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Benefit Plans

12 Months Ended

Dec. 31, 2018

Retirement Benefits [Abstract]

Benefit Plans

Note 10. 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
	2018			2017			2018			2017
	(in millions)
Projected benefit obligation at January 1	$	1,762		$	1,614		$	10,852		$	9,814
Service cost	43			46			146			156
Interest cost	61			62			199			199
Benefits paid	(29		)	(32		)	(462		)	(471		)
Settlements paid	(118		)	(111		)	(2		)	—
Actuarial (gains)/losses	(208		)	179			(640		)	180
Divestiture	—			—			—			(14		)
Currency	—			—			(528		)	976
Other	—			4			13			12
Projected benefit obligation at December 31	1,511			1,762			9,578			10,852
Fair value of plan assets at January 1	1,717			1,620			9,327			7,926
Actual return on plan assets	(99		)	217			(243		)	592
Contributions	39			23			323			482
Benefits paid	(29		)	(32		)	(462		)	(471		)
Settlements paid	(118		)	(111		)	(2		)	—
Divestiture	—			—			—			—
Currency	—			—			(478		)	798
Fair value of plan assets at December 31	1,510			1,717			8,465			9,327
Net pension (liabilities)/assets at December 31	$	(1	)	$	(45	)	$	(1,113	)	$	(1,525	)

The accumulated benefit obligation, which represents benefits earned to the measurement date, was $1,488 million at December 31, 2018 and $1,715 million at December 31, 2017 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $9,374 million at December 31, 2018 and $10,610 million at December 31, 2017.

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 $1,114 million at December 31, 2018 and $1,570 million at December 31, 2017. We recognized these amounts in our consolidated balance sheets as follows:



	As of December 31,
	2018			2017
	(in millions)
Prepaid pension assets	$	132		$	158
Other current liabilities	(25		)	(59		)
Accrued pension costs	(1,221		)	(1,669		)
	$	(1,114	)	$	(1,570	)

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,
	2018		2017		2018		2017
	(in millions)
Projected benefit obligation	$	52	$	94	$	3,343	$	9,345
Accumulated benefit obligation	50		90		3,194		9,138
Fair value of plan assets	2		2		2,169		7,709

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,
	2018		2017		2018		2017
	(in millions)
Discount rate	4.40	%	3.68	%	2.45	%	2.20	%
Expected rate of return on plan assets	5.75	%	5.50	%	4.80	%	4.90	%
Rate of compensation increase	4.00	%	4.00	%	3.31	%	3.31	%

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.

For the periods presented, we measure service and interest costs by applying the specific spot rates along a yield curve used to measure plan obligations to the plans’ liability cash flows. We believe this approach provides 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.

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,
	2018			2017			2016			2018			2017			2016
	(in millions)
Service cost	$	43		$	46		$	57		$	146		$	156		$	147
Interest cost	61			62			61			199			199			229
Expected return on plan assets	(88		)	(101		)	(97		)	(448		)	(434		)	(418		)
Amortization:
Net loss from experience differences	32			37			42			163			167			120
Prior service cost/(benefit)	2			2			2			(2		)	(3		)	(3		)
Settlement losses and other expenses ⁽¹⁾	35			35			30			5			6			6
Net periodic pension cost	$	85		$	81		$	95		$	63		$	91		$	81


(1)	Settlement losses include $5 million for the year ended December 31, 2018, $11 million for the year ended December 31, 2017 and $15 million for the year ended December 31, 2016 of pension settlement losses for employees who elected lump-

sum payments in connection with our Simplify to Grow Program. Retired employees who elected lump-sum payments resulted in net settlement losses of $31 million for our U.S. plans and $4 million for our non-U.S. plans in 2018, $21 million for our U.S. plans and $6 million for our non-U.S. plans in 2017 and $15 million for our U.S. plans and $6 million for our non-U.S. plans in 2016. See Note 7, 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, 2018, 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 2019:


•	an estimated $168 million of net loss from experience differences; and


•	an estimated $6 million of 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,
	2018		2017		2016		2018		2017		2016
Discount rate	3.68	%	4.19	%	4.50	%	2.20	%	2.31	%	3.11	%
Expected rate of return on plan assets	5.50	%	6.25	%	6.75	%	4.90	%	5.14	%	5.87	%
Rate of compensation increase	4.00	%	4.00	%	4.00	%	3.31	%	3.29	%	3.18	%

