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Postretirement Benefit Plans
 12 Months Ended
Dec. 31, 2019
Retirement Benefits [Abstract]  
Postretirement Benefit Plans Postretirement Benefit Plans
Defined contribution plans – Xylem and certain of our subsidiaries maintain various defined contribution savings plans, which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with specified guidelines. Several of the plans require us to match a percentage of the employee contributions up to certain limits, generally between 3.0% – 7.0% of employee eligible pay. Matching obligations, the majority of which were funded in cash in connection with the plans, and other company contributions are as follows:
(in millions)
Defined Contribution
2019
$
49

2018
39

2017
38


The Xylem Stock Fund, an investment option under the defined contribution plan in which Company employees participate is considered an Employee Stock Ownership Plan. As a result, participants in the Xylem Stock Fund may receive dividends in cash or may reinvest such dividends into the Xylem Stock Fund. Company employees held approximately 302 thousand and 328 thousand shares of Xylem Inc. common stock in the Xylem Stock Fund at December 31, 2019 and 2018, respectively.
Defined benefit pension plans and other postretirement plans – We historically have maintained qualified and nonqualified defined benefit retirement plans covering certain current and former employees, including hourly and union plans as well as salaried plans, which generally require up to 5 years of service to be vested and for which the benefits are determined based on years of credited service and either specified rates, final pay, or final average pay. The other postretirement benefit plans are all unfunded plans in the U.S. and Canada.
During 2019 and 2018, we made several amendments to plans that had no material impact to the Company's financial statements.
Amounts recognized in the Consolidated Balance Sheets for pension and other employee-related benefit plans (collectively, postretirement plans) reflect the funded status of the postretirement benefit plans. The following table provides a summary of the funded status of our postretirement plans, the presentation of such balances and a summary of amounts recorded within accumulated other comprehensive income:
(in millions)
December 31, 2019
 
December 31, 2018
 
Pension
 
Other
 
Total
 
Pension
 
Other
 
Total
Fair value of plan assets
$
605

 
$
—

 
$
605

 
$
567

 
$
—

 
$
567

Projected benefit obligation
(959
)
 
(49
)
 
(1,008
)
 
(862
)
 
(52
)
 
(914
)
Funded status
$
(354
)
 
$
(49
)
 
$
(403
)
 
$
(295
)
 
$
(52
)
 
$
(347
)
Amounts recognized in the balance sheet
 
 
 
 
 
 
 
 
 
 
 
Other non-current assets
$
58

 
$
—

 
$
58

 
$
68

 
$
—

 
$
68

Accrued and other current liabilities
(13
)
 
(3
)
 
(16
)
 
(12
)
 
(3
)
 
(15
)
Accrued postretirement benefits
(399
)
 
(46
)
 
(445
)
 
(351
)
 
(49
)
 
(400
)
Net amount recognized
$
(354
)
 
$
(49
)
 
$
(403
)
 
$
(295
)
 
$
(52
)
 
$
(347
)
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net actuarial losses
$
(330
)
 
$
(19
)
 
$
(349
)
 
$
(260
)
 
$
(24
)
 
$
(284
)
Prior service credit
(3
)
 
7

 
4

 
(4
)
 
12

 
8

Total
$
(333
)
 
$
(12
)
 
$
(345
)
 
$
(264
)
 
$
(12
)
 
$
(276
)

