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Print friendly pdf of Form 10-K Part II |
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Item 8 Notes to Consolidated Financial Statements
25. Pension and Other Benefit Plans
US Pension Plans
Schlumberger and its US subsidiary sponsor several defined benefit pension plans that cover substantially all employees. The benefits are based on years of service and compensation on a career-average pay basis. These plans are funded through a trust in respect to past and current service. Charges to expense are based upon costs computed by independent actuaries. The funding policy is to annually contribute amounts that are allowable for federal income tax purposes. These contributions are intended to provide for benefits earned to date and those expected to be earned in the future. The contribution in 2004 is expected to be between $40 million and $150 million.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense were as follows:
|
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|
 |
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| |
| |
2003 |
|
2002 |
|
2001 |
|
| Assumed discount rate |
6.75 |
% |
7.25 |
% |
7.50 |
% |
| Compensation increases |
3.00 |
% |
3.00 |
% |
4.50 |
% |
| Return on plan assets |
8.50 |
% |
8.50 |
% |
9.00 |
% |
|
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| |
Net pension cost in the US for 2003, 2002 and 2001, included the following components:
|
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| |
| |
2003 |
|
2002 |
|
2001 |
|
| Service cost – benefits earned during the period |
$ |
56 |
|
$ |
51 |
|
$ |
38 |
|
| Interest cost on projected benefit obligation |
|
93 |
|
|
90 |
|
|
84 |
|
Expected return on plan assets
[actual return: 2003 – $177; 2002 – $(114); 2001 – $(70)] |
|
(87 |
) |
|
(93 |
) |
|
(101 |
) |
| Amortization of transition assets |
|
— |
|
|
— |
|
|
(1 |
) |
| Amortization of prior service cost/other |
|
5 |
|
|
7 |
|
|
7 |
|
| Amortization of unrecognized net loss (gain) |
|
4 |
|
|
— |
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(4 |
) |
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|
|
|
|
|
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| Net pension cost |
$ |
71 |
|
$ |
55 |
|
$ |
23 |
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The change in the projected benefit obligation, plan assets and funded status of the plans on December 31, 2003 and 2002, was as follows:
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| |
|
2003 |
|
|
2002 |
|
| Projected benefit obligation at beginning of the year |
$ |
1,441 |
|
$ |
1,254 |
|
| Service cost |
|
56 |
|
|
51 |
|
| Interest cost |
|
93 |
|
|
90 |
|
| Actuarial losses |
|
94 |
|
|
123 |
|
| Benefits paid |
|
(82 |
) |
|
(77 |
) |
| Amendments |
|
(6 |
) |
|
— |
|
| Divestiture |
|
(13 |
) |
|
— |
|
|
|
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|
|
|
|
| Projected benefit obligation at end of the year |
$ |
1,583 |
|
$ |
1,441 |
|
|
|
|
|
|
|
|
| Plan assets at market value at beginning of the year |
$ |
952 |
|
$ |
1,074 |
|
| Actual return on plan assets |
|
177 |
|
|
(114 |
) |
| Contribution |
|
69 |
|
|
69 |
|
| Benefits paid |
|
(82 |
) |
|
(77 |
) |
| Divestiture |
|
(9 |
) |
|
— |
|
|
|
|
|
|
|
|
| Plan assets at market value at end of the year |
$ |
1,107 |
|
$ |
952 |
|
|
|
|
|
|
|
|
| Excess of projected benefit obligation over assets |
$ |
(476 |
) |
$ |
(489 |
) |
| Unrecognized net loss |
|
324 |
|
|
329 |
|
| Unrecognized prior service cost |
|
11 |
|
|
22 |
|
| Contribution receivable |
|
— |
|
|
(50 |
) |
|
|
|
|
|
|
|
| Pension liability at end of the year |
$ |
(141 |
) |
$ |
(188 |
) |
|
|
|
|
|
|
|
| Plan assets at market value at end of the year |
$ |
1,107 |
|
$ |
902 |
|
| Accumulated benefits obligation at end of the year |
|
(1,478 |
) |
|
(1,336) |
|
|
|
|
|
|
|
|
| Minimum liability |
|
(371 |
) |
|
(434) |
|
| Pension liability at end of the year |
|
141 |
|
|
188 |
|
| Unrecognized prior service cost |
|
11 |
|
|
22 |
|
|
|
|
|
|
|
|
| Charged to other comprehensive income (loss) |
$ |
(219 |
) |
$ |
(224 |
) |
|
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The combined market performance over the last three years and declining interest rates have decreased the value of assets held in the US pension plans and has correspondingly increased the amount by which the pension plans are under-funded. As a result of the decline in the value of the pension plan assets and a decline in the interest rates, which increases the present value of the benefit obligations, Schlumberger has recorded a cumulative non-cash pretax charge to Stockholders' Equity of $219 million ($136 million after-tax). A recovery in market returns in future periods would reverse a portion of the charge.