Plan Assets:

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



	As of December 31, 2018
Asset Category	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
U.S. equity securities	$	2	$	2	$	—	$	—
Non-U.S. equity securities	5		5		—		—
Pooled funds - equity securities	1,951		743		1,208		—
Total equity securities	1,958		750		1,208		—
Government bonds	3,156		62		3,094		—
Pooled funds - fixed-income securities	573		429		144		—
Corporate bonds and other fixed-income securities	2,050		87		931		1,032
Total fixed-income securities	5,779		578		4,169		1,032
Real estate	130		108		—		22
Private equity	2		—		—		2
Cash	44		32		12		—
Other	2		1		—		1
Total assets in the fair value hierarchy	$	7,915	$	1,469	$	5,389	$	1,057
Investments measured at net asset value	1,993
Total investments at fair value	$	9,908



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

We excluded plan assets of $67 million at December 31, 2018 and $71 million at December 31, 2017 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 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, 2018 Balance		Net Realized and Unrealized Gains/ (Losses)		Net Purchases, Issuances and Settlements			Net Transfers Into/(Out of) Level 3			Currency Impact			December 31, 2018 Balance
	(in millions)
Non-U.S. equity	$	—	$	—	$	—		$	—		$	—		$	—
Pooled funds- fixed-income securities	—		—		—			—			—			—
Corporate bond and other fixed-income securities	790		62		236			—			(56		)	1,032
Real estate	23		1		(1		)	—			(1		)	22
Private equity and other	3		—		—			—			—			3
Total Level 3 investments	$	816	$	63	$	235		$	—		$	(57	)	$	1,057

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

The increase in Level 3 pension plan investments during 2018 and 2017 was primarily due to additional purchases of corporate bond and other fixed income securities, which includes private debt placements.

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	2018		2017		2018		2017
Equity securities	15	%	15	%	26	%	28	%
Fixed-income securities	85	%	85	%	65	%	60	%
Real estate	—		—		6	%	6	%
Hedge funds	—		—		2	%	4	%
Private equity	—		—		—	%	1	%
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 31% equity securities (including investments in real estate), approximately 67% 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 2018, we contributed $39 million to our U.S. pension plans and $310 million to our non-U.S. pension plans. In addition, employees contributed $13 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 2019, we estimate that our pension contributions will be $5 million to our U.S. plans and $232 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, 2018 were (in millions):



	2019		2020		2021		2022		2023		2024-2028
U.S. Plans	$	107	$	91	$	91	$	93	$	92	$	483
Non-U.S. Plans	357		362		378		382		395		2,098

Multiemployer Pension Plans:

In accordance with obligations we have under collective bargaining agreements, we made contributions to multiemployer pension plans of $17 million in 2018, $26 million in 2017 and $25 million in 2016. In 2017 and 2016, the only individually significant multiemployer plan we contributed to was the Bakery and Confectionery Union and Industry International Pension Fund (the “Fund”). Our obligation to contribute to the Fund arose with respect to 8 collective bargaining agreements covering most of our employees represented by the Bakery, Confectionery, Tobacco and Grain Millers Union. All of those collective bargaining agreements expired in 2016 and we continued to contribute to the Fund through 2018. Our contributions to the Fund were $12 million in 2018, $22 million in 2017 and $21 million in 2016, while our contributions to other multiemployer pension plans that were not individually significant were $5 million in 2018, $4 million in 2017 and $4 million in 2016. Our contributions are based on our contribution rates under our collective bargaining agreements, the number of our eligible employees and Fund surcharges.



Pension Fund	EIN / Pension Plan Number	Pension Protection Act Zone Status	FIP / RP Status Pending / Implemented	Surcharge Imposed	Expiration Date of Collective-Bargaining 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 5% surcharge on our contribution rates. This surcharge increased to 10% for contributions paid from February 2013 forward. 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 Default schedule. We continued to contribute to the Fund until December 2018.

