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Pension and Postretirement Plans

12 Months Ended

Dec. 31, 2019

The following table provides a reconciliation of the projected benefit obligations and plan assets for our pension plans and accumulated benefit obligations for our other postretirement benefit plans:



	Millions of Dollars
	Pension Benefits									Other Benefits
	2019					2018				2019		2018
	U.S.			Int’l.		U.S.		Int’l.
Change in Benefit Obligations
Benefit obligations at January 1	$	2,730		1,007		3,043		1,209		220		232
Service cost	127			23		136		29		5		6
Interest cost	109			26		104		28		9		7
Plan participant contributions	—			2		—		2		5		4
Plan amendments	—			—		—		—		(2	)	—
Net actuarial loss (gain)	380			186		(167	)	(165	)	6		(9	)
Benefits paid	(198		)	(31	)	(386	)	(27	)	(17	)	(20	)
Curtailment gain	—			—		—		(5	)	—		—
Foreign currency exchange rate change	—			15		—		(64	)	—		—
Benefit obligations at December 31	$	3,148		1,228		2,730		1,007		226		220

Change in Fair Value of Plan Assets
Fair value of plan assets at January 1	$	2,377		902		2,751		972		—		—
Actual return on plan assets	478			121		(122	)	(29	)	—		—
Company contributions	45			28		134		34		12		16
Plan participant contributions	—			2		—		2		5		4
Benefits paid	(198		)	(31	)	(386	)	(27	)	(17	)	(20	)
Foreign currency exchange rate change	—			24		—		(50	)	—		—
Fair value of plan assets at December 31	$	2,702		1,046		2,377		902		—		—

Funded Status at December 31	$	(446	)	(182	)	(353	)	(105	)	(226	)	(220	)

Amounts recognized in the consolidated balance sheet for our pension and other postretirement benefit plans at December 31 include:



	Millions of Dollars
	Pension Benefits									Other Benefits
	2019					2018				2019		2018
	U.S.			Int’l.		U.S.		Int’l.
Amounts Recognized in the Consolidated Balance Sheet
Noncurrent assets	$	—		29		—		78		—		—
Current liabilities	(25		)	—		(25	)	—		(15	)	(16	)
Noncurrent liabilities	(421		)	(211	)	(328	)	(183	)	(211	)	(204	)
Total recognized	$	(446	)	(182	)	(353	)	(105	)	(226	)	(220	)

Included in accumulated other comprehensive loss at December 31 were the following pre-tax amounts that had not been recognized in net periodic benefit cost:



	Millions of Dollars
	Pension Benefits							Other Benefits
	2019				2018			2019		2018
	U.S.		Int’l.		U.S.	Int’l.

Unrecognized net actuarial loss (gain)	$	523	164		539	64		—		(8	)
Unrecognized prior service credit	—		(2	)	—	(3	)	(6	)	(6	)

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):



	Millions of Dollars
	Pension Benefits									Other Benefits
	2019					2018				2019		2018
	U.S.			Int’l.		U.S.		Int’l.
Sources of Change in Other Comprehensive Income (Loss)
Net actuarial gain (loss) arising during the period	$	(45	)	(106	)	(125	)	102		(7	)	9
Curtailment gain	—			—		—		5		—		—
Amortization of net actuarial loss (gain) and settlements	61			6		131		19		(1	)	—
Prior service credit arising during the period	—			—		—		—		2		—
Amortization of prior service credit	—			(1	)	—		(1	)	(2	)	(1	)
Total recognized in other comprehensive income (loss)	$	16		(101	)	6		125		(8	)	8

The accumulated benefit obligations for all U.S. and international pension plans were $2,855 million and $1,068 million, respectively, at December 31, 2019, and $2,466 million and $878 million, respectively, at December 31, 2018.

Information for U.S. and international pension plans with an accumulated benefit obligation in excess of plan assets at December 31 were:



	Millions of Dollars
	Pension Benefits
	2019			2018
	U.S.		Int’l.	U.S.	Int’l.

Accumulated benefit obligations	$	2,855	396	123	345
Fair value of plan assets	2,702		207	—	182

Information for U.S. and international pension plans with a projected benefit obligation in excess of plan assets at December 31 were:



	Millions of Dollars
	Pension Benefits
	2019			2018
	U.S.		Int’l.	U.S.	Int’l.

