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Note 15 – Employee Benefit Plans

We sponsor numerous pension and other post-retirement benefit plans, primarily retiree health, in our domestic and international operations. December 31 is the measurement date for all of our other post-retirement benefit plans.

Pension Benefits

Retiree Health

2010

2009

2010

2009

Change in Benefit Obligation:

Benefit obligation, January 1

$9,194

$8,495

$1,102

$1,002

Service cost

178

173

8

7

Interest cost

575

508

54

60

Plan participants’ contributions

11

9

26

36

Plan amendments(3)

(19)

4

(86)

1

Actuarial loss (gain)

477

209

13

124

Acquisitions(2)

140

1

1

Currency exchange rate changes

(154)

373

6

15

Curtailments

(1)

Benefits paid/settlements

(670)

(578)

(118)

(143)

Benefit obligation, December 31

9,731

9,194

1,006

1,102

Change in Plan Assets:

Fair value of plan assets, January 1

7,561

6,923

Actual return on plan assets

846

720

Employer contribution

237

122

92

107

Plan participants’ contributions

11

9

26

36

Acquisitions(3)

107

Currency exchange rate changes

(144)

349

Benefits paid/settlements

(669)

(578)

(118)

(143)

Other

(9)

16

Fair value of plan assets, December 31

7,940

7,561

Net funded status at December 31(1)

$(1,791)

$(1,633)

$(1,006)

$(1,102)

Amounts recognized in the Consolidated Balance Sheets:

Other long-term assets

$92

$155

$—

$—

Accrued compensation and benefit costs

(44)

(47)

(86)

(103)

Pension and other benefit liabilities

(1,839)

(1,741)

Post-retirement medical benefits

(920)

(999)

Net Amounts Recognized

$(1,791)

$(1,633)

$(1,006)

$(1,102)

(1) Includes under-funded and non-funded plans.

(2) Primarily ACS’s acquired balances.

(3) Refer to the “Plan Amendment” section for additional information.

Benefit plans pre-tax amounts recognized in AOCL:

Pension Benefits

Retiree Health

2010

2009

2010

2009

Net actuarial loss (gain)

$1,867

$1,834

$54

$40

Prior service (credit) cost

(167)

(169)

(200)

(144)

Total Pre-tax Loss (Gain)

$1,700

$1,665

$(146)

$(104)

The Accumulated benefit obligation for all defined benefit pension plans was $9,256 and $8,337 at December 31, 2010 and 2009, respectively.

Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below:

2010

2009

Projected benefit obligation

$5,726

$5,134

Accumulated benefit obligation

5,533

4,864

Fair value of plan assets

3,883

3,697

Our domestic retirement defined benefit plans provide employees a benefit, depending on eligibility, at the greater of (i) the benefit calculated under a highest average pay and years of service formula, (ii) the benefit calculated under a formula that provides for the accumulation of salary and interest credits during an employee’s work life, or (iii) the individual account balance from the Company’s prior defined contribution plan (Transitional Retirement Account or TRA).

Pension Benefits

Retiree Health

2010

2009

2008

2010

2009

2008

Components of Net Periodic Benefit Cost:

Service cost

$178

$173

$209

$8

$7

$14

Interest cost(1)

575

508

(5)

54

60

84

Expected return on plan assets(2)

(570)

(523)

(80)

Recognized net actuarial loss

71

25

36

Amortization of prior service credit

(22)

(21)

(20)

(30)

(41)

(21)

Recognized settlement loss

72

70

34

Defined Benefit Plans

304

232

174

32

26

77

Defined contribution plans

51

38

80

Total Net Periodic Benefit Costs

355

270

254

32

26

77

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:

Net actuarial loss (gain)(3)

$198

$8

$1,062

$13

$126

$(244)

Prior service cost (credit)(4)

(19)

1

(86)

1

(219)

Amortization of net actuarial (loss) gain

(143)

(95)

(70)

Amortization of prior service (cost) credit

22

21

20

30

41

21

Total Recognized in Other Comprehensive Income

58

(66)

1,013

(43)

168

(442)

Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income

$413

$204

$1,267

$(11)

$194

$(365)

(1) Interest cost includes interest expense on non-TRA obligations of $381, $390 and $408 and interest expense (income) directly allocated to TRA participant accounts of $194, $118 and $(413) for the years ended December 31, 2010, 2009 and 2008, respectively.