The assumed discount rate, the rate of compensation increases and the expected long-term rate of return on plan assets used to determine the projected benefit obligations were as follows:
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| |
| |
2003 |
|
2002 |
|
| Assumed discount rate |
6.25 |
% |
6.75 |
% |
| Compensation increases |
3.00 |
% |
3.00 |
% |
| Return on plan assets |
8.50 |
% |
8.50 |
% |
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| |
On December 31, 2003, there is no investment of the plan assets in Schlumberger common stock.
The following is a breakdown of the plan assets:
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| |
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| |
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2003 |
|
2002 |
|
|
|
|
|
| US Equity - Active |
$ |
381 |
|
$301 |
| US Equity - Indexed |
|
131 |
|
89 |
| Non-US Equity |
|
180 |
|
134 |
| Long-term fixed income |
|
257 |
|
228 |
| Cash or cash equivalents |
|
103 |
|
98 |
| Other investments |
|
55 |
|
52 |
| Contribution receivable |
|
— |
|
50 |
|
|
|
|
|
| |
$ |
1,107 |
|
$952 |
|
|
|
|
|
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The asset allocation objectives are to diversify the portfolio among several asset classes to reduce volatility while maintaining an asset mix that provide the highest expected rate of return consistent with an acceptable level of risk. The investment strategies include a rebalancing of the asset mix as necessary to the previously defined levels and reassessing funding levels and asset allocation strategy at least annually. In order to increase diversification and limit management risk, Schlumberger generally does not allocate more than 15% of fund assets to a single investment manager.
The expected long-term rate of return on assets is 8.5%. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed at least annually. The pension trust's performance over the last 10 years has been an annualized return of 9.2%.
Non-US Pension Plans
Outside the US, subsidiaries of Schlumberger sponsor several defined benefit and defined contribution plans that cover substantially all employees who are not covered by statutory plans. For defined benefit plans, charges to expense are based upon costs computed by independent actuaries. These plans are funded through trusts in respect to past and current service. For all defined benefit plans, pension expense was $87 million, $58 million and $52 million in 2003, 2002 and 2001, respectively. Based on plan assets and the projected benefit obligation, the only significant defined benefit plan is in the UK.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense were as follows:
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| |
| |
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
|
|
|
|
| Assumed discount rate |
5.70 |
% |
|
5.75 |
% |
|
6.00 |
% |
| Compensation increases |
3.75% – 2.5 |
% |
|
4.00 |
% |
|
4.00 |
% |
| Return on plan assets |
8.50 |
% |
|
9.00 |
% |
|
9.00 |
% |
|
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| |
Net pension cost in the UK plan for 2003, 2002 and 2001 (including the Sema plc plans) (translated into US dollars at the average exchange rate for the periods), included the following components:
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| |
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Service cost - benefits earned during the period |
$ |
52 |
|
|
$ |
58 |
|
|
$ |
47 |
|
| Interest cost on projected benefit obligation |
|
66 |
|
|
|
59 |
|
|
|
44 |
|
Expected return on plan assets
[actual return: 2003 - $152; 2002 - $(147); 2001 - $(47)] |
|
(90 |
) |
|
|
(91 |
) |
|
|
(68 |
) |
| Amortization of unrecognized loss |
|
11 |
|
|
|
— |
|
|
|
— |
|
| Amortization of transition asset and other |
|
— |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Net pension cost |
$ |
39 |
|
|
$ |
27 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
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| |
The change in the projected benefit obligation, plan assets and funded status of the plan (translated into US dollars at year-end exchange rates) was as follows:
|
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| |
| |
|
|
|
|
