Annual report pursuant to Section 13 and 15(d)

Retirement Benefit Plans

v3.20.1
Retirement Benefit Plans
12 Months Ended
Feb. 01, 2020
Retirement Benefits [Abstract]  
Retirement Benefit Plans Retirement Benefit Plans
 
We provide retirement pension benefits, postretirement health and welfare benefits, as well as 401(k) savings, profit-sharing and stock ownership plan benefits to various segments of our workforce. Retirement benefits are an important part of our total compensation and benefits program designed to retain and attract qualified, talented employees. Pension benefits are provided through defined benefit pension plans consisting of a non-contributory qualified pension plan (Primary Pension Plan) and, for certain management employees, non-contributory supplemental retirement plans, including a 1997 voluntary early retirement plan. Retirement and other benefits include:
Defined Benefit Pension Plans
Primary Pension Plan – funded
Supplemental retirement plans – unfunded
 
Other Benefit Plans
Postretirement benefits – dental
Defined contribution plans:
401(k) Safe harbor plan and the 401(k) savings, profit-sharing and stock ownership plan
Deferred compensation plan

 
Defined Benefit Pension Plans

Primary Pension Plan — Funded
The Primary Pension Plan is a funded non-contributory qualified pension plan, initiated in 1966 and closed to new entrants on January 1, 2007. The plan is funded by Company contributions to a trust fund, which are held for the sole benefit of participants and beneficiaries.
 
Supplemental Retirement Plans — Unfunded
We have unfunded supplemental retirement plans, which provide retirement benefits to certain management employees. We pay ongoing benefits from operating cash flow and cash investments. The plans are a Supplemental Retirement Program and a Benefit Restoration Plan. Participation in the Supplemental Retirement Program is limited to employees who were annual incentive-eligible management employees as of December 31, 1995. Benefits for these plans are based on length of service and final average compensation. The Benefit Restoration Plan is intended to make up benefits that could not be paid by the Primary Pension Plan due to governmental limits on the amount of benefits and the level of pay considered in the calculation of benefits. The Supplemental Retirement Program is a non-qualified plan that was designed to allow eligible management employees to retire at age 60 with retirement income comparable to the age 65 benefit provided under the Primary Pension Plan and Benefit Restoration Plan. In addition, the Supplemental Retirement Program offers participants who leave between ages 60 and 62 benefits equal to the estimated social security benefits payable at age 62. The Supplemental Retirement Program also continues Company-paid term life insurance at a declining rate until it is phased out at age 70. Employee-paid term life insurance through age 65 is continued under a separate plan (Supplemental Term Life Insurance Plan for Management Profit-Sharing Employees).

Voluntary Early Retirement Program
In 2017, the Company initiated a Voluntary Early Retirement Program (VERP) for approximately 6,000 eligible associates. Eligibility for the VERP included home office, stores and supply chain personnel who met certain criteria related to age and years of service as of January 31, 2017. The consideration period for eligible associates to accept the VERP ended on March 31, 2017. Based on the approximately 2,800 associates who elected to accept the VERP, we incurred a total charge of $112 million for special retirement benefits. The special retirement benefits increased the projected benefit obligation (PBO) of the Primary Pension Plan and the Supplemental Pension Plans by $88 million and $24 million, respectively. In addition, we incurred curtailment charges of $7 million related to our Primary Pension Plan and Supplemental Pension Plans as a result of the reduction in the expected years of future service related to these plans. We also recognized settlement expense of $13 million in 2017 due to higher lump-sum payment activity to retirees primarily as a result of the VERP executed earlier in the year.






Pension Expense/(Income) for Defined Benefit Pension Plans
The components of net periodic benefit expense/(income) for our non-contributory qualified defined benefit pension plan and supplemental pension plans are as follows:
 
 
 
 
 
 
 
($ in millions)
 
2019
 
2018
 
2017
Service cost
 
$
28

 
$
38

 
$
42

 
 
 
 
 
 
 
Other components of net periodic pension and postretirement benefit cost/(income):
 
 
 
 
 
 
Interest cost
 
131

 
141

 
150

Expected return on plan assets
 
(191
)
 
(223
)
 
(216
)
Amortization of actuarial loss/(gain)
 
10

 
(3
)
 
25

Amortization of prior service cost/(credit)
 
7

 
7

 
7

Settlement expense
 
8

 
7

 
13

Curtailment (gain)/loss recognized
 

 

 
7

Special termination benefit recognized
 

 

 
112

 
 
(35
)
 
(71
)
 
98

Net periodic benefit expense/(income)
 
$
(7
)
 
$
(33
)
 
$
140


 
Service cost is included in SG&A in the Consolidated Statements of Operations.

