Note 9. Benefit Plans

Pension Plans

Obligations and Funded Status:

The projected benefit obligations, plan assets and funded status of our pension plans were:


	U.S. Plans						Non-U.S. Plans
	2017			2016			2017			2016
	(in millions)

Projected benefit obligation at January 1	$	1,614		$	1,566		$	9,814		$	9,547
Service cost		46			57			156			147
Interest cost		62			61			199			229
Benefits paid		(32	)		(32	)		(471	)		(425	)
Settlements paid		(111	)		(91	)		–			–
Actuarial losses		179			52			180			1,284
Divestiture		–			–			(14	)		(5	)
Currency		–			–			976			(979	)
Other		4			1			12			16

Projected benefit obligation at December 31		1,762			1,614			10,852			9,814


Fair value of plan assets at January 1		1,620			1,247			7,926			7,721
Actual return on plan assets		217			118			592			1,079
Contributions		23			378			482			419
Benefits paid		(32	)		(32	)		(471	)		(425	)
Settlements paid		(111	)		(91	)		–			–
Divestiture		–			–			–			(4	)
Currency		–			–			798			(863	)
Other		–			–			–			(1	)

Fair value of plan assets at December 31		1,717			1,620			9,327			7,926

Net pension (liabilities)/assets at December 31	$	(45	)	$	6		$	(1,525	)	$	(1,888	)

The accumulated benefit obligation, which represents benefits earned to the measurement date, was $1,715 million at December 31, 2017 and $1,540 million at December 31, 2016 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $10,610 million at December 31, 2017 and $9,531 million at December 31, 2016.

Salaried and non-union hourly employees hired after January 1, 2009 in the U.S. and after January 1, 2011 in Canada (or earlier for certain legacy Cadbury employees) are no longer eligible to participate in the defined benefit pension plans. These employees are given an enhanced Company contribution to our employee defined contribution plans. For those salaried and non-union hourly employees who are currently participating in the defined benefit pension plans in the U.S. and Canada, benefit accruals will cease December 31, 2019.

The combined U.S. and non-U.S. pension plans resulted in a net pension liability of $1,570 million at December 31, 2017 and $1,882 million at December 31, 2016. We recognized these amounts in our consolidated balance sheets as follows:


	As of December 31,
	2017			2016
	(in millions)

Prepaid pension assets	$	158		$	159
Other current liabilities		(59	)		(27	)
Accrued pension costs		(1,669	)		(2,014	)

	$	(1,570	)	$	(1,882	)

Certain of our U.S. and non-U.S. plans are underfunded with an accumulated benefit obligations in excess of plan assets. For these plans, the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets were:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2017		2016		2017		2016
	(in millions)

Projected benefit obligation	$	94	$	96	$	9,345	$	8,386
Accumulated benefit obligation		90		88		9,138		8,168
Fair value of plan assets		2		2		7,709		6,451

We used the following weighted-average assumptions to determine our benefit obligations under the pension plans:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2017		2016		2017		2016
	(in millions)

Discount rate		3.68%		4.19%		2.20%		2.31%
Expected rate of return on plan assets		5.50%		6.25%		4.90%		5.14%
Rate of compensation increase		4.00%		4.00%		3.31%		3.29%

Year-end discount rates for our U.S., Canadian, Eurozone and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.

At the end of 2015, we changed the approach used to measure service and interest costs for pension benefits. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we measured service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provided a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic pension cost of approximately $64 million for the year ended December 31, 2016. This change did not affect the measurement of our plan obligations. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis.

Components of Net Periodic Pension Cost:

Net periodic pension cost consisted of the following:


	U.S. Plans									Non-U.S. Plans
	For the Years Ended December 31,									For the Years Ended December 31,
	2017			2016			2015			2017			2016			2015
	(in millions)

Service cost	$	46		$	57		$	64		$	156		$	147		$	188
Interest cost		62			61			67			199			229			307
Expected return on plan assets		(101	)		(97	)		(93	)		(434	)		(418	)		(478	)
Amortization:
Net loss from experience differences		37			42			43			167			120			141
Prior service cost/(benefit) ⁽¹⁾		2			2			2			(3	)		(3	)		15
Settlement losses and other expenses ⁽²⁾		35			30			19			6			6			2

Net periodic pension cost	$	81		$	95		$	102		$	91		$	81		$	175

(1)

For the year ended December 31, 2015, amortization of prior service cost includes $17 million of pension curtailment losses related to employees who transitioned to JDE upon the contribution of our global coffee business. Refer to Note 2, Divestitures and Acquisitions – JDE Coffee Business Transactions, for more information.

