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Employee Benefit Plans

12 Months Ended

Dec. 31, 2019

Defined Benefit Pension Plans

We sponsor both funded and unfunded defined benefit pension plans for some employees in the United States. These pension plans include qualified plans that are eligible for beneficial treatment under the Internal Revenue Code and non-qualified plans that provide additional benefits for employees who are impacted by limitations on compensation eligible for benefits available under the qualified plans. We also sponsor a separate defined benefit pension plan for some employees in the United Kingdom. Both the U.S. plans and the U.K. plan do not allow for new plan participants or additional benefit accruals. We also maintain defined benefit pension plans for some of our foreign subsidiaries that are excluded from the disclosures below due to their immateriality.

We measure defined benefit pension plan obligations 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. We determine the net periodic benefit costs 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) on our Consolidated Statements of Income. We calculate 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, on a plan-by-plan basis.

Funded Status of Defined Benefit Pension Plans

The reconciliation of the changes in the plans’ projected benefit obligations as of December 31 was as follows:



	U.S. Plans						U.K. Plan
(In millions)	2019			2018			2019			2018
Projected benefit obligation at beginning of year	$	1,659		$	1,821		$	1,164		$	1,305
Interest cost	66			59			29			28
Plan amendment	—			—			—			19
Actuarial loss (gain)	214			(147		)	136			(62		)
Benefits paid	(77		)	(74		)	(56		)	(56		)
Foreign currency exchange rate changes	—			—			50			(70		)
Projected benefit obligation at end of year ⁽¹⁾	$	1,862		$	1,659		$	1,323		$	1,164


(1)	As of December 31, 2019, the accumulated benefit obligations for the U.K. Plan was equal to the projected benefit obligations. As of December 31, 2018, the accumulated benefit obligations for the U.S. and U.K. plans were equal to the projected benefit obligations.

Actuarial losses were a result of assumption changes, including a decrease in the discount rate, updated mortality projection scales for plan participants and a decrease in assumed inflation for the U.K. plan.

The reconciliation of the changes in the fair value of plan assets as of December 31 was as follows:



	U.S. Plans						U.K. Plan
(In millions)	2019			2018			2019			2018
Fair value of plan assets at beginning of year	$	1,582		$	1,764		$	1,227		$	1,390
Actual return on plan assets	353			(113		)	138			(35		)
Employer contributions	5			5			2			3
Benefits paid	(77		)	(74		)	(56		)	(56		)
Foreign currency exchange rate changes	—			—			51			(75		)
Fair value of plan assets at end of year	$	1,863		$	1,582		$	1,362		$	1,227

The funded status of the plans as of December 31 was as follows:



	U.S. Plans						U.K. Plan
(In millions)	2019			2018			2019		2018
Funded status at end of year	$	1		$	(77	)	$	39	$	63
Amount recognized in balance sheet:
Long-term assets	$	76		$	—		$	39	$	63
Current liabilities	(6		)	(5		)	—		—
Long-term liabilities	(69		)	(72		)	—		—
Net amount recognized	$	1		$	(77	)	$	39	$	63
Plans with projected and accumulated benefit obligation in excess of plan assets:
Projected and accumulated benefit obligation	$	75		$	1,659		$	—	$	—
Fair value of plan assets	—			1,582			—		—

The funded status of our qualified plans and non-qualified plans was $76 million and $(75) million, respectively, at December 31, 2019. Qualified plans are eligible for certain beneficial treatment under the Internal Revenue Code (“IRC”), while non-qualified plans do not meet the IRC criteria.

