Note 11: Employee Benefit Plans and Postretirement Benefits

CNH Industrial provides pension, healthcare and insurance plans and other postemployment benefits to their employees and retirees under defined contribution and defined benefit plans.

In the case of defined contribution plans, CNH Industrial makes contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been made, the Company has no further payment obligations. CNH Industrial recognizes the contribution cost when the employees have rendered their service and includes this cost by function in cost of goods sold, SG&A expense, and R&D expense. During the years ended December 31, 2015, 2014, and 2013, CNH Industrial recorded expense of $185 million, $244 million, and $194 million, respectively, for its defined contribution plans.

Defined benefit plans are classified by CNH Industrial on the basis of the type of benefit provided as follows: pension plans, healthcare plans, and other postemployment benefit plans.

Pension Plans

Pension obligations primarily comprise the obligations of the Company’s pension plans in the United States, the United Kingdom, and Germany.

Under these plans, contributions are made to a separate fund (trust) that independently administers the plan assets. The Company’s funding policy is to meet the minimum funding requirements pursuant to the laws of the applicable jurisdictions. The Company may also choose to make discretionary contributions.

Healthcare Postretirement Benefit Plans

Healthcare postretirement benefit plan obligations comprise obligations for healthcare and insurance plans granted to employees working in the U.S. and Canada. These plans generally cover employees retiring on or after reaching the age of 55 who have completed at least 10 years of employment. CNH Industrial U.S. salaried and non-represented hourly employees and Canadian employees hired after January 1, 2001 and January 1, 2002, respectively, are not eligible for postretirement healthcare and life insurance benefits under the CNH Industrial plans. These benefits may be subject to deductibles, co-payment provisions and other limitations, and CNH Industrial has reserved the right to change or terminate these benefits, subject to the provisions of any collective bargaining agreement. These plans are not required to be funded. However, beginning in 2007, the Company began making contributions on a voluntary basis to a separate and independently managed fund established to finance the North American healthcare plans.

Other Postemployment Benefits

Other postemployment benefits consist of obligations for Italian Employee Leaving Entitlements up to December 31, 2006, loyalty bonus in Italy and various other similar plans in France, Germany and Belgium. Until December 31, 2006, Italian companies with more than 50 employees were required to accrue for benefits paid to employees upon them leaving the Company. The scheme has since changed to a defined contribution plan. The obligation on our consolidated balance sheet represents the residual reserve for years until December 31, 2006. Loyalty bonus is accrued for employees who have reached certain service seniority and are generally settled when employees leave the Company. These plans are not required to be funded and, therefore, have no plan assets.

Obligations and Funded Status

The following summarizes data from CNH Industrial’s defined benefit pension, healthcare and other postemployment plans for the years ended December 31, 2015 and 2014:

	Pension						Healthcare ˡ						Other ˡ
	2015			2014			2015			2014			2015			2014
	(in millions)
Change in benefit obligations:
Beginning benefit obligation	$	3,619		$	3,441		$	1,243		$	1,117		$	526		$	565
Service cost		30			27			8			9			15			18
Interest cost		112			134			48			51			5			10
Plan participants’ contributions		3			3			9			8			—			—
Actuarial (gain) loss		(159	)		442			(64	)		150			(37	)		58
Gross benefits paid		(190	)		(233	)		(80	)		(78	)		(45	)		(40	)
Plan amendments		—			1			—			(12	)		—			(24	)
Currency translation adjustments and other		(134	)		(196	)		(7	)		(2	)		(41	)		(61	)
Ending benefit obligation		3,281			3,619			1,157			1,243			423			526
Change in the fair value of plan assets:
Beginning plan assets		2,686			2,665			107			98			—			—
Actual return on plan assets		(9	)		288			—			11			—			—
Employer contributions		27			28			—			—			—			—
Plan participants’ contributions		3			3			—			—			—			—
Gross benefits paid		(161	)		(199	)		(2	)		(2	)		—			—
Currency translation adjustments and other		(66	)		(99	)		—			—			—			—
Ending plan assets		2,480			2,686			105			107			—			—
Funded status:	$	(801	)	$	(933	)	$	(1,052	)	$	(1,136	)	$	(423	)	$	(526	)

ˡ The healthcare and other postemployment plans are not required to be prefunded.