(2)

Settlement losses include $11 million for the year ended December 31, 2017, $15 million for the year ended December 31, 2016 and $9 million for the year ended December 31, 2015 of pension settlement losses for employees who elected lump-sum payments in connection with our 2014-2018 Restructuring Program. Retired employees who elected lump-sum payments resulted in net settlement losses of $21 million for our U.S. plans and $6 million for our non-U.S. plans in 2017, $15 million for our U.S. plans and $6 million for our non-U.S. plans in 2016 and $10 million for our U.S. plans and $2 million for our non-U.S. plans in 2015. See Note 6, 2014-2018 Restructuring Program, for more information.

For the U.S. plans, we determine the expected return on plan assets component of net periodic benefit cost using a calculated market return value that recognizes the cost over a four year period. For our non-U.S. plans, we utilize a similar approach with varying cost recognition periods for some plans, and with others, we determine the expected return on plan assets based on asset fair values as of the measurement date.

As of December 31, 2017, for the combined U.S. and non-U.S. pension plans, we expected to amortize from accumulated other comprehensive earnings/(losses) into net periodic pension cost during 2018:

•

an estimated $209 million of net loss from experience differences; and

•

less than $1 million of estimated prior service credit.

We used the following weighted-average assumptions to determine our net periodic pension cost:


	U.S. Plans						Non-U.S. Plans
	For the Years Ended December 31,						For the Years Ended December 31,
	2017		2016		2015		2017		2016		2015

Discount rate		4.19%		4.50%		4.20%		2.31%		3.11%		2.99%
Expected rate of return on plan assets		6.25%		6.75%		7.25%		5.14%		5.87%		5.96%
Rate of compensation increase		4.00%		4.00%		4.00%		3.29%		3.18%		3.26%

Plan Assets:

The fair value of pension plan assets was determined using the following fair value measurements:


	As of December 31, 2017
			Quoted Prices		Significant
			in Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Total Fair		Assets		Inputs		Inputs
Asset Category	Value		(Level 1)		(Level 2)		(Level 3)
	(in millions)

U.S. equity securities	$	2	$	2	$	–	$	–
Non-U.S. equity securities		5		5		–		–
Pooled funds - equity securities		2,340		848		1,492		–

Total equity securities		2,347		855		1,492		–

Government bonds		3,237		34		3,203		–
Pooled funds - fixed-income securities		602		449		153		–
Corporate bonds and other fixed-income securities		2,102		133		1,179		790

Total fixed-income securities		5,941		616		4,535		790

Real estate		156		120		13		23
Private equity		2		–		–		2
Cash		86		66		20		–
Other		2		1		–		1

Total assets in the fair value hierarchy	$	8,534	$	1,658	$	6,060	$	816

Investments measured at net asset value		2,439

Total investments at fair value	$	10,973


	As of December 31, 2016
			Quoted Prices		Significant
			in Active Markets		Other			Significant
			for Identical		Observable			Unobservable
	Total Fair		Assets		Inputs			Inputs
Asset Category	Value		(Level 1)		(Level 2)			(Level 3)
	(in millions)

U.S. equity securities	$	1	$	1	$	–		$	–
Non-U.S. equity securities		427		427		–			–
Pooled funds - equity securities		1,524		286		1,235			3

Total equity securities		1,952		714		1,235			3

Government bonds		3,009		37		2,972			–
Pooled funds - fixed-income securities		756		103		618			35
Corporate bonds and other fixed-income securities		852		357		(43	)		538

Total fixed-income securities		4,617		497		3,547			573

Real estate		170		98		50			22
Private equity		2		–		–			2
Cash		73		72		1			–
Other		3		1		–			2

Total assets in the fair value hierarchy	$	6,817	$	1,382	$	4,833		$	602

Investments measured at net asset value		2,667

Total investments at fair value	$	9,484

We excluded plan assets of $71 million at December 31, 2017 and $62 million at December 31, 2016 from the above tables related to certain insurance contracts as they are reported at contract value, in accordance with authoritative guidance.

Fair value measurements:

•

Level 1 – includes primarily U.S and non-U.S. equity securities and government bonds valued using quoted prices in active markets.

