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PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Nov. 03, 2019

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

8. PENSION AND OTHER POSTRETIREMENT BENEFITS

The company has several funded and unfunded defined benefit pension plans and other postretirement benefit (OPEB) plans, primarily 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:


	2019		2018		2017
Pensions
Service cost	$	261	$	293	$	274
Interest cost		447		390		361
Expected return on plan assets		(802)		(775)		(790)
Amortization of actuarial loss		148		226		247
Amortization of prior service cost		11		12		12
Settlements		5		8		2
Net cost	$	70	$	154	$	106
Weighted-average assumptions
Discount rates - service cost		4.0%		3.5%		3.5%
Discount rates - interest cost		4.0%		3.2%		3.0%
Rate of compensation increase		3.8%		3.8%		3.8%
Expected long-term rates of return		6.5%		6.9%		7.3%
Interest crediting rate - U.S. cash balance plan		3.3%		2.6%		2.8%

The components of net periodic OPEB cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:


	2019		2018		2017
OPEB
Service cost	$	41	$	45	$	42
Interest cost		216		191		194
Expected return on plan assets		(36)		(22)		(17)
Amortization of actuarial loss		16		62		99
Amortization of prior service credit		(72)		(77)		(77)
Net cost	$	165	$	199	$	241
Weighted-average assumptions
Discount rates - service cost		4.8%		4.3%		4.7%
Discount rates - interest cost		4.2%		3.3%		3.2%
Expected long-term rates of return		5.7%		5.7%		6.3%

The spot yield curve approach is used to estimate the service and interest cost components of the net periodic pension and OPEB costs by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. The components of net periodic pension and OPEB cost excluding the service component are included in the line item “Other operating expenses” in the Statement of Consolidated Income.

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:


	2019		2018		2017
Pensions
Net cost	$	70	$	154	$	106
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss		887		(553)		(702)
Amortization of actuarial loss		(143)		(226)		(247)
Amortization of prior service cost		(11)		(12)		(12)
Settlements		(3)		(8)		(2)
Total (gain) loss recognized in other comprehensive (income) loss		730		(799)		(963)
Total recognized in comprehensive (income) loss	$	800	$	(645)	$	(857)

The previous OPEB cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:


	2019		2018		2017
OPEB
Net cost	$	165	$	199	$	241
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss		141		(608)		(309)
Prior service cost				5
Amortization of actuarial loss		(16)		(62)		(99)
Amortization of prior service credit		72		77		77
Total (gain) loss recognized in other comprehensive (income) loss		197		(588)		(331)
Total recognized in comprehensive (income) loss	$	362	$	(389)	$	(90)

The benefit plan obligations, funded status, and the assumptions related to the obligations at November 3, 2019 and October 28, 2018, respectively, in millions of dollars follow:


	Pensions				OPEB
	2019		2018		2019		2018
Change in benefit obligations
Beginning of year balance	$	(12,108)	$	(13,166)	$	(5,472)	$	(6,162)
Service cost		(261)		(293)		(41)		(45)
Interest cost		(447)		(390)		(216)		(191)
Actuarial gain (loss)		(2,174)		1,012		(187)		624
Amendments								(5)
Benefits paid		705		711		316		317
Health care subsidies						(22)		(12)
Acquisition*				(29)
Foreign exchange and other		35		47				2
End of year balance		(14,250)		(12,108)		(5,622)		(5,472)

Change in plan assets (fair value)
Beginning of year balance		12,602		12,093		719		539
Actual return on plan assets		2,081		316		82		6
Employer contribution		70		938		448		488
Benefits paid		(705)		(711)		(316)		(317)
Foreign exchange and other		(24)		(34)		3		3
End of year balance		14,024		12,602		936		719
Funded status	$	(226)	$	494	$	(4,686)	$	(4,753)

Weighted-average assumptions
Discount rates		3.0%		4.1%		3.2%		4.5%
Rate of compensation increase		3.8%		3.8%
Interest crediting rate - U.S. cash balance plan		2.1%		3.3%

* See Note 4.

