Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018 are no longer eligible for pension benefits, but are eligible for an enhanced 401(k) benefit as described below in other retirement programs.

Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums are paid.

We are required by GAAP to separately recognize the overfunded or underfunded status of our pension and OPEB plans as an asset or liability. The funded status represents the difference between the projected benefit obligation (PBO) and the fair value of the plan assets. Our non-qualified (supplemental) pension plan is unfunded by design. The PBO of the pension plans is the present value of benefits earned to date by plan participants, including the effect of assumed future compensation increases. The PBO of the OPEB plan is equal to the accumulated benefit obligation, as the present value of the OPEB liabilities is not affected by compensation increases. Plan assets are measured at fair value. We use a December 31 measurement date for plan assets and obligations for all our retirement plans.

Changes in our PBO and plan assets were as follows for the years ended December 31:



Funded Status	Pension				OPEB
Millions	2019		2018		2019		2018
Projected Benefit Obligation
Projected benefit obligation at beginning of year	$	4,181	$	4,529	$	298	$	330
Service cost		80		105		1		2
Interest cost		160		145		9		10
Plan amendment		-		-		(92)		-
Actuarial (gain)/loss		656		(371)		11		(20)
Gross benefits paid		(230)		(227)		(22)		(24)
Projected benefit obligation at end of year	$	4,847	$	4,181	$	205	$	298
Plan Assets
Fair value of plan assets at beginning of year	$	3,887	$	4,224	$	-	$	-
Actual (loss)/return on plan assets		841		(139)		-		-
Non-qualified plan benefit contributions		30		29		22		24
Gross benefits paid		(230)		(227)		(22)		(24)
Fair value of plan assets at end of year	$	4,528	$	3,887	$	-	$	-
Funded status at end of year	$	(319)	$	(294)	$	(205)	$	(298)

Amounts recognized in the statement of financial position as of December 31, 2019, and 2018 consist of:



	Pension				OPEB
Millions	2019		2018		2019		2018
Noncurrent assets	$	203	$	172	$	-	$	-
Current liabilities		(29)		(28)		(20)		(22)
Noncurrent liabilities		(493)		(438)		(185)		(276)
Net amounts recognized at end of year	$	(319)	$	(294)	$	(205)	$	(298)

Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 2019, and 2018 consist of:



	2019						2018
Millions	Pension		OPEB		Total		Pension		OPEB		Total
Prior service cost	$	-	$	95	$	95	$	-	$	-	$	-
Net actuarial loss		(1,501)		(104)		(1,605)		(1,480)		(90)		(1,570)
Total	$	(1,501)	$	(9)	$	(1,510)	$	(1,480)	$	(90)	$	(1,570)

Pre-tax changes recognized in other comprehensive income/(loss) during 2019, 2018, and 2017 were as follows:



	Pension						OPEB
Millions	2019		2018		2017		2019		2018		2017
Prior service credit	$	-	$	-	$	-	$	92	$	-	$	-
Net actuarial (loss)/gain		(88)		(40)		67		(11)		20		(6)
Amortization of:
Prior service cost/(credit)		-		-		-		(7)		1		1
Actuarial loss		67		93		81		7		10		9
Total	$	(21)	$	53	$	148	$	81	$	31	$	4

Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2020:



Millions	Pension		OPEB		Total
Prior service credit	$	-	$	14	$	14
Net actuarial loss		(99)		(9)		(108)
Total	$	(99)	$	5	$	(94)

Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated benefit obligation represents the difference between the ABO and the fair value of plan assets.

The following table discloses only the PBO, ABO and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31:



Underfunded Accumulated Benefit Obligation
Millions	2019		2018
Projected benefit obligation	$	522	$	465
Accumulated benefit obligation	$	498	$	446
Fair value of plan assets		-		-
Underfunded accumulated benefit obligation	$	(498)	$	(446)

The ABO for all defined benefit pension plans was $4.5 billion and $3.9 billion at December 31, 2019, and 2018, respectively.

Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31:



	Pension		OPEB
Percentages	2019	2018	2019	2018
Discount rate	3.26%	4.23%	3.13%	4.17%
Compensation increase	4.10%	4.19%	N/A	N/A
Health care cost trend rate (employees under 65)	N/A	N/A	5.64%	5.87%
Ultimate health care cost trend rate	N/A	N/A	4.50%	4.50%
Year ultimate trend rate reached	N/A	N/A	2038	2038

Expense

Both pension and OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a 5 year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense.

On June 30, 2019, the OPEB plan was remeasured to reflect an announced plan amendment effective January 1, 2020 that reduced and eliminated certain medical benefits for Medicare-eligible retirees. This negative plan amendment resulted in a reduction in the accumulated postretirement benefit obligation of approximately $92 million with a corresponding adjustment of $69 million in other comprehensive income, net of $23 million in deferred taxes. This amount is being amortized as a reduction of future net periodic OPEB cost over approximately 8 years, which represents the future remaining service period of eligible employees.

The workforce reduction plan initiated in the third quarter of 2017 included a curtailment loss of $20 million and a special termination benefit of $49 million as a result of a remeasurement as of September 30, 2017, due to the eliminated future service for approximately 460 management employees.

The components of our net periodic pension and OPEB cost were as follows for the years ended December 31:



	Pension						OPEB
Millions	2019		2018		2017		2019		2018		2017
Net Periodic Benefit Cost:
Service cost	$	80	$	105	$	90	$	1	$	2	$	2
Interest cost		160		145		142		9		10		10
Expected return on plan assets		(273)		(272)		(267)		-		-		-
Plan curtailment cost		-		-		20		-		-		-
Special termination cost		-		-		49		-		-		-
Amortization of:
Prior service cost/(credit)		-		-		-		(7)		1		1
Actuarial loss		67		93		81		7		10		9
Net periodic benefit cost	$	34	$	71	$	115	$	10	$	23	$	22

Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:



	Pension			OPEB
Percentages	2019	2018	2017	2019	2018	2017
Discount rate for benefit obligations	4.23%	3.62%	4.09%	3.79%	3.54%	3.89%
Discount rate for interest on benefit obligations	3.94%	3.27%	3.47%	3.40%	3.14%	3.25%
Discount rate for service cost	4.33%	3.77%	4.41%	3.92%	3.71%	4.25%
Discount rate for interest on service cost	4.30%	3.72%	4.27%	3.85%	3.64%	4.11%
Expected return on plan assets	7.00%	7.00%	7.00%	N/A	N/A	N/A
Compensation increase	4.10%	4.19%	4.13%	N/A	N/A	N/A
Health care cost trend rate (employees under 65)	N/A	N/A	N/A	5.87%	6.09%	6.31%
Ultimate health care cost trend rate	N/A	N/A	N/A	4.50%	4.50%	4.50%
Year ultimate trend reached	N/A	N/A	N/A	2038	2038	2038

We measure the service cost and interest cost components of our net periodic benefit cost by using individual spot discount rates matched with separate cash flows for each future year. The discount rates were based on a yield curve of high quality corporate bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual return/(loss) on pension plan assets, net of fees, was approximately 20% in 2019, (2)% in 2018, and 19% in 2017.

Assumed health care cost trend rates have an effect on the expense and liabilities reported for health care plans. The assumed health care cost trend rate is based on historical rates and expected market conditions. The 2020 assumed health care cost trend rate for employees under 65 is 5.64%. It is assumed the rate will decrease gradually to an ultimate rate of 4.5% in 2038 and will remain at that level.

Cash Contributions

The following table details cash contributions, if any, for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans:



	Pension
Millions	Qualified		Non-qualified		OPEB
2019	$	-	$	30	$	22
2018		-		29		24

Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes.

The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments and claims paid for medical and life insurance. We anticipate our 2020 supplemental pension and OPEB payments will be made from cash generated from operations.