The unrecognized amounts recorded in accumulated other comprehensive income will be subsequently recognized as expense on a straight-line basis only to the extent they exceed 10% of the higher of the market-related value or the projected benefit obligation, over the average remaining service period of active participants, or for plans with all or substantially all inactive participants, over the average remaining life expectancy. Actuarial gains and losses incurred in future periods and not recognized as expense in those periods will be recognized as increases or decreases in other comprehensive income, net of tax.
The net actuarial loss included in accumulated other comprehensive income at the end of 2019 and expected to be recognized in net periodic benefit cost during 2020 is $18 million ($14 million, net of tax). The prior service credit included in accumulated other comprehensive income to be recognized in 2020 is $3 million ($2 million, net of tax).
The Company has initiated the process for a full buy-out of its largest defined benefit plan in the UK. In order to prepare for a buy-out, the plan's assets were converted to cash, cash equivalents or other highly liquid assets as of the third quarter 2019. In addition, the Company completed an enhanced transfer value ("ETV") exercise for the deferred vested participants of the plan. The ETV offered the participants an enhanced lump sum to transfer their full pension rights out of the plan. Lump sum payments of $21 million were paid out of the plan assets, and the Company recorded a settlement charge of $8 million during the third quarter. Prior to the settlement accounting, the plan was re-measured as of July 31, 2019, resulting in an increase in the plan's projected benefit obligation of $37 million, an increase in plan assets of $26 million and an increase to losses in accumulated other comprehensive income of $11 million. The assumptions used to re-measure the plan were developed in the same manner as at December 31, 2018. However, due to the recent change in the investment assets, the expected rate of return on assets for this plan was changed from 7.25% to 0.70%. The discount rate used in the re-measurement was 2.00%, down from 3.00% at December 31, 2018. The Company recorded incremental net periodic benefit cost of $3 million in the third quarter and $5 million in the fourth quarter as a result of the re-measurement and the investment change.
The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our defined benefit domestic and international pension plans were:
 
Domestic Plans
 
International Plans
 
December 31,
 
December 31,
(in millions)
2019
 
2018
 
2019
 
2018
Change in benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
99

 
$
107

 
$
763

 
$
843

Service cost
3

 
3

 
9

 
9

Interest cost
4

 
4

 
19

 
19

Benefits paid
(7
)
 
(5
)
 
(28
)
 
(36
)
Actuarial loss (gain)
15

 
(10
)
 
104

 
(20
)
Plan amendments, settlements and curtailments
—

 
—

 
(23
)
 
3

Foreign currency translation/other
(1
)
 
—

 
2

 
(55
)
Benefit obligation at end of year
$
113

 
$
99

 
$
846

 
$
763

Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
97

 
84

 
$
470

 
$
544

Employer contributions
—

 
22

 
16

 
16

Actual return on plan assets
17

 
(4
)
 
52

 
(20
)
Benefits paid
(7
)
 
(5
)
 
(28
)
 
(36
)
Plan amendments, settlements and curtailments
—

 
—

 
(23
)
 
—

Foreign currency translation/other
(2
)
 
—

 
13

 
(34
)
Fair value of plan assets at end of year
$
105

 
$
97

 
$
500

 
$
470

Unfunded status of the plans
$
(8
)
 
$
(2
)
 
$
(346
)
 
$
(293
)

The following table provides a rollforward of the projected benefit obligation for the other postretirement employee benefit plans:
(in millions)
2019
 
2018
Change in benefit obligation:
 
 
 
Benefit obligation at beginning of year
$
52

 
$
55

Service cost
—

 
—

Interest cost
2

 
2

Benefits paid
(3
)
 
(3
)
Actuarial gain/(loss)
(2
)
 
1

Plan Amendment and other
—

 
(3
)
Benefit obligation at the end of year
$
49

 
$
52


The accumulated benefit obligation (“ABO”) for all the defined benefit pension plans was $919 million and $829 million at December 31, 2019 and 2018, respectively.
For defined benefit pension plans in which the ABO was in excess of the fair value of the plans’ assets, the projected benefit obligation, ABO and fair value of the plans’ assets were as follows:
 
December 31,
(in millions)
2019
 
2018
Projected benefit obligation
$
562

 
$
500

Accumulated benefit obligation
526

 
470

Fair value of plan assets
150

 
137


The components of net periodic benefit cost for our defined benefit pension plans are as follows:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Domestic defined benefit pension plans:
 
 
 
 
 
Service cost
$
3

 
$
3

 
$
3

Interest cost
4

 
4

 
4

Expected return on plan assets
(8
)
 
(7
)
 
(6
)
Amortization of net actuarial loss
1

 
2

 
2

Net periodic benefit cost
$
—

 
$
2

 
$
3

International defined benefit pension plans:
 
 
 
 
 
Service cost
$
9

 
$
9

 
$
12

Interest cost
19

 
19

 
21

Expected return on plan assets
(27
)
 
(35
)
 
