Retirement Benefit Plans

The Company sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), post-retirement medical plans (post-retirement benefits), defined contribution savings plans, and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The expense related to these plans was $602 million, $584 million, and $433 million in fiscal years 2017, 2016, and 2015, respectively.

In the U.S., the Company maintains a qualified pension plan designed to provide guaranteed minimum retirement benefits to all eligible U.S. employees. Pension coverage for non-U.S. employees is provided, to the extent deemed appropriate, through separate plans. In addition, U.S. and Puerto Rico employees are also eligible to receive specified Company-paid health care and life insurance benefits through the Company’s post-retirement benefits. In addition to the benefits provided under the qualified pension plan, retirement benefits associated with wages in excess of the IRS allowable limits are provided to certain employees under a non-qualified plan.

At April 28, 2017 and April 29, 2016, the net underfunded status of the Company’s benefit plans was $1.3 billion and $1.4 billion, respectively. The $1.3 billion underfunded status at April 28, 2017 included $12 million of liabilities classified as held for sale. The liabilities classified as held for sale consisted of $9 million related to pension benefits and $3 million related to post-retirement benefits.

During fiscal year 2017, the Company offered certain eligible U.S. employees voluntary early retirement packages. The acceptance of this offer by eligible U.S. employees caused incremental expenses of $73 million to be recognized during fiscal year 2017. Of this amount, $60 million related to U.S. pension benefits, $7 million related to U.S. post-retirement benefits, $4 million related to defined contribution plans, and $2 million related to cash payments and administrative fees.

Defined Benefit Pension Plans The change in benefit obligation and funded status of the Company’s U.S. and Non-U.S. pension benefits are as follows:



	U.S. Pension Benefits						Non-U.S. Pension Benefits
	Fiscal Year						Fiscal Year
(in millions)	2017			2016			2017			2016
Accumulated benefit obligation at end of year:	$	2,879		$	2,757		$	1,518		$	1,367
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	3,048		$	2,956		$	1,535		$	1,647
Service cost	117			120			70			81
Interest cost	109			122			26			31
Employee contributions	—			—			15			16
Plan curtailments and settlements	—			(28		)	6			(133		)
Actuarial (gain) loss	(22		)	(42		)	182			(103		)
Benefits paid	(80		)	(80		)	(43		)	(49		)
Special termination benefits	60			—			—			—
Currency exchange rate changes and other	—			—			(57		)	45
Projected benefit obligation at end of year	$	3,232		$	3,048		$	1,734		$	1,535
Change in plan assets:
Fair value of plan assets at beginning of year	$	2,138		$	2,204		$	1,113		$	1,189
Actual return on plan assets	238			(70		)	109			(44		)
Employer contributions	183			112			76			93
Employee contributions	—			—			15			16
Plan settlements	—			(28		)	(1		)	(118		)
Benefits paid	(80		)	(80		)	(43		)	(49		)
Currency exchange rate changes and other	—			—			(34		)	26
Fair value of plan assets at end of year	$	2,479		$	2,138		$	1,235		$	1,113
Funded status at end of year:
Fair value of plan assets	$	2,479		$	2,138		$	1,235		$	1,113
Benefit obligations	3,232			3,048			1,734			1,535
Underfunded status of the plans	(753		)	(910		)	(499		)	(422		)
Recognized liability	$	(753	)	$	(910	)	$	(499	)	$	(422	)
Amounts recognized on the consolidated balance sheets consist of:
Non-current assets	$	—		$	—		$	5		$	20
Current liabilities	(13		)	(12		)	(7		)	(8		)
Non-current liabilities	(740		)	(898		)	(497		)	(434		)
Recognized liability	$	(753	)	$	(910	)	$	(499	)	$	(422	)
Amounts recognized in accumulated other comprehensive loss:
Prior service cost (benefit)	$	3		$	4		$	(6	)	$	(14	)
Net actuarial loss	1,212			1,361			450			359
Ending balance	$	1,215		$	1,365		$	444		$	345

In certain countries outside the U.S., fully funding pension plans is not a common practice, as funding provides no income tax benefit. Consequently, certain pension plans were partially funded at April 28, 2017 and April 29, 2016. U.S. and non-U.S. plans with accumulated benefit obligations in excess of plan assets consist of the following:



