The Company sponsors various pension plans for the majority of its U.S. and non-U.S. employees. The Company provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S. employees. The Company also provides certain postemployment benefits to certain former employees or inactive employees prior to retirement.

Pension and Other Postretirement Plans. Substantially all of the U.S. employees of the Company and its U.S. affiliates who were hired before July 1, 2007 are covered by the U.S. Qualified Plan, a non-contributory, defined benefit pension plan that is qualified under Section 401(a) of the Internal Revenue Code (the “U.S. Qualified Plan”). Unfunded supplementary plans (the “Supplemental Plans”) cover certain executives. In addition, certain of the Company's non-U.S. subsidiaries also have defined benefit pension plans covering substantially all of their employees. These pension plans generally provide pension benefits that are based on each employee's years of credited service and on compensation levels specified in the plans. The Company's policy is to fund at least the amounts sufficient to meet minimum funding requirements under applicable employee benefit and tax laws. Liabilities for benefits payable under the Supplemental Plans are accrued by the Company and are funded when paid to the beneficiaries. The Company's U.S. Qualified Plan was closed to new hires effective July 1, 2007. In lieu of a defined benefit pension plan, eligible employees (excluding legacy Smith Barney employees) who were first hired, rehired or transferred to a U.S. benefits eligible position on or after July 1, 2007 received a retirement contribution under the Morgan Stanley 401(k) Plan. On December 23, 2010, the Morgan Stanley 401(k) Plan was amended to cease allocating a retirement contribution with respect to plan years beginning on or after January 1, 2011.

On June 1, 2010, the U.S. Qualified Plan was amended to cease future benefit accruals after December 31, 2010. Any benefits earned by participants under the U.S. Qualified Plan at December 31, 2010 were preserved and will be payable based on the U.S. Qualified Plan's provisions. As a result, the Company recorded a curtailment gain that reduced Compensation and benefits expense by approximately $51 million in the consolidated statements of income for 2010. Additionally, the Company remeasured the obligation and assets of the U.S. Qualified Plan at May 31, 2010 due to such cessation of accruals for benefits.

The Company also has an unfunded postretirement benefit plan that provides medical and life insurance for eligible U.S. retirees and medical insurance for their dependents.

On October 29, 2010, the Morgan Stanley U.S. Medical Plan was amended to change eligibility requirements for a Company-provided subsidy toward the cost of retiree medical coverage after December 31, 2010. As a result, the Company recorded a curtailment gain that reduced Compensation and benefits expense by approximately $4 million in the consolidated statements of income for 2010. Additionally, the Company remeasured the obligation and assets of the postretirement plan at October 31, 2010 for this amendment.

The following table presents the components of the net periodic benefit expense for 2012, 2011 and 2010:

			Pension						Postretirement
			2012		2011		2010		2012		2011		2010

			(dollars in millions)
Service cost, benefits earned during the period		$	26	$	27	$	99	$	4	$	4	$	7
Interest cost on projected benefit obligation			156		158		152		7		8		11
Expected return on plan assets			(110)		(131)		(128)		—		—		—
Net amortization of prior service costs			—		—		(4)		(14)		(14)		(3)
Net amortization of actuarial loss			27		17		24		2		2		1
Curtailment gain			—		—		(50)		—		—		(4)
Settlement loss			—		1		3		—		—		—
	Net periodic benefit expense	$	99	$	72	$	96	$	(1)	$	—	$	12

Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income) on a pre-tax basis in 2012, 2011 and 2010 were as follows:

		Pension						Postretirement
		2012		2011		2010		2012		2011		2010

		(dollars in millions)
Net loss (gain)	$	416	$	(401)	$	34	$	16	$	(5)	$	2
Prior service cost (credit)		3		2		—		—		—		(54)
Amortization of prior service credit		—		—		54		14		14		7
Amortization of net loss		(27)		(18)		(27)		(2)		(2)		(1)
Total recognized in other comprehensive loss (income)	$	392	$	(417)	$	61	$	28	$	7	$	(46)

The Company, for most plans, amortizes (as a component of pension and postretirement expense) unrecognized net gains and losses over the average future service of active participants to the extent that the gain (loss) exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets. Effective January 1, 2011, the U.S. Qualified Plan amortizes the unrecognized net gains and losses using the average life expectancy of participants.

