RETIREMENT BENEFITS PLANS

Eaton has defined benefits pension plans and other postretirement benefits plans.

Obligations and Funded Status



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2015			2014			2015			2014			2015			2014
Funded status
Fair value of plan assets	$	2,934		$	3,086		$	1,472		$	1,535		$	93		$	116
Benefit obligations	(3,829		)	(4,047		)	(2,175		)	(2,337		)	(575		)	(676		)
Funded status	$	(895	)	$	(961	)	$	(703	)	$	(802	)	$	(482	)	$	(560	)

Amounts recognized in the Consolidated Balance Sheets
Non-current assets	$	11		$	14		$	57		$	77		$	—		$	—
Current liabilities	(57		)	(16		)	(23		)	(26		)	(42		)	(47		)
Non-current liabilities	(849		)	(959		)	(737		)	(853		)	(440		)	(513		)
Total	$	(895	)	$	(961	)	$	(703	)	$	(802	)	$	(482	)	$	(560	)

Amounts recognized in Accumulated other comprehensive loss (pretax)
Net actuarial loss	$	1,322		$	1,377		$	644		$	695		$	95		$	176
Prior service cost (credit)	5			5			9			11			(74		)	(86		)
Total	$	1,327		$	1,382		$	653		$	706		$	21		$	90

Change in Benefit Obligations



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2015			2014			2015			2014			2015			2014
Balance at January 1	$	4,047		$	3,625		$	2,337		$	2,127		$	676		$	867
Service cost	123			117			71			66			6			13
Interest cost	156			162			72			85			24			32
Actuarial (gain) loss	(179		)	470			(23		)	355			(66		)	(36		)
Gross benefits paid	(318		)	(329		)	(100		)	(106		)	(86		)	(91		)
Currency translation	—			—			(182		)	(190		)	(8		)	(4		)
Plan amendments	—			2			—			—			(1		)	(84		)
Other	—			—			—			—			30			(21		)
Balance at December 31	$	3,829		$	4,047		$	2,175		$	2,337		$	575		$	676

Accumulated benefit obligation	$	3,672		$	3,894		$	2,049		$	2,181

Change in Plan Assets



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2015			2014			2015			2014			2015			2014
Balance at January 1	$	3,086		$	2,940		$	1,535		$	1,432		$	116		$	138
Actual return on plan assets	(55		)	226			29			191			1			4
Employer contributions	221			248			109			114			31			40
Gross benefits paid	(318		)	(329		)	(100		)	(106		)	(86		)	(91		)
Currency translation	—			—			(101		)	(96		)	—			—
Other	—			1			—			—			31			25
Balance at December 31	$	2,934		$	3,086		$	1,472		$	1,535		$	93		$	116

The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:



	United States pension liabilities				Non-United States pension liabilities
	2015		2014		2015		2014
Projected benefit obligation	$	3,376	$	3,557	$	1,387	$	1,524
Accumulated benefit obligation	3,219		3,403		1,328		1,446
Fair value of plan assets	2,470		2,581		650		673

Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss follow:



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2015			2014			2015			2014			2015			2014
Balance at January 1	$	1,382		$	1,054		$	706		$	528		$	90		$	184
Prior service cost arising during the year	—			2			—			—			(1		)	(84		)
Net loss (gain) arising during the year	138			490			47			262			(62		)	(34		)
Currency translation	—			—			(58		)	(55		)	(4		)	(1		)
Less amounts included in expense during the year	(193		)	(164		)	(42		)	(29		)	(2		)	25
Net change for the year	(55		)	328			(53		)	178			(69		)	(94		)
Balance at December 31	$	1,327		$	1,382		$	653		$	706		$	21		$	90

Benefits Expense



	United States pension benefit expense									Non-United States pension benefit expense									Other postretirement benefits expense
	2015			2014			2013			2015			2014			2013			2015			2014			2013
Service cost	$	123		$	117		$	128		$	71		$	66		$	62		$	6		$	13		$	20
Interest cost	156			162			147			72			85			80			24			32			35
Expected return on plan assets	(262		)	(246		)	(226		)	(99		)	(98		)	(85		)	(5		)	(6		)	(6		)
Amortization	119			93			133			40			27			27			2			6			14
	136			126			182			84			80			84			27			45			63
Settlements, curtailments and other	74			71			53			2			2			2			—			(31		)	—
Total expense	$	210		$	197		$	235		$	86		$	82		$	86		$	27		$	14		$	63

The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2016 follow:



	United States pension liabilities		Non-United States pension liabilities		Other postretirement liabilities
Actuarial loss	$	165	$	34	$	5
Prior service cost (credit)	1		1		(14		)
Total	$	166	$	35	$	(9	)

Retirement Benefits Plans Assumptions

For purposes of determining liabilities related to pension plans and other postretirement benefits plans in the United States, the Company updated its mortality assumption in 2014 to use the RP-2014 tables with a generational improvement scale based on MP-2014. In 2015, the Company updated its mortality assumption to use 2014 tables and a generational improvement scale that are based on MP-2015.