	Fiscal Year
(in millions)	2017		2016
Accumulated benefit obligation	$	4,188	$	3,922
Projected benefit obligation	4,677		4,333
Plan assets at fair value	3,454		2,981

Plans with projected benefit obligations in excess of plan assets consist of the following:



	Fiscal Year
(in millions)	2017		2016
Projected benefit obligation	$	4,903	$	4,362
Plan assets at fair value	3,646		3,009

The net periodic benefit cost of the plans include the following components:



	U.S. Pension Benefits									Non-U.S. Pension Benefits
	Fiscal Year									Fiscal Year
(in millions)	2017			2016			2015			2017			2016			2015
Service cost	$	117		$	120		$	104		$	70		$	81		$	60
Interest cost	109			122			105			26			31			33
Expected return on plan assets	(195		)	(180		)	(160		)	(48		)	(48		)	(41		)
Amortization of prior service cost	1			—			—			(1		)	—			—
Amortization of net actuarial loss	88			98			65			17			20			12
Settlement gain	—			(1		)	—			—			(10		)	—
Special termination benefits	60			—			—			—			—			—
Net periodic benefit cost	$	180		$	159		$	114		$	64		$	74		$	64

The other changes in plan assets and projected benefit obligations recognized in accumulated other comprehensive loss for fiscal year 2017 are as follows:



(in millions)	U.S. Pension Benefits			Non-U.S. Pension Benefits
Net actuarial (gain) loss	$	(61	)	$	121
Amortization of prior service cost	(1		)	1
Amortization of net actuarial loss	(88		)	(17		)
Prior service cost	—			8
Effect of exchange rates	—			(13		)
Total (gain) loss recognized in accumulated other comprehensive loss	$	(150	)	$	100
Total loss recognized in net periodic benefit cost and accumulated other comprehensive loss	$	30		$	164

The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost, before tax, in fiscal year 2018 for U.S. and non-U.S. pension benefits is expected to be $83 million and $17 million, respectively.

The actuarial assumptions are as follows:



	U.S. Pension Benefits						Non-U.S. Pension Benefits
	Fiscal Year						Fiscal Year
	2017		2016		2015		2017		2016		2015
Critical assumptions – projected benefit obligation:
Discount rate	3.70% - 4.30%		3.60% - 4.30%		4.20	%	0.45% - 11.40%		0.25% - 10.20%		1.88	%
Rate of compensation increase	3.90	%	3.90	%	3.90	%	2.89	%	2.83	%	2.92	%
Critical assumptions – net periodic benefit cost:
Discount rate – benefit obligation	3.55% - 4.30%		4.20% - 4.80%		4.75	%	0.25% - 10.20%		0.80% - 9.00%		3.32	%
Discount rate – service cost	3.60% - 4.45%		4.20% - 4.80%		4.75	%	0.05% - 10.20%		0.80% - 9.00%		3.32	%
Discount rate – interest cost	2.90% - 3.80%		4.20% - 4.80%		4.75	%	0.30% - 10.20%		0.80% - 9.00%		3.32	%
Expected return on plan assets	8.20	%	8.20	%	8.25	%	4.45	%	4.35	%	4.77	%
Rate of compensation increase	3.90	%	3.90	%	3.90	%	2.83	%	2.92	%	2.80	%

The Company changed the methodology used to estimate the service and interest cost components of net periodic pension cost and net periodic postretirement benefit cost for the Company’s pension and other postretirement benefit plans, effective April 30, 2016. Previously, the Company estimated such cost components utilizing a single weighted-average discount rate derived from the market-observed yield curves of high-quality fixed income securities used to measure the pension benefit obligation and accumulated postretirement benefit obligation. The new methodology utilizes a full yield curve approach in the estimation of these cost components by applying the specific spot rates along the yield curve to their underlying projected cash flows and provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and their corresponding spot rates. The current yield curves represent high quality, long-term fixed income instruments. The change does not affect the measurement of the Company’s pension obligation or accumulated postretirement benefit obligation. The Company accounted for this change prospectively as a change in accounting estimate.

The expected long-term rate of return on plan assets assumptions are determined using a building block approach, considering historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration is given to local market expectations of long-term returns.

