Pension and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2019

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	2019			2018			2017			2019			2018			2017			2019			2018			2017
Service cost	$	293		$	326		$	312		$	238		$	238		$	252		$	48		$	57		$	57
Interest cost	458			432			454			177			178			172			69			69			81
Expected return on plan assets	(817		)	(851		)	(862		)	(426		)	(431		)	(393		)	(72		)	(83		)	(78		)
Amortization of unrecognized prior service cost	(49		)	(50		)	(53		)	(12		)	(13		)	(11		)	(78		)	(84		)	(98		)
Net loss amortization	151			232			180			64			84			98			(10		)	1			1
Termination benefits	31			19			44			8			2			4			5			3			8
Curtailments	14			10			3			6			1			(4		)	(11		)	(8		)	(31		)
Settlements	—			5			—			1			13			5			—			—			—
Net periodic benefit cost (credit)	$	81		$	123		$	78		$	56		$	72		$	123		$	(49	)	$	(45	)	$	(60	)

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 2019, 2018 and 2017 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 14), 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
	2019			2018			2019			2018			2019			2018
Fair value of plan assets January 1	$	9,648		$	10,896		$	8,580		$	9,339		$	968		$	1,114
Actual return on plan assets	2,165			(810		)	1,505			(289		)	203			(72		)
Company contributions	130			378			262			167			14			6
Effects of exchange rate changes	—			—			31			(352		)	—			—
Benefits paid	(582		)	(772		)	(230		)	(202		)	(104		)	(80		)
Settlements	—			(44		)	(12		)	(106		)	—			—
Other	—			—			27			23			21			—
Fair value of plan assets December 31	$	11,361		$	9,648		$	10,163		$	8,580		$	1,102		$	968
Benefit obligation January 1	$	10,620		$	11,904		$	9,083		$	9,483		$	1,615		$	1,922
Service cost	293			326			238			238			48			57
Interest cost	458			432			177			178			69			69
Actuarial losses (gains) ⁽¹⁾	2,165			(1,258		)	1,313			(154		)	21			(341		)
Benefits paid	(582		)	(772		)	(230		)	(202		)	(104		)	(80		)
Effects of exchange rate changes	—			—			4			(387		)	1			(6		)
Plan amendments	—			—			1			10			—			(9		)
Curtailments	18			13			3			(2		)	—			—
Termination benefits	31			19			8			2			5			3
Settlements	—			(44		)	(12		)	(106		)	—			—
Other	—			—			27			23			18			—
Benefit obligation December 31	$	13,003		$	10,620		$	10,612		$	9,083		$	1,673		$	1,615
Funded status December 31	$	(1,642	)	$	(972	)	$	(449	)	$	(503	)	$	(571	)	$	(647	)
Recognized as:
Other Assets	$	—		$	—		$	837		$	659		$	—		$	—
Accrued and other current liabilities	(92		)	(47		)	(18		)	(14		)	(10		)	(10		)
Other Noncurrent Liabilities	(1,550		)	(925		)	(1,268		)	(1,148		)	(561		)	(637		)

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

At December 31, 2019 and 2018, the accumulated benefit obligation was $22.8 billion and $19.0 billion, respectively, for all pension plans, of which $12.8 billion and $10.4 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
	2019		2018		2019		2018
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation	$	13,003	$	10,620	$	7,421	$	6,251
Fair value of plan assets	11,361		9,648		6,135		5,089
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation	$	12,009	$	9,702	$	2,476	$	5,936
Fair value of plan assets	10,484		8,966		1,501		5,071

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, 2019 and 2018, $860 million and $826 million, respectively, or approximately 4% and 5%, 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
	Level 1		Level 2		Level 3		NAV ⁽¹⁾		Total		Level 1		Level 2		Level 3		NAV ⁽¹⁾		Total
	2019										2018
U.S. Pension Plans
Assets
Cash and cash equivalents	$	3	$	—	$	—	$	236	$	239	$	40	$	—	$	—	$	182	$	222
Investment funds
Developed markets equities	205		—		—		3,542		3,747		169		—		—		3,021		3,190
Emerging markets equities	165		—		—		723		888		121		—		—		720		841
Government and agency obligations	—		—		—		173		173		—		—		—		161		161
Corporate obligations	—		—		—		—		—		—		—		—		32		32
Equity securities
Developed markets	2,451		—		—		—		2,451		2,172		—		—		—		2,172
Fixed income securities																			—
Government and agency obligations	—		2,094		—		—		2,094		—		1,509		—		—		1,509
Corporate obligations	—		1,582		—		—		1,582		—		1,246		—		—		1,246
Mortgage and asset-backed securities	—		178		—		—		178		—		262		—		—		262
Other investments	—		—		9		—		9		—		—		13		—		13
Plan assets at fair value	$	2,824	$	3,854	$	9	$	4,674	$	11,361	$	2,502	$	3,017	$	13	$	4,116	$	9,648
International Pension Plans
Assets
Cash and cash equivalents	$	70	$	1	$	—	$	15	$	86	$	50	$	3	$	—	$	16	$	69
Investment funds
Developed markets equities	546		3,761		—		96		4,403		461		3,071		—		75		3,607
Government and agency obligations	462		2,534		—		207		3,203		372		2,082		—		180		2,634
Emerging markets equities	66		96		—		90		252		56		112		—		83		251
Corporate obligations	5		11		—		109		125		4		7		—		94		105
Fixed income obligations	9		6		—		—		15		7		4		—		—		11
Real estate	—		1		—		—		1		—		1		1		—		2
Equity securities
Developed markets	565		—		—		—		565		544		—		—		—		544
Fixed income securities
Government and agency obligations	3		376		—		—		379		2		291		—		—		293
Corporate obligations	1		135		—		—		136		1		113		—		—		114
Mortgage and asset-backed securities	—		61		—		—		61		—		55		—		—		55
Other investments
Insurance contracts ⁽²⁾	—		65		851		—		916		—		66		811		—		877
Other	—		5		—		16		21		—		4		1		13		18
Plan assets at fair value	$	1,727	$	7,052	$	851	$	533	$	10,163	$	1,497	$	5,809	$	813	$	461	$	8,580


⁽¹⁾	Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV 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, 2019 and 2018.