In 2019, the company made a voluntary contribution of $300 million to a U.S. OPEB plan. In 2018, the company made voluntary contributions of $870 million to a U.S. pension plan and $430 million to its U.S. OPEB plans.

The actuarial loss for pension for 2019 was primarily due to a decrease in discount rates. The actuarial loss for OPEB for 2019 was primarily due to a decrease in discount rates partially offset by a decrease in health care trend rates. The actuarial gain for pension and OPEB for 2018 was primarily due to an increase in discount rates.

The mortality assumptions for the 2019 and 2018 benefit plan obligations reflect the most recent tables and scales issued by the Society of Actuaries at that time.

The amounts recognized at November 3, 2019 and October 28, 2018, respectively, in millions of dollars consist of the following:


	Pensions				OPEB
	2019		2018		2019		2018
Amounts recognized in balance sheet
Noncurrent asset	$	840	$	1,298
Current liability		(56)		(36)	$	(35)	$	(34)
Noncurrent liability		(1,010)		(768)		(4,651)		(4,719)
Total	$	(226)	$	494	$	(4,686)	$	(4,753)
Amounts recognized in accumulated other comprehensive income – pretax
Net actuarial loss	$	4,312	$	3,571	$	912	$	787
Prior service cost (credit)		32		43		(28)		(100)
Total	$	4,344	$	3,614	$	884	$	687

The total accumulated benefit obligations for all pension plans at November 3, 2019 and October 28, 2018, were $13,430 million and $11,485 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 $1,836 million and $924 million, respectively, at November 3, 2019 and $1,710 million and $1,015 million, respectively, at October 28, 2018. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $10,097 million and $9,031 million, respectively, at November 3, 2019 and $1,833 million and $1,029 million, respectively, at October 28, 2018.

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 $80 million to its pension plans and approximately $445 million to its OPEB plans in 2020. The anticipated OPEB contributions include a voluntary $300 million to a U.S. plan, which will increase plan assets. The pension and remaining OPEB contributions primarily include direct benefit payments from company funds.

The benefits expected to be paid from the benefit plans, which reflect expected future years of service, are as follows in millions of dollars:


	Pensions		OPEB*
2020	$	731	$	308
2021		719		307
2022		703		309
2023		698		310
2024		699		313
2025 to 2029		3,469		1,566

* 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. For the 2019 actuarial valuation, the weighted-average composite trend rates for these obligations were assumed to be an 8.6 percent increase from 2019 to 2020, gradually decreasing to 4.7 percent from 2027 to 2028 and all future years. The 2018 obligations and the cost in 2019 assumed an 8.9 percent increase from 2018 to 2019, gradually decreasing to 4.8 percent from 2024 to 2025 and all future years.

The discount rate assumptions used to determine the pension and OPEB obligations for all periods presented 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 27.

The fair values of the pension plan assets at November 3, 2019 follow in millions of dollars:


	Total		Level 1		Level 2
Cash and short-term investments	$	587	$	353	$	234
Equity:
U.S. equity securities		1,192		1,156		36
International equity securities		981		974		7
Fixed Income:
Government and agency securities		1,257		970		287
Corporate debt securities		2,416		1		2,415
Mortgage-backed securities		90				90
Real estate		69		63		6
Derivative contracts - assets*		208		17		191
Derivative contracts - liabilities**		(47)		(13)		(34)
Receivables, payables, and other		(106)		(107)		1
Securities lending collateral		476				476
Securities lending liability		(476)				(476)
Securities sold short		(279)		(275)		(4)
Total of Level 1 and Level 2 assets		6,368	$	3,139	$	3,229
Investments at net asset value:
Short-term investments		398
U.S. equity funds		1,250
International equity funds		764
Fixed income funds		1,529
Real estate		648
Hedge funds		679
Private equity/venture capital		1,913
Other investments		475
Total net assets	$	14,024

* Includes contracts for interest rates of $171 million, foreign currency of $20 million, equity of $10 million, and other of $7 million.