(2) Expected return on plan assets includes expected investment income on non-TRA assets of $376, $405 and $493 and actual investment income (expense) on TRA assets of $194, $118 and $(413) for the years ended December 31, 2010, 2009 and 2008, respectively.

(3) Includes adjustments as a result of the plan amendments as well as the actual valuation results based on January 1, 2010 plan census data for the U.S. and Canadian defined benefit plans and the U.S. retiree medical plan. Refer to the “Plan Amendment” section for additional information.

(4) Refer to “Plan Amendments” for additional information.

The following table provides a summary of the components of the Net change in benefit plans included within Other comprehensive income as reported in the Consolidated Statement of Shareholders’ Equity.

(Expense)/Benefit

2010

2009

2008

Other changes in plan assets and benefit obligations

$(15)

$(102)

$(571)

Income tax

(12)

61

183

Fuji Xerox changes in defined benefit plans(1)

28

(36)

(75)

Currency, net(2)

22

(90)

175

Other, net

(2)

2

Net Change in Benefit Plans

$23

$(169)

$(286)

(1) Represents our share of Fuji Xerox’s benefit plan changes.

(2) Represents currency impact on cumulative amount of benefit plan net actuarial losses and prior service credits included in AOCL.

The net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $71 and $(24), respectively. The net actuarial loss and prior service credit for the retiree health benefit plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are zero and $(41), respectively.

Pension plan assets consist of both defined benefit plan assets and assets legally restricted to the TRA accounts. The combined investment results for these plans, along with the results for our other defined benefit plans, are shown above in the “actual return on plan assets” caption. To the extent that investment results relate to TRA, such results are charged directly to these accounts as a component of interest cost.

Plan Amendments

In 2010, we amended our domestic retiree health benefit plan to eliminate the use of the Retiree Drug Subsidy that the Company receives from Medicare as an offset to retiree contributions. This amendment is effective January 1, 2011. The Company will instead use this subsidy to reduce its retiree healthcare costs. The amendment resulted in a net decrease of $55 to the retiree medical benefit obligation and a corresponding $34 after-tax increase to equity. This amendment will reduce 2011 expenses by approximately $13.

In 2010, as a result of a renegotiation of the contract with our largest union, we amended our union pension plan for this population to freeze the final average pay formula of the pension plan effective January 1, 2013 and our union retiree health benefits plan to eliminate a portion of the subsidy currently paid to current and future Medicare-eligible retirees effective January 1, 2011. These amendments are generally consistent with amendments previously made to our salaried employee retirement plans.

In 2009, the U.K. Final Salary Pension Plan was amended to close the plan to future accrual effective January 1, 2014. Benefits earned up to January 1, 2014 will not be affected; therefore, the amendment does not result in a material change to the projected benefit obligation at the re-measurement date, December 31, 2009. The amendment results in substantially all participants becoming inactive; therefore, the amortization period for actuarial gains and losses changes from the average remaining service period of active members (approximately 10 years) to the average remaining life expectancy of all members (approximately 27 years). As of December 31, 2010, the accumulated actuarial losses for our U.K. plan amounted to $707.

In 2008, we amended our domestic retiree health benefit plan to eliminate the subsidy currently paid to current and future Medicare-eligible retirees effective January 1, 2010. The amendment resulted in a net decrease of approximately $225 in the benefit obligation and a corresponding after-tax increase to equity.

