Benefit Plans:

Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.

Pension and Postretirement Benefit Plans

Obligations and Funded Status

The postretirement health care plans are not funded. The projected benefit obligations, plan assets and funded status of PMI’s pension plans, and the accumulated benefit obligation and net amount accrued for PMI's postretirement health care plans, at December 31, 2016 and 2015, were as follows:



	Pension
	U.S. Plans						Non-U.S. Plans						Postretirement
(in millions)	2016			2015			2016			2015			2016			2015
Benefit obligation at January 1,	$	389		$	438		$	7,697		$	7,638		$	211		$	238
Service cost	5			5			202			200			3			4
Interest cost	17			17			129			139			9			9
Benefits paid	(18		)	(51		)	(222		)	(225		)	(10		)	(11		)
Settlement and curtailment	—			—			(1		)	(16		)	—			—
Actuarial losses (gains)	12			(20		)	415			261			15			(12		)
Currency	—			—			(329		)	(365		)	(2		)	(17		)
Other	—			—			91			65			1			—
Benefit obligation at December 31,	405			389			7,982			7,697			227			211
Fair value of plan assets at January 1,	298			312			6,106			6,410
Actual return on plan assets	13			—			309			56
Employer contributions	4			37			187			117
Employee contributions	—			—			39			37
Benefits paid	(18		)	(51		)	(222		)	(225		)
Settlement and curtailment	—			—			—			(14		)
Currency	—			—			(259		)	(275		)
Fair value of plan assets at December 31,	297			298			6,160			6,106
Net pension and postretirement liability recognized at December 31,	$	(108	)	$	(91	)	$	(1,822	)	$	(1,591	)	$	(227	)	$	(211	)

At December 31, 2016 and 2015, the Swiss pension plan represented 60% and 61% of the non-U.S. benefit obligation, respectively, and approximately 60% of the non-U.S. fair value of plan assets for each of the years.

At December 31, 2016 and 2015, the amounts recognized on PMI's consolidated balance sheets for the combined U.S. and non-U.S. pension plans, and postretirement plans were as follows:



	Pension						Postretirement
(in millions)	2016			2015			2016			2015
Other assets	$	33		$	47
Accrued liabilities — employment costs	(23		)	(23		)	$	(10	)	$	(9	)
Long-term employment costs	(1,940		)	(1,706		)	(217		)	(202		)
	$	(1,930	)	$	(1,682	)	$	(227	)	$	(211	)

The accumulated benefit obligation, which represents benefits earned to date, for the U.S. pension plans was $376 million and $360 million at December 31, 2016 and 2015, respectively. The accumulated benefit obligation for non-U.S. pension plans was $7,555 million and $7,157 million at December 31, 2016 and 2015, respectively.

For U.S. pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $405 million, $376 million and $297 million, respectively, as of December 31, 2016. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $389 million, $360 million and $298 million, respectively, as of December 31, 2015. The underfunding relates to plans for salaried employees that cannot be funded under IRS regulations. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $6,529 million, $6,246 million, and $4,712 million, respectively, as of December 31, 2016, and $6,355 million, $5,961 million, and $4,766 million, respectively, as of December 31, 2015.

The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at December 31:



	Pension
	U.S. Plans				Non-U.S. Plans				Postretirement
	2016		2015		2016		2015		2016		2015
Discount rate	4.07	%	4.30	%	1.39	%	1.68	%	3.68	%	4.45	%
Rate of compensation increase	3.00		3.00		1.61		1.98
Health care cost trend rate assumed for next year									7.15		6.23
Ultimate trend rate									5.08		4.75
Year that rate reaches the ultimate trend rate									2029		2029

The discount rate for the largest U.S. and non-U.S. pension plans is based on a yield curve constructed from a portfolio of high quality corporate bonds that produces a cash flow pattern equivalent to each plan’s expected benefit payments. The discount rate for the remaining non-U.S. plans is developed from local bond indices that match local benefit obligations as closely as possible.