The following summarizes data from CNH Industrial’s defined benefit pension plans by significant geographical area for the years ended December 31, 2015 and 2014:

	U.S.						U.K						Germanyˡ						Other Countriesˡ
	2015			2014			2015			2014			2015			2014			2015			2014
	(in millions)
Change in benefit obligations:
Beginning benefit obligation	$	1,291		$	1,223		$	1,468		$	1,360		$	523		$	537		$	337		$	321
Service cost		6			5			7			5			4			4			13			13
Interest cost		48			55			50			56			8			14			6			9
Plan participants’ contributions		—			—			—			—			—			—			3			3
Actuarial (gain) loss		(54	)		128			(74	)		199			(16	)		71			(15	)		44
Gross benefits paid		(83	)		(120	)		(64	)		(62	)		(29	)		(34	)		(14	)		(17	)
Plan amendments		—			—			—			—			—			—			—			1
Currency translation adjustments and other		—			—			(55	)		(90	)		(52	)		(69	)		(27	)		(37	)
Ending benefit obligation		1,208			1,291			1,332			1,468			438			523			303			337
Change in the fair value of plan assets:
Beginning plan assets		1,295			1,269			1,105			1,099			5			6			281			291
Actual return on plan assets		(30	)		146			13			119			—			—			8			23
Employer contributions		—			—			17			17			—			—			10			11
Plan participants’ contributions		—			—			—			—			—			—			3			3
Gross benefits paid		(83	)		(120	)		(64	)		(62	)		—			—			(14	)		(17	)
Currency translation adjustments and other		—			—			(43	)		(68	)		—			(1	)		(23	)		(30	)
Ending plan assets		1,182			1,295			1,028			1,105			5			5			265			281
Funded status:	$	(26	)	$	4		$	(304	)	$	(363	)	$	(433	)	$	(518	)	$	(38	)	$	(56	)

ˡ Pension benefits in Germany and some other countries are not required to be prefunded.

Net amounts recognized in the consolidated balance sheets as of December 31, 2015 and 2014 consist of:

	Pension						Healthcare						Other
	2015			2014			2015			2014			2015			2014
	(in millions)
Other assets	$	6		$	19		$	—		$	—		$	—		$	—
Pension, postretirement and other postemployment benefits		(807	)		(952	)		(1,052	)		(1,136	)		(423	)		(526	)
Net liability recognized at end of year	$	(801	)	$	(933	)	$	(1,052	)	$	(1,136	)	$	(423	)	$	(526	)

Pre-tax amounts recognized in accumulated other comprehensive loss as of December 31, 2015 consist of:

	Pension			Healthcare			Other
	(in millions)
Unrecognized actuarial losses	$	970		$	195		$	66
Unrecognized prior service credit		(3	)		(10	)		(4	)
Accumulated other comprehensive loss	$	967		$	185		$	62

The following table summarizes the aggregate pension accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets:

	Pension
	2015		2014
	(in millions)
Accumulated benefit obligation	$	3,182	$	2,103
Fair value of plan assets	$	2,404	$	1,191

The following table summarizes CNH Industrial’s pension and other postemployment plans with projected benefit obligations in excess of plan assets:

	Pension				Healthcare				Other
	2015		2014		2015		2014		2015		2014
	(in millions)
Projected benefit obligation	$	3,211	$	2,149	$	1,157	$	1,243	$	423	$	526
Fair value of plan assets	$	2,404	$	1,191	$	105	$	107	$	—	$	—

The total accumulated benefit obligation for pension was $3,252 million and $3,570 million as of December 31, 2015 and 2014, respectively.

