | 4.2% | 4.2% | 4.2% |
The assumed health care cost trend rates for medical and dental plans at December 31 were as follows:
| 2008 | 2007 | 2006 | |
| Health care cost trend rate assumed for the next year | 7% | 7% | 7% |
| Rate that the cost trend rate gradually declines to | 5% | 5% | 5% |
| Year that rate reaches the assumed ultimate rate | 2012 | 2012 | 2012 |
The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates represent Abbott’s expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date. A one-percentage point increase/(decrease) in the assumed health care cost trend rate would increase/(decrease) the accumulated post-employment benefit obligations as of December 31, 2008, by
$193 million /$(157) million, and the total of the service and interest cost components of net post-employment health care cost for the year then ended by approximately $23 million /$(18) million.
Approximately 58 percent of Abbott’s U.S. defined benefit plans and medical and dental plans assets are invested in equity securities, 30 percent in fixed income securities, and the remainder in other securities, which consist of investment partnerships that employ diverse investment strategies across a wide variety of asset classes and financial instruments. The investment mix of equity securities, fixed income and other securities is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities. Abbott’s domestic plans are invested in diversified portfolios of public-market equity and fixed-income securities. Investment allocations are made across a range of markets, industry sectors, capitalization sizes, and in the case of fixed income securities, maturities and credit quality. The plans do not directly hold any securities of Abbott. Abbott’s international defined benefit plans are invested approximately 70 percent in equities and 30 percent in fixed income securities.
The plans’ expected return on assets, as shown above, is based on management’s expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plans are invested, as well as current economic and capital market conditions.
Abbott funds its domestic pension plans according to IRS funding limitations. In 2008, 2007 and 2006, $200 million was funded to the main domestic pension plan. International pension plans are funded according to similar regulations. Abbott expects pension funding for its main domestic pension plan of $700 million in 2009 and $200 million annually thereafter.
Total benefit payments expected to be paid to participants, which includes payments funded from company assets as well as paid from the plans, are as follows:
| (dollars in millions) | Defined Benefit Plans |
Medical and Dental Plans |
| 2009 | $ 237 | $ 80 |
| 2010 | 245 | 85 |
| 2011 | 253 | 90 |
| 2012 | 266 | 94 |
| 2013 | 277 | 97 |
| 2014 to 2018 | 1,706 | 557 |
The Abbott Stock Retirement Plan is the principal defined contribution plan. Abbott’s contributions to this plan were $129 million in 2008, $119 million in 2007 and $102 million in 2006.
Abbott provides certain other post-employment benefits, primarily salary continuation plans, to qualifying domestic employees, and accrues for the related cost over the service lives of the employees.
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