Components of Net Periodic Benefit Cost

Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2016, 2015 and 2014:



	Pension
	U.S. Plans									Non-U.S. Plans									Postretirement
(in millions)	2016			2015			2014			2016			2015			2014			2016		2015		2014
Service cost	$	5		$	5		$	5		$	202		$	200		$	211		$	3	$	4	$	4
Interest cost	17			17			17			129			139			205			9		9		10
Expected return on plan assets	(14		)	(15		)	(16		)	(332		)	(325		)	(357		)	—		—		—
Amortization:
Net losses	9			14			6			177			180			115			2		4		2
Prior service cost	—			—			1			4			4			5			—		—		(1		)
Settlement and curtailment	—			1			5			4			2			1			—		—		—
Net periodic pension and postretirement costs	$	17		$	22		$	18		$	184		$	200		$	180		$	14	$	17	$	15

As of December 31, 2016, PMI elected to change the method used to calculate the service and interest cost components of the net periodic pension benefit costs. Historically, these costs were determined utilizing a single weighted-average discount rate based on a yield curve used to measure the benefit obligation at the beginning of the period. As of January 1, 2017, PMI will utilize a full yield curve approach in the estimation of the service and interest costs by applying the specific spot rates along the yield curve to the relevant projected cash flows. Specifically, service costs will be determined based on duration-specific spot rates applied to service cost cash flows, and interest costs will be determined by applying duration specific spot rates to the year-by-year projected benefit payments. PMI has changed to the new method to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit cash flows to the corresponding spot rates along the yield curve. PMI will account for this change as a change in accounting estimate on a prospective basis. This change does not affect the measurement of PMI’s pension plan obligations and will not have a material impact on PMI’s consolidated results of operations, financial position or cash flows.

Settlement and curtailment charges were due primarily to early retirement programs.

For the combined U.S. and non-U.S. pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive earnings into net periodic benefit cost during 2017 are $177 million and $13 million, respectively.

The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:



	Pension
	U.S. Plans						Non-U.S. Plans						Postretirement
	2016		2015		2014		2016		2015		2014		2016		2015		2014
Discount rate	4.30	%	3.95	%	4.80	%	1.68	%	1.92	%	3.09	%	4.45	%	4.20	%	5.01	%
Expected rate of return on plan assets	4.60		5.10		5.70		5.39		5.38		5.63
Rate of compensation increase	3.00		3.00		3.00		1.98		2.06		2.34
Health care cost trend rate													6.23		6.62		6.60

PMI’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.

PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled $56 million, $52 million and $62 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Plan Assets

PMI’s investment strategy for U.S. and non-U.S. pension plans is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, the target allocation of PMI’s plan assets is broadly characterized as approximately a 60%/40% split between equity and debt securities. The strategy primarily utilizes indexed U.S. equity securities, international equity securities and investment-grade debt securities. PMI’s plans have no investments in hedge funds, private equity or derivatives. PMI attempts to mitigate investment risk by rebalancing between equity and debt asset classes once a year or as PMI’s contributions and benefit payments are made.

The fair value of PMI’s pension plan assets at December 31, 2016 and 2015, by asset category was as follows:



Asset Category (in millions)	At December 31, 2016		Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	8	$	8
Equity securities:
U.S. securities	131		131
International securities	432		432
Investment funds^(a)	5,270		3,530		$	1,740
International government bonds	309		309
Other	10		10
Total assets in the fair value hierarchy	$	6,160	$	4,420	$	1,740	$	—
Investment funds measured at net asset value^(b)	297
Total assets	$	6,457

^(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60% are invested in U.S. and international equities; 19% are invested in U.S. and international government bonds; 11% are invested in real estate and other money markets, and 10% are invested in corporate bonds.

^(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share 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 in the statement of financial position.



Asset Category (in millions)	At December 31, 2015		Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	225	$	225
Equity securities:
U.S. securities	120		120
International securities	409		409
Investment funds^(a)	5,039		3,446		1,593
International government bonds	289		289
Other	24		24
Total assets in the fair value hierarchy	$	6,106	$	4,513	$	1,593	$	—
Investment funds measured at net asset value^(b)	298
Total assets	$	6,404

^(a)Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 61% were invested in U.S. and international equities; 18% were invested in U.S. and international government bonds; 11% were invested in real estate and other money markets, and 10% were invested in corporate bonds.

See Note 16. Fair Value Measurements for a discussion of the fair value of pension plan assets.

PMI makes, and plans to make, contributions to the extent that they are tax deductible and to meet specific funding requirements of its funded U.S. and non-U.S. pension plans. Currently, PMI anticipates making contributions of approximately $70 million in 2017 to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.

