Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.

Net Periodic Benefit Cost

The net periodic benefit cost (credit) for pension and other postretirement benefit plans consisted of the following components:



	Pension Benefits
	U.S.									International									Other Postretirement Benefits
Years Ended December 31	2017			2016			2015			2017			2016			2015			2017			2016			2015
Service cost	$	312		$	282		$	307		$	252		$	238		$	251		$	57		$	54		$	80
Interest cost	454			456			434			172			204			206			81			82			110
Expected return on plan assets	(862		)	(831		)	(819		)	(393		)	(382		)	(379		)	(78		)	(107		)	(143		)
Amortization of unrecognized prior service cost	(53		)	(55		)	(56		)	(11		)	(11		)	(14		)	(98		)	(106		)	(64		)
Net loss amortization	180			119			214			98			87			118			1			3			5
Termination benefits	44			23			22			4			4			1			8			4			7
Curtailments	3			5			(12		)	(4		)	(1		)	(9		)	(31		)	(18		)	(19		)
Settlements	—			—			1			5			6			12			—			—			—
Net periodic benefit cost (credit)	$	78		$	(1	)	$	91		$	123		$	145		$	186		$	(60	)	$	(88	)	$	(24	)

The changes in net periodic benefit cost (credit) year over year for pension plans are largely attributable to changes in the discount rate affecting net loss amortization. The increase in net periodic benefit credit for other postretirement benefit plans in 2017 and 2016 as compared with 2015 is largely attributable to changes in retiree medical benefits approved by the Company in December 2015, partially offset by lower returns on plan assets.

In connection with restructuring actions (see Note 5), termination charges were recorded in 2017, 2016 and 2015 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments were recorded on pension and other postretirement benefit plans and settlements were recorded on certain U.S. and international pension plans as reflected in the table above.

Obligations and Funded Status

Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows:



	Pension Benefits												Other Postretirement Benefits
	U.S.						International						Other Postretirement Benefits
	2017			2016			2017			2016			2017			2016
Fair value of plan assets January 1	$	9,766		$	9,266		$	7,794		$	7,204		$	1,019		$	1,913
Actual return on plan assets	1,723			941			677			898			161			138
Company contributions, net	58			63			226			424			(4		)	68
Effects of exchange rate changes	—			—			843			(546		)	—			—
Benefits paid	(651		)	(504		)	(198		)	(193		)	(62		)	(108		)
Settlements	—			—			(17		)	(21		)	—			—
Assets no longer restricted to the payment of postretirement benefits ⁽¹⁾	—			—			—			—			—			(992		)
Other	—			—			14			28			—			—
Fair value of plan assets December 31	$	10,896		$	9,766		$	9,339		$	7,794		$	1,114		$	1,019
Benefit obligation January 1	$	10,849		$	9,723		$	8,372		$	7,733		$	1,922		$	1,810
Service cost	312			282			252			238			57			54
Interest cost	454			456			172			204			81			82
Actuarial losses (gains) ⁽²⁾	881			854			(7		)	938			(87		)	77
Benefits paid	(651		)	(504		)	(198		)	(193		)	(62		)	(108		)
Effects of exchange rate changes	—			—			916			(576		)	3			2
Plan amendments	—			—			(22		)	—			—			—
Curtailments	15			15			(3		)	(15		)	—			1
Termination benefits	44			23			4			4			8			4
Settlements	—			—			(17		)	(21		)	—			—
Other	—			—			14			60			—			—
Benefit obligation December 31	$	11,904		$	10,849		$	9,483		$	8,372		$	1,922		$	1,922
Funded status December 31	$	(1,008	)	$	(1,083	)	$	(144	)	$	(578	)	$	(808	)	$	(903	)
Recognized as:
Other assets	$	—		$	—		$	828		$	451		$	—		$	—
Accrued and other current liabilities	(59		)	(50		)	(17		)	(7		)	(11		)	(11		)
Other noncurrent liabilities	(949		)	(1,033		)	(955		)	(1,022		)	(797		)	(892		)

⁽¹⁾ As a result of certain allowable administrative actions that occurred in June 2016, $992 million of plan assets previously restricted for the payment of other postretirement benefits became available to fund certain other health and welfare benefits.

⁽²⁾ Actuarial losses in 2017 and 2016 primarily reflect changes in discount rates.

At December 31, 2017 and 2016, the accumulated benefit obligation was $20.5 billion and $18.4 billion, respectively, for all pension plans, of which $11.5 billion and $10.5 billion, respectively, related to U.S. pension plans.

