6. Retirement Plans
Devon has various non-contributory defined benefit pension plans, including qualified plans ("Qualified Plans") and nonqualified plans ("Supplemental Plans"). The Qualified Plans provide retirement benefits for U.S. and Canadian employees meeting certain age and service requirements. Benefits for the Qualified Plans are based on the employees' years of service and compensation and are funded from assets held in the plans' trusts.
Devon's funding policy regarding the Qualified Plans is to contribute the amount of funds necessary so that the Qualified Plans' assets will be approximately equal to the related accumulated benefit obligation. As of December 31, 2007 and 2006, the fair values of the Qualified Plans' assets were $619 million and $590 million, respectively, which were $62 million and $59 million more, respectively, than the related accumulated benefit obligation. The actual amount of contributions required during future periods will depend on investment returns from the plan assets during the same period as well as changes in long-term interest rates.
The Supplemental Plans provide retirement benefits for certain employees whose benefits under the Qualified Plans are limited by income tax regulations. The Supplemental Plans' benefits are based on the employees' years of service and compensation. For certain Supplemental Plans, Devon has established trusts to fund these plans' benefit obligations. The total value of these trusts was $59 million at both December 31, 2007 and 2006, and is included in noncurrent other assets in the consolidated balance sheets. For the remaining Supplemental Plans for which trusts have not been established, benefits are funded from Devon's available cash and cash equivalents.
Devon also has defined benefit postretirement plans ("Postretirement Plans") that provide benefits for substantially all U.S. employees. The Postretirement Plans provide medical and, in some cases, life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. Benefit obligations for the Postretirement Plans are estimated based on Devon's future cost-sharing intentions. Devon's funding policy for the Postretirement Plans is to fund the benefits as they become payable with available cash and cash equivalents.
Revisions to Retirement Plans
In the second quarter of 2007, Devon adopted an enhanced defined contribution structure related to its 401(k) Incentive Savings Plan ("401(k) Plan") to be effective January 1, 2008. Participants in this enhanced defined contribution structure will continue to receive a discretionary match of a percentage of their contributions to the 401(k) Plan. These participants will also receive additional, nondiscretionary contributions by Devon calculated as a percentage of annual compensation. The percentage will vary based on the employees' years of service.
On or before November 15, 2007, existing eligible employees elected to either continue to participate in the defined benefit plan or participate in the enhanced defined contribution structure of the 401(k) Plan. Employees who elected to continue participating in the defined benefit plans will continue to accrue benefits under the existing provisions of such plans. Employees who elected to participate in the enhanced defined contribution structure will receive enhanced contributions to the 401(k) Plan and will retain the benefits that they have accrued under the defined benefit plan as of December 31, 2007. However, such employees will only be entitled to the benefits that have accrued in the defined benefit plans as of December 31, 2007, after all applicable vesting requirements have been met. Employees hired on or after October 1, 2007 will not have an election and will only participate in the 401(k) Plan and the enhanced defined contribution structure.
For those employees who elected to participate in the enhanced defined contribution structure, Devon's pension benefit obligation included $16 million related to projected future years of service for these employees. Because this portion of the employees' benefits was curtailed upon their election, Devon reduced its pension liabilities by $16 million in the fourth quarter of 2007.
Change in Measurement Date
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Statement No. 158 requires the measurement of plan assets and benefit obligations as of the date of the employer's fiscal year-end, beginning with fiscal years ending after December 15, 2008. Although not required until 2008, Devon adopted this measurement-date requirement in the second quarter of 2007 and changed its measurement date from November 30 to December 31. As a result, Devon used data as of December 31, 2006 to remeasure its plans assets and benefit obligations previously measured using data as of November 30, 2006. As a result of the remeasurement, Devon recognized the following amounts in the second quarter of 2007.
| Increase (Decrease) | |||
|---|---|---|---|
| (In millions) | |||
| Other long-term liabilities | $ | (27 | ) |
| Deferred income tax liabilities | $ | 9 | |
| Retained earnings | $ | (1 | ) |
| Accumulated other comprehensive income | $ | 16 | |
| General and administrative expenses | $ | (3 | ) |
Benefit Obligations and Plan Assets
The following table presents the status of Devon's pension and other postretirement benefit plans for 2007 and 2006. The benefit obligation for pension plans represents the projected benefit obligation, while the benefit obligation for the postretirement benefit plans represents the accumulated benefit obligation. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. The accumulated benefit obligation for pension plans at December 31, 2007 and 2006 was $693 million and $652 million, respectively.