The following table presents the weighted average assumptions used to determine net periodic benefit costs for 2012, 2011 and 2010:

The expected long-term rate of return on plan assets represents the Company's best estimate of the long-term return on plan assets. For the U.S. Qualified Plan, the expected long-term rate of return was estimated by computing a weighted average return of the underlying long-term expected returns on the plan's fixed income assets based on the investment managers' target allocations within this asset class. The expected long-term return on assets is a long-term assumption that generally is expected to remain the same from one year to the next unless there is a significant change in the target asset allocation, the fees and expenses paid by the plan or market conditions. The U.S. Qualified Plan has 100% investment in fixed income securities and related derivative securities, including interest rate swap contracts. This asset allocation is expected to help protect the plan's funded status and limit volatility of the Company's contributions. Total U.S. Qualified Plan portfolio performance is assessed by comparing actual investment performance with changes in the estimated present value of the U.S. Qualified Plan's liability.

The following table provides a reconciliation of the changes in the benefit obligation and fair value of plan assets for 2012 and 2011:

			Pension		Postretirement

			(dollars in millions)
Reconciliation of benefit obligation:
	Benefit obligation at December 31, 2010	$	2,953	$	155
	Service cost		27		4
	Interest cost		158		8
	Actuarial loss (gain)		490		(4)
	Plan amendments		4		—
	Plan settlements		(16)		—
	Benefits paid		(98)		(9)
	Other, including foreign currency exchange rate changes		(1)		—
	Benefit obligation at December 31, 2011	$	3,517	$	154
	Service cost		26		4
	Interest cost		156		7
	Actuarial loss		405		15
	Plan settlements		(2)		—
	Benefits paid		(147)		(6)
	Other, including foreign currency exchange rate changes		(72)		—
	Benefit obligation at December 31, 2012	$	3,883	$	174
Reconciliation of fair value of plan assets:
	Fair value of plan assets at December 31, 2010	$	2,642	$	—
	Actual return on plan assets		1,024		—
	Employer contributions		57		9
	Benefits paid		(98)		(9)
	Plan settlements		(16)		—
	Other, including foreign currency exchange rate changes		(5)		—
	Fair value of plan assets at December 31, 2011	$	3,604	$	—
	Actual return on plan assets		83		—
	Employer contributions		42		6
	Benefits paid		(147)		(6)
	Plan settlements		(2)		—
	Other, including foreign currency exchange rate changes		(61)		—
	Fair value of plan assets at December 31, 2012	$	3,519	$	—

The following table presents a summary of the funded status at December 31, 2012 and December 31, 2011:

				Pension				Postretirement
				December 31, 2012		December 31, 2011		December 31, 2012		December 31, 2011

				(dollars in millions)
Funded (unfunded) status			$	(364)	$	87	$	(174)	$	(154)
Amounts recognized in the consolidated statements of financial
condition consist of:
	Assets		$	97	$	495	$	—	$	—
	Liabilities			(461)		(408)		(174)		(154)
		Net amount recognized	$	(364)	$	87	$	(174)	$	(154)
Amounts recognized in accumulated other comprehensive loss
consist of:
	Prior service credit		$	(2)	$	(5)	$	(24)	$	(38)
	Net loss			821		432		41		27
		Net loss (gain) recognized	$	819	$	427	$	17	$	(11)

The estimated prior service credit that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over 2013 is $14 million for postretirement plans. The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over 2013 is approximately $36 million for defined benefit pension plans and $3 million for postretirement plans.

The accumulated benefit obligation for all defined benefit pension plans was $3,858 million and $3,458 million at December 31, 2012 and December 31, 2011, respectively.

The following table contains information for pension plans with projected benefit obligations in excess of the fair value of plan assets at period-end:

The following table contains information for pension plans with accumulated benefit obligations in excess of the fair value of plan assets at period-end:

The following table presents the weighted average assumptions used to determine benefit obligations at period-end:

The discount rates used to determine the benefit obligations for the U.S. pension plans, U.S. postretirement plan and the U.K. pension plan's liabilities were selected by the Company, in consultation with its independent actuaries, using a pension discount yield curve based on the characteristics of the plans, each determined independently. The pension discount yield curve represents spot discount yields based on duration implicit in a representative broad based Aa corporate bond universe of high-quality fixed income investments. For all other non-U.S. pension plans, the Company set the assumed discount rates based on the nature of liabilities, local economic environments and available bond indices.

The following table presents assumed health care cost trend rates used to determine the U.S. postretirement benefit obligations at period-end:

		December 31, 2012	December 31, 2011

Health care cost trend rate assumed for next year:
	Medical	6.93-7.53%	6.95-7.68%
	Prescription	8.66%	9.08%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)		4.50%	4.50%
Year that the rate reaches the ultimate trend rate		2029	2029

Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company's postretirement benefit plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:

No impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has been reflected in the Company's consolidated statements of income as Medicare prescription drug coverage was deemed to have no material effect on the Company's postretirement benefit plan.