Plan Assets

Current Allocation

As of the 2010 and 2009 measurement dates, the global pension plan assets were $7.9 billion and $7.6 billion, respectively. These assets were invested among several asset classes. None of the investments includes debt or equity securities of Xerox Corporation.

The following table presents the defined benefit plans assets measured at fair value at December 31, 2010 and the basis for that measurement:

Valuation Based on:

Asset Class

Quoted Prices
in Active
Markets for
Identical Asset
(Level 1)

Significant 
Other
Observable
 Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Fair Value
December 31, 2010

% of Total

Cash and Cash Equivalents

$640

$—

$—

$640

8%

Equity Securities:

U.S. Large Cap

507

54

561

7%

U.S. Mid Cap

84

84

1%

U.S. Small Cap

60

62

122

2%

International Developed

1,513

514

2,027

26%

Emerging Markets

324

324

4%

Global Equity

8

25

33

—%

Total Equity Securities

2,496

655

3,151

40%

Debt Securities:

U.S. Treasury Securities

4

209

213

3%

Debt Security Issued by Government
Agency

75

1,011

1,086

14%

Corporate Bonds

167

1,412

1,579

20%

Asset Backed Securities

2

15

17

—%

Total Debt Securities

248

2,647

2,895

37%

Common/Collective Trust

4

69

73

1%

Derivatives:

Interest Rate Contracts

123

123

2%

Foreign Exchange Contracts

5

(12)

(7)

—%

Equity Contracts

53

53

—%

Credit Contracts

—%

Other Contracts

66

3

69

1%

Total Derivatives

71

167

238

3%

Hedge Funds

2

4

6

—%

Real Estate

103

73

275

451

6%

Private Equity/Venture Capital

308

308

4%

Guaranteed Insurance Contracts

96

96

1%

Other

7

49

(1)

55

—%

Total Defined Benefit Plans Assets(1)

$3,569

$3,662

$682

$7,913

100%

(1) Total fair value assets exclude $27 of other net non-financial assets (liabilities) such as due to/from broker, interest receivables and accrued expenses.

The following table presents the defined benefit plans assets measured at fair value at December 31, 2009 and the basis for that measurement:

Valuation Based on:

Asset Class

Quoted Prices
in Active
Markets for
Identical Asset
(Level 1)

Significant 
Other
Observable
 Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total
Fair Value
December 31, 2009

% of Total

Cash and Cash Equivalents

$748

$—

$—

$748

10%

Equity Securities:

U.S. Large Cap

768

46

814

11%

U.S. Mid Cap

31

31

—%

U.S. Small Cap

90

70

160

2%

International Developed

1,292

493

1,785

24%

Emerging Markets

299

299

4%

Global Equity

12

12

—%

Total Equity Securities

2,492

609

3,101

41%

Debt Securities:

U.S. Treasury Securities

4

185

189

3%

Debt Security Issued by Government Agency

114

798

912

12%

Corporate Bonds

145

1,570

1,715

23%

Asset Backed Securities

3

23

26

—%

Total Debt Securities

266

2,576

2,842

38%

Common/Collective Trust

2

26

28

—%

Derivatives:

Interest Rate Contracts

52

52

—%

Foreign Exchange Contracts

15

(77)

(62)

(1)%

Equity Contracts

(24)

(24)

—%

Credit Contracts

(2)

(2)

—%

Other Contracts

(6)

(6)

—%

Total Derivatives

15

(57)

(42)

(1)%

Hedge Funds

4

4

—%

Real Estate

62

119

237

418

6%

Private Equity/Venture Capital

286

286

4%

Guaranteed Insurance Contracts

130

130

2%

Other

8

9

17

—%

Total Defined Benefit Plans Assets(1)

$3,593

$3,282

$657

$7,532

100%

(1) Total fair value assets exclude $29 of other net non-financial assets (liabilities) such as due to/from broker, interest receivables and accrued expenses.