Benefit Payments

The following table details expected benefit payments for the years 2020 through 2029:



Millions	Pension		OPEB
2020	$	224	$	20
2021		221		19
2022		220		15
2023		219		15
2024		220		10
Years 2025 - 2029		1,119		45

Asset Allocation Strategy

Our pension plan asset allocation at December 31, 2019, and 2018, and target allocation for 2020, are as follows:



		Percentage of Plan Assets
		December 31,
	Target Allocation 2020	2019	2018
Equity securities	60% to 70%	63%	56%
Debt securities	25% to 35%	31	36
Real estate	2% to 8%	6	6
Commodities	N/A	-	2
Total		100%	100%

The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target average long-term rate of return of 7.0%. While we believe we can achieve a long-term average rate of return of 7.0%, we cannot be certain that the portfolio will perform to our expectations. Assets are strategically allocated among equity, debt, and other investments in order to achieve a diversification level that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other portfolios are evaluated at least every three years with the assistance of an independent consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at least quarterly, as needed.

The pension plan investments are held in a Master Trust. The majority of pension plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons and are expected to do so in the future. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high quality debt securities. The average credit rating of the debt portfolio exceeded A at both December 31, 2019 and December 31, 2018. The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury, mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 14 years and 13 years, respectively at December 31, 2019, and 2018.

The investment of pension plan assets in securities issued by UPC is explicitly prohibited by the plan for both the equity and debt portfolios, other than through index fund holdings.

Fair Value Measurements

The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

As of December 31, 2019, the pension plan assets measured at fair value on a recurring basis were as follows:



	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Inputs		Inputs		Inputs
Millions	(Level 1)		(Level 2)		(Level 3)		Total
Plan assets at fair value:
Temporary cash investments	$	6	$	1	$	-	$	7
Registered investment companies [a]		9		-		-		9
Federal government securities		-		202		-		202
Bonds and debentures		-		575		-		575
Corporate stock		1,932		7		-		1,939
Total plan assets at fair value	$	1,947	$	785	$	-	$	2,732
Plan assets at NAV:
Registered investment companies [b]								285
Venture capital and buyout partnerships								531
Real estate funds								261
Collective trust and other funds								707
Total plan assets at NAV							$	1,784
Other assets/(liabilities) [c]								12
Total plan assets							$	4,528

As of December 31, 2018, the pension plan assets measured at fair value on a recurring basis were as follows:



	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Inputs		Inputs		Inputs
Millions	(Level 1)		(Level 2)		(Level 3)		Total
Plan assets at fair value:
Temporary cash investments	$	21	$	-	$	-	$	21
Registered investment companies [a]		1		-		-		1
Federal government securities		-		191		-		191
Bonds and debentures		-		538		-		538
Corporate stock		1,355		12		-		1,367
Total plan assets at fair value	$	1,377	$	741	$	-	$	2,118
Plan assets at NAV:
Registered investment companies [b]								378
Venture capital and buyout partnerships								443
Real estate funds								222
Collective trust and other funds								745
Total plan assets at NAV							$	1,788
Other assets/(liabilities) [c]								(19)
Total plan assets							$	3,887

[a]Registered investment companies measured at fair value are stock investments.

[b]Registered investment companies measured at NAV include bond investments.

[c]Other assets include accrued receivables, net payables, and pending broker settlements.

For the years ended December 31, 2019 and 2018, significant transfers in or out of Levels 1, 2, or 3 totaled $0.

‎

The Master Trust’s investments in limited partnerships and similar structures (used to invest in private equity and real estate) are valued at fair value based on their proportionate share of the partnerships’ fair value as recorded in the limited partnerships’ audited financial statements. The limited partnerships allocate gains, losses and expenses to the partners based on the ownership percentage as described in the partnership agreements. At December 31, 2019 and 2018, the Master Trust had future commitments for additional contributions to private equity partnerships totaling $189 million and $248 million, respectively, and to real estate partnerships and funds totaling $8 million and $54 million, respectively.

401(k)/Thrift Plan – For non-union employees hired prior to January 1, 2018, and eligible union employees for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan). We match 50% for each dollar contributed by employees up to the first 6% of compensation contributed. For non-union employees hired on or after January 1, 2018, we match 100% for each dollar, up to the first 6% of compensation contributed, in addition to contributing an annual amount of 3% of the employee’s annual base salary. Our plan contributions were $20 million in 2019, $18 million in 2018, and $19 million in 2017.

Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System (the System). Contributions made to the System are expensed as incurred and amounted to approximately $654 million in 2019, $710 million in 2018, and $672 million in 2017.