Assumptions 
The weighted-average actuarial assumptions used to determine expense were as follows:
 
2019
 
2018
 
2017
 
Expected return on plan assets
6.25
%
 
6.50
%
 
6.50
%
 
Discount rate
4.33
%
 
3.98
%
 
4.40
%
(1) 
Salary increase
2.8
%
 
3.8
%
 
3.9
%
 
 
(1)
As of January 31, 2017. The Primary Pension Plan was remeasured as of March 31, 2017 using a discount rate of 4.34% and as of October 31, 2017 using a discount rate of 3.94%.

The expected return on plan assets is based on the plan’s long-term asset allocation policy, historical returns for plan assets and overall capital market returns, taking into account current and expected market conditions.

The discount rate used to measure pension expense each year is the rate as of the beginning of the year (i.e., the prior measurement date). The discount rate used, determined by the plan actuary, was based on a hypothetical AA yield curve represented by a series of bonds maturing over the next 30 years, designed to match the corresponding pension benefit cash payments to retirees.

The salary progression rate to measure pension expense was based on age ranges and projected forward.
   
Funded Status
As of the end of 2019, the funded status of the Primary Pension Plan was 104%. The Primary Benefit Obligation (PBO) is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. Under the Employee Retirement Income Security Act of 1974 (ERISA), the funded status of the plan exceeded 100% as of December 31, 2019 and 2018, the qualified pension plan’s year end.







The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the Primary Pension Plan and supplemental pension plans:
 
Primary Pension Plan
 
Supplemental Plans
 
($ in millions)
2019
 
2018
 
2019
 
2018
 
Change in PBO
 
 
 
 
 

 
 
 
Beginning balance
$
3,016


$
3,467


$
146


$
182

  
Service cost
28

  
37

  

  
1

  
Interest cost
125

  
133

  
6

  
8

  
Settlements
(153
)
 
(174
)
 

 

 
Actuarial loss/(gain)
478

  
(289
)
  
14

  
(12
)
  
Benefits (paid)
(147
)
 
(158
)
 
(30
)
 
(33
)
 
Balance at measurement date
$
3,347

  
$
3,016

  
$
136

  
$
146

  
 
 
 
 
 
 
 
 
 
Change in fair value of plan assets
 
 
 
 
 
 
 
 
Beginning balance
$
3,163

  
$
3,528

  
$

  
$

  
Company contributions

  

  
30

  
33

  
Actual return on assets (1)
604

  
(33
)
  

  

  
Settlements
(153
)
 
(174
)
 

 

 
Benefits (paid)
(147
)
 
(158
)
 
(30
)
 
(33
)
 
Balance at measurement date
$
3,467

  
$
3,163

  
$

  
$

  
Funded status of the plan
$
120

(2) 
$
147

(2) 
$
(136
)
(3) 
$
(146
)
(3) 
 
(1)
Includes plan administrative expenses.
(2)
$120 million in 2019 and $147 million in 2018 were included in Prepaid pension in the Consolidated Balance Sheets.
(3)
$27 million in 2019 and $30 million in 2018 were included in Other accounts payable and accrued expenses on the Consolidated Balance Sheets, and the remaining amounts were included in Other liabilities.
 
In 2019, the funded status of the Primary Pension Plan decreased by $27 million primarily due to lower interest rates. The actual one-year return on pension plan assets at the measurement date was 20.3% in 2019, bringing the annualized return since inception of the plan to 9.0%.

The following pre-tax amounts were recognized in Accumulated other comprehensive income/(loss) in the Consolidated Balance Sheets as of the end of 2019 and 2018:
 
Primary Pension Plan
 
Supplemental Plans
($ in millions)
2019
 
2018
 
2019
 
2018
Net actuarial loss/(gain)
$
184

 
$
129

 
$
12

 
$
9

Prior service cost/(credit)
23

  
30

 
(2
)
  
(3
)
Total
$
207

(1) 
$
159

 
$
10

 
$
6

 
(1)
In 2020, approximately $6 million for the Primary Pension Plan is expected to be amortized from Accumulated other comprehensive income/(loss) and into the Consolidated Statement of Operations.