The following table represents a roll-forward of the defined benefit plans assets measured using significant unobservable inputs (Level 3 assets):

Fair Value Measurement Using Significant Unobservable Inputs (Level 3)

Hedge Funds

Real Estate

Private
Equity/Venture
Capital

Guaranteed
Insurance
Contracts

Other

Total

December 31, 2008

$3

$279

$331

$104

$—

$717

Net payments, purchases and sales

1

5

16

1

23

Net transfers in (out)

16

16

Realized gains (losses)

8

3

(1)

10

Unrealized gains (losses)

(66)

(69)

2

1

(132)

Currency translation

19

4

23

December 31, 2009

4

237

286

  130

657

Net payments, purchases and sales

7

(8)

(12)

(13)

Net transfers in (out)

1

1

Realized gains (losses)

5

28

(2)

31

Unrealized gains (losses)

22

(2)

20

Currency translation

(6)

(9)

(15)

Other

10

1

(9)

(1)

1

December 31, 2010

$4

$275

$307

$97

$(1)

$682

Our pension plan assets and benefit obligations at December 31, 2010 were as follows:

(in billions)

Fair Value of
Pension Plan
Assets

Pension Benefit
Obligations

Net Funded
Status

U.S.

$3.2

$4.4

$(1.2)

U.K.

2.9

2.9

    –

Canada

0.6

0.8

(0.2)

Other

1.2

1.6

(0.4)

Total

$7.9

$9.7

$(1.8)

Investment Strategy

The target asset allocations for our worldwide plans for 2010 and 2009 were:

2010

2009

Equity investments

42%

41%

Fixed income investments

45%

45%

Real estate

7%

7%

Private equity

4%

4%

Other

2%

3%

Total Investment Strategy

100%

100%

We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate, private equity and hedge funds are used to improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability measurements and quarterly investment portfolio reviews.

Expected Long-term Rate of Return

We employ a “building block” approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established giving consideration to investment diversification and rebalancing. Peer data and historical returns are reviewed periodically to assess reasonableness and appropriateness.

Contributions

2010 contributions for our defined benefit pension plans were $237 and $92 for our retiree health plans. In 2011 we expect, based on current actuarial calculations, to make contributions of approximately $500 to our defined benefit pension plans and approximately $90 to our retiree health benefit plans.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years:

Pension
Benefits

Retiree
Health

2011

$749

$87

2012

647

86

2013

644

85

2014

653

85

2015

668

84

Years 2016–2020

3,473

396

Assumptions

Weighted-average assumptions used to determine benefit obligations at the plan measurement dates:

Pension Benefits

Retiree Health

2010

2009

2008

2010

2009

2008

Discount rate

5.2%

5.7%

6.3%

4.9%

5.4%

6.3%

Rate of compensation increase

3.1%

3.6%

3.9%

 (1)

(1)

(1)

(1) Rate of compensation increase is not applicable to the retiree health benefits, as compensation levels do not impact earned benefits.

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:

Pension Benefits

Retiree Health

2011

2010

2009

2008

2011

2010

2009

2008

Discount rate

5.2%

5.7%

6.3%

5.9%

4.9%

5.4%

6.3%

6.2%

Expected return on plan assets

7.2%

7.3%

7.4%

7.6%

(1)

(1)

(1)

(1)

Rate of compensation increase

3.1%

3.6%

3.9%

4.1%

(2)

(2)

(2)

(2)

(1) Expected return on plan assets is not applicable to retiree health benefits, as these plans are not funded.

(2) Rate of compensation increase is not applicable to retiree health benefits, as compensation levels do not impact earned benefits.

Assumed healthcare cost trend rates at December 31,

2010

2009

Health care cost trend rate assumed for next year

9.0%

9.8%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

4.9%

4.9%

Year that the rate reaches the ultimate trend rate

2017

2017

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A 1-percentage-point change in assumed health care cost trend rates would have the following effects:

1% increase

1% decrease

Effect on total service and interest cost components

$6

$(5)

Effect on post-retirement benefit obligation

82

(68)