** Includes contracts for foreign currency of $26 million, interest rates of $20 million, and other of $1 million.

The fair values of the health care assets at November 3, 2019 follow in millions of dollars:


	Total		Level 1		Level 2
Cash and short-term investments	$	81	$	77	$	4
Equity:
U.S. equity securities and funds		41		41
International equity securities		9		9
Fixed Income:
Government and agency securities		112		101		11
Corporate debt securities		43				43
Mortgage-backed securities		15				15
Other				(2)		2
Securities lending collateral		20				20
Securities lending liability		(20)				(20)
Securities sold short		(4)		(4)
Total of Level 1 and Level 2 assets		297	$	222	$	75
Investments at net asset value:
Short-term investments		4
U.S. equity funds		311
International equity funds		197
Fixed income funds		84
Hedge funds		9
Private equity/venture capital		22
Other investments		12
Total net assets	$	936

The fair values of the pension plan assets at October 28, 2018 follow in millions of dollars:


	Total		Level 1		Level 2
Cash and short-term investments	$	868	$	377	$	491
Equity:
U.S. equity securities		1,495		1,466		29
International equity securities		1,143		1,136		7
Fixed Income:
Government and agency securities		764		500		264
Corporate debt securities		1,626				1,626
Mortgage-backed securities		53				53
Real estate		76		72		4
Derivative contracts - assets*		102		3		99
Derivative contracts - liabilities**		(115)		(40)		(75)
Receivables, payables, and other		(9)		(10)		1
Securities lending collateral		561				561
Securities lending liability		(561)				(561)
Securities sold short		(333)		(330)		(3)
Total of Level 1 and Level 2 assets		5,670	$	3,174	$	2,496
Investments at net asset value:
Short-term investments		219
U.S. equity funds		1,526
International equity funds		802
Fixed income funds		1,290
Real estate		654
Hedge funds		724
Private equity/venture capital		1,680
Other investments		37
Total net assets	$	12,602

* Includes contracts for interest rates of $48 million, foreign currency of $47 million, and other of $7 million.

** Includes contracts for interest rates of $49 million, foreign currency of $28 million, equity of $29 million, and other of $9 million.

The fair values of the health care assets at October 28, 2018 follow in millions of dollars:


	Total		Level 1		Level 2
Cash and short-term investments	$	78	$	73	$	5
Equity:
U.S. equity securities and funds		54		54
International equity securities		10		10
Fixed Income:
Government and agency securities		57		53		4
Corporate debt securities		29				29
Mortgage-backed securities		11				11
Other		1				1
Securities lending collateral		24				24
Securities lending liability		(24)				(24)
Securities sold short		(3)		(3)
Total of Level 1 and Level 2 assets		237	$	187	$	50
Investments at net asset value:
Short-term investments		2
U.S. equity funds		220
International equity funds		146
Fixed income funds		83
Hedge funds		7
Private equity/venture capital		17
Other Investments		7
Total net assets	$	719

Investments at net asset value in the preceding tables 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 – Include accounts that are valued based on the account value, which approximates fair value, and investment funds that are valued based on a constant fund net asset value (NAV) using the NAV per share practical expedient or on the fund’s 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 fund’s NAV, based on the fair value of the underlying securities.

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.

Interest Rate, Foreign Currency, Equity, 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 for each plan since the obligations are long-term in nature. The current target allocations for pension assets are approximately 32 percent for equities, 45 percent for debt, 5 percent for real estate, and 18 percent for other investments. The target allocations for health care assets are approximately 58 percent for equities, 34 percent for debt, and 8 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 equals 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 9.6 percent during the past ten years and approximately 7.9 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 its 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 $192 million in 2019, $206 million in 2018, and $188 million in 2017. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.