Retirement Benefit Plan Investment Strategy The Company sponsors trusts that hold the assets for U.S. pension plans and other U.S. post-retirement benefit plans, primarily retiree medical benefits. For investment purposes, the legacy Medtronic U.S. pension and other U.S. post-retirement benefit plans are managed in an identical way, as their objectives are similar.

The Company has a Qualified Plan Committee (the Plan Committee) that sets investment guidelines for U.S. pension plans and other U.S. post-retirement benefit plans with the assistance of external consultants. These guidelines are established based on market conditions, risk tolerance, funding requirements, and expected benefit payments. The Plan Committee also oversees the investment allocation process, selects the investment managers, and monitors asset performance. As pension liabilities are long-term in nature, the Company employs a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent level of risk. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption.

The investment portfolios contain a diversified allocation of investment categories, including equities, fixed income securities, hedge funds, and private equity. Securities are also diversified in terms of domestic and international, short- and long-term, growth and value styles, large cap and small cap stocks, active and passive management, and derivative-based styles.

Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. There is significant variation in policy asset allocation from country to country. Local regulations, funding rules, and financial and tax considerations are part of the funding and investment allocation process in each country. The weighted average target asset allocations at April 28, 2017 for the plans are 37% equity securities, 29% debt securities, and 34% other.

The plans did not hold any investments in the Company’s ordinary shares at April 28, 2017 or April 29, 2016.

The Company’s U.S. plans target asset allocations at April 28, 2017, compared to the U.S. plans actual asset allocations at April 28, 2017 and April 29, 2016 by asset category, are as follows:



U.S. Plans
	Target Allocation		Actual Allocation
	April 28, 2017		April 28, 2017		April 29, 2016
Asset Category:
Equity securities	40	%	45	%	43	%
Debt securities	36		37		35
Other	24		18		22
Total	100	%	100	%	100	%

Retirement Benefit Plan Asset Fair Values The following is a description of the valuation methodologies used for retirement benefit plan assets measured at fair value:

Short-term investments: Valued at the closing price reported in the active markets in which the individual security is traded.

U.S. government securities: Certain U.S. government securities are valued at the closing price reported in the active markets in which the individual security is traded. Other U.S. government securities are valued based on inputs other than quoted prices that are observable.

Corporate debt securities: Valued based on inputs other than quoted prices that are observable.

Equity commingled trusts: Comprised of investments in equity securities held in pooled investment vehicles. The valuations of equity commingled trusts are based on the respective net asset values which are determined by the fund daily at market close. The net asset values are calculated based on the valuation of the underlying assets which are determined using observable inputs. The net asset values are not publicly reported and funds are valued at the net asset value practical expedient.

Fixed income commingled trusts: Comprised of investments in fixed income securities held in pooled investment vehicles. The valuations of fixed income commingled trusts are based on the respective net asset values which are determined by the fund daily at market close. The net asset values are calculated based on the valuation of the underlying assets which are determined using observable inputs. The net asset values are not publicly reported and funds are valued at the net asset value practical expedient.

Partnership units: Valued based on the year-end net asset values of the underlying partnerships. The net asset values of the partnerships are based on the fair values of the underlying investments of the partnerships. Quoted market prices are used to value the underlying investments of the partnerships, where the partnerships consist of the investment pools which invest primarily in common stocks. Partnership units include partnerships, private equity investments, and real asset investments. Partnerships primarily include long/short equity and absolute return strategies. These investments may be redeemed monthly with notice periods ranging from 45 to 95 days. At April 28, 2017, there is one absolute return strategy fund totaling $2 million that is in the process of liquidation. The Company expects to receive the proceeds over the next year. Private equity investments consist of common stock and debt instruments of private companies. For private equity funds, the sum of the unfunded commitments at April 28, 2017 is $158 million, and the estimated liquidation period of these funds is expected to be one to 15 years. Real asset investments consist of commodities, derivatives, Real Estate Investment Trusts, and illiquid real estate holdings. These investments have redemption and liquidation periods ranging from 30 days to 10 years. At April 28, 2017, there is one real estate investment totaling $1 million that is in the process of liquidation. The Company expects to receive the proceeds over the next year. Other valuation procedures are utilized to arrive at fair value if a quoted market price is not available for a partnership investment.

