16. Retirement Benefits

The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan. Pursuant to the Second Step Transaction, the Company assumed a number of retirement benefit plans in the United Kingdom and other countries. The Company valued the assumed pension assets and liabilities on the acquisition date and uses an August 31 annual measurement date for its pension and post-retirement plans.

Defined Benefit Pension Plans (non-U.S. plans)

The principal defined benefit pension plan is the Boots Pension Plan covering certain employees in the United Kingdom (the “Boots Plan”). The Boots Plan is a funded final salary defined benefit plan providing pensions and death benefits to members. The Boots Plan was closed to future accrual effective July 1, 2010 with pensions calculated based on salaries up until that date. The Boots Plan is governed by a trustee board, which is independent of the Company. The plan is subject to a full funding actuarial valuation on a triennial basis. The Company also has two smaller defined benefit plans in the United Kingdom, both of which were closed to future accruals effective July 1, 2010. Other defined benefit pension plans include smaller plans in Germany and France.

The obligation related to the Company’s pension plans was acquired as a result of the Second Step Transaction. The pension costs presented for 2015 represent the costs for the period from December 31, 2014 through August 31, 2015. Prior to December 31, 2014, Alliance Boots was accounted for as an equity method investee and as such, pension costs were included for fiscal 2013, 2014 and fiscal 2015 prior to the date of the Second Step Transaction within Equity earnings in Alliance Boots.

Defined benefit pension plan assets were invested in the following classes of securities as of August 31, 2015:

	Percentage of Fair Market Value
Equity securities		9.5	%
Debt securities		81.5	%
Real estate		5.6	%
Other		3.4	%

The investment strategy of the principal defined benefit pension plan is to hold approximately 85% of its assets in a diverse portfolio of high quality bonds with the remainder invested in equity and real estate assets backing longer term liabilities. Interest rate and inflation rate swaps are also employed to complement the role of fixed and index-linked bond holdings in liability risk management.

The following table presents defined benefit pension plan assets using the fair value hierarchy as of August 31, 2015 (in millions).

	August 31, 2015		Level 1		Level 2		Level 3
Equity securities:
Equity securities (1)	$	852	$	-	$	852	$	-

Debt securities:
Fixed interest government bonds (2)		267		-		267		-
Index linked government bonds (2)		1,006		-		1,006		-
Corporate bonds (3)		5,535		-		5,535		-
Other bonds (4)		472		-		472		-

Real estate:
Real estate (5)		502		-		-		502

Other:
Other investments (6)		302		25		275		2

Total	$	8,936	$	25	$	8,407	$	504

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Equity securities, which mainly comprise investments in comingled funds, are valued based on quoted prices and are primarily exchange-traded. Securities for which official close or last trade pricing on an active exchange is available are classified as Level 1 investments. If closing prices are not available, securities are valued at the last quoted bid price and typically are categorized as Level 2 investments.

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Debt securities: government bonds comprise fixed interest and index linked bonds issued by central governments, and are valued based on quotes received from independent pricing services or from dealers who make markets in such securities. Pricing services utilize pricing which considers readily available inputs such as the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as dealer-supplied prices. Debt securities: government bonds are categorized as Level 2 investments.

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Debt securities: corporate bonds comprise bonds issued by corporations and are valued using recently executed transactions, or quoted market prices for similar assets and liabilities in active markets, or for identical assets and liabilities in markets that are not active. 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. Debt securities: corporate bonds are categorized as Level 2 investments.

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Debt securities: other bonds comprise agency and mortgage-backed securities. These are valued using recently executed transactions and quoted market prices for similar assets and liabilities in active markets, or for identical assets and liabilities in markets that are not active. 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. Debt securities: other bonds are categorized as Level 2 investments.

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Real estate comprises investments in certain property funds which themselves are valued based on the value of the underlying properties. These properties are valued using a number of standard industry techniques such as cost, discounted cash flows, independent appraisals and market based comparable data. Real estate investments are categorized as Level 3 investments.

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Other investments mainly comprise cash and cash equivalents and derivatives. Cash is categorized as a Level 1 investment. Cash equivalents are valued using observable yield curves, discounting and interest rates and are categorized as Level 2 investments. Derivatives which are exchange-traded and for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market, or exchange on which they are traded, and are categorized as Level 1 investments. Over-the-counter derivatives typically are valued by independent pricing services and are categorized as Level 2 investments.

Components of net periodic pension costs for the defined benefit pension plans (in millions):

	Boots and Other Pension Plans
	2015
Service costs	$	3
Interest costs		214
Expected returns on plan assets		(173	)
Settlements		(2	)
Total net periodic pension costs	$	42

Change in benefit obligations for the defined benefit pension plans from the date of the Second Step Transaction (in millions):

	2015
Benefit obligation at December 31	$	8,827
Service costs		3
Interest costs		214
Amendments		(2	)
Net actuarial (gain)		(103	)
Benefits paid		(186	)
Currency translation adjustments		(118	)
Benefit obligation at August 31	$	8,635

Change in plan assets for the defined benefit pension plans from the date of the Second Step Transaction (in millions):

	2015
Plan assets at fair value at December 31	$	8,987
Employer contributions		152
Benefits paid		(186	)
Return on assets		91
Currency translation adjustments		(108	)
Plan assets at fair value at August 31	$	8,936

