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.

On September 1, 2016, for U.K. and U.S. benefit plans using the yield curve approach, the Company changed the method used to calculate the service cost and interest cost components of net periodic benefit costs for pension and postretirement benefit plans and measures these costs by applying the specific spot rates along the yield curve to the plans’ projected cash flows. The Company believes this approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change did not affect the measurement of the Company’s pension and other postretirement benefit obligations for those plans and was accounted for as a change in accounting estimate, which was applied prospectively.

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.

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



Percentage of fair market value	2017	2016
Equity securities	10.6%	8.9%
Debt securities	83.3%	78.8%
Real estate	5.3%	4.3%
Other	0.8%	8.0%

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, 2017 (in millions).



	August 31, 2017		Level 1		Level 2		Level 3
Equity securities:
Equity securities¹	$	956	$	—	$	956	$	—

Debt securities:
Fixed interest government bonds²	217		—		217		—
Index linked government bonds²	3,354		—		3,354		—
Corporate bonds³	3,251		—		3,251		—

Real estate:
Real estate⁴	461		—		—		461

Other:
Other investments⁵	741		58		583		100

Total	$	8,980	$	58	$	8,361	$	561



	August 31, 2016		Level 1		Level 2		Level 3
Equity securities:
Equity securities¹	$	834	$	—	$	834	$	—

Debt securities:
Fixed interest government bonds²	265		—		265		—
Index linked government bonds²	3,502		—		3,502		—
Corporate bonds³	3,663		—		3,663		—

Real estate:
Real estate⁴	411		—		—		411

Other:
Other investments⁵	753		38		713		2

Total	$	9,428	$	38	$	8,977	$	413

Equity securities, which mainly comprise investments in commingled 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.

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. Government bonds are categorized as Level 2 investments.

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. Corporate bonds are categorized as Level 2 investments.

⁴

Real estate comprises investments in certain property funds which 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. Change in Level 3 investments driven primarily by currency fluctuations.

⁵

Other investments mainly comprise cash and cash equivalents, derivatives and direct private placements. 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. Direct private placements are typically bonds valued by reference to comparable bonds and are categorized as Level 3 investments.

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



	Boots and other pension plans
	2017			2016
Service costs	$	5		$	4
Interest costs	174			308
Expected returns on plan assets/other	(146		)	(249		)
Total net periodic pension costs	$	33		$	63

Change in benefit obligations for the defined benefit pension plans (in millions):



	2017			2016
Benefit obligation at beginning of year	$	9,463		$	8,635
Service costs	5			4
Interest costs	174			308
Amendments/other	(11		)	(2		)
Net actuarial (gain) loss	(295		)	2,272
Benefits paid	(298		)	(277		)
Currency translation adjustments	(158		)	(1,477		)
Benefit obligation at end of year	$	8,880		$	9,463

Change in plan assets for the defined benefit pension plans (in millions):



	2017			2016
Plan assets at fair value at beginning of year	$	9,428		$	8,936
Employer contributions	70			75
Benefits paid	(298		)	(277		)
Return on assets/other	(52		)	2,216
Currency translation adjustments	(168		)	(1,522		)
Plan assets at fair value at end of year	$	8,980		$	9,428

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



	2017			2016
Other non-current assets	$	278		$	155
Accrued expenses and other liabilities	(7		)	(6		)
Other non-current liabilities	(171		)	(184		)
Net asset (liability) recognized at end of year	$	100		$	(35	)

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



	2017		2016
Net actuarial loss	$	171	$	258

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans, including accumulated benefit obligations in excess of plan assets, at August 31, 2017 were as follows (in millions):



	2017		2016
Projected benefit obligation	$	8,880	$	9,463
Accumulated benefit obligation	8,861		9,457
Fair value of plan assets	8,980		9,428

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



	Estimated future benefit payments
2018	$	303
2019	238
2020	249
2021	263
2022	277
2023-2027	1,629

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



	2017		2016
Weighted-average assumptions used to determine benefit obligations
Discount rate	2.41	%	2.17	%
Rate of compensation increase	2.83	%	2.44	%

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate	2.16	%	3.87	%
Expected long-term return on plan assets	1.69	%	3.05	%
Rate of compensation increase	2.44	%	2.55	%

Based on current actuarial estimates, the Company plans to make contributions of $54 million to its defined benefit pension plans in fiscal 2018 and expects to make contributions beyond 2018, which will vary based upon many factors, including the performance of the defined benefit pension plan assets.

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 is in the form of a guaranteed match which is approved annually by the Walgreen Co. Board of Directors and reviewed by the Compensation Committee and Finance Committee of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of $221 million, $226 million and $158 million in fiscal 2017, 2016 and 2015, respectively. The Company’s contributions were $220 million, $225 million and $249 million in fiscal 2017, 2016 and 2015, respectively.

The Company also has certain contract based defined contribution arrangements. The principal one is the Alliance Healthcare & 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 Statement of Earnings was $112 million in fiscal 2017, $130 million in fiscal 2016 and $93 million from the date of the Second Step Transaction through August 31, 2015.

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. An amendment to this plan in the third quarter of fiscal 2017 resulted in $109 million curtailment gain. The Company’s postretirement health benefit plan obligation was $361 million and $466 million in fiscal 2017 and 2016 respectively and is not funded. The expected benefit to be paid net of the estimated federal subsidy during fiscal year 2018 is $10 million.