Assumptions to Determine Obligations
The weighted-average actuarial assumptions used to determine benefit obligations for each of the years below were as follows:
 
 
2019
 
2018
 
2017
Discount rate
 
3.08
%
 
4.33
%
 
3.98
%
Salary progression rate
 
2.7
%
 
2.8
%
 
3.8
%


Accumulated Benefit Obligation (ABO)
The ABO is the present value of benefits earned to date, assuming no future salary growth. The ABO for our Primary Pension Plan was $3.2 billion as of the end of 2019 and $2.9 billion as of the end of 2018. At the end of 2019, plan assets of $3.467
billion for the Primary Pension Plan were above the ABO. The ABO for our unfunded supplemental pension plans was $130 million and $141 million as of the end of 2019 and 2018, respectively. 
 
Primary Pension Plan Asset Allocation
The target allocation ranges for each asset class as of the end of 2019 and the fair value of each asset class as a percent of the total fair value of pension plan assets were as follows:
 
 
2019 Target
 
Plan Assets
Asset Class
 
Allocation Ranges
 
2019
 
2018
Equity
 
10% - 25%
 
17
%
 
18
%
Fixed income
 
60% - 75%
 
74
%
 
68
%
Real estate, cash and other investments
 
0% - 25%
 
9
%
 
14
%
Total
 
 
 
100
%
 
100
%

 
Asset Allocation Strategy
In 2009, we began implementing a liability-driven investment (LDI) strategy to lower the plan’s volatility risk and minimize the impact of interest rate changes on the plan funded status. The implementation of the LDI strategy is phased in over time by reallocating the plan’s assets more towards fixed income investments (i.e., debt securities) that are more closely matched in terms of duration to the plan liability. In 2018, we shifted 5% of the plan's target allocation from equities into fixed income.
The plan’s asset portfolio is actively managed and primarily invested in fixed income balanced with investments in equity securities and other asset classes to maintain an efficient risk/return diversification profile. The risk of loss in the plan’s equity portfolio is mitigated by investing in a broad range of equity securities across different sectors and countries. Investment types, including high-yield debt securities, illiquid assets such as real estate, the use of derivatives and Company securities are set forth in written guidelines established for each investment manager and monitored by the plan’s management team. The plan’s asset allocation policy is designed to meet the plan’s future pension benefit obligations. Under the policy, asset classes are periodically reviewed and rebalanced as necessary, to ensure that the mix continues to be appropriate relative to established targets and ranges. 
We have an internal Benefit Plans Investment Committee (BPIC), which consists of senior executives who have established a review process of asset allocation and investment strategies and oversee risk management practices associated with the management of the plan’s assets. Key risk management practices include having an established and broad decision-making framework in place, focused on long-term plan objectives. This framework consists of the BPIC and various third parties, including investment managers, an investment consultant, an actuary and a trustee/custodian. The funded status of the plan is monitored on a continuous basis, including quarterly reviews with updated market and liability information. Actual asset allocations are monitored monthly and rebalancing actions are executed at least quarterly, if needed. To manage the risk associated with an actively managed portfolio, the plan’s management team reviews each manager’s portfolio on a quarterly basis and has written manager guidelines in place, which are adjusted as necessary to ensure appropriate diversification levels. Finally, to minimize operational risk, we utilize a master custodian for all plan assets, and each investment manager reconciles its account with the custodian at least quarterly.















Fair Value of Primary Pension Plan Assets
The tables below provide the fair values of the Primary Pension Plan’s assets as of the end of 2019 and 2018, by major class of asset. 
 
 
Investments at Fair Value at February 1, 2020
($ in millions)
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Cash
 
$
30

 
$

 
$

 
$
30

Common collective trusts
 

 
65

 

 
65

Cash and cash equivalents total
 
30

 
65

 

 
95

Common collective trusts – international
 

 
42

 

 
42

Equity securities – domestic
 
356

 

 

 
356

Equity securities – international
 
154

 

 

 
154

Equity securities total
 
510

 
42

 

 
552

Common collective trusts
 

 
325

 

 
325

Corporate bonds
 

 
1,833

 
4

 
1,837

Swaps
 

 
630

 

 
630

Government securities
 

 
441

 

 
441

Mortgage backed securities
 

 
15

 

 
15

Other fixed income
 

 
140

 
6

 
146

Fixed income total
 

 
3,384

 
10

 
3,394

Public REITs
 
48

 

 

 
48

Real estate total
 
48

 

 

 
48

Total investment assets at fair value
 
$
588

 
$
3,491

 
$
10

 
$
4,089

Liabilities
 
 
 
 
 
 
 
 
Swaps
 
$

 
$
(625
)
 
