Defined Benefit Pension Plans

The Company maintains defined benefit pension plans for certain employees in the United States. These pension plans include qualified plans (the “U.S. Qualified Plans”) that are eligible for certain beneficial treatment under the Internal Revenue Code (“IRC”), as well as non-qualified plans that do not meet the IRC criteria. The Company’s non-qualified defined benefit pension plans (collectively, the “U.S. Non-Qualified Pension Plans” and together with the U.S. Qualified Plans, the “U.S. Plans”) consist mostly of a primary non-qualified supplemental defined benefit pension plan and provide additional benefits for certain employees who are affected by IRC limitations on compensation eligible for benefits available under the qualified plans. Additionally, the Company maintains a separate defined benefit pension plan for certain employees in the United Kingdom (the “U.K. Plan”).

The Company also maintains defined benefit pension plans for certain of its foreign subsidiaries. These international defined benefit pension plans are excluded from the disclosures below due to their immateriality. Both the U.S. Plans and U.K. Plan do not allow for new plan participants or additional benefit accruals.

During 2017, the Company offered eligible former employees who had not yet commenced receiving their pension benefit an opportunity to receive a lump sum payout of their vested pension benefit. On December 1, 2017, in connection with this offer, one of the Company’s pension plans paid $142 million from pension plan assets to those who accepted this offer, thereby reducing its pension benefit obligations. The transaction had no cash impact on the Company but did result in a non-cash pre-tax pension settlement gain of $1 million. As a result of the lump sum payout, the Company re-measured the funded status of its pension plan as of the settlement date. To calculate this pension settlement gain, the Company utilized a discount rate of 4.35% through the measurement date and 3.83% thereafter.

Defined benefit pension plan obligations are measured based on the present value of projected future benefit payments for all participants for services rendered to date. The projected benefit obligation is a measure of benefits attributed to service to date, assuming that the plan continues in effect and that estimated future events (including turnover and mortality) occur. The net periodic benefit costs are determined using assumptions regarding the projected benefit obligation and the fair value of plan assets as of the beginning of the year. Net periodic benefit costs are recorded in Other expense (income) in the Consolidated Statements of Income. The funded status of the defined benefit pension plans, which represents the difference between the projected benefit obligation and the fair value of plan assets, is calculated on a plan-by-plan basis.

Funded Status of Defined Benefit Pension Plans

The following tables provide a reconciliation of the changes in the plans’ projected benefit obligations as of December 31:



	U.S. Qualified Plans						U.S. Non-Qualified Plans						U.K. Plan
(In millions)	2018			2017			2018			2017			2018			2017
Projected benefit obligation at beginning of year	$	1,743		$	1,745		$	78		$	74		$	1,305		$	1,235
Interest cost	57			74			2			3			28			34
Plan amendment	—			—			—			—			19			—
Actuarial (gain) loss	(142		)	128			(5		)	6			(62		)	(23		)
Benefits paid	(69		)	(62		)	(5		)	(5		)	(56		)	(60		)
Settlement	—			(142		)	—			—			—			—
Foreign currency exchange rate changes	—			—			—			—			(70		)	119
Projected benefit obligation at end of year ⁽¹⁾	$	1,589		$	1,743		$	70		$	78		$	1,164		$	1,305


(1)	At the end of each year presented, the accumulated benefit obligations for the plans are equal to the projected benefit obligations.

The U.S. Qualified Plans and U.K. Plan realized actuarial gains of $142 million and $62 million, respectively, in 2018. In the U.S. Qualified Plans, the gain was a result of assumption changes, including an increase in the discount rate based on a December 31, 2018 reference yield curve and the use of an updated mortality projection scale for plan participants. In the U.K. Plan, the gain was a result of changes in actuarial assumptions, including an increase in the discount rate based on a December 31, 2018 reference yield curve, an increase in inflation assumptions and the use of an updated mortality projection scale for plan participants.