(34
)
Amortization of net actuarial loss
9

 
9

 
9

Settlement
9

 
1

 
1

Net periodic benefit cost
$
19

 
$
3

 
$
9

Total net periodic benefit cost
$
19

 
$
5

 
$
12


The components of net periodic benefit cost other than the service cost component are included in the line item "other non-operating income (expense), net" in the Consolidated Income Statements.
Other changes in plan assets and benefit obligations recognized in other comprehensive loss, as they pertain to our defined benefit pension plans are as follows:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Domestic defined benefit pension plans:
 
 
 
 
 
Net (gain) loss
$
6

 
$
1

 
$
1

Prior service cost
—

 
—

 
1

Amortization of net actuarial loss
(1
)
 
(2
)
 
(2
)
(Gains) losses recognized in other comprehensive loss
$
5

 
$
(1
)
 
$
—

International defined benefit pension plans:
 
 
 
 
 
Net (gain) loss
$
79

 
$
35

 
$
23

Prior service credit
—

 
3

 
1

Amortization of net actuarial loss
(9
)
 
(9
)
 
(9
)
Settlement
(9
)
 
(1
)
 
(1
)
Foreign Exchange
3

 
(15
)
 
19

(Gains) losses recognized in other comprehensive loss
$
64

 
$
13

 
$
33

Total (gains) losses recognized in other comprehensive loss
$
69

 
$
12

 
$
33

Total (gains) losses recognized in comprehensive income
$
88

 
$
17

 
$
45


The components of net periodic benefit cost for other postretirement employee benefit plans are as follows:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Service cost
$
—

 
$
—

 
$
1

Interest cost
2

 
2

 
2

Amortization of prior service credit
(4
)
 
(4
)
 
(3
)
Amortization of net actuarial loss
2

 
2

 
2

Net periodic benefit cost
$
—

 
$
—

 
$
2


Other changes in benefit obligations recognized in other comprehensive loss, as they pertain to other postretirement employee benefit plans are as follows:
 
Year Ended December 31,
(in millions)
2019
 
2018
 
2017
Net loss (gain)
$
(2
)
 
$
1

 
$
(5
)
Prior service credit
—

 
(3
)
 
(3
)
Amortization of prior service credit
4

 
4

 
3

Amortization of net actuarial loss
(2
)
 
(2
)
 
(2
)
Foreign Exchange/Other
—

 
—

 
(1
)
Losses (gains) recognized in other comprehensive loss
$
—

 
$
—

 
$
(8
)
Total losses (gains) recognized in comprehensive income
$
—

 
$
—

 
$
(6
)

Assumptions
The following table provides the weighted-average assumptions used to determine projected benefit obligations and net periodic benefit cost, as they pertain to our pension plans.
 
2019
 
2018
 
2017
 
U.S.
 
Int’l
 
U.S.
 
Int’l
 
U.S.
 
Int’l
Benefit Obligation Assumptions
 
 
 
 
 
 
 
 
 
 
 
Discount rate
3.25
%
 
1.80
%
 
4.50
%
 
2.60
%
 
3.75
%
 
2.43
%
Rate of future compensation increase
NM

 
2.94
%
 
NM

 
2.92
%
 
NM

 
2.93
%
Net Periodic Benefit Cost Assumptions
 
 
 
 
 
 
 
 
 
 
 