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|
|
|
|
|
|
|
| |
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
| Projected benefit obligation at beginning of the year |
$ |
1,142 |
|
$ |
989 |
|
| Service cost |
|
52 |
|
|
58 |
|
| Interest cost |
|
66 |
|
|
59 |
|
| Contributions by Plan participants |
|
7 |
|
|
7 |
|
| Transfer in |
|
18 |
|
|
— |
|
| Actuarial losses (gains) |
|
165 |
|
|
(45 |
) |
| Currency effect |
|
152 |
|
|
106 |
|
| Benefits paid |
|
(32 |
) |
|
(25 |
) |
| Disposals |
|
— |
|
|
(7 |
) |
|
|
|
|
|
|
|
| Projected benefit obligation at end of the year |
$ |
1,570 |
|
$ |
1,142 |
|
|
|
|
|
|
|
|
| Plan assets at market value at beginning of the year |
$ |
815 |
|
$ |
868 |
|
| Actual return on plan assets |
|
152 |
|
|
(147 |
) |
| Currency effect |
|
106 |
|
|
81 |
|
| Employer contributions |
|
47 |
|
|
39 |
|
| Employee contributions |
|
7 |
|
|
7 |
|
| Transfer in |
|
15 |
|
|
— |
|
| Benefits paid |
|
(32 |
) |
|
(25 |
) |
| Disposals |
|
(2 |
) |
|
(8 |
) |
|
|
|
|
|
|
|
| Plan assets at market value at end of the year |
$ |
1,108 |
|
$ |
815 |
|
|
|
|
|
|
|
|
| Excess of projected benefit obligation over assets |
$ |
(462 |
) |
$ |
(327 |
) |
| Unrecognized net loss |
|
498 |
|
|
351 |
|
| Unrecognized prior service cost |
|
— |
|
|
1 |
|
| Unrecognized net asset at transition date |
|
(1 |
) |
|
(2 |
) |
|
|
|
|
|
|
|
| Pension asset |
$ |
35 |
|
$ |
23 |
|
|
|
|
|
|
|
|
| Assets of under-funded plans at market value at end of the year |
$ |
882 |
|
$ |
335 |
|
| Accumulated benefit obligation of under-funded plans at end of the year |
|
(1,097 |
) |
|
(495 |
) |
|
|
|
|
|
|
|
| Minimum liability of under-funded plans |
|
(215 |
) |
|
(160 |
) |
| Pension liability of under-funded plans |
|
6 |
|
|
70 |
|
|
|
|
|
|
|
|
| Charged to other comprehensive income (loss) |
$ |
(209 |
) |
$ |
(90 |
) |
|
|
|
|
|
|
|
|
|
| |
The combined market performance over the last three years and declining interest rates have decreased the value of assets held in the UK pension plans and has correspondingly increased the amount by which the pension plans are under-funded. As a result of the decline in the value of the pension plan assets and a decline in the interest rates, which increased the present value of the benefit obligations, Schlumberger has recorded a cumulative non-cash pretax charge to Stockholders' Equity of $209 million ($147 million after-tax). A recovery in market returns in future periods would reverse a portion of the charge.
The assumed discount rate and rate of compensation increases used to determine the projected benefit obligation were as follows: |
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| |
| |
2003 |
|
|
2002 |
|
|
|
|
|
|
|
| Assumed discount rate |
5.60 |
% |
|
5.70 |
% |
| Compensation increases |
4% – 3.5 |
% |
|
3.75% – 2.55 |
% |
|
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| |
The following is a breakdown of the plan assets:
|
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| |
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|
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|
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| |
2003 |
|
2002 |
| Equity securities |
$ |
818 |
|
$ |
610 |
| Fixed income securities |
|
178 |
|
|
95 |
| Index linked gilts |
|
56 |
|
|
46 |
| Real estate |
|
17 |
|
|
15 |
| Other investments |
|
39 |
|
|
49 |
|
|
|
|
|
|
| |
$ |
1,108 |
|
$ |
815 |
|
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The trustees of all the UK plans determine their investment strategy with regard to the liability profile of each Fund on an individual basis and have determined benchmarks which they believe provides an adequate balance between maximizing the return on the assets and minimizing the risk of failing to meet the liabilities over the long-term.
Overall, the trustees of each plan aim to have a sufficiently diversified portfolio of appropriate liquidity, which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future liabilities which each plan provides. They achieve this by using active investment managers who are set specific benchmarks and various restrictions to avoid undue concentration of assets. As the plans mature, the Trustees review the appropriateness of their investment strategy.
