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	2018			2017			2016			2018			2017			2016			2018			2017			2016
Service cost	$	326		$	312		$	282		$	238		$	252		$	238		$	57		$	57		$	54
Interest cost	432			454			456			178			172			204			69			81			82
Expected return on plan assets	(851		)	(862		)	(831		)	(431		)	(393		)	(382		)	(83		)	(78		)	(107		)
Amortization of unrecognized prior service cost	(50		)	(53		)	(55		)	(13		)	(11		)	(11		)	(84		)	(98		)	(106		)
Net loss amortization	232			180			119			84			98			87			1			1			3
Termination benefits	19			44			23			2			4			4			3			8			4
Curtailments	10			3			5			1			(4		)	(1		)	(8		)	(31		)	(18		)
Settlements	5			—			—			13			5			6			—			—			—
Net periodic benefit cost (credit)	$	123		$	78		$	(1	)	$	72		$	123		$	145		$	(45	)	$	(60	)	$	(88	)

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.

In connection with restructuring actions (see Note 5), termination charges were recorded in 2018, 2017 and 2016 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.

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 15), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions as noted 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
	2018			2017			2018			2017			2018			2017
Fair value of plan assets January 1	$	10,896		$	9,766		$	9,339		$	7,794		$	1,114		$	1,019
Actual return on plan assets	(810		)	1,723			(289		)	677			(72		)	161
Company contributions, net	378			58			167			226			6			(4		)
Effects of exchange rate changes	—			—			(352		)	843			—			—
Benefits paid	(772		)	(651		)	(202		)	(198		)	(80		)	(62		)
Settlements	(44		)	—			(106		)	(17		)	—			—
Other	—			—			23			14			—			—
Fair value of plan assets December 31	$	9,648		$	10,896		$	8,580		$	9,339		$	968		$	1,114
Benefit obligation January 1	$	11,904		$	10,849		$	9,483		$	8,372		$	1,922		$	1,922
Service cost	326			312			238			252			57			57
Interest cost	432			454			178			172			69			81
Actuarial (gains) losses ⁽¹⁾	(1,258		)	881			(154		)	(7		)	(341		)	(87		)
Benefits paid	(772		)	(651		)	(202		)	(198		)	(80		)	(62		)
Effects of exchange rate changes	—			—			(387		)	916			(6		)	3
Plan amendments	—			—			10			(22		)	(9		)	—
Curtailments	13			15			(2		)	(3		)	—			—
Termination benefits	19			44			2			4			3			8
Settlements	(44		)	—			(106		)	(17		)	—			—
Other	—			—			23			14			—			—
Benefit obligation December 31	$	10,620		$	11,904		$	9,083		$	9,483		$	1,615		$	1,922
Funded status December 31	$	(972	)	$	(1,008	)	$	(503	)	$	(144	)	$	(647	)	$	(808	)
Recognized as:
Other assets	$	—		$	—		$	659		$	828		$	—		$	—
Accrued and other current liabilities	(47		)	(59		)	(14		)	(17		)	(10		)	(11		)
Other noncurrent liabilities	(925		)	(949		)	(1,148		)	(955		)	(637		)	(797		)

⁽¹⁾ Actuarial (gains) losses in 2018 and 2017 primarily reflect changes in discount rates.

At December 31, 2018 and 2017, the accumulated benefit obligation was $19.0 billion and $20.5 billion, respectively, for all pension plans, of which $10.4 billion and $11.5 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
	2018		2017		2018		2017
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation	$	10,620	$	11,904	$	6,251	$	3,323
Fair value of plan assets	9,648		10,896		5,089		2,352
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation	$	9,702	$	676	$	5,936	$	2,120
Fair value of plan assets	8,966		—		5,071		1,346

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, 2018 and 2017, $826 million and $488 million, respectively, or approximately 5% and 2%, respectively, 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
	2018								2017
U.S. Pension Plans
Assets
Cash and cash equivalents	$	40	$	—	$	—	$	40	$	6	$	—	$	—	$	6
Investment funds
Developed markets equities	169		—		—		169		390		—		—		390
Emerging markets equities	121		—		—		121		138		—		—		138
Equity securities
Developed markets	2,172		—		—		2,172		2,743		—		—		2,743
Fixed income securities
Government and agency obligations	—		1,509		—		1,509		—		757		—		757
Corporate obligations	—		1,246		—		1,246		—		900		—		900
Mortgage and asset-backed securities	—		262		—		262		—		240		—		240
Other investments	—		—		13		13		—		—		15		15
Net assets in fair value hierarchy	$	2,502	$	3,017	$	13	$	5,532	$	3,277	$	1,897	$	15	$	5,189
Investments measured at NAV ⁽¹⁾							4,116								5,707
Plan assets at fair value							$	9,648							$	10,896
International Pension Plans
Assets
Cash and cash equivalents	$	50	$	3	$	—	$	53	$	54	$	19	$	—	$	73
Investment funds
Developed markets equities	461		3,071		—		3,532		562		3,326		—		3,888
Emerging markets equities	56		112		—		168		62		176		—		238
Government and agency obligations	372		2,082		—		2,454		249		2,095		—		2,344
Corporate obligations	4		7		—		11		5		329		—		334
Fixed income obligations	7		4		—		11		7		4		—		11
Real estate ⁽²⁾	—		1		1		2		—		1		2		3
Equity securities
Developed markets	544		—		—		544		660		—		—		660
Fixed income securities
Government and agency obligations	2		291		—		293		2		266		—		268
Corporate obligations	1		113		—		114		1		118		—		119
Mortgage and asset-backed securities	—		55		—		55		—		55		—		55
Other investments
Insurance contracts ⁽³⁾	—		66		811		877		—		67		470		537
Other	—		4		1		5		—		6		1		7
Net assets in fair value hierarchy	$	1,497	$	5,809	$	813	$	8,119	$	1,602	$	6,462	$	473	$	8,537
Investments measured at NAV ⁽¹⁾							461								802
Plan assets at fair value							$	8,580							$	9,339


⁽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, 2018 and 2017.


