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PENSION AND OTHER POSTRETIREMENT BENEFITS | 12 Months Ended
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Oct. 31, 2016
PENSION AND OTHER POSTRETIREMENT BENEFITS |
PENSION AND OTHER POSTRETIREMENT BENEFITS | 7. PENSION AND OTHER POSTRETIREMENT BENEFITS The company has several defined benefit pension plans and postretirement health care and life insurance plans covering its U.S. employees and employees in certain foreign countries. The company uses an October 31 measurement date for these plans. The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
|  | 2016 |  | 2015 |  | 2014 |
Pensions |  |  |  |  |  |  |  |  |  |
Service cost |  | $ | 254 |  | $ | 282 |  | $ | 244 |
Interest cost |  |  | 391 |  |  | 474 |  |  | 480 |
Expected return on plan assets |  |  | (775) |  |  | (769) |  |  | (776) |
Amortization of actuarial loss |  |  | 211 |  |  | 223 |  |  | 177 |
Amortization of prior service cost |  |  | 16 |  |  | 25 |  |  | 25 |
Other postemployment benefits |  |  | 2 |  |  | 1 |  |  | 5 |
Settlements/curtailments |  |  | 11 |  |  | 11 |  |  | 9 |
Net cost |  | $ | 110 |  | $ | 247 |  | $ | 164 |
Weighted-average assumptions |  |  |  |  |  |  |  |  |  |
Discount rates - service cost |  |  | 4.3% |  |  | 4.0% |  |  | 4.5% |
Discount rates - interest cost |  |  | 3.4% |  |  | 4.0% |  |  | 4.5% |
Rate of compensation increase |  |  | 3.8% |  |  | 3.8% |  |  | 3.8% |
Expected long-term rates of return |  |  | 7.3% |  |  | 7.3% |  |  | 7.5% |
The components of net periodic postretirement benefits cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
|  | 2016 |  | 2015 |  | 2014 |
Health care and life insurance |  |  |  |  |  |  |  |  |  |
Service cost |  | $ | 38 |  | $ | 46 |  | $ | 44 |
Interest cost |  |  | 204 |  |  | 259 |  |  | 267 |
Expected return on plan assets |  |  | (35) |  |  | (55) |  |  | (72) |
Amortization of actuarial loss |  |  | 73 |  |  | 91 |  |  | 33 |
Amortization of prior service credit |  |  | (78) |  |  | (77) |  |  | (3) |
Settlements/curtailments |  |  |  |  |  | 1 |  |  | (1) |
Net cost |  | $ | 202 |  | $ | 265 |  | $ | 268 |
Weighted-average assumptions |  |  |  |  |  |  |  |  |  |
Discount rates - service cost |  |  | 5.0% |  |  | 4.2% |  |  | 4.7% |
Discount rates - interest cost |  |  | 3.5% |  |  | 4.2% |  |  | 4.7% |
Expected long-term rates of return |  |  | 6.6% |  |  | 7.0% |  |  | 7.2% |
In 2016, the company changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefits cost. The new method uses the spot yield curve approach to estimate the service and interest cost by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. Previously, the service and interest cost components were determined using a single weighted-average discount rate. The change does not affect the measurement of the total benefit plan obligations as the change in service and interest cost offsets in the actuarial gains and losses recorded in other comprehensive income. The spot yield curve approach provides a more precise measure of service and interest cost by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The company accounted for this change as a change in estimate prospectively beginning in 2016. The discount rate used to measure the 2016 service and interest cost using the single weighted-average discount rate method would have been 4.1 percent for pension and 4.3 percent for postretirement benefits. The decrease in the 2016 total service and interest cost was approximately $175 million compared to the previous method. The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
|  | 2016 |  | 2015 |  | 2014 |
Pensions |  |  |  |  |  |  |  |  |  |
Net cost |  | $ | 110 |  | $ | 247 |  | $ | 164 |
Retirement benefit adjustments included in other comprehensive (income) loss: |  |  |  |  |  |  |  |  |  |
Net actuarial loss |  |  | 1,140 |  |  | 361 |  |  | 940 |
Prior service cost |  |  | 1 |  |  | 66 |  |  |  |
Amortization of actuarial loss |  |  | (211) |  |  | (223) |  |  | (177) |