Beginning in 2016, the Company will adopt a change in the method it will use to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension and other postretirement benefit plans. Historically, for the vast majority of its plans, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, the Company will use a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the estimation of the service and interest components of benefit cost, resulting in a more precise measurement. This change does not affect the measurement of total benefit obligations. The change will be accounted for as a change in estimate and, accordingly, will be accounted for prospectively starting in 2016. The discount rates that will be used to measure service and interest cost during 2016 are 4.3% and 3.3%, respectively. The discount rate that was measured at December 31, 2015 and would have been used for service and interest cost under the prior estimation method was 4.0%. The reductions in service cost and interest cost for 2016 associated with this change in estimate are expected to be $3 and $42, respectively.

Pension Plans



	United States pension plans						Non-United States pension plans
	2015		2014		2013		2015		2014		2013
Assumptions used to determine benefit obligation at year-end
Discount rate	4.22	%	3.97	%	4.67	%	3.46	%	3.33	%	4.20	%
Rate of compensation increase	3.18	%	3.16	%	3.16	%	3.12	%	3.13	%	3.12	%

Assumptions used to determine expense
Discount rate	3.97	%	4.67	%	3.97	%	3.33	%	4.20	%	4.17	%
Expected long-term return on plan assets	8.50	%	8.40	%	8.45	%	6.92	%	7.00	%	6.92	%
Rate of compensation increase	3.16	%	3.16	%	3.16	%	3.13	%	3.12	%	3.09	%

The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The discount rate was determined using appropriate bond data for each country.

Other Postretirement Benefits Plans

Substantially all of the obligation for other postretirement benefits plans relates to United States plans. Assumptions used to determine other postretirement benefits obligations and expense follow:



	Other postretirement benefits plans
	2015		2014		2013
Assumptions used to determine benefit obligation at year-end
Discount rate	4.04	%	3.79	%	4.48	%
Health care cost trend rate assumed for next year	7.10	%	6.31	%	6.64	%
Ultimate health care cost trend rate	4.75	%	4.77	%	4.77	%
Year ultimate health care cost trend rate is achieved	2025		2024		2023

Assumptions used to determine expense
Discount rate	3.79	%	4.48	%	3.79	%
Initial health care cost trend rate	6.31	%	6.64	%	6.96	%
Ultimate health care cost trend rate	4.77	%	4.77	%	4.53	%
Year ultimate health care cost trend rate is achieved	2024		2023		2022

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1-percentage point change in the assumed health care cost trend rates would have the following effects:



	1% increase		1% decrease
Effect on total service and interest cost	$	1	$	(1	)
Effect on other postretirement liabilities	17		(16		)

Employer Contributions to Retirement Benefits Plans

Contributions to pension plans that Eaton expects to make in 2016, and made in 2015, 2014 and 2013, follow:



	2016		2015		2014		2013
United States plans	$	59	$	221	$	248	$	196
Non-United States plans	103		109		114		145
Total contributions	$	162	$	330	$	362	$	341

The following table provides the estimated pension and other postretirement benefit payments for each of the next five years, and the five years thereafter in the aggregate. For other postretirement benefits liabilities, the expected subsidy receipts related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, would reduce the gross payments listed below.



	Estimated United States pension payments		Estimated non-United States pension payments		Estimated other postretirement benefit payments
	Estimated United States pension payments		Estimated non-United States pension payments		Gross		Medicare prescription drug subsidy
2016	$	334	$	81	$	65	$	(5	)
2017	270		82		61		(4		)
2018	280		85		57		(4		)
2019	287		86		52		(3		)
2020	292		89		48		(2		)
2021 - 2025	1,515		491		199		(10		)

Pension Plan Assets

Investment policies and strategies are developed on a country specific basis. The United States plans, representing 67% of worldwide pension assets, and the United Kingdom plans representing 27% of worldwide pension assets, are invested primarily for growth, as the majority of the assets are in plans with active participants and ongoing accruals. In general, the plans have their primary allocation to diversified global equities, primarily through index funds in the form of common collective trusts. The United States plans' target allocation is 33% United States equities, 32% non-United States equities, 8% real estate (primarily equity of real estate investment trusts), 22% debt securities and 5% other, including hedge funds, private equity and cash equivalents. The United Kingdom plans' target asset allocations are 65% equities and the remainder in debt securities, cash equivalents and real estate investments. The equity risk for the plans is managed through broad geographic diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for these plans are longer duration government and corporate debt. The United States, United Kingdom and Canada pension plans are authorized to use derivatives to achieve more economically desired market exposures and to use futures, swaps and options to gain or hedge exposures.