Projected benefit obligations	$	3,148	419	2,730	365
Fair value of plan assets	2,702		207	2,377	182

Components of net periodic benefit cost for all defined benefit plans are presented in the table below:



	Millions of Dollars
	Pension Benefits													Other Benefits
	2019					2018				2017				2019		2018		2017
	U.S.			Int’l.		U.S.		Int’l.		U.S.		Int’l.
Components of Net Periodic Benefit Cost
Service cost	$	127		23		136		29		132		32		5		6		6
Interest cost	109			26		104		28		108		27		9		7		8
Expected return on plan assets	(143		)	(44	)	(169	)	(46	)	(146	)	(40	)	—		—		—
Amortization of prior service cost (credit)	—			(1	)	—		(1	)	3		(1	)	(2	)	(1	)	(2	)
Amortization of net actuarial loss (gain)	53			6		59		19		70		23		(1	)	—		—
Settlements	8			—		72		—		83		—		—		—		—
Total net periodic benefit cost*	$	154		10		202		29		250		41		11		12		12

* Included in the “Operating expenses” and “Selling, general and administrative expenses” line items on our consolidated statement of income.

In determining net periodic benefit cost, we amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. For net actuarial gains and losses, we amortize 10% of the unamortized balance each year. The amount subject to amortization is determined on a plan-by-plan basis.

The following weighted-average assumptions were used to determine benefit obligations and net periodic benefit costs for years ended December 31:



	Pension Benefits					Other Benefits
	2019			2018		2019	2018
	U.S.		Int’l.	U.S.	Int’l.
Assumptions Used to Determine Benefit Obligations:
Discount rate	3.30	%	1.81	4.30	2.59	3.05	4.15
Rate of compensation increase	4.00		3.34	4.00	3.34	—	—
Interest crediting rate on cash balance plan	2.70		—	3.25	—	—	—

Assumptions Used to Determine Net Periodic Benefit Cost:
Discount rate	4.30	%	2.59	3.60	2.36	4.15	3.35
Expected return on plan assets	6.50		4.93	6.50	4.78	—	—
Rate of compensation increase	4.00		3.34	4.00	3.74	—	—
Interest crediting rate on cash balance plan	3.25		—	3.00	—	—	—

For both U.S. and international pension plans, the overall expected long-term rate of return is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. We rely on a variety of independent market forecasts in developing the expected rate of return for each class of assets.

For the year ended December 31, 2019, actuarial losses resulted in increases in our U.S. and international pension benefit obligations of $380 million and $186 million, respectively. The primary drivers for the actuarial losses were decreases in the discount rates and changes to the census data demographics. For the year ended December 31, 2018, actuarial gains resulted in decreases in our U.S. and international pension benefit obligations of $167 million and $165 million, respectively. The primary drivers for the actuarial gains were increases in the discount rates and changes to the census data demographics.

For the year ended December 31, 2019, the weighted-average actual return on plan assets for our U.S. pension plans was 20%, which resulted in a $478 million increase in plan assets. For the year ended December 31, 2018, the weighted-average actual return on plan assets for our U.S. pension plans was negative 4%, which resulted in a $122 million reduction in plan assets. The primary driver of the return on plan assets in 2019 and 2018 was fluctuations in the equity and fixed income markets.

Our other postretirement benefit plans for health insurance are contributory. Effective December 31, 2012, we terminated the subsidy for retiree medical plans. Since January 1, 2013, eligible employees have been able to utilize notional amounts credited to an account during their period of service with the company to pay all, or a portion, of their cost to participate in postretirement health insurance through the company. In general, employees hired after December 31, 2012, will not receive credits to an account, but will have unsubsidized access to health insurance through the plan. The cost of health insurance will be adjusted annually by the company’s actuary to reflect actual experience and expected health care cost trends. The measurement of the accumulated benefit obligation assumes a health care cost trend rate of 6.75% in 2020 that declines to 5.00% by 2027.