Information related to the funded status of selected pension plans at December 31 is as follows:



	U.S.				International
	2017		2016		2017		2016
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation	$	11,904	$	10,849	$	3,323	$	5,486
Fair value of plan assets	10,896		9,766		2,352		4,457
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation	$	676	$	9,807	$	2,120	$	2,692
Fair value of plan assets	—		9,057		1,346		1,898

Plan Assets

Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 2017 and 2016, $488 million and $435 million, respectively, or approximately 2% of the Company’s pension investments were categorized as Level 3 assets.

If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:



	Fair Value Measurements Using								Fair Value Measurements Using
	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	2017								2016
U.S. Pension Plans
Assets
Cash and cash equivalents	$	6	$	—	$	—	$	6	$	2	$	2	$	—	$	4
Investment funds
Developed markets equities	390		—		—		390		521		—		—		521
Emerging markets equities	138		—		—		138		104		—		—		104
Equity securities
Developed markets	2,743		—		—		2,743		2,521		—		—		2,521
Fixed income securities
Government and agency obligations	—		757		—		757		—		475		—		475
Corporate obligations	—		900		—		900		—		660		—		660
Mortgage and asset-backed securities	—		240		—		240		—		239		—		239
Other investments	—		—		15		15		—		—		18		18
Net assets in fair value hierarchy	$	3,277	$	1,897	$	15	$	5,189	$	3,148	$	1,376	$	18	$	4,542
Investments measured at NAV ⁽¹⁾							5,707								5,224
Plan assets at fair value							$	10,896							$	9,766
International Pension Plans
Assets
Cash and cash equivalents	$	54	$	19	$	—	$	73	$	42	$	11	$	—	$	53
Investment funds
Developed markets equities	562		3,326		—		3,888		187		2,846		—		3,033
Emerging markets equities	62		176		—		238		24		148		—		172
Government and agency obligations	249		2,095		—		2,344		123		1,904		—		2,027
Corporate obligations	5		329		—		334		2		282		—		284
Fixed income obligations	7		4		—		11		6		3		—		9
Real estate ⁽²⁾	—		1		2		3		—		3		4		7
Equity securities
Developed markets	660		—		—		660		565		—		—		565
Fixed income securities
Government and agency obligations	2		266		—		268		2		235		—		237
Corporate obligations	1		118		—		119		—		92		—		92
Mortgage and asset-backed securities	—		55		—		55		—		50		—		50
Other investments
Insurance contracts ⁽³⁾	—		67		470		537		—		59		412		471
Other	—		6		1		7		1		4		1		6
Net assets in fair value hierarchy	$	1,602	$	6,462	$	473	$	8,537	$	952	$	5,637	$	417	$	7,006
Investments measured at NAV ⁽¹⁾							802								788
Plan assets at fair value							$	9,339							$	7,794


⁽¹⁾	Certain investments that were measured at net asset value (NAV) per share or its equivalent as a 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 fair value of plan assets at December 31, 2017 and 2016.


⁽²⁾	The plans’ Level 3 investments in real estate funds are generally valued by market appraisals of the underlying investments in the funds.


⁽³⁾	The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:



	2017											2016
	Insurance Contracts		Real Estate			Other			Total			Insurance Contracts			Real Estate			Other			Total
U.S. Pension Plans
Balance January 1	$	—	$	—		$	18		$	18		$	—		$	—		$	23		$	23
Actual return on plan assets:
Relating to assets still held at December 31	—		—			(2		)	(2		)	—			—			(3		)	(3		)
Relating to assets sold during the year	—		—			4			4			—			—			4			4
Purchases and sales, net	—		—			(5		)	(5		)	—			—			(6		)	(6		)
Balance December 31	$	—	$	—		$	15		$	15		$	—		$	—		$	18		$	18
International Pension Plans
Balance January 1	$	412	$	4		$	1		$	417		$	393		$	5		$	2		$	400
Actual return on plan assets:
Relating to assets still held at December 31	52		—			—			52			(9		)	1			—			(8		)
Purchases and sales, net	5		(2		)	—			3			2			(2		)	(1		)	(1		)
Transfers into Level 3	1		—			—			1			26			—			—			26
Balance December 31	$	470	$	2		$	1		$	473		$	412		$	4		$	1		$	417

The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:



	Fair Value Measurements Using								Fair Value Measurements Using
	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	2017								2016
Assets
Cash and cash equivalents	$	97	$	—	$	—	$	97	$	125	$	—	$	—	$	125
Investment funds
Developed markets equities	37		—		—		37		48		—		—		48
Emerging markets equities	13		—		—		13		10		—		—		10
Government and agency obligations	1		—		—		1		1		—		—		1
Equity securities
Developed markets	256		—		—		256		231		—		—		231
Fixed income securities
Government and agency obligations	—		71		—		71		—		43		—		43
Corporate obligations	—		84		—		84		—		60		—		60
Mortgage and asset-backed securities	—		23		—		23		—		22		—		22
Net assets in fair value hierarchy	$	404	$	178	$	—	$	582	$	415	$	125	$	—	$	540
Investments measured at NAV ⁽¹⁾							532								479
Plan assets at fair value							$	1,114							$	1,019


⁽¹⁾	Certain investments that were measured at net asset value (NAV) per share or its equivalent as a 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 fair value of plan assets at December 31, 2017 and 2016.