Registered investment companies: Valued at net asset values which are not publicly reported. The net asset values are calculated based on the valuation of the underlying assets. The underlying assets are valued at the quoted market prices of shares held by the plan at year-end in the active market on which the individual securities are traded.

Insurance contracts: Comprised of investments in collective (group) insurance contracts, consisting of individual insurance policies. The policyholder is the employer and each member is the owner/beneficiary of their individual insurance policy. These policies are a part of the insurance company’s general portfolio and participate in the insurer’s profit-sharing policy on an excess yield basis.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

There were no transfers between Level 1, Level 2, or Level 3 during fiscal years 2017 or 2016.

The following tables provide information by level for the retirement benefit plan assets that are measured at fair value, as defined by U.S. GAAP. See Note 1 for discussion of the fair value measurement terms of Levels 1, 2, and 3. In accordance with authoritative guidance adopted in fiscal year 2017, certain investments for which the fair value is measured using the net asset value per share (or its equivalent) practical expedient are not presented within the fair value hierarchy. The fair value amounts presented for these investments are intended to permit reconciliation to the total fair value of plan assets at April 28, 2017 and April 29, 2016. The revised presentation has been applied retrospectively and fiscal year 2016 values have been reclassified to conform to classifications used in the current year.

U.S. Pension Benefits



	Fair Value at
	Fair Value at		Fair Value Measurements Using Inputs Considered as						Investments Measured at Net Asset Value
(in millions)	April 28, 2017		Level 1		Level 2		Level 3		Investments Measured at Net Asset Value
Short-term investments	$	168	$	168	$	—	$	—	$	—
U.S. government securities	167		138		29		—		—
Corporate debt securities	250		—		250		—		—
Equity commingled trusts	1,127		—		—		—		1,127
Fixed income commingled trusts	299		—		—		—		299
Partnership units	468		—		—		468		—
	$	2,479	$	306	$	279	$	468	$	1,426



	Fair Value at		Fair Value Measurements Using Inputs Considered as						Investments Measured at Net Asset Value
(in millions)	April 29, 2016		Level 1		Level 2		Level 3		Investments Measured at Net Asset Value
Short-term investments	$	127	$	127	$	—	$	—	$	—
U.S. government securities	146		137		9		—		—
Corporate debt securities	216		—		216		—		—
Equity commingled trusts	956		—		—		—		956
Fixed income commingled trusts	231		—		—		—		231
Partnership units	462		—		—		462		—
	$	2,138	$	264	$	225	$	462	$	1,187

The following tables provide a reconciliation of the beginning and ending balances of U.S. pension benefit assets measured at fair value that used significant unobservable inputs (Level 3):



(in millions)	Total Level 3 Investments			Partnership Units
April 29, 2016	$	462		$	462
Total realized gains included in income	25			25
Total unrealized gains included in accumulated other comprehensive (loss) income	28			28
Purchases and sales, net	(47		)	(47		)
April 28, 2017	$	468		$	468



(in millions)	Total Level 3 Investments			Corporate Debt Securities			Partnership Units
April 24, 2015	$	473		$	1		$	472
Total realized gains included in income	10			—			10
Total unrealized losses included in accumulated other comprehensive (loss) income	(144		)	(1		)	(143		)
Purchases and sales, net	123			—			123
April 29, 2016	$	462		$	—		$	462

Non-U.S. Pension Benefits



	Fair Value at		Fair Value Measurements Using Inputs Considered as						Investments Measured at Net Asset Value
(in millions)	April 28, 2017		Level 1		Level 2		Level 3		Investments Measured at Net Asset Value
Registered investment companies	$	1,191	$	—	$	—	$	—	$	1,191
Insurance contracts	44		—		—		44		—
	$	1,235	$	—	$	—	$	44	$	1,191



	Fair Value at		Fair Value Measurements Using Inputs Considered as						Investments Measured at Net Asset Value
(in millions)	April 29, 2016		Level 1		Level 2		Level 3		Investments Measured at Net Asset Value
Registered investment companies	$	1,037	$	—	$	—	$	—	$	1,037
Insurance contracts	76		—		—		76		—
	$	1,113	$	—	$	—	$	76	$	1,037

The following tables provide a reconciliation of the beginning and ending balances of non-U.S. pension benefit assets measured at fair value that used significant unobservable inputs (Level 3):