The following tables provide a reconciliation of the changes in the fair value of plan assets as of December 31:



	U.S. Qualified Plans						U.S. Non-Qualified Plans						U.K. Plan
(In millions)	2018			2017			2018			2017			2018			2017
Fair value of plan assets at beginning of year	$	1,764		$	1,700		$	—		$	—		$	1,390		$	1,207
Actual return on plan assets	(113		)	268			—			—			(35		)	109
Employer contributions	—			—			5			5			3			13
Benefits paid	(69		)	(62		)	(5		)	(5		)	(56		)	(60		)
Settlement	—			(142		)	—			—			—			—
Foreign currency exchange rate changes	—			—			—			—			(75		)	121
Fair value of plan assets at end of year	$	1,582		$	1,764		$	—		$	—		$	1,227		$	1,390

The following table provides the funded status of the plans as of December 31:



	U.S. Qualified Plans					U.S. Non-Qualified Plans						U.K. Plan
(In millions)	2018			2017		2018			2017			2018		2017
Funded status:
Funded status at end of year	$	(7	)	$	21	$	(70	)	$	(78	)	$	63	$	85
Funded status recognized in balance sheet:
Long-term assets	$	—		$	21	$	—		$	—		$	63	$	85
Current liabilities	—			—		(5		)	(6		)	—		—
Long-term liabilities	(7		)	—		(65		)	(72		)	—		—
Net amount recognized	$	(7	)	$	21	$	(70	)	$	(78	)	$	63	$	85
Plans with projected and accumulated benefit obligation in excess of plan assets:
Projected and accumulated benefit obligation	$	1,589		$	—	$	70		$	78		$	—	$	—
Fair value of plan assets	1,582			—		—			—			—		—

The following table provides amounts included in AOCI that have not yet been recognized in net periodic benefit expense as of December 31:



	U.S. Qualified Plans					U.S. Non-Qualified Plans						U.K. Plan
(In millions)	2018			2017		2018			2017			2018		2017
Actuarial (loss) gain	$	(50	)	$	13	$	(3	)	$	(8	)	$	5	$	44
Prior-service credit	—			—		—			—			19		39
AOCI	$	(50	)	$	13	$	(3	)	$	(8	)	$	24	$	83

The following table sets forth the amount of net periodic benefit cost and amounts recognized in Other comprehensive (loss) income for the years ended December 31:



	U.S. Qualified Plans									U.S. Non-Qualified Plans							U.K. Plan
(In millions)	2018			2017			2016			2018			2017		2016		2018			2017			2016
Net periodic benefit (income) expense:
Interest cost	$	57		$	74		$	76		$	2		$	3	$	3	$	28		$	34		$	41
Expected return on plan assets	(92		)	(93		)	(88		)	—			—		—		(67		)	(60		)	(59		)
Amortization of prior-service credit	—			—			—			—			—		—		(2		)	(1		)	(1		)
Recognized AOCI loss due to settlements	—			(1		)	—			—			—		—		—			—			—
Net periodic benefit (income) expense	$	(35	)	$	(20	)	$	(12	)	$	2		$	3	$	3	$	(41	)	$	(27	)	$	(19	)
Amounts recognized in Other comprehensive (loss) income
Actuarial loss (gain)	$	63		$	(47	)	$	11		$	(5	)	$	6	$	3	$	40		$	(72	)	$	29
Prior-service cost	—			—			—			—			—		—		19			—			(42		)
Reclassification of recognized AOCI gain due to settlements	—			1			—			—			—		—		—			—			—
Reclassification of prior-service credit to net periodic benefit (income) expense	—			—			—			—			—		—		2			1			1
Loss (gain) recognized in Other comprehensive (loss) income	$	63		$	(46	)	$	11		$	(5	)	$	6	$	3	$	61		$	(71	)	$	(12	)

The following table outlines the weighted-average assumptions used to determine the net periodic benefit costs and benefit obligations for the year ended December 31:



	U.S. Qualified Plans				U.S. Non-Qualified Plans					U.K. Plan
	2018	2017	2016		2018	2017		2016		2018		2017		2016
Discount rate - net periodic benefit costs	3.14% - 3.38%	3.83% - 4.35%	4.65	%	2.84% - 3.21%	4.35	%	4.65	%	2.21	%	2.70	%	3.75	%
Discount rate - benefit obligations	4.18% - 4.39%	3.55% - 3.71%	4.35	%	3.93% - 4.28%	3.21% - 3.60%		4.35	%	2.85	%	2.53	%	2.70	%
Expected long-term rate of return on plan assets	3.00% - 5.40%	2.35% - 5.65%	5.58	%	N/A	N/A		N/A		4.95	%	5.00	%	5.40	%

No rate of compensation increase was assumed as the plans are frozen to additional participant benefit accruals.