Net Periodic Benefit Cost

The following summarizes the components of net periodic benefit cost of CNH Industrial’s defined benefit for the years ended December 31, 2015, 2014, and 2014:

	Pension									Healthcare									Other
	2015			2014			2013			2015			2014			2013			2015			2014		2013
	(in millions)
Service cost	$	30		$	27		$	27		$	8		$	9		$	9		$	15		$	18	$	16
Interest cost		112			134			126			48			51			45			5			10		12
Expected return on assets		(140	)		(151	)		(166	)		(7	)		(7	)		(7	)		—			—		—
Amortization of:
Prior service cost (credit)		—			1			2			(10	)		(12	)		(12	)		1			2		1
Actuarial loss (gain)		83			64			78			26			5			22			(7	)		13		(5	)
Settlement loss and other		—			—			1			—			—			—			—			1		1
Net periodic benefit cost	$	85		$	75		$	68		$	65		$	46		$	57		$	14		$	44	$	25

Net periodic benefit cost recognized in net income and other changes in plan assets and benefit obligations that are recognized in other comprehensive loss during 2015 consist of:

	Pension			Healthcare			Other
	(in millions)
Net periodic benefit cost	$	85		$	65		$	14
Benefit adjustments included in other comprehensive (income) loss:
Net actuarial gains		(10	)		(57	)		(37	)
Amortization of actuarial gains (losses)		(83	)		(26	)		7
Amortization of prior service (cost) credit		—			10			(1	)
Currency translation adjustments and other		(38	)		(1	)		(9	)
Total recognized in other comprehensive loss		(131	)		(74	)		(40	)
Total recognized in comprehensive loss	$	(46	)	$	(9	)	$	(26	)

Pre-tax amounts expected to be amortized in 2016 from accumulated other comprehensive loss consist of:

	Pension			Healthcare			Other
	(in millions)
Actuarial losses	$	(79	)	$	(15	)	$	—
Prior service (cost) credit		—			4			(1	)
Total	$	(79	)	$	(11	)	$	(1	)

Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the benefit obligation, the excess is amortized as a component of net periodic cost over the remaining service period of the active participants. For plans in which all or almost all of the plan's participants are inactive, the amortization period is the remaining life expectancy of the inactive participants.

Assumptions

The following assumptions were utilized in determining the funded status as at December 31, 2015 and 2014, and the net periodic benefit cost of CNH Industrial’s defined benefit plans for the years ended December 31, 2015, 2014, and 2013:

	Pension plans						Healthcare plans						Other
(in %)	2015		2014		2013		2015		2014		2013		2015		2014		2013
Assumptions used to determine funded status at December 31
Weighted-average discount rates		3.49		3.22	n/a			4.27		3.96	n/a			2.06		1.81	n/a
Weighted-average rate of compensation increase		2.98		3.25	n/a			2.50		3.00	n/a			1.33		2.27	n/a
Weighted-average, initial healthcare cost trend rate	n/a		n/a		n/a			6.98		7.23	n/a		n/a		n/a		n/a
Weighted-average, ultimate healthcare cost trend rate(*)	n/a		n/a		n/a			5.00		5.00	n/a		n/a		n/a		n/a
Assumptions used to determine expense for the years ended December 31
Weighted-average discount rates		3.22		4.05		3.75		3.96		4.67		3.79		1.81		3.00		3.27
Weighted-average rate of compensation increase		3.25		3.35		2.99		3.00		3.42		3.42		2.27		2.63		2.75
Weighted-average long-term rates of return on plan assets		5.38		5.85		5.95		6.75		6.75		7.00	n/a		n/a		n/a
Weighted-average, initial healthcare cost trend rate	n/a		n/a		n/a			7.23		8.19		7.04	n/a		n/a		n/a
Weighted-average, ultimate healthcare cost trend rate(*)	n/a		n/a		n/a			5.00		5.00		5.00	n/a		n/a		n/a

*	CNH Industrial expects to achieve the ultimate healthcare cost trend rate in 2024 and 2018 for U.S. and Canada plans, respectively.