Discount rate
4.50
%
 
2.60
%
 
3.75
%
 
2.43
%
 
4.25
%
 
2.63
%
Expected long-term return on plan assets
7.75
%
 
6.96
%
 
8.00
%
 
7.23
%
 
8.00
%
 
7.20
%
Rate of future compensation increase
NM

 
2.92
%
 
NM

 
2.93
%
 
NM

 
2.76
%

NM
Not meaningful. The pension benefits for future service for all the U.S. pension plans are based on years of service and not impacted by future compensation increases.
Management develops each assumption using relevant company experience in conjunction with market-related data for each individual country in which plans exist. Assumptions are reviewed annually and adjusted as necessary.
The expected long-term rate of return on assets reflects the expected returns for each major asset class in which the plans hold investments, the weight of each asset class in the target mix, the correlations among asset classes and their expected volatilities. The assets of the pension plans are held by a number of independent trustees, managed by several investment institutions and are accounted for separately in the Company’s pension funds.
Our expected return on plan assets is estimated by evaluating both historical returns and estimates of future returns. Specifically, we analyze the plans’ actual historical annual return on assets, net of fees, over the past 15, 20 and 25 years; estimate future returns based on independent estimates of asset class returns; and evaluate historical broad market returns over long-term timeframes based on our asset allocation range. For the U.S. Master Trust which has only existed since 2011, historical returns were estimated using a constructed portfolio that reflects the Company’s strategic asset allocation and the historical compound geometric returns of each asset class for the longest time period available. Based on this approach, the weighted average expected long-term rate of return for all of our plan assets to be used in determining net periodic benefit costs for 2020 is estimated at 3.46%.
The table below provides the weighted average actual rate of return generated on all of our plan assets during each of the years presented as compared to the weighted average expected long-term rates of return utilized in calculating the net periodic benefit costs.
 
2019
 
2018
 
2017
Expected long-term rate of return on plan assets
7.09
%
 
7.34
 %
 
7.30
%
Actual rate of return (loss) on plan assets
12.59
%
 
(3.85
)%
 
5.70
%

The assumed rate of future increases in the per capita cost of health care (the health care trend rate) is 6.53% for 2020, decreasing ratably to 4.50% in 2028. An increase or decrease in the health care trend rates by one percent per year would impact the aggregate annual service and interest components by less than $1 million, and impact the benefit obligation by approximately $3 million.
Investment Policy
The investment strategy for managing worldwide postretirement benefit plan assets is to seek an optimal rate of return relative to an appropriate level of risk for each plan. Investment strategies vary by plan, depending on the specific characteristics of the plan, such as plan size and design, funded status, liability profile and legal requirements. In general, the plans are managed closely to their strategic allocations.
During 2019 the Company updated its investment policy for the Xylem UK Pension Plan (the "UK Plan"), its largest defined benefit plan in the UK, to prepare for a full buy-out. As of the third quarter, the UK Plan's assets were converted to cash, cash equivalents or other highly liquid assets. At December 31, 2019, the assets of the UK Plan were held in cash or cash equivalents, hedging instruments and government bonds for $272 million, $35 million and $11 million, respectively.
The following table provides the actual asset allocations of plan assets as of December 31, 2019 and 2018, and the related asset target allocation ranges by asset category.
 