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



	U.S. Plans						U.K. Plan
(In millions)	2019			2018			2019			2018
Actuarial (loss) gain	$	(5	)	$	(53	)	$	(54	)	$	5
Prior-service credit	—			—			18			19
AOCI	$	(5	)	$	(53	)	$	(36	)	$	24

The net periodic benefit cost and amounts recognized in Other comprehensive income (loss) for the years ended December 31 was as follows:



	U.S. Plans									U.K. Plan
(In millions)	2019			2018			2017			2019			2018			2017
Net periodic benefit (income) expense:
Interest cost	$	66		$	59		$	77		$	29		$	28		$	34
Expected return on plan assets	(90		)	(92		)	(93		)	(58		)	(67		)	(60		)
Amortization of prior-service credit	—			—			—			(1		)	(2		)	(1		)
Recognized AOCI loss due to settlements	—			—			(1		)	—			—			—
Net periodic benefit income	$	(24	)	$	(33	)	$	(17	)	$	(30	)	$	(41	)	$	(27	)
Amounts recognized in Other comprehensive income (loss)
Actuarial (gain) loss	$	(49	)	$	58		$	(41	)	$	57		$	40		$	(72	)
Prior-service cost	—			—			—			—			19			—
Reclassification of recognized AOCI gain due to settlements	—			—			1			—			—			—
Reclassification of prior-service credit to net periodic benefit income	—			—			—			1			2			1
(Gain) loss recognized in Other comprehensive income (loss)	$	(49	)	$	58		$	(40	)	$	58		$	61		$	(71	)

The weighted-average assumptions used to determine the net periodic benefit costs and benefit obligations for the year ended December 31 were as follows:



	U.S. Qualified Plans				U.S. Non-Qualified Plans				U.K. Plan
	2019		2018	2017	2019	2018	2017		2019		2018		2017
Discount rate - net periodic benefit costs	4.08	%	3.14% - 3.38%	3.83% - 4.35%	3.65% - 3.95%	2.84% - 3.21%	4.35	%	2.56	%	2.21	%	2.70	%
Discount rate - benefit obligations	3.35	%	4.18% - 4.39%	3.55% - 3.71%	2.72% - 3.20%	3.93% - 4.28%	3.21% - 3.60%		2.04	%	2.85	%	2.53	%
Expected long-term rate of return on plan assets	5.80	%	3.00% - 5.40%	2.35% - 5.65%	N/A	N/A	N/A		4.85	%	4.95	%	5.00	%

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

Beginning in 2018, we started using a full yield curve approach to estimate the interest cost component of net periodic benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to each of the underlying projected cash flows based on time until payment. Before 2018, we estimated the interest cost component by using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. Our new approach provides a more precise measurement of interest costs by improving the

correlation between projected benefit cash flows and their corresponding spot rates. The change did not impact the measurement of our U.S. and U.K. pension benefit obligation and has been accounted for as a change in accounting estimate and 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. Plans		U.K. Plan
Year ending December 31:
2020	$	90	$	42
2021	93		44
2022	95		46
2023	98		46
2024	100		49
2025-2029	524		268

Plan Assets

U.S. Plans

We manage the assets in the U.S. plans using a long-term liability-driven investment strategy that seeks to mitigate the funded status volatility by increasing exposure to fixed income investments over time. We developed this strategy by analyzing a variety of diversified asset-class combinations with the projected liabilities.

Our investment strategy is to achieve an investment mix of approximately 80% in fixed income securities and 20% of investments in equity securities. The fixed income allocation consists primarily of domestic fixed income securities and targets to hedge more than 90% of domestic projected liabilities. The target allocations for equity securities includes approximately 55% in U.S. equities and approximately 45% in non-U.S. equities. Investments in equity and fixed income securities consist of individual securities held in managed separate accounts and commingled investment funds. Generally, our investment strategy does not include an allocation to cash and cash equivalents but a cash allocation may arise periodically in response to timing considerations regarding contributions, investments, and the payment of benefits and eligible plan expenses. We periodically evaluate our defined benefit plans’ asset portfolios for significant concentrations of risk. Types of investment concentration risks that are evaluated include concentrations in a single entity, industry, foreign country or individual fund manager. As of December 31, 2019, our defined benefit plan assets had no significant concentrations of risk.

Our investment policy does not allow investment managers to use market-timing strategies or financial derivative instruments for speculative purposes but financial derivative instruments are used to manage risk and achieve stated investment objectives for duration, yield curve, credit, foreign exchange and equity exposures. Generally, our 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 5.80% for the overall expected long-term rate of return on plan assets in 2019 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

Our U.K. Plan’s assets are separated from our assets and invested by trustees, which include our 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 approximately 60% matching assets (U.K. gilts and cash) and approximately 40% growth and income assets (consisting of a range of pooled funds investing in structured equities, high yield

bonds and asset-backed securities). The target asset allocations of the U.K. Plan include acceptable ranges for each asset class.

