RETIREMENT PLANS

Defined Contribution Plans

We provide certain employees with defined contribution plans and other types of retirement plans. A portion of our retirement plan expense under the defined contribution plans is funded with Stryker common stock. The use of Stryker common stock represents a non-cash operating activity that is not reflected in our Consolidated Statements of Cash Flows.



	2018			2017			2016
Plan expense	$	180		$	181		$	166
Expense funded with Stryker common stock	29			25			22
Stryker common stock held by plan:
Dollar amount	358			353			272
Shares (in millions)	2.3			2.3			2.3
Value as a percentage of total plan assets	12		%	11		%	11		%

Defined Benefit Plans

Certain of our subsidiaries have both funded and unfunded defined benefit pension plans covering some or all of their employees. Substantially all of the defined benefit pension plans have projected benefit obligations in excess of plan assets.

Discount Rate

The discount rates were selected using a hypothetical portfolio of high quality bonds on December 31 that would provide the necessary cash flows to match our projected benefit payments. Effective January 1, 2017, in countries where it was possible, we elected to change the method to calculate the service cost and interest cost components of net periodic benefit costs for our defined benefit plans and will measure these costs by applying the specific spot rates along the yield curve of the projected cash flows for the respective plans. Our defined benefit plans previously utilized the yield curve approach to establish discount rates and we believe the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of our total benefit obligations for those plans and is accounted for as a change in accounting estimate inseparable from a change in accounting principle, which is applied prospectively. The reductions in service and interest costs for 2017 associated with this change in estimate are nominal.

Expected Return on Plan Assets

The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns.



Components of Net Periodic Pension Cost
Net periodic benefit cost:	2018			2017			2016
Service cost	$	(44	)	$	(42	)	$	(33	)
Interest cost	(11		)	(10		)	(11		)
Expected return on plan assets	12			11			10
Amortization of prior service credit	1			1			1
Recognized actuarial loss	(11		)	(9		)	(9		)
Net periodic benefit cost	$	(53	)	$	(49	)	$	(42	)
Changes in assets and benefit obligations recognized in OCI:
Net actuarial gain (loss)	$	11		$	(25	)	$	(26	)
Recognized net actuarial loss	10			9			9
Prior service (credit) cost and transition amount	(1		)	(1		)	(1		)
Total recognized in other comprehensive income (loss)	$	20		$	(17	)	$	(18	)
Total recognized in net periodic benefit cost and OCI	$	(33	)	$	(66	)	$	(60	)

Weighted-average rates used to determine net periodic benefit cost:
Discount rate	1.8		%	1.8		%	2.1		%
Expected return on plan assets	3.3		%	3.3		%	3.6		%
Rate of compensation increase	2.8		%	2.8		%	2.3		%
Weighted-average discount rate used to determine projected benefit obligations	1.9		%	1.8		%	1.8		%

Investment Strategy

The investment strategy for our defined benefit pension plans is to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within appropriate risk tolerances.



	2018			2017
Fair value of plan assets	$	376		$	370
Benefit obligations	(735		)	(708		)
Funded status	$	(359	)	$	(338	)
Reported as:
Current liabilities—accrued compensation	$	(2	)	$	(2	)
Noncurrent liabilities—other liabilities	(339		)	(336		)
Pre-tax amounts recognized in AOCI:
Unrecognized net actuarial loss	(168		)	(189		)
Unrecognized prior service credit	11			12
Total	$	(157	)	$	(177	)

The estimated net actuarial loss for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit cost is $7 in 2019. The total estimated amortization of prior service credit and transition asset for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit credit is $1 in 2019.



Change in Benefit Obligations
	2018			2017
Beginning projected benefit obligations	$	708		$	588
Service cost	44			42
Interest cost	11			10
Foreign exchange impact	(16		)	60
Employee contributions	6			6
Actuarial (gains) losses	(1		)	19
Acquisition	—			—
Benefits paid	(17		)	(17		)
Ending projected benefit obligations	$	735		$	708
Ending accumulated benefit obligations	$	702		$	675



Change in Plan Assets
	2018			2017
Beginning fair value of plan assets	$	370		$	308
Actual return	(2		)	21
Employer contributions	22			23
Employee contributions	6			6
Foreign exchange impact	(6		)	26
Acquisition	—			—
Benefits paid	(14		)	(14		)
Ending fair value of plan assets	$	376		$	370



Allocation of Plan Assets
	2019 Target		2018 Actual		2017 Actual
Equity securities	26	%	26	%	28	%
Debt securities	45		46		45
Other	29		28		27
Total	100	%	100	%	100	%



Valuation of Plan Assets
2018	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	10	$	—	$	—	$	10
Equity securities	20		85		—		105
Corporate debt securities	2		153		—		155
Other	7		43		56		106
Total	$	39	$	281	$	56	$	376
2017
Cash and cash equivalents	$	4	$	—	$	—	$	4
Equity securities	28		92		—		120
Corporate debt securities	2		148		—		150
Other	2		45		49		96
Total	$	36	$	285	$	49	$	370

Our Level 3 pension plan assets consist primarily of guaranteed investment contracts with insurance companies. The insurance contracts guarantee us principal repayment and a fixed rate of return. The $7 increase in Level 3 pension plan assets is primarily related to actual returns and acquired assets. We expect to contribute $25 to our defined benefit pension plans in 2019.



Estimated Future Benefit Payments
2019		2020		2021		2022		2023		2024-2028
$	18	$	17	$	17	$	18	$	18	$	106