Amounts recognized in the Consolidated Balance Sheets (in millions):

	2015
Non-current assets	$	468
Current liabilities		1
Non-current liabilities		166
Net asset recognized at August 31	$	301

Pre-tax amounts recognized in accumulated other comprehensive (income) loss (in millions):

	2015
Prior service credit	$	-
Net actuarial gain		21

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets at August 31, 2015 were as follows (in millions):

	2015
Projected benefit obligation	$	8,635
Accumulated benefit obligation		8,624
Fair value of plan assets		8,936

Estimated future benefit payments from defined benefit pension plans to participants are as follows (in millions):

	Estimated Future Benefit Payments
2016	$	288
2017		284
2018		293
2019		303
2020		311
2021-2025		1,707

The assumptions used in accounting for the defined benefit pension plans were as follows:

	2015
Weighted-average assumptions used to determine benefit obligations
Discount rate		3.87	%
Rate of compensation increase		2.55	%

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate		3.77	%
Expected long-term return on plan assets		2.99	%
Rate of compensation increase		2.66	%

The Company made cash contributions to its defined benefit pension plans of $148 million from the date of the Second Step Transaction to August 31, 2015 which primarily related to committed deficit funding payments triggered by the Second Step Transaction. Based on current actuarial estimates, the Company plans to make contributions of $75 million to its defined benefit pension plans in fiscal 2016 and expects to make contributions beyond 2016, which will vary based upon many factors, including the performance of the Company’s pension investments.

Defined Contribution Plans

The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing Retirement Trust, to which both the Company and participating employees contribute. The Company’s contribution, which has historically related to adjusted FIFO earnings before interest and taxes and a portion of which is in the form of a guaranteed match, is determined annually at the discretion of the Board of Directors. The profit-sharing provision was an expense of $158 million, $355 and $342 million in fiscal 2015, 2014 and 2013, respectively. The Company’s contributions were $249 million, $328 million and $262 million in fiscal 2015, 2014 and 2013, respectively.

Following the Second Step Transaction, the Company also assumed certain contract based defined contribution arrangements. The principal one is the Alliance Boots Retirement Savings Plan, which is United Kingdom based and to which both the Company and participating employees contribute. The cost related to these arrangements recognized in the Consolidated Statements of Earnings from the date of the Second Step Transaction through August 31, 2015 was $93 million.

Postretirement Healthcare Plan

The Company provides certain health insurance benefits to retired U.S. employees who meet eligibility requirements, including age, years of service and date of hire. The costs of these benefits are accrued over the service life of the employee. The Company’s postretirement health benefit plan is not funded.

Components of net periodic benefit costs (in millions):

	2015			2014			2013
Service cost	$	11		$	8		$	9
Interest cost		17			17			14
Amortization of actuarial loss		19			11			12
Amortization of prior service cost		(24	)		(23	)		(22	)
Total postretirement benefit cost	$	23		$	13		$	13

Change in benefit obligation (in millions):

	2015			2014
Benefit obligation at September 1	$	427		$	350
Service cost		11			8
Interest cost		17			17
Amendments		(27	)		(23	)
Actuarial loss (gain)		17			88
Benefits paid		(21	)		(19	)
Participants’ contributions		7			6
Benefit obligation at August 31	$	431		$	427

Change in plan assets (in millions):

	2015			2014
Plan assets at fair value at September 1	$	-		$	-
Participants’ contributions		7			6
Employer contributions		14			13
Benefits paid		(21	)		(19	)
Plan assets at fair value at August 31	$	-		$	-

Funded status (in millions):

		2015				2014
Funded status at August 31		$	(431	)		$	(427	)

Amounts recognized in the Consolidated Balance Sheets (in millions):

	2015			2014
Current liabilities (present value of expected net benefit payments)	$	(12	)	$	(11	)
Non-current liabilities		(419	)		(416	)
Net liability recognized at August 31	$	(431	)	$	(427	)

Amounts recognized in accumulated other comprehensive (income) loss (in millions):

	2015			2014
Prior service credit	$	(231	)	$	(228	)
Net actuarial loss		223			225

Amounts expected to be recognized as components of net periodic costs for fiscal year 2016 (in millions):

	2016
Prior service credit	$	(27	)
Net actuarial loss		19

The discount rate assumption used to compute the postretirement benefit obligation at year-end was 4.78% for 2015, and 4.40% for 2014. The discount rate assumption used to determine net periodic benefit cost was 4.40%, 5.05% and 4.15% for fiscal years ending 2015, 2014 and 2013, respectively.

The consumer price index assumption used to compute the postretirement benefit obligation was 2.00% for 2015 and 2014.

Future benefit costs were estimated assuming medical costs would increase at a 7.15% annual rate, gradually decreasing to 5.25% over the next nine years and then remaining at a 5.25% annual growth rate thereafter. A one percentage point change in the assumed medical cost trend rate would have the following effects (in millions):

	1% Increase			1% Decrease
Effect on service and interest cost	$	(1	)	$	1
Effect on postretirement obligation		17			(13	)

Estimated future federal subsidies are immaterial for all periods presented. Future benefit payments are as follows (in millions):

	Estimated Future Benefit Payments
2016	$	10
2017		11
2018		12
2019		13
2020		14
2021-2025		98

The expected benefit to be paid net of the estimated federal subsidy during fiscal year 2016 is $10 million.