Assumed discount rates are used in measurements of pension, healthcare and other postemployment benefit obligations and interest cost components of net periodic cost. CNH Industrial selects its assumed discount rates based on the consideration of equivalent yields on high-quality fixed income investments at the measurement date. The assumed discount rate is used to discount future benefit obligations back to today’s dollars. The discount rates for the U.S., European, U.K. and Canadian obligations are based on a benefit cash flow-matching approach and represent the rates at which the benefit obligations could effectively be settled as of the measurement date, December 31. The benefit cash flow-matching approach involves analyzing CNH Industrial’s projected cash flows against a high quality bond yield curve, mainly calculated using a wide population of AA-grade corporate bonds subject to minimum amounts outstanding and meeting other defined selection criteria. The discount rates for the CNH Industrial’s remaining obligations are based on benchmark yield data of high-quality fixed income investments for which the timing and amounts of payments approximate the timing and amounts of projected benefit payments.

The expected long-term rate of return on plan assets reflects management’s expectations on long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering asset allocation and investment strategy, premiums for active management to the extent asset classes are actively managed, and plan expenses. Return patterns and correlations, consensus return forecasts, and other relevant financial factors are analyzed to check for reasonability and appropriateness.

The assumed healthcare trend rate represents the rate at which healthcare costs are assumed to increase. Rates are determined based on company-specific experience, consultation with actuaries and outside consultants, and various trend factors including general and healthcare sector-specific inflation projections from the United States Department of Health and Human Services Healthcare Financing Administration. The initial trend is a short-term assumption based on recent experience and prevailing market conditions. The ultimate trend is a long-term assumption of healthcare cost inflation based on general inflation, incremental medical inflation, technology, new medicine, government cost-shifting, utilization changes, an aging population, and a changing mix of medical services.

In October 2014, the Society of Actuaries (“SOA”) in the United States issued updated mortality table (“RP-2014”) and mortality improvement scale (“MP-2014”). Accordingly, CNH Industrial reviewed the historical mortality experience and demographic characteristics of its U.S. pension and Healthcare plan participants and have decided to adopt the variants of Blue Collar tables of RP-2014 as the base mortality tables and Male Scale BB as opposed to MP-2014 as the mortality improvement scale. CNH Industrial management believes the new mortality assumptions most appropriately represent its plans’ experience and characteristics. The adoption of the new mortality assumptions resulted in a total increase of $69 million to the Company’s benefit obligations at December 31, 2014, of which, $37 million was related to Pension plans and $32 million to Healthcare plans.

Beginning in 2016, the Company will change the method used to estimate the service and interest cost components of the net periodic pension and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. Previously, those costs were determined using a single weighted-average discount rate. The change does not affect the measurement of the Company’s benefit obligations and it is accounted for as a change in accounting estimate, which is applied prospectively beginning in the first quarter of 2016.

A one percentage point change in the assumed healthcare cost trend rates would have the following effect:

	One Percentage- Point Increase		One Percentage- Point Decrease
	(in millions)
Total increase/(decrease) in service cost and interest cost components of 2015 Healthcare Plan benefit expense	$	8	$	(7	)
Total increase/(decrease) in accumulated Healthcare benefit obligations as of December 31, 2015	$	149	$	(121	)

Plan Assets

The investment strategy for the plan assets depends on the features of the plan and on the maturity of the obligations. Typically, less mature plan benefit obligations are funded by using more equity securities as they are expected to achieve long-term growth exceeding the rate of inflation. More mature plan benefit obligations are funded using more fixed income securities as they are expected to produce current income with limited volatility. Risk management practices include the use of multiple asset classes and investment managers within each asset class for diversification purposes. Specific guidelines for each asset class and investment manager are implemented and monitored.