$

 
$
(625
)
Other fixed income
 
(10
)
 
(10
)
 

 
(20
)
Fixed income total
 
(10
)
 
(635
)
 

 
(645
)
Total liabilities at fair value
 
$
(10
)
 
$
(635
)
 
$

 
$
(645
)
Accounts payable, net
 
 
 
 
 
 
 
(223
)
Investments at Net Asset Value (NAV) (2)
 
 
 
 
 
 
 
 
Private equity
 
 
 
 
 
 
 
$
123

Private real estate
 
 
 
 
 
 
 
51

Hedge funds
 
 
 
 
 
 
 
72

Total investments at NAV
 
 
 
 
 
 
 
$
246

Total net assets
 
 
 
 
 
 
 
$
3,467

 
(1)
There were no significant transfers in or out of level 1 or 2 investments.
(2)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheet.
 
 
Investments at Fair Value at February 2, 2019
($ in millions)
 
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Cash
 
$
9

 
$

 
$

 
$
9

Common collective trusts
 

 
60

 

 
60

Cash and cash equivalents total
 
9

 
60

 

 
69

Common collective trusts – international
 

 
55

 

 
55

Equity securities – domestic
 
326

 

 

 
326

Equity securities – international
 
146

 

 

 
146

Equity securities total
 
472

 
55

 

 
527

Common collective trusts
 

 
897

 

 
897

Corporate bonds
 

 
985

 
4

 
989

Swaps
 

 
647

 

 
647

Government securities
 

 
200

 

 
200

Mortgage backed securities
 

 
5

 

 
5

Other fixed income
 

 
107

 
6

 
113

Fixed income total
 

 
2,841

 
10

 
2,851

Public REITs
 
41

 

 

 
41

Real estate total
 
41

 

 

 
41

Total investment assets at fair value
 
$
522

 
$
2,956

 
$
10

 
$
3,488

Liabilities
 
 
 
 
 
 
 
 
Swaps
 
$

 
$
(642
)
 
$

 
$
(642
)
Other fixed income
 
(7
)
 
(2
)
 

 
(9
)
Fixed income total
 
(7
)
 
(644
)
 

 
(651
)
Total liabilities at fair value
 
$
(7
)
 
$
(644
)
 
$

 
$
(651
)
Accounts payable, net
 
 
 
 
 
 
 
(26
)
Investments at Net Asset Value (NAV) (2)
 
 
 
 
 
 
 
 
Private equity
 
 
 
 
 
 
 
$
164

Private real estate
 
 
 
 
 
 
 
55

Hedge funds
 
 
 
 
 
 
 
133

Total investments at NAV
 
 
 
 
 
 
 
$
352

Total net assets
 
 
 
 
 
 
 
$
3,163


(1)
There were no significant transfers in or out of level 1 or 2 investments.
(2)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Balance Sheet.
 
Following is a description of the valuation methodologies used for Primary Pension Plan assets measured at fair value.
 
Cash – Cash is valued at cost which approximates fair value, and is classified as level 1 of the fair value hierarchy.
 
Common Collective Trusts Common collective trusts are pools of investments within cash equivalents, equity and fixed income that are benchmarked relative to a comparable index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets. The investments are valued at net asset value (NAV) as fair value and are classified as level 2 of the fair value hierarchy.
 
Equity Securities Equity securities are common stocks and preferred stocks valued based on the price of the security as listed on an open active exchange and classified as level 1 of the fair value hierarchy, as well as warrants and preferred stock that are
valued at a price, which is based on a broker quote in an over-the-counter market, and are classified as level 2 of the fair value hierarchy.

Private Equity Private equity is composed of interests in private equity funds valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets and/or common stock of privately held companies. There are no observable market values for private equity funds. The valuations for the funds are derived using a combination of different methodologies including (1) the market approach, which consists of analyzing market transactions for comparable assets, (2) the income approach using the discounted cash flow model, or (3) cost method. Private equity funds also provide audited financial statements. Private equity investments are valued at NAV as a practical expedient.

Corporate Bonds – Corporate bonds and Corporate loans are valued at a price which is based on observable market information in primary markets or a broker quote in an over-the-counter market, and are classified as level 2 or level 3 of the fair value hierarchy.
  
Swaps – swap contracts are based on broker quotes in an over-the-counter market and are classified as level 2 of the fair value hierarchy.
 