⁽²⁾	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:



	2019												2018
	Insurance Contracts			Real Estate			Other			Total			Insurance Contracts			Real Estate			Other			Total
U.S. Pension Plans
Balance January 1	$	—		$	—		$	13		$	13		$	—		$	—		$	15		$	15
Actual return on plan assets:
Relating to assets still held at December 31	—			—			(8		)	(8		)	—			—			(3		)	(3		)
Relating to assets sold during the year	—			—			8			8			—			—			4			4
Purchases and sales, net	—			—			(4		)	(4		)	—			—			(3		)	(3		)
Balance December 31	$	—		$	—		$	9		$	9		$	—		$	—		$	13		$	13
International Pension Plans
Balance January 1	$	811		$	1		$	1		$	813		$	470		$	2		$	1		$	473
Actual return on plan assets:
Relating to assets still held at December 31	54			—			—			54			(32		)	—			—			(32		)
Purchases and sales, net	(14		)	(1		)	(1		)	(16		)	380			(1		)	—			379
Transfers out of Level 3	—			—			—			—			(7		)	—			—			(7		)
Balance December 31	$	851		$	—		$	—		$	851		$	811		$	1		$	1		$	813

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
	Level 1		Level 2		Level 3		NAV ⁽¹⁾		Total		Level 1		Level 2		Level 3		NAV ⁽¹⁾		Total
	2019										2018
Assets
Cash and cash equivalents	$	52	$	—	$	—	$	22	$	74	$	78	$	—	$	—	$	16	$	94
Investment funds
Developed markets equities	19		—		—		324		343		16		—		—		279		295
Emerging markets equities	15		—		—		66		81		12		—		—		67		79
Government and agency obligations	1		—		—		16		17		1		—		—		15		16
Corporate obligations	—		—		—		—		—		—		—		—		3		3
Equity securities																			—
Developed markets	225		—		—		—		225		200		—		—		—		200
Fixed income securities
Government and agency obligations	—		196		—		—		196		—		141		—		—		141
Corporate obligations	—		149		—		—		149		—		116		—		—		116
Mortgage and asset-backed securities	—		17		—		—		17		—		24		—		—		24
Plan assets at fair value	$	312	$	362	$	—	$	428	$	1,102	$	307	$	281	$	—	$	380	$	968


⁽¹⁾	Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV 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, 2019 and 2018.

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 45% in U.S. equities, 15% to 30% in international equities, 35% 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 10%, 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 2020 are approximately $100 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
2020	$	747	$	242	$	88
2021	717		225		92
2022	710		243		94
2023	718		250		98
2024	708		250		100
2025 — 2029	3,943		1,417		540

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	2019			2018			2017			2019			2018			2017			2019			2018			2017
Net (loss) gain arising during the period	$	(816	)	$	(397	)	$	(19	)	$	(227	)	$	(505	)	$	309		$	112		$	186		$	170
Prior service (cost) credit arising during the period	(4		)	(4		)	(13		)	(1		)	(10		)	22			(11		)	2			(31		)
	$	(820	)	$	(401	)	$	(32	)	$	(228	)	$	(515	)	$	331		$	101		$	188		$	139
Net loss amortization included in benefit cost	$	151		$	232		$	180		$	64		$	84		$	98		$	(10	)	$	1		$	1
Prior service credit amortization included in benefit cost	(49		)	(50		)	(53		)	(12		)	(13		)	(11		)	(78		)	(84		)	(98		)
	$	102		$	182		$	127		$	52		$	71		$	87		$	(88	)	$	(83	)	$	(97	)

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	2019		2018		2017		2019		2018		2017
Net periodic benefit cost
Discount rate	4.40	%	3.70	%	4.30	%	2.20	%	2.10	%	2.20	%
Expected rate of return on plan assets	8.10	%	8.20	%	8.70	%	4.90	%	5.10	%	5.10	%
Salary growth rate	4.30	%	4.30	%	4.30	%	2.80	%	2.90	%	2.90	%
Interest crediting rate	3.40	%	3.30	%	3.30	%	2.90	%	2.80	%	3.00	%
Benefit obligation
Discount rate	3.40	%	4.40	%	3.70	%	1.50	%	2.20	%	2.10	%
Salary growth rate	4.20	%	4.30	%	4.30	%	2.80	%	2.80	%	2.90	%
Interest crediting rate	4.90	%	3.40	%	3.30	%	2.80	%	2.90	%	2.80	%

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 for 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 2020, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will range from 7.00% to 7.30%, as compared to a range of 7.70% to 8.10% in 2019. The decrease reflects lower expected asset returns and 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 2017 to 2019 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	2019		2018
Health care cost trend rate assumed for next year	6.8	%	7.0	%
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

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 2019, 2018 and 2017 were $149 million, $136 million and $131 million, respectively.