Weighted average target asset allocation for all plans for 2015 are as follows:

	All Plans
Asset category:
Equity securities		22	%
Debt securities		67	%
Cash/Other		11	%

CNH Industrial determines the fair value of plan assets using observable market data obtained from independent sources when available. CNH Industrial classifies its plan assets according to the fair value hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following summarizes the fair value of plan assets by asset category and level within the fair value hierarchy as of December 31, 2015:

	Total		Level 1		Level 2		Level 3
	(in millions)
Equity securities:
U.S. equities—large cap	$	53	$	15	$	38	$	—
U.S. equities—mid cap		—		—		—		—
U.S. equities—small cap		—		—		—		—
Non-U.S. equities		289		—		289		—
Total Equity securities		342		15		327		—
Fixed income securities:
U.S. government bonds		305		302		3		—
U.S. corporate bonds		504		—		504		—
Non-U.S. government bonds		611		17		594		—
Non-U.S. corporate bonds		112		—		112		—
Mortgage backed securities		1		—		1		—
Other fixed income		12		—		12		—
Total Fixed income securities		1,545		319		1,226		—
Other types of investments:
Mutual funds (A)		537		—		537		—
Insurance contracts		133		—		—		133
Derivatives—credit contracts		—		—		—		—
Real estate		—		—		—		—
Other (B)		8		—		8		—
Total Other types of investments		678		—		545		133
Cash:		20		1		19		—
Total	$	2,585	$	335	$	2,117	$	133

(A)

This category includes mutual funds, which primarily invest in non-U.S. equities and non-U.S. corporate bonds.

(B)

This category includes primarily commingled funds, which invest in both U.S. and non-U.S. equity securities.

The following table presents the changes in the Level 3 plan assets for the year ended December 31, 2015:

	Insurance Contracts
Balance at December 31, 2014	$	125
Actual return on plan assets relating to assets still held at reporting date		2
Purchases		7
Settlements		(6	)
Transfers in and/or out of level 3		6
Currency impact		(1	)
Balance at December 31, 2015	$	133

The following summarizes the fair value of plan assets by asset category and level within the fair value hierarchy as of December 31, 2014:

	Total		Level 1		Level 2		Level 3
	(in millions)
Equity securities:
U.S. equities—large cap	$	—	$	—	$	—	$	—
U.S. equities—mid cap		—		—		—		—
U.S. equities—small cap		—		—		—		—
Non-U.S. equities—large cap		15		15		—		—
Total Equity securities		15		15		—		—
Fixed income securities:
U.S. government bonds		346		336		10		—
U.S. corporate bonds		534		—		534		—
Non-U.S. government bonds		682		17		665		—
Non-U.S. corporate bonds		116		—		116		—
Mortgage backed securities		1		—		1		—
Other fixed income		31		—		31		—
Total Fixed income securities		1,710		353		1,357		—
Other types of investments:
Mutual funds(A)		556		—		556		—
Insurance contracts		125		—		—		125
Derivatives—credit contracts		4		4		—		—
Real estate		—		—		—		—
Other (B)		350		—		350		—
Total Other types of investments		1,035		4		906		125
Cash:		33		—		33		—
Total	$	2,793	$	372	$	2,296	$	125

(A)	This category includes mutual funds, which primarily invest in non-U.S. equities and non-U.S. corporate bonds.

(B)	This category includes primarily commingled funds, which invest in both U.S. and non-U.S. equity securities.

The following table presents the changes in the Level 3 plan assets for the year ended December 31, 2014:

	Insurance Contracts
Balance at December 31, 2013	$	33
Actual return on plan assets relating to assets still held at reporting date		6
Purchases		105
Settlements		(3	)
Currency impact		(16	)
Balance at December 31, 2014	$	125

Contributions

CNH Industrial expects to contribute (including through direct benefit payments) approximately $64 million to its pension plans, $70 million to its healthcare plans and $30 million to its other postemployment plans in 2016.

The benefit expected to be paid from the benefit plans, which reflect expected future years of service, and the Medicare subsidy expected to be received are as follows:

	Pension Plans		Healthcare		Medicare Part D Reimbursement			Other
	(in millions)
2016	$	189	$	74	$	(1	)	$	30
2017		189		72		—			30
2018		188		71		—			35
2019		189		71		—			33
2020		193		70		—			35
2021 - 2025		964		341		(2	)		146
Total	$	1,912	$	699	$	(3	)	$	309