⁽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:



	2018												2017
	Insurance Contracts			Real Estate			Other			Total			Insurance Contracts		Real Estate			Other			Total
U.S. Pension Plans
Balance January 1	$	—		$	—		$	15		$	15		$	—	$	—		$	18		$	18
Actual return on plan assets:
Relating to assets still held at December 31	—			—			(3		)	(3		)	—		—			(2		)	(2		)
Relating to assets sold during the year	—			—			4			4			—		—			4			4
Purchases and sales, net	—			—			(3		)	(3		)	—		—			(5		)	(5		)
Balance December 31	$	—		$	—		$	13		$	13		$	—	$	—		$	15		$	15
International Pension Plans
Balance January 1	$	470		$	2		$	1		$	473		$	412	$	4		$	1		$	417
Actual return on plan assets:
Relating to assets still held at December 31	(32		)	—			—			(32		)	52		—			—			52
Purchases and sales, net	380			(1		)	—			379			5		(2		)	—			3
Transfers into Level 3	(7		)	—			—			(7		)	1		—			—			1
Balance December 31	$	811		$	1		$	1		$	813		$	470	$	2		$	1		$	473

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
	2018								2017
Assets
Cash and cash equivalents	$	78	$	—	$	—	$	78	$	97	$	—	$	—	$	97
Investment funds
Developed markets equities	16		—		—		16		37		—		—		37
Emerging markets equities	12		—		—		12		13		—		—		13
Government and agency obligations	1		—		—		1		1		—		—		1
Equity securities
Developed markets	200		—		—		200		256		—		—		256
Fixed income securities
Government and agency obligations	—		141		—		141		—		71		—		71
Corporate obligations	—		116		—		116		—		84		—		84
Mortgage and asset-backed securities	—		24		—		24		—		23		—		23
Net assets in fair value hierarchy	$	307	$	281	$	—	$	588	$	404	$	178	$	—	$	582
Investments measured at NAV ⁽¹⁾							380								532
Plan assets at fair value							$	968							$	1,114


⁽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, 2018 and 2017.

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 30% to 50% in U.S. equities, 15% to 30% in international equities, 30% to 45% 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 11%, 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 2019 are approximately $50 million for U.S. pension plans, approximately $150 million for international pension plans and approximately $15 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
2019	$	638	$	225	$	91
2020	661		213		95
2021	680		221		98
2022	685		239		102
2023	709		249		105
2024 — 2028	3,805		1,349		577

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	2018			2017			2016			2018			2017			2016			2018			2017			2016
Net (loss) gain arising during the period	$	(397	)	$	(19	)	$	(743	)	$	(505	)	$	309		$	(380	)	$	186		$	170		$	(45	)
Prior service (cost) credit arising during the period	(4		)	(13		)	(10		)	(10		)	22			(2		)	2			(31		)	(19		)
	$	(401	)	$	(32	)	$	(753	)	$	(515	)	$	331		$	(382	)	$	188		$	139		$	(64	)
Net loss amortization included in benefit cost	$	232		$	180		$	119		$	84		$	98		$	87		$	1		$	1		$	3
Prior service (credit) cost amortization included in benefit cost	(50		)	(53		)	(55		)	(13		)	(11		)	(11		)	(84		)	(98		)	(106		)
	$	182		$	127		$	64		$	71		$	87		$	76		$	(83	)	$	(97	)	$	(103	)

The estimated net loss (gain) and prior service cost (credit) amounts that will be amortized from AOCI into net periodic benefit cost during 2019 are $204 million and $(62) million, respectively, for pension plans (of which $141 million and $(50) million, respectively, relates to U.S. pension plans) and $(7) million and $(78) 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	2018		2017		2016		2018		2017		2016
Net periodic benefit cost
Discount rate	3.70	%	4.30	%	4.70	%	2.10	%	2.20	%	2.80	%
Expected rate of return on plan assets	8.20	%	8.70	%	8.60	%	5.10	%	5.10	%	5.60	%
Salary growth rate	4.30	%	4.30	%	4.30	%	2.90	%	2.90	%	2.90	%
Benefit obligation
Discount rate	4.40	%	3.70	%	4.30	%	2.20	%	2.10	%	2.20	%
Salary growth rate	4.30	%	4.30	%	4.30	%	2.80	%	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 2019, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 7.70% to 8.10%, as compared to a range of 7.70% to 8.30% in 2018. The decrease is primarily due to a modest shift in asset allocation. The change in the weighted-average expected return on U.S. pension and other postretirement benefit plan assets from 2016 to 2018 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	2018		2017
Health care cost trend rate assumed for next year	7.0	%	7.2	%
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	$	11	$	(9	)
Effect on benefit obligation	88		(74		)

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 2018, 2017 and 2016 were $136 million, $131 million and $126 million, respectively.