Collateral assets 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 105% of the liability inflation sensitivity were hedged as of December 31, 2019. The expected long-term rate of return on plan assets in 2019 was 4.85%. Our approach to determine the expected long-term rate of return on plan assets is consistent with the one we used for the U.S. Plans.

The fair values of investments held in the pension plans by major asset category as of December 31, 2019 and 2018, and the percentage that each asset category comprises of total plan assets were as follows:



(Dollars in millions)	December 31, 2019
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	$	—	$	—		$	24	$	24	1.3	%
Equity:
U.S. large companies	—		—			140		140		7.5	%
U.S. small companies	30		—			—		30		1.6	%
International	72		—			75		147		7.9	%
Fixed income securities:
Global long-term debt instruments	405		1,108			5		1,518		81.5	%
Derivatives	—		4			—		4		0.2	%
Total U.S. Plan assets	$	507	$	1,112		$	244	$	1,863	100.0	%

Asset category (U.K. Plan)
Cash and cash equivalents	$	34	$	—		$	—	$	34	2.5	%
Fixed income securities	—		773			474		1,247		91.6	%
Derivatives	—		(8		)	89		81		5.9	%
Total U.K. Plan assets	$	34	$	765		$	563	$	1,362	100.0	%


(1)	Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not 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.



(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)	Investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not 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 the anniversary of investment with 60 days’ prior notice.

For the periods ended December 31, 2019 and 2018, we had no investments held in the pension plans within Level 3 of the fair value hierarchy. Our common stock was not a plan asset as of December 31, 2019 or 2018. The U.S. Non-Qualified Pension Plans are unfunded.

Funding

Our funding practice is to evaluate our tax and cash position, and the funded status of our plans, in determining our planned contributions. We estimate that we will contribute $5 million to our U.S. non-qualified plans and $3 million to our U.K. plan in 2020 but this could change based on variations in interest rates, asset returns and other factors.

Defined Contribution Retirement Plans

Our costs for defined contribution retirement plans were $70 million, $66 million and $62 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Postretirement Medical Plan

We provide health benefits through a postretirement medical plan for eligible employees hired before 1993 (the “Postretirement Plan”).

Funded Status of Postretirement Medical Plan

The reconciliation of the changes in the plan’s benefit obligation and the determination of the amounts recognized on our Consolidated Balance Sheets were as follows:



	As of December 31,
(In millions)	2019			2018
Projected benefit obligation at beginning of year	$	34		$	40
Interest cost on projected benefit obligation	1			1
Actuarial loss (gain)	9			(5		)
Participant contributions	1			2
Benefits paid	(4		)	(4		)
Projected and accumulated benefit obligation at end of year	$	41		$	34
Funded status of the plan	$	(41	)	$	(34	)
Amounts recognized in the balance sheet consist of:
Current liabilities	$	(3	)	$	(3	)
Long-term liabilities	(38		)	(31		)
Net amount recognized	$	(41	)	$	(34	)
Discount rate assumption as of December 31	3.09		%	4.21		%

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



(In millions)	2019		2018
Actuarial gain (loss)	$	2	$	12
AOCI	$	2	$	12

Net Periodic Benefit Expense for Postretirement Medical Plan



	Years Ended December 31,
(In millions, except discount rate)	2019			2018			2017
Service cost - benefits earned during the year	$	—		$	1		$	—
Interest cost on projected benefit obligation	1			1			2
Amortization of actuarial gain	(2		)	(1		)	—
Net periodic benefit (gain) expense	$	(1	)	$	1		$	2
Discount rate assumption used to calculate interest cost	3.87% - 4.36%			3.11% - 3.67%			3.90		%

Expected benefit payments, which reflect expected future service, as appropriate, are summarized below. These estimates are based on assumptions about future events. Actual benefit payments may vary from these estimates.



(In millions)	Benefit Payments
Year ending December 31:
2020	$	3
2021	3
2022	3
2023	4
2024	4
2025-2029	15