Plan Assets. The U.S. Qualified Plan assets represent 90% of the Company's total pension plan assets. The U.S. Qualified Plan uses a combination of active and risk-controlled fixed income investment strategies. The fixed income asset allocation consists primarily of fixed income securities designed to approximate the expected cash flows of the plan's liabilities in order to help reduce plan exposure to interest rate variation and to better align assets with obligations. The longer duration fixed income allocation is expected to help protect the plan's funded status and maintain the stability of plan contributions over the long run.

The allocation by investment manager of the Company's U.S. Qualified Plan is reviewed by the Morgan Stanley Retirement Plan Investment Committee (“Investment Committee”) on a regular basis. When the exposure to a given investment manager reaches a minimum or maximum allocation level, an asset allocation review process is initiated, and the portfolio will be automatically rebalanced toward the target allocation unless the Investment Committee determines otherwise.

Derivative instruments are permitted in the U.S. Qualified Plan's portfolio only to the extent that they comply with all of the plan's policy guidelines and are consistent with the plan's risk and return objectives. In addition, any investment in derivatives must meet the following conditions:

• Derivatives may be used only if they are deemed by the investment manager to be more attractive than a similar direct investment in the underlying cash market or if the vehicle is being used to manage risk of the portfolio.

• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.

• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the U.S. Qualified Plan is that investment activity is undertaken for long-term investment rather than short-term trading.

• Derivatives may only be used in the management of the U.S. Qualified Plan's portfolio when their possible effects can be quantified, shown to enhance the risk-return profile of the portfolio, and reported in a meaningful and understandable manner.

As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivative product. This includes percentage allocations and credit quality. Derivatives will be used solely for the purpose of enhancing investment in the underlying assets and not to circumvent portfolio restrictions.

The plan assets are measured at fair value using valuation techniques that are consistent with the valuation techniques applied to the Company's major categories of assets and liabilities as described in Note 4. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available. If a quoted market price is available, the fair value is the product of the number of trading units multiplied by the market price. If a quoted market price is not available, the estimate of fair value is based on the valuation approaches that maximize use of observable inputs and minimize use of unobservable inputs.

The fair value of OTC derivative contracts is derived primarily using pricing models, which may require multiple market input parameters. Derivative contracts are presented on a gross basis prior to cash collateral or counterparty netting. Derivative contracts consist of investments in futures contracts and swaps.

Commingled trust funds are privately offered funds available to institutional clients that are regulated, supervised and subject to periodic examination by a federal or state agency. The trust must be maintained for the collective investment or reinvestment of assets contributed to it from employee benefit plans maintained by more than one employer or a controlled group of corporations. The sponsor of the commingled trust funds values the funds' NAV based on the fair value of the underlying securities. The underlying securities of the commingled trust funds consist of mainly long-duration fixed income instruments. Commingled trust funds that are redeemable at the measurement date or in the near future are categorized in Level 2 of the fair value hierarchy, otherwise they are categorized in Level 3 of the fair value hierarchy.

Some non-U.S. based plans hold foreign funds that consist of investments in foreign corporate equity funds, foreign corporate bond funds, foreign target cash flow funds and foreign liquidity funds. Foreign corporate equity funds and foreign corporate bond funds invest in individual securities quoted on a recognized stock exchange or traded in a regulated market and certain bond funds that aim to produce returns as close as possible to certain Financial Times Stock Exchange indexes. Foreign target cash flow funds are designed to provide a series of fixed annual cash flows over 5 or 10 years achieved by investing in government bonds and derivatives. Foreign liquidity funds place a high priority on capital preservation, stable value and a high liquidity of assets. Foreign fund investments are categorized in Level 2 of the fair value hierarchy as they are readily redeemable at their NAV. Corporate equity investments traded on a formal exchange are categorized in Level 1 of the fair value hierarchy.

Other investments consist of investment held by non-U.S. based plans in emerging markets, real estate, hedge funds and insurance annuity contracts. These emerging markets, real estate and hedge funds are categorized in Level 2 of the fair value hierarchy to the extent that they are readily redeemable at their NAV, otherwise they are categorized in Level 3 of the fair value hierarchy. The insurance annuity contracts are valued based on the premium reserve of the insurer for a guarantee that the insurer has given to the employee benefit fund that approximates fair value. The insurance annuity contracts are categorized in Level 3 of the fair value hierarchy.