•

Level 2 – includes primarily pooled funds, including assets in real estate pooled funds, valued using net asset values of participation units held in common collective trusts, as reported by the managers of the trusts and as supported by the unit prices of actual purchase and sale transactions. Level 2 plan assets also include corporate bonds and other fixed-income securities, valued using independent observable market inputs, such as matrix pricing, yield curves and indices.

•

Level 3 – includes investments valued using unobservable inputs that reflect the plans’ assumptions that market participants would use in pricing the assets, based on the best information available.

•

Fair value estimates for pooled funds are calculated by the investment advisor when reliable quotations or pricing services are not readily available for certain underlying securities. The estimated value is based on either cost or last sale price for most of the securities valued in this fashion.

•

Fair value estimates for private equity investments are calculated by the general partners using the market approach to estimate the fair value of private investments. The market approach utilizes prices and other relevant information generated by market transactions, type of security, degree of liquidity, restrictions on the disposition, latest round of financing data, company financial statements, relevant valuation multiples and discounted cash flow analyses.

•

Fair value estimates for private debt placements are calculated using standardized valuation methods, including but not limited to income-based techniques such as discounted cash flow projections or market-based techniques utilizing public and private transaction multiples as comparables.

•

Fair value estimates for real estate investments are calculated by the investment managers using the present value of future cash flows expected to be received from the investments, based on valuation methodologies such as appraisals, local market conditions, and current and projected operating performance.

•

Fair value estimates for certain fixed-income securities such as insurance contracts are calculated based on the future stream of benefit payments discounted using prevailing interest rates based on the valuation date.

•

Net asset value – primarily includes equity funds, fixed income funds, real estate funds, hedge funds and private equity investments for which net asset values are normally used.

Changes in our Level 3 plan assets, which are recorded in other comprehensive earnings/(losses), included:


Asset Category	January 1, 2017 Balance		Net Realized and Unrealized Gains/ (Losses)		Net Purchases, Issuances and Settlements			Net Transfers Into/(Out of) Level 3			Currency Impact			December 31, 2017 Balance
	(in millions)
Non-U.S. equity	$	3	$	–	$	–		$	(3	)	$	–		$	–
Pooled funds- fixed-income securities		35		–		(16	)		(21	)		2			–
Corporate bond and other fixed-income securities		538		10		182			–			60			790
Real estate		22		1		–			–			–			23
Private equity and other		4		–		–			(1	)		–			3

Total Level 3 investments	$	602	$	11	$	166		$	(25	)	$	62		$	816


Asset Category	January 1, 2016 Balance		Net Realized and Unrealized Gains/ (Losses)		Net Purchases, Issuances and Settlements			Net Transfers Into/(Out of) Level 3			Currency Impact			December 31, 2016 Balance
	(in millions)
Non-U.S. equity	$	–	$	–	$	–		$	3		$	–		$	3
Pooled funds- fixed-income securities		26		6		15			(7	)		(5	)		35
Corporate bond and other fixed-income securities		665		21		(41	)		–			(107	)		538
Real estate		230		–		(184	)		(3	)		(21	)		22
Private equity and other		3		–		–			1			–			4

Total Level 3 investments	$	924	$	27	$	(210	)	$	(6	)	$	(133	)	$	602

The increases in Level 3 pension plan investments during 2017 were primarily due to net purchases in corporate bonds and other fixed income securities, which includes private debt placements, and the effects of currency. The decreases in Level 3 pension plan investments during 2016 were primarily due to net settlements in real estate funds and the effects of currency.

The percentage of fair value of pension plan assets was:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
Asset Category	2017		2016		2017		2016

Equity securities		15%		33%		28%		29%
Fixed-income securities		85%		63%		60%		57%
Real estate		–		4%		6%		5%
Hedge funds		–		–		4%		6%
Private equity		–		–		1%		2%
Cash		–		–		1%		1%

Total		100%		100%		100%		100%

For our U.S. plans, our investment strategy is to reduce the risk of underfunded plans in part through appropriate asset allocation within our plan assets. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments. The strategy involves using indexed U.S. equity and international equity securities and actively managed U.S. investment grade fixed-income securities (which constitute 95% or more of fixed-income securities) with smaller allocations to high yield fixed-income securities.