The estimated future benefit payments from PMI pension plans at December 31, 2016, are as follows:



(in millions)	U.S. Plans		Non-U.S. Plans
2017	$	18	$	247
2018	18		272
2019	24		265
2020	22		280
2021	21		300
2022 - 2026	124		1,675

PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2026.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care trend rates would have the following effects as of December 31, 2016:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total service and interest cost	23.9	%	(18.1	)%
Effect on postretirement benefit obligation	19.4		(15.3	)

Postemployment Benefit Plans

PMI and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs were $166 million, $187 million and $167 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The estimated net loss for the postemployment benefit plans that will be amortized from accumulated other comprehensive losses into net postemployment costs during 2017 is approximately $67 million.

The amounts recognized in accrued postemployment costs on PMI's consolidated balance sheets at December 31, 2016 and 2015, were $727 million and $745 million, respectively.

During 2016, 2015 and 2014, certain salaried employees left PMI under separation programs. These programs resulted in incremental postemployment costs and benefit obligations. For further details see Note 5. Asset Impairment and Exit Costs.

The accrued postemployment costs were determined using a weighted-average discount rate of 2.8% and 3.5% in 2016 and 2015, respectively; an assumed ultimate annual weighted-average turnover rate of 2.8% and 2.7% in 2016 and 2015, respectively; assumed compensation cost increases of 2.6% in 2016 and 2.2% in 2015, and assumed benefits as defined in the respective plans. In accordance with local regulations, certain postemployment plans are funded. As a result, the accrued postemployment costs disclosed above are presented net of the related assets of $25 million and $26 million at December 31, 2016 and 2015, respectively. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Comprehensive Earnings (Losses)

The amounts recorded in accumulated other comprehensive losses at December 31, 2016, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(3,314	)	$	(73	)	$	(713	)	$	(4,100	)
Prior service cost	(53		)	4			—			(49		)
Net transition obligation	(5		)	—			—			(5		)
Deferred income taxes	350			24			215			589
Losses to be amortized	$	(3,022	)	$	(45	)	$	(498	)	$	(3,565	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2015, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(3,074	)	$	(61	)	$	(710	)	$	(3,845	)
Prior service cost	(40		)	5			—			(35		)
Net transition obligation	(5		)	—			—			(5		)
Deferred income taxes	320			20			213			553
Losses to be amortized	$	(2,799	)	$	(36	)	$	(497	)	$	(3,332	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2014, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(2,760	)	$	(77	)	$	(721	)	$	(3,558	)
Prior service cost	(45		)	6			—			(39		)
Net transition obligation	(6		)	—			—			(6		)
Deferred income taxes	342			25			216			583
Losses to be amortized	$	(2,469	)	$	(46	)	$	(505	)	$	(3,020	)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2016, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	193		$	2		$	62		$	257
Prior service cost	6			—			—			6
Other income/expense:
Net losses	4			—			—			4
Prior service cost	—			—			—			—
Deferred income taxes	(26		)	—			(17		)	(43		)
	177			2			45			224
Other movements during the year:
Net losses	(437		)	(15		)	(65		)	(517		)
Prior service cost	(18		)	—			—			(18		)
Deferred income taxes	55			4			19			78
	(400		)	(11		)	(46		)	(457		)
Total movements in other comprehensive earnings (losses)	$	(223	)	$	(9	)	$	(1	)	$	(233	)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2015, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	194		$	4		$	69		$	267
Prior service cost	4			—			—			4
Other income/expense:
Net losses	3			—			—			3
Prior service cost	1			—			—			1
Deferred income taxes	(26		)	(2		)	(20		)	(48		)
	176			2			49			227
Other movements during the year:
Net losses	(510		)	12			(58		)	(556		)
Deferred income taxes	4			(4		)	17			17
	(506		)	8			(41		)	(539		)
Total movements in other comprehensive earnings (losses)	$	(330	)	$	10		$	8		$	(312	)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2014, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	121		$	2		$	66		$	189
Prior service cost	6			(1		)	—			5
Other income/expense:
Net losses	14			2			—			16
Prior service cost	5			—			—			5
Deferred income taxes	(21		)	(1		)	(20		)	(42		)
	125			2			46			173
Other movements during the year:
Net losses	(1,149		)	(34		)	(126		)	(1,309		)
Prior service cost	(5		)	—			—			(5		)
Deferred income taxes	118			12			37			167
	(1,036		)	(22		)	(89		)	(1,147		)
Total movements in other comprehensive earnings (losses)	$	(911	)	$	(20	)	$	(43	)	$	(974	)