The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 35% to 55% in U.S. equities, 20% to 35% in international equities, 20% to 35% in fixed-income investments, and up to 5% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of returns of the target portfolio, which approximates 13%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

Expected Contributions

Expected contributions during 2018 are approximately $60 million for U.S. pension plans, approximately $150 million for international pension plans and approximately $25 million for other postretirement benefit plans.

Expected Benefit Payments

Expected benefit payments are as follows:



	U.S. Pension Benefits		International Pension Benefits		Other Postretirement Benefits
2018	$	609	$	222	$	96
2019	638		205		101
2020	650		217		104
2021	663		225		109
2022	683		243		113
2023 — 2027	3,760		1,326		623

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.

Amounts Recognized in Other Comprehensive Income

Net loss amounts reflect experience differentials primarily relating to differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI:



	Pension Plans																		Other Postretirement Benefit Plans
	U.S.									International									Other Postretirement Benefit Plans
Years Ended December 31	2017			2016			2015			2017			2016			2015			2017			2016			2015
Net (loss) gain arising during the period	$	(19	)	$	(743	)	$	73		$	309		$	(380	)	$	(66	)	$	170		$	(45	)	$	209
Prior service (cost) credit arising during the period	(13		)	(10		)	(13		)	22			(2		)	(4		)	(31		)	(19		)	511
	$	(32	)	$	(753	)	$	60		$	331		$	(382	)	$	(70	)	$	139		$	(64	)	$	720
Net loss amortization included in benefit cost	$	180		$	119		$	214		$	98		$	87		$	118		$	1		$	3		$	5
Prior service (credit) cost amortization included in benefit cost	(53		)	(55		)	(56		)	(11		)	(11		)	(14		)	(98		)	(106		)	(64		)
	$	127		$	64		$	158		$	87		$	76		$	104		$	(97	)	$	(103	)	$	(59	)

The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from AOCI into net periodic benefit cost during 2018 are $314 million and $(64) million, respectively, for pension plans (of which $230 million and $(51) million, respectively, relates to U.S. pension plans) and $1 million and $(84) million, respectively, for other postretirement benefit plans.

Actuarial Assumptions

The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows:



	U.S. Pension and Other Postretirement Benefit Plans						International Pension Plans
December 31	2017		2016		2015		2017		2016		2015
Net periodic benefit cost
Discount rate	4.30	%	4.70	%	4.20	%	2.20	%	2.80	%	2.70	%
Expected rate of return on plan assets	8.70	%	8.60	%	8.50	%	5.10	%	5.60	%	5.70	%
Salary growth rate	4.30	%	4.30	%	4.40	%	2.90	%	2.90	%	2.90	%
Benefit obligation
Discount rate	3.70	%	4.30	%	4.80	%	2.10	%	2.20	%	2.80	%
Salary growth rate	4.30	%	4.30	%	4.30	%	2.90	%	2.90	%	2.90	%

For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. The expected rate of return within each plan is developed considering long-term historical returns data, current market conditions, and actual returns on the plan assets. Using this reference information, the long-term return expectations for each asset category and a weighted average expected return for each plan’s target portfolio is developed, according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2018, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 7.70% to 8.30%, as compared to a range of 8.00% to 8.75% in 2017. The decrease is primarily due to a modest shift in asset allocation. The increase in the weighted-average expected return on U.S. pension and other postretirement benefit plan assets from 2015 to 2017 is due to the relative weighting of the referenced plans’ assets.

The health care cost trend rate assumptions for other postretirement benefit plans are as follows:



December 31	2017		2016
Health care cost trend rate assumed for next year	7.2	%	7.4	%
Rate to which the cost trend rate is assumed to decline	4.5	%	4.5	%
Year that the trend rate reaches the ultimate trend rate	2032		2032

A one percentage point change in the health care cost trend rate would have had the following effects:



	One Percentage Point
	Increase		Decrease
Effect on total service and interest cost components	$	13	$	(11	)
Effect on benefit obligation	125		(104		)

Savings Plans

The Company also maintains defined contribution savings plans in the United States. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2017, 2016 and 2015 were $131 million, $126 million and $125 million, respectively.