For our non-U.S. plans, the investment strategy is subject to local regulations and the asset/liability profiles of the plans in each individual country. In aggregate, the asset allocation targets of our non-U.S. plans are broadly characterized as a mix of approximately 32% equity securities (including investments in real estate), approximately 66% fixed-income securities and approximately 2% for other types of securities. Our investment strategy for our largest non-U.S. plan, which comprises 63% of our non-U.S. pension assets, is designed to balance risk and return by diversifying across a wide range of return-seeking and liability matching assets, invested in a range of both active and passive mandates. We target an allocation of approximately 23% in equity securities, 20% credit, and 57% liability matching assets. The strategy uses indexed global developed equities, actively managed global investment grade and alternative credit, real estate and other liability matching assets including a buy-in annuity policy.

Employer Contributions:

In 2017, we contributed $23 million to our U.S. pension plans and $470 million to our non-U.S. pension plans. The non-U.S. amount included a non-recurring $250 million contribution made in connection with a new funding agreement for a Company plan in the United Kingdom. In addition, employees contributed $12 million to our non-U.S. plans. We make contributions to our pension plans in accordance with local funding arrangements and statutory minimum funding requirements. Discretionary contributions are made to the extent that they are tax deductible and do not generate an excise tax liability.

In 2018, we estimate that our pension contributions will be $39 million to our U.S. plans and $250 million to our non-U.S. plans based on current tax laws. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates.

Future Benefit Payments:

The estimated future benefit payments from our pension plans at December 31, 2017 were (in millions):


	2018		2019		2020		2021		2022		2023-2027

U.S. Plans	$	120	$	83	$	89	$	93	$	93	$	498
Non-U.S. Plans		375		375		387		409		409		2,196

Multiemployer Pension Plans:

In accordance with obligations we have under collective bargaining agreements, we made contributions to multiemployer pension plans of $26 million in 2017, $25 million in 2016 and $31 million in 2015. There are risks of participating in multiemployer pension plans that are different from single employer plans. Contributions made by a participating employer are not segregated to be used to provide benefits for participants related to that participating employer. If a participating employer stops contributing to the plan, the unfunded vested obligations of the plan are borne by the remaining participating employers.

The only individually significant multiemployer plan we participate in as of December 31, 2017 is the Bakery and Confectionery Union and Industry International Pension Fund (the “Fund”). Our contributions to the Fund exceeded 5% of total contributions to the Fund for fiscal years 2017, 2016 and 2015. Our contributions to the Fund were $22 million in 2017, $21 million in 2016 and $27 million in 2015. Our contributions to other multiemployer pension plans that were not individually significant were $4 million in 2017, $4 million in 2016 and $4 million in 2015. Our contributions are based on our contribution rates under our collective bargaining agreements, the number of our eligible employees and Fund surcharges.

Expiration Date

Pension

FIP / RP

of Collective-

EIN / Pension

Protection Act

Status Pending /

Surcharge

Bargaining

Pension Fund

Plan Number

Zone Status

Implemented

Imposed

Agreements

Bakery and Confectionery Union and
Industry International Pension Fund

526118572

Red

Implemented

Yes

2/29/2016

Effective January 1, 2012, the Fund’s zone status changed to “Red”. As a result of this certification, beginning in July 2012, we were charged a 10% surcharge on our contribution rates. The Fund subsequently adopted a rehabilitation plan on November 7, 2012 that required contribution increases and reductions to benefit provisions. As of August 28, 2016, the 10% surcharge was no longer applicable and we were required to pay higher contributions under the Fund’s rehabilitation plan. Although our collective bargaining agreements with the Fund expired during 2016 and while we continue to renegotiate the agreements, we continue to make contributions to the Fund.

Other Costs:

We sponsor and contribute to employee defined contribution plans. These plans cover eligible salaried, non-union and union employees. Our contributions and costs are determined by the matching of employee contributions, as defined by the plans. Amounts charged to expense in continuing operations for defined contribution plans totaled $43 million in 2017, $44 million in 2016 and $45 million in 2015.

Postretirement Benefit Plans

Obligations:

Our postretirement health care plans are not funded. The changes in and the amount of the accrued benefit obligation were:


	As of December 31,
	2017			2016
	(in millions)

Accrued benefit obligation at January 1	$	394		$	511
Service cost		7			12
Interest cost		15			20
Benefits paid		(15	)		(14	)
Plan amendments ⁽¹⁾		–			(149	)
Currency		8			3
Assumption changes		30			34
Actuarial losses/(gains)		(4	)		(23	)

Accrued benefit obligation at December 31	$	435		$	394

(1)

Plan amendments in 2016 included a change in eligibility requirements related to medical and life insurance benefits and a change in benefits for Medicare-eligible participants.