Plan Assets

The investment strategy for managing pension plan assets is to seek a reasonable rate of return relative to an appropriate level of risk and provide adequate liquidity for benefit payments and portfolio management. We follow a policy of diversifying pension plan assets across asset classes, investment managers, and individual holdings. As a result, our plan assets have no significant concentrations of credit risk. Asset classes that are considered appropriate include equities, fixed income, cash, real estate, infrastructure and insurance contracts. Plan fiduciaries may consider and add other asset classes to the investment program from time to time. The target allocations for plan assets are approximately 43% equity securities, 41% debt securities, 8% real estate investments and 8% in all other types of investments as of December 31, 2019. Generally, the investments in the plans are publicly traded, therefore minimizing the liquidity risk in the portfolio.

The following is a description of the valuation methodologies used for the pension plan assets.


•	Fair values of equity securities and government debt securities are based on quoted market prices.


•	Fair values of corporate debt securities are estimated using recently executed transactions and market price quotations. If there have been no market transactions in a particular fixed income security, its fair value is calculated by pricing models that benchmark the security against other securities with actual market prices.


•	Cash and cash equivalents are valued at cost, which approximates fair value.


•	Fair values of insurance contracts are valued at the present value of the future benefit payments owed by the insurance company to the plans’ participants.

•

Fair values of investments in common/collective trusts and real estate funds are valued at the net asset value (NAV) as a practical expedient. The NAV is based on the underlying net assets owned by the fund and the relative interest of each participating investor in the fair value of the underlying assets. These investments valued at NAV are not classified within the fair value hierarchy, but are presented in the fair value table to permit reconciliation of total plan assets to the amounts presented in the notes to consolidated financial statements.

The fair values of our pension plan assets at December 31, by asset class, were:



	Millions of Dollars
	U.S.					International
	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
2019
Equity securities	$	437	—	—	437	—	—	—	—
Government debt securities	475		—	—	475	—	—	—	—
Corporate debt securities	—		134	—	134	—	—	—	—
Cash and cash equivalents	136		—	—	136	4	—	—	4
Insurance contracts	—		—	—	—	—	—	14	14
Total assets in the fair value hierarchy	1,048		134	—	1,182	4	—	14	18
Common/collective trusts measured at NAV					1,364				938
Real estate funds measured at NAV					156				90
Total	$	1,048	134	—	2,702	4	—	14	1,046



	Millions of Dollars
	U.S.					International
	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
2018
Equity securities	$	421	—	—	421	—	—	—	—
Government debt securities	610		—	—	610	—	—	—	—
Corporate debt securities	—		129	—	129	—	—	—	—
Cash and cash equivalents	50		—	—	50	7	—	—	7
Insurance contracts	—		—	—	—	—	—	14	14
Total assets in the fair value hierarchy	1,081		129	—	1,210	7	—	14	21
Common/collective trusts measured at NAV					1,048				873
Real estate funds measured at NAV					119				8
Total	$	1,081	129	—	2,377	7	—	14	902

Our funding policy for U.S. plans is to contribute at least the minimum required by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended. Contributions to international plans are subject to local laws and tax regulations. Actual contribution amounts are dependent upon plan asset returns, changes in pension obligations, regulatory environments, and other economic factors. In 2020, we expect to contribute approximately $50 million to our U.S. pension plans and other postretirement benefit plans and $25 million to our international pension plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid to plan participants in the years indicated:



	Millions of Dollars
	Pension Benefits			Other Benefits
	U.S.		Int’l.

2020	$	538	21	26
2021	309		23	27
2022	320		25	27
2023	284		27	26
2024	289		29	24
2025-2029	1,198		176	96

Defined Contribution Plans

Most U.S. employees are eligible to participate in the Phillips 66 Savings Plan (Savings Plan). Employees can contribute up to 75% of their eligible pay, subject to certain statutory limits, in the Savings Plan to a choice of investment funds. Phillips 66 provides a company match of participant contributions up to 6% of eligible pay. Prior to January 1, 2019, the match was up to 5% of eligible pay. In addition, eligible participants receive an additional discretionary Success Share contribution from the company. The target for the Success Share contribution is 2% of eligible pay, but the Success Share contribution can range from 0% to 6% based on management discretion.

For the years ended December 31, 2019, 2018 and 2017, we recorded expense of $192 million, $178 million and $101 million, respectively, related to our contributions to the Savings Plan.