The overall expected return on assets assumption is derived as the weighted average of the expected returns from each of the main asset classes. The expected return for each asset class reflects a combination of historical performance analysis, the forward looking views of the financial markets (as suggested by the yields available) and the views of investment organizations. Consideration is also given to the rate of return expected to be available for reinvestment. The pension trusts' performance over the last 10 years has been an annualized return of 5.3%.
For defined contribution plans, funding and cost are generally based upon a predetermined percentage of employee compensation. Charges to expense in 2003, 2002 and 2001, were $47 million, $44 million and $32 million, respectively.
Other Deferred Benefits
In addition to providing pension benefits, Schlumberger and its subsidiaries have other deferred benefit programs, primarily profit sharing. Expenses for these programs were $137 million, $143 million and $192 million in 2003, 2002 and 2001, respectively.
Health Care Benefits
Schlumberger and its US subsidiary provide health care benefits for certain active employees. The cost of providing these benefits is recognized as expense when incurred and aggregated $70 million, $79 million and $68 million in 2003, 2002 and 2001, respectively. Outside the US, such benefits are mostly provided through government-sponsored programs.
Postretirement Benefits Other than Pensions
Schlumberger and its US subsidiary provide certain health care benefits to former employees who have retired under the US pension plans.
The principal actuarial assumptions used to measure costs were a discount rate of 6.75% in 2003, 7.25% in 2002 and 7.5% in 2001. The overall medical cost trend rate assumption is 10.8% graded to 5% over the next six years and 5% thereafter.
Net periodic postretirement benefit cost in the US for 2003, 2002 and 2001, included the following components:
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| |
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|
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|
|
|
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| |
2003 |
|
2002 |
|
2001 |
|
| Service cost – benefits earned during the period |
$ |
28 |
|
$ |
21 |
|
$ |
13 |
|
| Interest cost on accumulated postretirement benefit obligation |
|
52 |
|
|
41 |
|
|
32 |
|
| Amortization of unrecognized net loss (gain) and other |
|
11 |
|
|
4 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
| |
$ |
92 |
|
$ |
66 |
|
$ |
44 |
|
|
|
|
|
|
|
|
|
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|
|
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The change in accumulated postretirement benefit obligation and funded status on December 31, 2003 and 2002, was as follows: |
|
| |
|
|
|
|
|
|
|
| |
2003 |
|
2002 |
|
| Accumulated postretirement benefit obligation at beginning of the year |
$ |
676 |
|
$ |
478 |
|
| Service cost |
|
28 |
|
|
21 |
|
| Interest cost |
|
53 |
|
|
41 |
|
| Actuarial losses |
|
202 |
|
|
121 |
|
| Benefits paid |
|
(26 |
) |
|
(21 |
) |
| Other |
|
– |
|
|
36 |
|
|
|
|
|
|
|
|
| Accumulated postretirement benefit obligation at the end of the year |
|
933 |
|
|
676 |
|
| Unrecognized net loss |
|
(326 |
) |
|
(105 |
) |
| Unrecognized prior service cost/other |
|
(2 |
) |
|
(27 |
) |
|
|
|
|
|
|
|
| Postretirement benefit liability on December 31 |
$ |
605 |
|
$ |
544 |
|
|
|
|
|
|
|
|
|
|
| |
The components of the accumulated postretirement benefit obligation on December 31, 2003 and 2002, were as follows:
|
|
| |
|
|
|
|
|
|
| |
2003 |
|
2002 |
| Retirees |
$ |
404 |
|
$ |
277 |
| Fully eligible |
|
162 |
|
|
110 |
| Actives |
|
367 |
|
|
289 |
|
|
|
|
|
|
| |
$ |
933 |
|
$ |
676 |
|
|
|
|
|
|
|
|
| |
The assumed discount rate used to determine the accumulated postretirement benefit obligation was 6.25% for 2003 and 6.75% for 2002.
If the assumed medical cost trend rate was increased by one percentage point, health care cost in 2003 would have been $99 million, and the accumulated postretirement benefit obligation would have been $1.12 billion on December 31, 2003.
If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 2003 would have been $67 million, and the accumulated postretirement benefit obligation would have been $790 million on December 31, 2003. |
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Go to Part II, Item 8, Notes: 26. Supplementary Information |
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