Amortization of prior service cost |  |  | (16) |  |  | (25) |  |  | (25) |
Settlements/curtailments |  |  | (14) |  |  | (11) |  |  | (9) |
Total loss recognized in other comprehensive (income) loss |  |  | 900 |  |  | 168 |  |  | 729 |
Total recognized in comprehensive (income) loss |  | $ | 1,010 |  | $ | 415 |  | $ | 893 |
The previous postretirement benefits cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
|  | 2016 |  | 2015 |  | 2014 |
Health care and life insurance |  |  |  |  |  |  |  |  |  |
Net cost |  | $ | 202 |  | $ | 265 |  | $ | 268 |
Retirement benefit adjustments included in other comprehensive (income) loss: |  |  |  |  |  |  |  |  |  |
Net actuarial (gain) loss |  |  | 496 |  |  | (141) |  |  | 748 |
Prior service credit |  |  | (3) |  |  | (3) |  |  | (370) |
Amortization of actuarial loss |  |  | (73) |  |  | (91) |  |  | (33) |
Amortization of prior service credit |  |  | 78 |  |  | 77 |  |  | 3 |
Settlements/curtailments |  |  |  |  |  | (2) |  |  | 1 |
Total (gain) loss recognized in other comprehensive (income) loss |  |  | 498 |  |  | (160) |  |  | 349 |
Total recognized in comprehensive (income) loss |  | $ | 700 |  | $ | 105 |  | $ | 617 |
The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:
|  |  |  |  |  |  |  | Health Care |
|  |  |  |  |  |  |  | and |
|  | Pensions |  | Life Insurance |
|  | 2016 |  | 2015 |  | 2016 |  | 2015 |
Change in benefit obligations |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning of year balance |  | $ | (12,186) |  | $ | (12,190) |  | $ | (6,084) |  | $ | (6,304) |
Service cost |  |  | (254) |  |  | (282) |  |  | (38) |  |  | (46) |
Interest cost |  |  | (391) |  |  | (474) |  |  | (204) |  |  | (259) |
Actuarial gain (loss) |  |  | (1,001) |  |  | (174) |  |  | (478) |  |  | 172 |
Amendments |  |  | (1) |  |  | (66) |  |  | 3 |  |  | 3 |
Benefits paid |  |  | 702 |  |  | 781 |  |  | 321 |  |  | 344 |
Health care subsidies |  |  |  |  |  |  |  |  | (16) |  |  | (20) |
Other postemployment benefits |  |  | (2) |  |  | (1) |  |  |  |  |  |  |
Settlements/curtailments |  |  | 6 |  |  | 2 |  |  |  |  |  | 1 |
Foreign exchange and other |  |  | 41 |  |  | 218 |  |  | (4) |  |  | 25 |
End of year balance |  |  | (13,086) |  |  | (12,186) |  |  | (6,500) |  |  | (6,084) |
Change in plan assets (fair value) |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning of year balance |  |  | 11,164 |  |  | 11,447 |  |  | 689 |  |  | 957 |
Actual return on plan assets |  |  | 628 |  |  | 582 |  |  | 17 |  |  | 24 |
Employer contribution |  |  | 80 |  |  | 83 |  |  | 47 |  |  | 48 |
Benefits paid |  |  | (702) |  |  | (781) |  |  | (321) |  |  | (344) |
Settlements |  |  | (3) |  |  | (2) |  |  |  |  |  |  |
Foreign exchange and other |  |  | (30) |  |  | (165) |  |  | 3 |  |  | 4 |
End of year balance |  |  | 11,137 |  |  | 11,164 |  |  | 435 |  |  | 689 |
Funded status |  | $ | (1,949) |  | $ | (1,022) |  | $ | (6,065) |  | $ | (5,395) |
Weighted-average assumptions |  |  |  |  |  |  |  |  |  |  |  |  |
Discount rates |  |  | 3.6% |  |  | 4.1% |  |  | 3.8% |  |  | 4.3% |
Rate of compensation increase |  |  | 3.8% |  |  | 3.8% |  |  |  |  |  |  |
In the fourth quarter of 2015, the company decided to transition Medicare eligible wage and certain Medicare eligible salaried retirees to a Medicare Advantage plan offered by a private insurance company effective in January 2016. This change did not affect the participants’ level of benefits and is expected to result in future cost savings for the company. The mortality assumptions for the 2016 and 2015 benefit plan obligations reflect the most recent tables issued by the Society of Actuaries at that time. For Medicare eligible salaried retirees that primarily retire after July 1, 1993 and are eligible for postretirement medical benefits, the company’s postretirement benefit plan consists of annual Retiree Medical Credits (RMCs). The RMC is a monetary amount provided to the retirees annually to assist with their medical costs. In October 2014, the RMC plan was modified to change the annual cost sharing provisions. Beginning in 2015, the annual RMC amount did not increase and future changes in the amount will be set each year by the company. The amounts recognized at October 31 in millions of dollars consist of the following:
|  |  |  |  |  |  |  | Health Care |
|  |  |  |  |  |  |  | and |
|  | Pensions |  | Life Insurance |
|  | 2016 |  | 2015 |  | 2016 |  | 2015 |
Amounts recognized in balance sheet |  |  |  |  |  |  |  |  |  |  |  |  |
Noncurrent asset |  | $ | 94 |  | $ | 216 |  |  |  |  |  |  |
Current liability |  |  | (33) |  |  | (44) |  | $ | (32) |  | $ | (20) |
Noncurrent liability |  |  | (2,010) |  |  | (1,194) |  |  | (6,033) |  |  | (5,375) |
Total |  | $ | (1,949) |  | $ | (1,022) |  | $ | (6,065) |  | $ | (5,395) |
Amounts recognized in accumulated other comprehensive income – pretax |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial loss |  | $ | 5,309 |  | $ | 4,393 |  | $ | 1,865 |  | $ | 1,442 |
Prior service cost (credit) |  |  | 67 |  |  | 83 |  |  | (259) |  |  | (334) |
Total |  | $ | 5,376 |  | $ | 4,476 |  | $ | 1,606 |  | $ | 1,108 |
The total accumulated benefit obligations for all pension plans at October 31, 2016 and 2015 was $12,410 million and $11,508 million, respectively. The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $8,402 million and $7,016 million, respectively, at October 31, 2016 and $7,254 million and $6,669 million, respectively, at October 31, 2015. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $9,157 million and $7,114 million, respectively, at October 31, 2016 and $8,196 million and $6,958 million, respectively, at October 31, 2015. The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2017 in millions of dollars follow:
|  |  |  |  | Health Care |
|  |  |  |  | and |
|  | Pensions |  | Life Insurance |
Net actuarial loss |  | $ | 240 |  | $ | 101 |
Prior service cost (credit) |  |  | 12 |  |  | (77) |
Total |  | $ | 252 |  | $ | 24 |
Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the benefit obligation, the excess is amortized as a component of net periodic cost over the remaining service period of the active participants. For plans in which all or almost all of the plan’s participants are inactive, the amortization period is the remaining life expectancy of the inactive participants. The company expects to contribute approximately $59 million to its pension plans and approximately $38 million to its health care and life insurance plans in 2017, which are primarily direct benefit payments for unfunded plans. The benefits expected to be paid from the benefit plans, which reflect expected future years of service, are as follows in millions of dollars:
|  |  |  |  | Health Care |
|  |  |  |  | and |
|  | Pensions |  | Life Insurance* |
2017 |  | $ | 717 |  | $ | 339 |
2018 |  |  | 721 |  |  | 353 |
2019 |  |  | 709 |  |  | 356 |
2020 |  |  | 707 |  |  | 358 |
2021 |  |  | 696 |  |  | 362 |
2022 to 2026 |  |  | 3,454 |  |  | 1,834 |
* Net of prescription drug group benefit subsidy under Medicare Part D. The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. At October 31, 2016, the weighted-average composite trend rates for these obligations were assumed to be a 8.3 percent increase from 2016 to 2017, gradually decreasing to 4.8 percent from 2024 to 2025 and all future years. The obligations at October 31, 2015 and the cost in 2016 assumed a .8 percent increase from 2015 to 2016, followed by an increase of 7.9 percent from 2016 to 2017, gradually decreasing to 4.8 percent from 2024 to 2025 and all future years. The small estimated increase from 2015 to 2016 resulted from the transition to the Medicare Advantage plan in January 2016. An increase of one percentage point in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligations by $876 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $36 million. A decrease of one percentage point would decrease the obligations by $673 million and the cost by $28 million. The discount rate assumptions used to determine the postretirement obligations at October 31, 2016 and 2015 were based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company’s benefit obligations could effectively be settled at the October 31 measurement dates. Fair value measurement levels in the following tables are defined in Note 26. The fair values of the pension plan assets at October 31, 2016 follow in millions of dollars:
|  | Total |  | Level 1 |  | Level 2 |
Cash and short-term investments |  | $ | 684 |  | $ | 322 |  | $ | 362 |
Equity: |  |  |  |  |  |  |  |  |  |
U.S. equity securities and funds |  |  | 3,000 |  |  | 2,965 |  |  | 35 |
International equity securities and funds |  |  | 1,711 |  |  | 1,697 |  |  | 14 |
Fixed Income: |  |  |  |  |  |  |  |  |  |
Government and agency securities |  |  | 440 |  |  | 224 |  |  | 216 |
Corporate debt securities |  |  | 1,205 |  |  |  |  |  | 1,205 |
Mortgage-backed securities |  |  | 39 |  |  |  |  |  | 39 |
Fixed income funds |  |  | 20 |  |  | 20 |  |  |  |
Real estate |  |  | 121 |  |  | 118 |  |  | 3 |
Derivative contracts - assets* |  |  | 191 |  |  | 3 |  |  | 188 |
Derivative contracts - liabilities** |  |  | (59) |  |  | (14) |  |  | (45) |
Receivables, payables and other |  |  | 6 |  |  | 5 |  |  | 1 |
Securities lending collateral |  |  | 693 |  |  | 108 |  |  | 585 |
Securities lending liability |  |  | (693) |  |  | (108) |  |  | (585) |
Securities sold short |  |  | (338) |  |  | (333) |  |  | (5) |
Total of Level 1 and Level 2 assets |  |  | 7,020 |  | $ | 5,007 |  | $ | 2,013 |
Investments at net asset value***: |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  | 216 |  |  |  |  |  |  |
U.S. equity funds |  |  | 30 |  |  |  |  |  |  |
International equity funds |  |  | 595 |  |  |  |  |  |  |
Corporate debt funds |  |  | 25 |  |  |  |  |  |  |
Fixed income funds |  |  | 482 |  |  |  |  |  |  |
Real estate |  |  | 515 |  |  |  |  |  |  |
Hedge funds |  |  | 624 |  |  |  |  |  |  |
Private equity/venture capital |  |  | 1,603 |  |  |  |  |  |  |
Other investments |  |  | 27 |  |  |  |  |  |  |
Total net assets |  | $ | 11,137 |  |  |  |  |  |  |
* Includes contracts for interest rates of $125 million, foreign currency of $59 million, equity of $4 million and other of $3 million. ** Includes contracts for interest rates of $19 million, foreign currency of $33 million, equity of $6 million and other of $1 million. *** Investments are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy. The fair values of the health care assets at October 31, 2016 follow in millions of dollars:
|  | Total |  | Level 1 |  | Level 2 |
Cash and short-term investments |  | $ | 32 |  | $ | 27 |  | $ | 5 |
Equity: |  |  |  |  |  |  |  |  |  |
U.S. equity securities and funds |  |  | 138 |  |  | 138 |  |  |  |
International equity securities and funds |  |  | 25 |  |  | 25 |  |  |  |
Fixed Income: |  |  |  |  |  |  |  |  |  |
Government and agency securities |  |  | 43 |  |  | 40 |  |  | 3 |
Corporate debt securities |  |  | 30 |  |  |  |  |  | 30 |
Mortgage-backed securities |  |  | 11 |  |  |  |  |  | 11 |
Real estate |  |  | 2 |  |  | 2 |  |  |  |
Derivative contracts - assets* |  |  | 3 |  |  |  |  |  | 3 |
Securities lending collateral |  |  | 48 |  |  | 11 |  |  | 37 |
Securities lending liability |  |  | (48) |  |  | (11) |  |  | (37) |
Securities sold short |  |  | (5) |  |  | (5) |  |  |  |
Total of Level 1 and Level 2 assets |  |  | 279 |  | $ | 227 |  | $ | 52 |
Investments at net asset value**: |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  | 3 |  |  |  |  |  |  |
International equity funds |  |  | 60 |  |  |  |  |  |  |
Fixed income funds |  |  | 20 |  |  |  |  |  |  |
Real estate funds |  |  | 7 |  |  |  |  |  |  |
Hedge funds |  |  | 44 |  |  |  |  |  |  |
Private equity/venture capital |  |  | 22 |  |  |  |  |  |  |
Total net assets |  | $ | 435 |  |  |  |  |  |  |
* Includes contracts for interest rates of $2 million and foreign currency of $1 million. ** Investments are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy. The fair values of the pension plan assets at October 31, 2015 follow in millions of dollars:
|  | Total |  | Level 1 |  | Level 2 |
Cash and short-term investments |  | $ | 867 |  | $ | 378 |  | $ | 489 |
Equity: |  |  |  |  |  |  |  |  |  |
U.S. equity securities and funds |  |  | 3,075 |  |  | 3,053 |  |  | 22 |
International equity securities |  |  | 1,802 |  |  | 1,781 |  |  | 21 |
Fixed Income: |  |  |  |  |  |  |  |  |  |
Government and agency securities |  |  | 386 |  |  | 197 |  |  | 189 |
Corporate debt securities |  |  | 751 |  |  | 1 |  |  | 750 |
Mortgage-backed securities |  |  | 83 |  |  |  |  |  | 83 |
Fixed income funds |  |  | 26 |  |  | 26 |  |  |  |
Real estate |  |  | 133 |  |  | 130 |  |  | 3 |
Derivative contracts - assets* |  |  | 190 |  |  | 25 |  |  | 165 |
Derivative contracts - liabilities** |  |  | (26) |  |  | (4) |  |  | (22) |
Receivables, payables and other |  |  | 4 |  |  | 3 |  |  | 1 |
Securities lending collateral |  |  | 745 |  |  | 92 |  |  | 653 |
Securities lending liability |  |  | (745) |  |  | (92) |  |  | (653) |
Securities sold short |  |  | (470) |  |  | (466) |  |  | (4) |
Total of Level 1 and Level 2 assets |  |  | 6,821 |  | $ | 5,124 |  | $ | 1,697 |
Investments at net asset value***: |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  | 195 |  |  |  |  |  |  |
U.S. equity funds |  |  | 33 |  |  |  |  |  |  |
International equity funds |  |  | 540 |  |  |  |  |  |  |
Corporate debt funds |  |  | 26 |  |  |  |  |  |  |
Fixed income funds |  |  | 495 |  |  |  |  |  |  |
Real estate |  |  | 501 |  |  |  |  |  |  |
Hedge funds |  |  | 625 |  |  |  |  |  |  |
Private equity/venture capital |  |  | 1,604 |  |  |  |  |  |  |
Other investments |  |  | 324 |  |  |  |  |  |  |
Total net assets |  | $ | 11,164 |  |  |  |  |  |  |
* Includes contracts for interest rates of $137 million, foreign currency of $17 million, equity of $30 million and other of $6 million. ** Includes contracts for interest rates of $7 million, foreign currency of $15 million and other of $4 million. *** Investments are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy. The fair values of the health care assets at October 31, 2015 follow in millions of dollars:
|  | Total |  | Level 1 |  | Level 2 |
Cash and short-term investments |  | $ | 35 |  | $ | 25 |  | $ | 10 |
Equity: |  |  |  |  |  |  |  |  |  |
U.S. equity securities and funds |  |  | 229 |  |  | 229 |  |  |  |
International equity securities |  |  | 39 |  |  | 39 |  |  |  |
Fixed Income: |  |  |  |  |  |  |  |  |  |
Government and agency securities |  |  | 84 |  |  | 78 |  |  | 6 |
Corporate debt securities |  |  | 35 |  |  |  |  |  | 35 |
Mortgage-backed securities |  |  | 13 |  |  |  |  |  | 13 |
Fixed income funds |  |  | 1 |  |  | 1 |  |  |  |
Real estate |  |  | 4 |  |  | 4 |  |  |  |
Derivative contracts - assets* |  |  | 4 |  |  | 1 |  |  | 3 |
Receivables, payables and other |  |  | 1 |  |  | 1 |  |  |  |
Securities lending collateral |  |  | 65 |  |  | 9 |  |  | 56 |
Securities lending liability |  |  | (65) |  |  | (9) |  |  | (56) |
Securities sold short |  |  | (10) |  |  | (10) |  |  |  |
Total of Level 1 and Level 2 assets |  |  | 435 |  | $ | 368 |  | $ | 67 |
Investments at net asset value**: |  |  |  |  |  |  |  |  |  |
Short-term investments |  |  | 4 |  |  |  |  |  |  |
International equity funds |  |  | 103 |  |  |  |  |  |  |
Fixed income funds |  |  | 47 |  |  |  |  |  |  |
Real estate funds |  |  | 10 |  |  |  |  |  |  |
Hedge funds |  |  | 50 |  |  |  |  |  |  |
Private equity/venture capital |  |  | 34 |  |  |  |  |  |  |
Other investments |  |  | 6 |  |  |  |  |  |  |
Total net assets |  | $ | 689 |  |  |  |  |  |  |