The current portion of our accrued postretirement benefit obligation of $16 million at December 31, 2017 and $12 million at December 31, 2016 was included in other current liabilities.

We used the following weighted-average assumptions to determine our postretirement benefit obligations:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2017		2016		2017		2016

Discount rate		3.66%		4.14%		4.24%		4.55%
Health care cost trend rate assumed for next year		6.25%		6.50%		5.56%		5.50%
Ultimate trend rate		4.81%		5.00%		5.56%		5.68%
Year that the rate reaches the ultimate trend rate		2024		2020		2018		2018

Year-end discount rates for our U.S., Canadian and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. Our expected health care cost trend rate is based on historical costs.

At the end of 2015, we changed the approach used to measure service and interest costs for other postretirement benefits. For 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016, we measured service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provided a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. The impact of this change was a decrease in net periodic postretirement cost of approximately $4 million for the year ended December 31, 2016. This change does not affect the measurement of our plan obligations. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis.

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


	As of December 31, 2017
	One-Percentage-Point
	Increase		Decrease
	(in millions)

Effect on postretirement benefit obligation	$	49	$	(40	)
Effect on annual service and interest cost		3		(2	)

Components of Net Periodic Postretirement Health Care Costs:

Net periodic postretirement health care costs consisted of the following:


	For the Years Ended December 31,
	2017			2016			2015
	(in millions)

Service cost	$	7		$	12		$	15
Interest cost		15			20			22
Amortization:
Net loss from experience differences		14			10			13
Prior service credit ⁽¹⁾		(40	)		(20	)		(7	)

Net periodic postretirement health care costs	$	(4	)	$	22		$	43

(1)

In the fourth quarter of 2016, the prior service credit included a one-time $9 million curtailment gain related to a change in the eligibility requirement resulting in ongoing amortization of $10 million. In 2017, we continue to amortize prior service credit and recorded $40 million on a full year basis.

As of December 31, 2017, we expected to amortize from accumulated other comprehensive earnings/(losses) into pre-tax net periodic postretirement health care costs during 2018:

•

an estimated $18 million of net loss from experience differences, and

•

an estimated $39 million of prior service credit.

We used the following weighted-average assumptions to determine our net periodic postretirement health care cost:


	U.S. Plans			Non-U.S. Plans
	For the Years Ended December 31,			For the Years Ended December 31,
	2017	2016	2015	2017	2016	2015

Discount rate	4.14%	4.60%	4.20%	4.55%	4.77%	4.52%
Health care cost trend rate	6.50%	6.50%	6.50%	5.50%	5.50%	5.18%

Future Benefit Payments:

Our estimated future benefit payments for our postretirement health care plans at December 31, 2017 were (in millions):


	2018		2019		2020		2021		2022		2023-2027

U.S. Plans	$	11	$	12	$	13	$	15	$	16	$	85
Non-U.S. Plans		5		5		6		6		6		55

Other Costs:

We made contributions to multiemployer medical plans totaling $18 million in 2017, $19 million in 2016 and $20 million in 2015. These plans provide medical benefits to active employees and retirees under certain collective bargaining agreements.

Postemployment Benefit Plans

Obligations:

Our postemployment plans are primarily not funded. The changes in and the amount of the accrued benefit obligation at December 31, 2017 and 2016 were:


	As of December 31,
	2017			2016
	(in millions)

Accrued benefit obligation at January 1	$	71		$	95
Service cost		5			7
Interest cost		4			6
Benefits paid		(6	)		(9	)
Assumption changes		–			(21	)
Actuarial losses/(gains)		2			(7	)

Accrued benefit obligation at December 31	$	76		$	71

The accrued benefit obligation was determined using a weighted-average discount rate of 6.5% in 2017 and 6.2% in 2016, an assumed weighted-average ultimate annual turnover rate of 0.3% in 2017 and 2016, assumed compensation cost increases of 4.0% in 2017 and 2016 and assumed benefits as defined in the respective plans.

Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Components of Net Periodic Postemployment Costs:

Net periodic postemployment costs consisted of the following:


	For the Years Ended December 31,
	2017			2016			2015
	(in millions)

Service cost	$	5		$	7		$	7
Interest cost		4			6			5
Amortization of net gains		(3	)		(1	)		–

Net periodic postemployment costs	$	6		$	12		$	12

As of December 31, 2017, the estimated net gain for the postemployment benefit plans that we expected to amortize from accumulated other comprehensive earnings/(losses) into net periodic postemployment costs during 2018 was approximately $3 million.