Government, Municipal Bonds and Mortgaged Backed Securities  – Government and municipal securities are valued at a price based on a broker quote in an over-the-counter market and classified as level 2 of the fair value hierarchy. Mortgage backed securities are valued at a price based on observable market information or a broker quote in an over-the-counter market and classified as level 2 of the fair value hierarchy.
 
Other Fixed Income non-mortgage asset backed securities, collateral held in short-term investments for derivative contract and derivatives composed of futures contracts, option contracts and other fixed income derivatives valued at a price based on observable market information or a broker quote in an over-the-counter market and classified as level 2 of the fair value hierarchy.    
 
Real Estate Real estate is comprised of public and private real estate investments. Real estate investments through registered investment companies that trade on an exchange are classified as level 1 of the fair value hierarchy. Investments through open end private real estate funds, depending on the type of investment, are valued at the reported NAV as fair value or are classified as level 2 of the fair value hierarchy. Private real estate investments through partnership interests that are valued based on different methodologies including discounted cash flow, direct capitalization and market comparable analysis are valued at NAV as a practical expedient.

Hedge Fund Hedge funds exposure is through fund of funds, which are made up of over 30 different hedge fund managers diversified over different hedge strategies. The fair value of the hedge fund is determined by the fund's administrator using valuation provided by the third party administrator for each of the underlying funds. Hedge fund investments are valued at NAV as a practical expedient.

The following tables set forth a summary of changes in the fair value of the Primary Pension Plan’s level 3 investment assets:
 
2019
($ in millions)
Corporate Loans
 
Corporate Bonds
Balance, beginning of year
$
6

 
$
4

Purchases and issuances

 

Sales, maturities and settlements

 

Balance, end of year
$
6

 
$
4

 
 
2018
($ in millions)
Corporate Loans
 
Corporate Bonds
Balance, beginning of year
$
4

 
$
10

Purchases and issuances
3

 

Sales, maturities and settlements
(1
)
 
(6
)
Balance, end of year
$
6

 
$
4



Contributions
Our policy with respect to funding the Primary Pension Plan is to fund at least the minimum required by ERISA rules, as amended by the Pension Protection Act of 2006, and not more than the maximum amount deductible for tax purposes. Due to our past funding of the pension plan and overall positive growth in plan assets since plan inception, there will not be any required cash contribution for funding of plan assets in 2020 under ERISA.

Our contributions to the unfunded non-qualified supplemental retirement plans are equal to the amount of benefit payments made to retirees throughout the year and for 2020 are anticipated to be approximately $27 million. Benefits are paid in the form of five equal annual installments to participants and no election as to the form of benefit is provided for in the unfunded plans.  The following sets forth our estimated future benefit payments:
($ in millions)
 
Primary Plan Benefits
 
Supplemental Plan Benefits
2020
 
$
237

 
$
27

2021
 
236

 
22

2022
 
235

 
9

2023
 
229

 
8

2024
 
227

 
8

2025-2029
 
1,067

 
38


     
Other Benefit Plans

Defined Contribution Plans 
The Savings, Profit-Sharing and Stock Ownership Plan (Savings Plan) is a qualified defined contribution plan, a 401(k) plan, available to all eligible employees. Effective January 1, 2007, all employees who are age 21 or older are immediately eligible to participate in and contribute a percentage of their pay to the Savings Plan. Eligible employees, who have completed one year and at least 1,000 hours of service within an eligibility period, are offered a fixed matching contribution each pay period equal to 50% of up to 6% of pay contributed by the employee. Matching contributions are credited to employees’ accounts in accordance with their investment elections and fully vest after three years. We may make additional discretionary matching contributions. 

Effective January 1, 2017, the Company added a Safe Harbor 401(k) Plan that was made available for active employees hired on or after January 1, 2007. The Company matching contributions under the Safe Harbor Plan are equal to 100% of up to 5% of pay contributed by the employee. Matching contributions are credited to employees' accounts in accordance with their investment elections and fully vest immediately. The Safe Harbor Plan replaces the non-contributory retirement account.
 
In addition to the Savings Plan, we sponsor the Mirror Savings Plan, which is a non-qualified contributory unfunded defined contribution plan offered to certain management employees. This plan supplements retirement savings under the Savings Plan for eligible management employees who choose to participate in it. The plan’s investment options generally mirror the traditional Savings Plan investment options. Similar to the supplemental retirement plans, the Mirror Savings Plan benefits are paid from our operating cash flow and cash investments.
 
The expense for these plans was included in SG&A expenses in the Consolidated Statements of Operations, was $43 million in 2019, $43 million in 2018 and $46 million in 2017.