* Includes contracts for interest rates of $2 million, foreign currency of $1 million and equity of $1 million. ** Investments are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy. Fair values are determined as follows: Cash and Short-Term Investments – Includes accounts that are valued based on the account value, which approximates fair value, and investment funds that are valued on the fund’s net asset value (NAV) based on the fair value of the underlying securities. Also included are securities that are valued using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data. Equity Securities and Funds – The values are determined primarily by closing prices in the active market in which the equity investment trades, or the fund’s NAV, based on the fair value of the underlying securities. Fixed Income Securities and Funds – The securities are valued using either a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk and prepayment speeds, or they are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the NAV, based on the fair value of the underlying securities or closing prices in the active market in which the investment trades. Real Estate, Venture Capital, Private Equity, Hedge Funds and Other – The investments that are structured as limited partnerships are valued at estimated fair value based on their proportionate share of the limited partnership’s fair value that is determined by the respective general partner. These investments are valued using a combination of NAV, an income approach (primarily estimated cash flows discounted over the expected holding period), or market approach (primarily the valuation of similar securities and properties). Real estate investment trusts are primarily valued at the closing prices in the active markets in which the investment trades. Real estate funds and other investments are primarily valued at NAV, based on the fair value of the underlying securities. Interest Rate, Foreign Currency and Other Derivative Instruments – The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (closing prices in the active market in which the derivative instrument trades). The primary investment objective for the pension and health care plans assets is to maximize the growth of these assets to support the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s risk tolerance. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the company’s long-term asset class risk/return expectations since the obligations are long-term in nature. The current target allocations for pension assets are approximately 49 percent for equity securities, 27 percent for debt securities, 5 percent for real estate and 19 percent for other investments. The target allocations for health care assets are approximately 54 percent for equity securities, 29 percent for debt securities, 1 percent for real estate and 16 percent for other investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company’s diversified investment policy, there were no significant concentrations of risk. The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. A market related value of plan assets is used to calculate the expected return on assets. The market related value recognizes changes in the fair value of pension plan assets systematically over a five-year period. The market related value of the health care plan assets equal fair value. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed significantly unless there are fundamental changes in capital markets that affect the company’s expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company’s U.S. pension fund was approximately 7.1 percent during the past ten years and approximately 8.4 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not necessarily indicative of long-term future expected returns. The company’s systematic methodology for determining the long-term rate of return for the company’s investment strategies supports the long-term expected return assumptions. The company has created certain Voluntary Employees’ Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company’s pension plan trust. The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company’s contributions and costs under these plans were $193 million in 2016, $185 million in 2015 and $184 million in 2014. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.

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