(in millions)	Total Level 3 Investments			Insurance Contracts
April 29, 2016	$	76		$	76
Total unrealized gains included in accumulated other comprehensive (loss) income	2			2
Purchases and sales, net	(31		)	(31		)
Currency exchange rate changes	(3		)	(3		)
April 28, 2017	$	44		$	44



(in millions)	Total Level 3 Investments			Insurance Contracts		Partnership Units
April 24, 2015	$	76		$	60	$	16
Purchases and sales, net	(2		)	14		(16		)
Currency exchange rate changes	2			2		—
April 29, 2016	$	76		$	76	$	—

Retirement Benefit Plan Funding It is the Company’s policy to fund retirement costs within the limits of allowable tax deductions. During fiscal year 2017, the Company made discretionary contributions of approximately $183 million to the U.S. pension plan. Internationally, the Company contributed approximately $76 million for pension benefits during fiscal year 2017. The Company anticipates that it will make contributions of $302 million to its pension benefits in fiscal year 2018. Based on the guidelines under the U.S. Employee Retirement Income Security Act of 1974 and the various guidelines which govern the plans outside the U.S., the majority of anticipated fiscal year 2018 contributions will be discretionary. The Company believes that, along with pension assets, the returns on invested pension assets, and Company contributions, the Company will be able to meet its pension and other post-retirement obligations in the future.

Retiree benefit payments, which reflect expected future service, are anticipated to be paid as follows:



(in millions)	U.S. Pension Benefits		Non-U.S. Pension Benefits
Fiscal Year	Gross Payments		Gross Payments
2018	$	101	$	44
2019	110		42
2020	121		43
2021	131		46
2022	143		50
2023 – 2027	901		298
Total	$	1,507	$	523

Post-retirement Benefit Plans The net periodic benefit cost associated with the Company’s post-retirement benefit plans was $11 million, $12 million, and $14 million in fiscal years 2017, 2016, and 2015, respectively. The Company’s projected benefit obligation for all post-retirement benefit plans was $323 million and $369 million at April 28, 2017 and April 29, 2016, respectively. The Company’s fair value of plan assets for all post-retirement benefit plans was $289 million and $269 million at April 28, 2017 and April 29, 2016, respectively. The decrease in the Company's projected benefit obligation during fiscal year 2017 was due to the U.S. post-retirement benefit plan being frozen, effective January 1, 2018. The activity during fiscal year 2016 related to the change in projected benefit obligation was not material. The activity during fiscal years 2017 and 2016 related to the change in fair value of plan assets was not material.

Defined Contribution Savings Plans The Company has defined contribution savings plans that cover substantially all U.S. employees and certain non-U.S. employees. The general purpose of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on employee contributions and Company performance. Expense recognized under these plans was $347 million, $269 million, and $188 million in fiscal years 2017, 2016, and 2015, respectively.

Effective May 1, 2005, the Company froze participation in the original defined benefit pension plan in the U.S. and implemented two new plans: an additional defined benefit pension plan, the Personal Pension Account (PPA), and a new defined contribution plan, the Personal Investment Account (PIA). Employees in the U.S. hired on or after May 1, 2005 but before January 1, 2016 had the option to participate in either the PPA or the PIA. Participants in the PPA receive an annual allocation of their salary and bonus on which they will receive an annual guaranteed rate of return which is based on the ten-year Treasury bond rate. Participants in the PIA also receive an annual allocation of their salary and bonus; however, they are allowed to determine how to invest their funds among identified fund alternatives. The cost associated with the PPA is included in U.S. Pension Benefits in the tables presented earlier. The defined contribution cost associated with the PIA was approximately $58 million, $58 million, and $53 million in fiscal years 2017, 2016, and 2015, respectively.

Effective January 1, 2016, the Company froze participation in the existing defined benefit (PPA) and contribution (PIA) pension plans in the U.S. and implemented a new form of benefit under the existing defined contribution plan for legacy Covidien employees and employees in the U.S. hired on or after January 1, 2016. Participants in the Medtronic Core Contribution (MCC) also receive an annual allocation of their salary and bonus and are allowed to determine how to invest their funds among identified fund alternatives. The defined contribution cost associated with the MCC was approximately $45 million and $12 million in fiscal years 2017 and 2016, respectively.