2019
 
2018
 
Target
Allocation
Ranges
Equity securities
18.6
%
 
29.7
%
 
15-60%
Fixed income
31.7
%
 
24.5
%
 
10-50%
Hedge funds
2.0
%
 
11.8
%
 
0-40%
Private equity
—
%
 
1.1
%
 
0-30%
Cash, insurance contracts and other
47.7
%
 
32.9
%
 
0-60%

Fair Value of Plan Assets
In measuring plan assets at fair value, the fair value hierarchy is applied which categorizes and prioritizes the inputs used to estimate fair value into three levels. See Note 1 "Summary of Significant Accounting Policies" for further detail on fair value hierarchy.    
In certain instances, fair value is estimated using quoted market prices obtained from external pricing services. In obtaining such data from the pricing service, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value, including net asset value ("NAV"). Additionally, in certain circumstances, the NAV reported by an asset manager may be adjusted when sufficient evidence indicates NAV is not representative of fair value.
The following is a description of the valuation methodologies and inputs used to measure fair value for major categories of investments.
•
Equity securities — Equities (including common and preferred shares, domestic listed and foreign listed, closed end mutual funds and exchange traded funds) are generally valued at the closing price reported on the major market on which the individual securities are traded at the measurement date. Equity securities held by the Company that are publicly traded in active markets are classified within Level 1 of the fair value hierarchy. Those equities that are held in proprietary funds pooled with other investor accounts measured at fair value using the NAV per share practical expedient are not classified in the fair value hierarchy.
•
Fixed income — United States government securities are generally valued using quoted prices of securities with similar characteristics. Corporate bonds and notes are generally valued by using pricing models (e.g.
discounted cash flows), quoted prices of securities with similar characteristics or broker quotes. Fixed income securities listed on active markets are classified in Level 1. Fixed income held in proprietary funds pooled with other investor accounts measured at fair value using the NAV per share practical expedient are not classified in the fair value hierarchy. Hedging instruments are collateralized daily with either cash or government bonds, have daily liquidity and pricing based on observable inputs from over-the-counter markets, and are classified as Level 2.
•
Hedge funds — Hedge funds are pooled funds that employ a range of investment strategies including equity and fixed income, credit driven, macro and multi-oriented strategies. The valuation of limited partnership interests in hedge funds may require significant management judgment. Generally, hedge funds are valued using the NAV reported by the asset manager, and are adjusted when it is determined that NAV is not representative of fair value. In making such an assessment, a variety of factors is reviewed, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. All of the hedge funds held have lockups and/or gates. Hedge funds have unfunded commitments of $0 million and $0 million at December 31, 2019 and 2018, respectively.
•
Private equity — Private equity includes a diversified range of strategies, including buyout funds, distressed funds, venture and growth equity funds and mezzanine funds with long-term commitments, and redemptions beginning no earlier than 2019. The valuation of limited partnership interests in private equity funds may require significant management judgment. Generally, private equity is valued using the NAV reported by the asset manager, and is adjusted when it is determined that NAV is not representative of fair value. In making such an assessment, a variety of factors is reviewed, including, but not limited to, the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager. Private equity is not liquid and has unfunded commitments of $0 million and $3 million at December 31, 2019 and 2018, respectively.
•
Cash, insurance contracts and other — Primarily comprised of insurance contracts and cash. Insurance contracts are valued at contract value, which approximates fair value, and is calculated using the prior year balance adjusted for investment returns and cash flows and are generally classified as Level 3. Insurance contracts are held by certain foreign pension plans. Cash and cash equivalents are held in accounts with brokers or custodians for liquidity and investment collateral and are classified as Level 1.
The following table provides the fair value of plan assets held by our pension benefit plans by asset class:
 
2019
 
2018
(in millions)
Level 1
Level 2
Level 3
NAV Practical Expedient
Total
 
Level 1
Level 2
Level 3
NAV Practical Expedient
Total
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Global stock funds/securities
$
90

$
—

$
—

$
13

$
103

 
$
88

$
—

$
—

$
29

$
117

Index funds
—

—

—

—

—

 
—

—

—

1

1

Diversified Growth and Income Funds
—

—

—

9

9

 
—

—

—

51

51

Fixed income
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
86

—

—

5

91

 
34

—

—

25

59

Government bonds
35

—

—

27

62

 
31

—

—

20

51

Hedging Instruments
4

35

—

—

39

 
5

22

—

—

27

Diversified Growth and Income Funds
—

—

—

—

—

 
—

—

—

2

2

Hedge funds
—

—

—

12

12

 
—

—

—

67

67

Private equity
—

—

—

—

—

 
—

—

—

6

6

Insurance contracts and other


—

13

3

16

 
104

—

12

70

186

Cash & Cash Equivalents
273

—

—

—

273

 
—

—

—

—

—

Total plan assets subject to leveling
$
488

$
35

$
13

$
69

$
605

 
$
262

$
22

$
12

$
271

$
567


The following table presents a reconciliation of the beginning and ending balances of fair value measurement within our pension plans using significant unobservable inputs (Level 3):
(in millions)
 
Insurance Contracts and Other
Balance, December 31, 2017
 
$
17

Purchases, sales, settlements
 
(5
)
Currency impact
 
—

Balance, December 31, 2018
 
$
12

Purchases, sales, settlements
 
1

Currency impact
 
—

Balance, December 31, 2019
 
$
13


Contributions and Estimated Future Benefit Payments
Funding requirements under governmental regulations are a major consideration in making contributions to our postretirement plans. We made contributions of $19 million and $41 million to our pension and postretirement defined benefit plans during 2019 and 2018, respectively. A discretionary contribution was made to the U.S. Plan in the third quarter of 2018 for $19 million to increase the funding ratio and reduce regulatory fees. We currently anticipate making contributions to our pension and postretirement defined benefit plans in the range of $15 million to $25 million during 2020, of which approximately $5 million is expected to be made in the first quarter.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
(in millions)
Pension
 
Other Benefits
2020
$
37

 
$
3

2021
36

 
3

2022
37

 
3

2023
38

 
3

2024
39

 
3

Years 2025 - 2029
208

 
16