The following table presents the fair value of the net pension plan assets at December 31, 2012. There were no transfers between levels during 2012:

				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

				(dollars in millions)
Assets:
Investments:
	Cash and cash equivalents(1)		$	80	$	—	$	—	$	80
	U.S. government and agency securities:
		U.S. Treasury securities		1,354		—		—		1,354
		U.S. agency securities		—		241		—		241
		Total U.S. government and agency securities		1,354		241		—		1,595

	Corporate and other debt:
		State and municipal securities		—		2		—		2
		Collateralized debt obligations		—		71		—		71
		Total corporate and other debt		—		73		—		73
	Corporate equities			20		—		—		20
	Derivative contracts(2)			—		224		—		224
	Derivative-related cash collateral receivable			—		3		—		3
	Commingled trust funds(3)			—		1,275		—		1,275
	Foreign funds(4)			—		282		—		282
	Other investments			—		11		30		41
		Total investments		1,454		2,109		30		3,593
Receivables:
	Other receivables(1)			—		71		—		71
		Total receivables		—		71		—		71
Total assets			$	1,454	$	2,180	$	30	$	3,664

Liabilities:
Derivative contracts(5)			$	—	$	57	$	—	$	57
Derivative-related cash collateral payable				—		28		—		28
Other liabilities(1)				—		60		—		60
Total liabilities				—		145		—		145
	Net pension assets		$	1,454	$	2,035	$	30	$	3,519

(1) Cash and cash equivalents, other receivables and other liabilities are valued at cost, which approximates fair value.

(2) Derivative contracts in an asset position include investments in interest rate swaps of $224 million.

(3) Commingled trust funds include investments in fixed income funds of $1,275 million.

(4) Foreign funds include investments in bond funds, targeted cash flow funds, liquidity funds and diversified funds of $141 million, $85 million, $55 million and $1 million, respectively.

(5) Derivative contracts in a liability position include investments in interest rate swaps of $57 million.

The following table presents the fair value of the net pension plan assets at December 31, 2011. Certain investments in U.S. agency securities, valued at approximately $245 million, were reclassified from Level 1 to Level 2 during 2011 as transactions in these securities did not occur with sufficient frequency and volume to constitute an active market:

				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

				(dollars in millions)
Assets:
Investments:
	Cash and cash equivalents(1)		$	11	$	—	$	—	$	11
	U.S. government and agency securities:
		U.S. Treasury securities		1,295		—		—		1,295
		U.S. agency securities		—		245		—		245
		Total U.S. government and agency securities		1,295		245		—		1,540

	Other sovereign government obligations			16		48		—		64
	Corporate and other debt:
		State and municipal securities		—		2		—		2
		Corporate bonds		—		142		—		142
		Collateralized debt obligations		—		88		—		88
		Total corporate and other debt		—		232		—		232
	Corporate equities			6		—		—		6
	Derivative contracts(2)			—		230		—		230
	Derivative-related cash collateral receivable			—		1		—		1
	Commingled trust funds(3)			—		1,339		—		1,339
	Foreign funds(4)			—		273		—		273
	Other investments			—		13		26		39
		Total investments		1,328		2,381		26		3,735
Receivables:
	Other receivables(1)			—		14		—		14
		Total receivables		—		14		—		14
Total assets			$	1,328	$	2,395	$	26	$	3,749

Liabilities:
Derivative contracts(5)			$	—	$	105	$	—	$	105
Derivative-related cash collateral payable				—		25		—		25
Other liabilities(1)				—		15		—		15
Total liabilities				—		145		—		145
	Net pension assets		$	1,328	$	2,250	$	26	$	3,604

(1) Cash and cash equivalents, other receivables and other liabilities are valued at cost, which approximates fair value.

(2) Derivative and other contracts in an asset position include investments in interest rate swaps of $230 million.

(3) Commingled trust funds include investments in cash funds and fixed income funds of $39 million and $1,300 million, respectively.

(4) Foreign funds include investments in equity funds, bond funds, targeted cash flow funds and diversified funds of $17 million, $124 million, $131 million and $1 million, respectively.

(5) Derivative and other contracts in a liability position include investments in inflation swaps and interest rate swaps of $9 million and $96 million, respectively.