Other Postretirement Benefits Plan Assets

The Voluntary Employee Benefit Association trust which holds U.S. other postretirement benefits plan assets has investment guidelines that include allocations to global equities and fixed income investments. The trust's 2015 target investment allocation is 50% diversified global equities and 50% fixed income securities. The fixed income securities are primarily comprised of intermediate term, high quality, dollar denominated, fixed income instruments. The equity allocation is invested in a diversified global equity index fund in the form of a collective trust.

Fair Value Measurements

Financial instruments included in pension and other postretirement benefits plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:


Level 1 -	Quoted prices (unadjusted) for identical assets in active markets.


Level 2 -	Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.


Level 3 -	Unobservable prices or inputs.

Pension Plans

A summary of the fair value of pension plan assets at December 31, 2015 and 2014, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2015
Common collective trusts
Non-United States equity and global equities	$	1,347	$	—	$	1,347	$	—
United States equity	953		—		953		—
Fixed income	514		—		514		—
Exchange traded funds	158		—		158		—
Fixed income securities	357		—		357		—
United States treasuries	105		105		—		—
Bank loans	136		—		136		—
Real estate securities	251		244		—		7
Equity securities	98		98		—		—
Cash equivalents	246		17		229		—
Hedge funds	92		—		—		92
Exchange traded funds	49		49		—		—
Other	100		—		14		86
Total pension plan assets	$	4,406	$	513	$	3,708	$	185



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2014
Common collective trusts
Non-United States equity and global equities	$	1,458	$	—	$	1,458	$	—
United States equity	1,005		—		1,005		—
Fixed income	646		—		646		—
Exchange traded funds	138		—		138		—
Fixed income securities	398		—		398		—
United States treasuries	106		106		—		—
Bank loans	128		—		128		—
Real estate securities	263		257		—		6
Equity securities	92		92		—		—
Cash equivalents	218		8		210		—
Hedge funds	54		—		—		54
Exchange traded funds	50		50		—		—
Other	65		—		5		60
Total pension plan assets	$	4,621	$	513	$	3,988	$	120

The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2014 and 2015 due to the following:



	Real Estate		Hedge Funds			Other			Total
Balance at December 31, 2013	$	6	$	—		$	94		$	100
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end	—		1			(3		)	(2		)
Purchases, sales, settlements - net	—		53			—			53
Transfers into or out of Level 3	—		—			(31		)	(31		)
Balance at December 31, 2014	6		54			60			120
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end	1		(5		)	(2		)	(6		)
Purchases, sales, settlements - net	—		43			37			80
Transfers into or out of Level 3	—		—			(9		)	(9		)
Balance at December 31, 2015	$	7	$	92		$	86		$	185

Other Postretirement Benefits Plans

A summary of the fair value of other postretirement benefits plan assets at December 31, 2015 and 2014, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2015
Common collective trusts
Global equities	$	44	$	—	$	44	$	—
Fixed income securities	18		—		18		—
United States treasuries	20		20		—		—
Cash equivalents	11		11		—		—
Total other postretirement benefits plan assets	$	93	$	31	$	62	$	—



2014
Common collective trusts
Global equities	$	54	$	—	$	54	$	—
Fixed income securities	24		—		24		—
United States treasuries	37		37		—		—
Cash equivalents	1		1		—		—
Total other postretirement benefits plan assets	$	116	$	38	$	78	$	—

Valuation Methodologies

Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2015 and 2014.

Common collective trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices.

Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt securities is determined through third-party pricing models that consider various assumptions, including time value, yield curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.

United States treasuries - Valued at the closing price of each security.

Bank loans - These securities consist of senior secured term loans of publicly traded and privately held United States and non-United States floating rate obligations (principally corporations of non-investment grade rating). The fair value is determined through third-party pricing models that primarily utilize dealer quoted current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.

Real estate and equity securities - These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.

Cash equivalents - Primarily certificates of deposit, commercial paper, money market funds and repurchase agreements.

Hedge funds - Consists of direct investments in hedge funds through limited partnership interests. Values are based on the estimated fair value of the ownership interest in the investment as determined by the General Partner. The majority of the holdings of the hedge funds are in equity securities traded on public exchanges. The investment terms of the hedge funds allow capital to be redeemed quarterly given prior notice with certain limitations.

Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.

Other - Primarily insurance contracts for international plans and also futures contracts and over-the-counter options. These investments are valued based on the closing prices of future contracts or indices as available on Bloomberg or similar service, and private equity investments.

For additional information regarding fair value measurements, see Note 12.

Defined Contribution Plans

The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The total contributions related to these plans are charged to expense and were as follows:



2015	$	137
2014	141
2013	121