| Pension Benefits | Other Postretirement Benefits |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | |||||||||
| (In millions) | ||||||||||||
| Change in benefit obligation: Benefit obligation at beginning of year |
$ | 768 | 666 | 52 | 54 | |||||||
| Effect of change in measurement date | (23 | ) | — | (1 | ) | — | ||||||
| Service cost | 30 | 23 | 1 | — | ||||||||
| Interest cost | 46 | 39 | 3 | 3 | ||||||||
| Participant contributions | — | — | 2 | 2 | ||||||||
| Plan amendments | 17 | 2 | 23 | 1 | ||||||||
| Curtailment gain | (16 | ) | — | — | — | |||||||
| Foreign exchange rate changes | 6 | 1 | — | — | ||||||||
| Actuarial loss (gain) | 51 | 66 | (2 | ) | — | |||||||
| Benefits paid | (30 | ) | (29 | ) | (7 | ) | (8 | ) | ||||
| Benefit obligation at end of year | 849 | 768 | 71 | 52 | ||||||||
Change in plan assets: Fair value of plan assets at beginning of year |
590 | 533 | — | — | ||||||||
| Effect of change in measurement date | 3 | — | — | — | ||||||||
| Actual return on plan assets | 47 | 79 | — | — | ||||||||
| Employer contributions | 6 | 6 | 5 | 6 | ||||||||
| Participant contributions | — | — | 2 | 2 | ||||||||
| Benefits paid | (30 | ) | (29 | ) | (7 | ) | (8 | ) | ||||
| Foreign exchange rate changes | 3 | 1 | — | — | ||||||||
| Fair value of plan assets at end of year | 619 | 590 | — | — | ||||||||
Funded status at end of year |
$ | (230 | ) | (178 | ) | (71 | ) | (52 | ) | |||
Amounts recognized in balance sheet: Noncurrent assets |
$ | 3 | 2 | — | — | |||||||
| Current liabilities | (8 | ) | (7 | ) | (6 | ) | (5 | ) | ||||
| Noncurrent liabilities | (225 | ) | (173 | ) | (65 | ) | (47 | ) | ||||
| Net amount | $ | (230 | ) | (178 | ) | (71 | ) | (52 | ) | |||
Amounts recognized in accumulated other comprehensive income: Net actuarial loss |
$ | 208 | 214 | 2 | 6 | |||||||
| Prior service cost (benefit) | 22 | 6 | 15 | (7 | ) | |||||||
| Total | $ | 230 | 220 | 17 | (1 | ) | ||||||
The plan assets for pension benefits in the table above exclude the assets held in trusts for the Supplemental Plans. However, employer contributions for pension benefits in the table above include $6 million for both 2007 and 2006, which were transferred from the trusts established for the Supplemental Plans.
Certain of Devon's pension and postretirement plans have a projected benefit obligation in excess of plan assets at December 31, 2007 and 2006. The aggregate benefit obligation and fair value of plan assets for these plans is included below.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (In millions) | ||||||
| Projected benefit obligation | $ | 834 | 755 | |||
| Fair value of plan assets | $ | 601 | 574 | |||
Certain of Devon's pension plans have an accumulated benefit obligation in excess of plan assets at December 31, 2007 and 2006. The aggregate accumulated benefit obligation and fair value of plan assets for these plans is included below.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (In millions) | ||||||
| Accumulated benefit obligation | $ | 135 | 121 | |||
| Fair value of plan assets | $ | — | — | |||
The plan assets included in the above two tables exclude the Supplemental Plan trusts, which had a total value of $59 million at both December 31, 2007 and 2006.
Net Periodic Benefit Cost and Other Comprehensive Income
The following table presents the components of net periodic benefit cost and other comprehensive income for Devon's pension and other postretirement benefit plans for 2007, 2006 and 2005.
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||
| (In millions) | ||||||||||||||||||
| Net periodic benefit cost: Service cost |
$ | 30 | 23 | 18 | 1 | 1 | 1 | |||||||||||
| Interest cost | 46 | 39 | 35 | 3 | 3 | 3 | ||||||||||||
| Expected return on plan assets | (49 | ) | (44 | ) | (36 | ) | — | — | — | |||||||||
| Curtailment and settlement expense | 1 | — | — | — | — | — | ||||||||||||
| Plan amendment | — | — | — | 1 | — | — | ||||||||||||
| Recognition net actuarial loss | 12 | 12 | 8 | 1 | 1 | — | ||||||||||||
| Recognition of prior service cost | 1 | 1 | 1 | — | — | (1 | ) | |||||||||||
| Total net periodic benefit cost | 41 | 31 | 26 | 6 | 5 | 3 | ||||||||||||
| Other comprehensive income: Actuarial loss (gain) arising in current year |
54 | — | — | (3 | ) | — | — | |||||||||||
| Prior service cost arising in current year | 17 | — | — | 22 | — | — | ||||||||||||
| Recognition of net actuarial loss in net periodic benefit cost |
(12 | ) | — | — | (1 | ) | — | — | ||||||||||
| Recognition of prior service cost in net periodic benefit cost |
(1 | ) | — | — | — | — | — | |||||||||||
| Curtailment of pension benefits | (16 | ) | — | — | — | — | — | |||||||||||
| Change in additional minimum pension liability | — | 30 | (8 | ) | — | — | — | |||||||||||
| Total other comprehensive income | 42 | 30 | (8 | ) | 18 | — | — | |||||||||||
| Total recognized | $ | 83 | 31 | 26 | 24 | 5 | 3 | |||||||||||
The following table presents the estimated net actuarial loss and prior service cost for the pension and other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2008.
| Pension Benefits | Other Postretirement Benefits |
|||||
|---|---|---|---|---|---|---|
| (In millions) | ||||||
| Net actuarial loss | $ | 14 | — | |||
| Prior service cost | 2 | 2 | ||||
| Total | $ | 16 | 2 | |||