The following table presents changes in Level 3 pension assets measured at fair value for 2012:

				Beginning Balance at January 1, 2012		Actual Return on Plan Assets Related to Assets Still Held at December 31, 2012		Actual Return on Plan Assets Related to Assets Sold during 2012		Purchases, Sales, Other Settlements and Issuances, net		Net Transfers In and/or (Out) of Level 3		Ending Balance at December 31, 2012
				(dollars in millions)
Investments
	Other investments		$	26	$	—	$	—	$	4	$	—	$	30
		Total investments	$	26	$	—	$	—	$	4	$	—	$	30

The following table presents changes in Level 3 pension assets measured at fair value for 2011:

				Beginning Balance at January 1, 2011		Actual Return on Plan Assets Related to Assets Still Held at December 31, 2011		Actual Return on Plan Assets Related to Assets Sold during 2011		Purchases, Sales, Other Settlements and Issuances, net		Net Transfers In and/or (Out) of Level 3		Ending Balance at December 31, 2011
				(dollars in millions)
Investments
	Other investments		$	23	$	(1)	$	—	$	4	$	—	$	26
		Total investments	$	23	$	(1)	$	—	$	4	$	—	$	26

At December 31, 2012, the Company expects to contribute approximately $50 million to its pension and postretirement benefit plans in 2013 based upon the plans' current funded status and expected asset return assumptions for 2013, as applicable.

Expected benefit payments associated with the Company's pension and postretirement benefit plans for the next five years and in aggregate for the five years thereafter at December 31, 2012 are as follows:

Morgan Stanley 401(k) Plan, Morgan Stanley 401(k) Savings Plan and Profit Sharing Awards. U.S. employees meeting certain eligibility requirements may participate in the Morgan Stanley 401(k) Plan or the Morgan Stanley 401(k) Savings Plan. Eligible U.S. employees receive 401(k) matching cash or stock contributions. Matching contributions for 2012 were funded with cash and allocated according to participants' current investment direction. Matching contributions for 2011 were funded in stock and invested in the Morgan Stanley Stock Fund.

Effective January 1, 2011, the Morgan Stanley 401(k) Plan was amended to conform with the Morgan Stanley 401(k) Savings Plan to provide a $1 for $1 Company match up to 4% of eligible pay up to the Internal Revenue Service (“IRS”) limit. In addition, the fixed contribution was amended to apply to eligible employees in both the Morgan Stanley 401(k) Plan and Morgan Stanley 401(k) Savings Plan with eligible pay less than or equal to $100,000 who are not Financial Advisors or Senior Advisors. The fixed contribution is equal to 2% of eligible pay. Also effective January 1, 2011, an MS Transition Contribution was added for participants who received a 2010 accrual in the U.S. Qualified Plan or a 2010 retirement contribution in the 401(k) Plan and who met certain age and service requirements as of December 31, 2010.

Effective July 1, 2009, the Company introduced the Morgan Stanley 401(k) Savings Plan for legacy Smith Barney U.S. employees who were contributed to MSSB and certain other groups. In 2010, legacy Smith Barney U.S. employees with eligible pay less than or equal to $100,000 received a fixed contribution under the 401(k) Savings Plan. The amount of fixed contribution was included in the Company's 401(k) expense and equaled between 1% and 2% of eligible pay based on years of service at December 31. Additionally, certain eligible legacy Smith Barney employees were granted a transition contribution and, for their year of transfer, a one-time make-up Company match based on certain transition percentages of eligible pay and a comparison of the Company match under the Citi 401(k) Plan and Morgan Stanley 401(k) Savings Plan. The retirement contribution granted in lieu of a defined benefit pension plan and the fixed contribution, transition contribution and make-up Company match granted to legacy Smith Barney employees are included in the Company's 401(k) expense. Effective May 1, 2011, the Saxon 401(k) Plan was merged with the Morgan Stanley 401(k) Savings Plan. Effective December 31, 2012, the Morgan Stanley 401(k) Savings Plan was merged with the Morgan Stanley 401(k) Plan.

The Company also provides discretionary profit sharing to certain non-U.S. employees. The pre-tax expense associated with the 401(k) plans and profit sharing for 2012, 2011 and 2010 was $246 million, $257 million and $196 million, respectively.

Defined Contribution Pension Plans. The Company maintains separate defined contribution pension plans that cover substantially all employees of certain non-U.S. subsidiaries. Under such plans, benefits are determined based on a fixed rate of base salary with certain vesting requirements. In 2012, 2011 and 2010, the Company's expense related to these plans was $126 million, $136 million and $117 million, respectively.

Other Postemployment Benefits. Postemployment benefits may include, but are not limited to, salary continuation, severance benefits, disability-related benefits, and continuation of health care and life insurance coverage provided to former employees or inactive employees after employment but before retirement. The postemployment benefit obligations were not material at December 31, 2012 and December 31, 2011.