In 2018, the Company changed how it estimates the interest cost component of net periodic cost for its U.S. and U.K. pension benefit plans. Previously, the Company estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The new estimate utilizes a full yield curve approach in the estimation of this component by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to each of the underlying projected cash flows based on time until payment. The new estimate provides a more precise measurement of interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change does not affect the measurement of the Company’s U.S. and U.K. pension benefit obligation and has been accounted for as a change in accounting estimate and thus applied prospectively.

Expected benefit payments for the defined benefit pension plans are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates.



(In millions)	U.S. Qualified Plans		U.S. Non-Qualified Plans		U.K. Plan
Year ending December 31:
2019	$	80	$	5	$	40
2020	83		5		41
2021	87		5		43
2022	89		5		45
2023	92		5		46
2024-2028	492		25		257

Plan Assets

U.S. Qualified Plans

Assets of the U.S. Qualified Plans are segregated from those of the Company and are managed pursuant to a long-term liability-driven asset allocation strategy that seeks to mitigate the funded status volatility by increasing exposure to fixed income investments over time. This strategy was developed by analyzing a variety of diversified asset-class combinations in conjunction with the projected liabilities.

The current investment strategy is to achieve an investment mix of approximately 82% in fixed income securities and 18% of investments in equity securities. The current fixed income allocation consists primarily of domestic fixed income and targets to hedge 90% of domestic projected liabilities. The target allocations for equity securities include 56% in U.S. equities and 44% in non-U.S. equities. Investments in equity and fixed income securities consist of individual securities held in managed separate accounts, as well as commingled investment funds. The investment strategy does not include a meaningful long-term investment allocation to cash and cash equivalents; however, the cash allocation may rise periodically in response to timing considerations regarding contributions, investments, and the payment of benefits and eligible plan expenses. The Company periodically evaluates its defined benefit plans’ asset portfolios for the existence of significant concentrations of risk. Types of investment concentration risks that are evaluated include, but are not limited to, concentrations in a single entity, industry, foreign country or individual fund manager. As of December 31, 2018, there were no significant concentrations of risk in the Company’s defined benefit plan assets.

The investment policy does not allow investment managers to use market-timing strategies or financial derivative instruments for speculative purposes. However, financial derivative instruments are used to manage risk and achieve stated investment objectives regarding duration, yield curve, credit, foreign exchange and equity exposures. Generally, the investment managers are prohibited from short selling, trading on margin, and trading commodities, warrants or other options, except when acquired as a result of the purchase of another security, or in the case of options, when sold as part of a covered position.

The assumption of between 3.00% and 5.40% for the overall expected long-term rate of return on plan assets in 2018 was developed using asset allocation and return expectations. The return expectations are created using long-term historical and expected returns and current market expectations for inflation, interest rates and economic growth.

U.K. Plan

The U.K. Plan’s assets are segregated from those of the Company and invested by trustees, which include Company representatives, with the goal of meeting the U.K. Plan’s projected future pension liabilities. The trustees’ investment objectives are to meet the performance target set in the deficit recovery plan of the U.K. Plan in a risk-controlled framework. The actual asset allocations of the U.K. Plan are in line with the target asset allocations. The implied target asset allocation of the U.K. Plan consists of 56% matching assets (U.K. gilts and cash) and 44% growth assets (consisting of a range of pooled funds investing in structured equities, illiquid credit, dynamic asset allocation, high yield bonds, multi-asset credit and asset-backed securities). The target asset allocations of the U.K. Plan include acceptable ranges for each asset class.

The dynamic asset allocation and multi-asset credit funds invest dynamically across multiple asset classes with the aim of providing a diversified exposure to markets. Collateral consist of U.K. fixed-interest gilts, index-linked gilts and cash, which are used to back derivative positions that hedge the sensitivity of the liabilities to changes in interest rates and inflation. On the U.K. Plan Actuary’s Technical Provisions funding basis, approximately 95% of the liability interest rate sensitivity and 112% of the liability inflation sensitivity were hedged as of December 31, 2018. The expected long-term rate of return on plan assets in 2018 was 4.95%. The approach to determine the expected long-term rate of return on plan assets is consistent with the one used for the U.S. Plans.