In the fourth quarter of 2018, we executed a complete withdrawal from the Fund. We estimated a withdrawal liability of $573 million, which represents our best estimate of the withdrawal liability absent an assessment from the Fund. We anticipate receiving an assessment in 2019, and the ultimate withdrawal liability may change from the currently estimated amount. We will record any future adjustments in the period during which the liability is confirmed or as new information becomes available. We expect to pay the liability over a period of 20 years from the date of the assessment. During 2018, within our North America segment, we recorded a discounted liability and related charge

of $423 million or $316 million net of tax. We determined the net present value of the liability using a risk-free interest rate. We recorded the pre-tax non-cash charges in selling, general and administrative expense (and in other non-cash items, net in the consolidated statement of cash flows) and the liability in long-term other liabilities. During 2018, we also recorded $6 million of accreted interest related to the long-term liability within interest and other expense, net.

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 $57 million in 2018, $43 million in 2017 and $44 million in 2016.

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,
	2018			2017
	(in millions)
Accrued benefit obligation at January 1	$	435		$	394
Service cost	6			7
Interest cost	15			15
Benefits paid	(19		)	(15		)
Currency	(11		)	8
Assumption changes	(39		)	30
Actuarial losses/(gains)	(21		)	(4		)
Accrued benefit obligation at December 31	$	366		$	435

The current portion of our accrued postretirement benefit obligation of $15 million at December 31, 2018 and $16 million at December 31, 2017 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,
	2018		2017		2018		2017
Discount rate	4.37	%	3.66	%	4.40	%	4.24	%
Health care cost trend rate assumed for next year	6.25	%	6.25	%	5.44	%	5.56	%
Ultimate trend rate	5.00	%	4.81	%	5.44	%	5.56	%
Year that the rate reaches the ultimate trend rate	2024		2024		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.

For the periods presented, we measure service and interest costs for other postretirement benefits by applying the specific spot rates along a yield curve used to measure plan obligations to the plans’ liability cash flows. We believe this approach provides a good 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.

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, 2018
	One-Percentage-Point
	Increase		Decrease
	(in millions)
Effect on postretirement benefit obligation	$	37	$	(30	)
Effect on annual service and interest cost	2		(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,
	2018			2017			2016
	(in millions)
Service cost	$	6		$	7		$	12
Interest cost	14			15			20
Amortization:
Net loss from experience differences	15			14			10
Prior service credit ⁽¹⁾	(39		)	(40		)	(20		)
Net periodic postretirement health care costs	$	(4	)	$	(4	)	$	22


(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. We continued to amortize the prior service credit and recorded $39 million in 2018 and $40 million in 2017.

As of December 31, 2018, we expected to amortize from accumulated other comprehensive earnings/(losses) into pre-tax net periodic postretirement health care costs during 2019:


•	an estimated $7 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,
	2018	2017	2016	2018	2017	2016
Discount rate	3.66%	4.14%	4.60%	4.24%	4.55%	4.77%
Health care cost trend rate	6.25%	6.50%	6.50%	5.56%	5.50%	5.50%

Future Benefit Payments:

Our estimated future benefit payments for our postretirement health care plans at December 31, 2018 were (in millions):



	2019		2020		2021		2022		2023		2024-2028
U.S. Plans	$	11	$	12	$	13	$	14	$	15	$	78
Non-U.S. Plans	5		5		5		5		5		30

Other Costs:

We made contributions to multiemployer medical plans totaling $19 million in 2018, $18 million in 2017 and $19 million in 2016. 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, 2018 and 2017 were:



	As of December 31,
	2018			2017
	(in millions)
Accrued benefit obligation at January 1	$	76		$	71
Service cost	6			5
Interest cost	4			4
Benefits paid	(7		)	(6		)
Assumption changes	(1		)	—
Actuarial losses/(gains)	(4		)	2
Accrued benefit obligation at December 31	$	74		$	76

The accrued benefit obligation was determined using a weighted-average discount rate of 6.7% in 2018 and 6.5% in 2017, an assumed weighted-average ultimate annual turnover rate of 0.3% in 2018 and 2017, assumed compensation cost increases of 4.0% in 2018 and 2017 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,
	2018			2017			2016
	(in millions)
Service cost	$	6		$	5		$	7
Interest cost	4			4			6
Amortization of net gains	(3		)	(3		)	(1		)
Net periodic postemployment costs	$	7		$	6		$	12

As of December 31, 2018, the estimated net gain for the postemployment benefit plans that we expect to amortize from accumulated other comprehensive earnings/(losses) into net periodic postemployment costs during 2019 is approximately $3 million.