The following tables set forth the fair values of investments held in the pension plans by major asset category as of December 31, 2018 and 2017, as well as the percentage that each asset category comprises of total plan assets:



(Dollars in millions)	December 31, 2018
Asset category (U.S. Qualified Plans)	Level 1		Level 2			Not Subject to Leveling⁽¹⁾		Total		Percentage of Plan Assets
Cash and cash equivalents
Short-term investment fund	$	—	$	—		$	37	$	37	2.3	%
Equity:
U.S. large companies	—		—			107		107		6.8	%
U.S. small companies	25		—			—		25		1.6	%
International	59		—			60		119		7.5	%
Fixed income securities:
Global long-term debt instruments	223		1,063			8		1,294		81.8	%
Derivatives	1		(1		)	—		—		—	%
Total U.S. Plan assets	$	308	$	1,062		$	212	$	1,582	100.0	%

Asset category (U.K. Plan)
Cash and cash equivalents	$	57	$	—		$	—	$	57	4.6	%
Fixed income securities	—		615			363		978		79.7	%
Derivatives	—		5			26		31		2.6	%
Hedge funds⁽²⁾	—		—			38		38		3.1	%
Diversified multi-asset funds:
Dynamic asset allocation	—		—			123		123		10.0	%
Total U.K. Plan assets	$	57	$	620		$	550	$	1,227	100.0	%

(1)

In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total defined benefit pension plan assets.


(2)	The fair value of the fund is based on the fair value of the underlying assets, substantially all of which is invested in the York Credit Opportunities Master Fund, L.P., an exempted limited partnership formed under the laws of the Cayman Islands. The fund offers very limited liquidity with redemption only allowed on anniversary of investment with 60 days’ prior notice.



(Dollars in millions)	December 31, 2017
Asset category (U.S. Qualified Plans)	Level 1		Level 2		Not Subject to Leveling⁽¹⁾		Total		Percentage of Plan Assets
Cash and cash equivalents
Short-term investment fund	$	—	$	—	$	25	$	25	1.4	%
Equity:
U.S. large companies	189		49		101		339		19.2	%
U.S. small companies	37		—		—		37		2.1	%
International	79		—		82		161		9.1	%
Fixed income securities:
Global long-term debt instruments	171		940		87		1,198		68.0	%
Derivatives	1		3		—		4		0.2	%
Total U.S. Plan assets	$	477	$	992	$	295	$	1,764	100.0	%

Asset category (U.K. Plan)
Cash and cash equivalents	$	65	$	—	$	—	$	65	4.6	%
Fixed income securities	—		371		293		664		47.8	%
Derivatives	—		13		54		67		4.9	%
Hedge funds⁽²⁾	—		—		42		42		3.0	%
Diversified multi-asset funds:
Risk parity	—		—		275		275		19.8	%
Dynamic asset allocation	—		—		277		277		19.9	%
Total U.K. Plan assets	$	65	$	384	$	941	$	1,390	100.0	%

(1)


(2)	The fair value of the fund is based on the fair value of the underlying assets, substantially all of which is invested in the York Credit Opportunities Master Fund, L.P., an exempted limited partnership formed under the laws of the Cayman Islands. The fund offers very limited liquidity with redemption only allowed on anniversary of investment with 60 days’ prior notice.

For the periods ended December 31, 2018 and 2017, the Company had no investments held in the pension plans within Level 3 of the fair value hierarchy. There was no XPO common stock held in plan assets as of December 31, 2018 or 2017. The U.S. Non-Qualified Pension Plans are unfunded.

Funding

The Company’s funding practice is to evaluate its tax and cash position, as well as the funded status of its plans, in determining its planned contributions. The Company estimates that it will contribute $5 million to its U.S. Non-Qualified Plans and $3 million to its U.K. Plan in 2019; however, this could change based on variations in interest rates, asset returns and other factors.