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Retirement benefits

12 Months Ended

Aug. 31, 2020

The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.

Defined benefit pension plans (non-U.S. plans)

The Company has various defined benefit pension plans outside the United States. The principal defined benefit pension plan is the Boots Pension Plan (the “Boots Plan”), which covers certain employees in the United Kingdom. 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 investment strategy of the principal defined benefit pension plan is to hold the majority of its assets in a diverse portfolio ("Matching Portfolio") which aims to broadly match the characteristics of the plan’s liabilities by investing in bonds, derivatives and other fixed income assets, with the remainder invested in predominantly return-seeking assets. Interest rate and inflation rate swaps are also employed to complement the role of fixed and index-linked bond holdings in liability risk

management. During 2020, the target strategic allocation to the Matching Portfolio was changed from 85% to 75%, with a corresponding increase in the allocation to return seeking assets.

The following tables present classes of defined benefit pension plan assets by fair value hierarchy (in millions):


	August 31, 2020		Level 1		Level 2		Level 3
Equity securities:
Equity securities¹	$	1,505	$	—	$	1,505	$	—

Debt securities:
Fixed interest government bonds²	515		111		404		—
Index linked government bonds²	4,168		2,936		1,232		—
Corporate bonds³	2,730		1		2,729		—

Real estate:
Real estate⁴	492		—		—		492

Other:
Other investments, net⁵	204		152		(347)		399

Total	$	9,614	$	3,200	$	5,523	$	891


	August 31, 2019		Level 1		Level 2		Level 3
Equity securities:
Equity securities¹	$	1,006	$	—	$	1,005	$	—

Debt securities:
Fixed interest government bonds²	489		148		341		—
Index linked government bonds²	3,861		3,824		37		—
Corporate bonds³	2,390		1		2,389		—

Real estate:
Real estate⁴	471		—		—		471

Other:
Other investments, net⁵	914		63		516		335

Total	$	9,131	$	4,036	$	4,288	$	806

¹Equity securities, which mainly comprise of 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, or the investments are in a commingled fund, securities are valued at the last quoted bid price and typically are categorized as Level 2 investments.

²Debt securities: government bonds comprise of 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.

³Debt securities: corporate bonds comprise bonds issued by corporations in both segregated and commingled funds

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.

⁴Real estate comprise of investments in certain property funds which are valued based on 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. Changes in Level 3 investments during fiscal 2020 were driven by actual return on plan assets still held at August 31, 2020 and purchases during the year.

⁵Other investments mainly comprise of net receivable (payable) amounts for unsettled transactions, cash and cash equivalents, derivatives and direct private placements. Cash is categorized as a Level 1 investment and cash in commingled funds is categorized as Level 2 investments. Amounts receivable (payable) are categorized as level 2 investments. 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. Changes in Level 3 investments during fiscal 2020 were primarily driven by purchases during the year.

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


	Boots and other pension plans
	2020		2019		2018
Service costs	$	5	$	4	$	5
Interest costs	143		196		193
Expected returns on plan assets/other	(285)		(246)		(209)
Total net periodic pension (income) cost	$	(137)	$	(46)	$	(11)

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


	2020		2019
Benefit obligation at beginning of year	$	8,834	$	8,293
Service costs	5		4
Interest costs	143		196
Amendments/other	—		22
Net actuarial loss	495		1,212
Benefits paid	(333)		(363)
Currency translation adjustments	805		(530)
Benefit obligation at end of year	$	9,949	$	8,834

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


	2020		2019
Plan assets at fair value at beginning of year	$	9,131	$	8,676
Employer contributions	38		38
Benefits paid	(333)		(363)
Return on assets/other	(31)		1,333
Currency translation adjustments	810		(552)
Plan assets at fair value at end of year	$	9,614	$	9,131

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


	2020		2019
Other non-current assets	$	—	$	486
Accrued expenses and other liabilities	(8)		(6)
Other non-current liabilities	(327)		(183)
Net asset (liability) recognized at end of year	$	(335)	$	297

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


	2020		2019
Net actuarial loss	$	858	$	92
Prior service cost	(1)		24
Total	$	857	$	116

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 were as follows (in millions):


	2020		2019
Projected benefit obligation	$	9,949	$	8,834
Accumulated benefit obligation	9,937		8,823
Fair value of plan assets	9,614		9,131

Pension plans with projected benefit obligation and accumulated benefit obligations in excess of plan assets were not material for periods presented.

Estimated future benefit payments for the next 10 years from defined benefit pension plans to participants are as follows (in millions):


	Estimated future benefit payments
2021	$	289
2022	282
2023	293
2024	302
2025	318
2026-2030	1,774

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


	2020		2019
Weighted-average assumptions used to determine benefit obligations
Discount rate	1.63	%	1.80	%
Rate of compensation increase	3.10	%	2.91	%

Weighted-average assumptions used to determine net periodic benefit cost
Discount rate	1.58	%	1.58	%
Expected long-term return on plan assets	3.10	%	3.10	%
Rate of compensation increase	2.91	%	2.68	%

Based on current actuarial estimates, the Company plans to make contributions of $39 million to its defined benefit pension plans in fiscal 2021 and expects to make contributions beyond 2021, 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 made pursuant to the applicable plan document approved by the Walgreen Co. Board of Directors. Plan activity is reviewed periodically by certain Committees of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of $227 million, $239 million and $217 million in fiscal 2020, 2019 and 2018, respectively. The Company’s contributions were $226 million, $234 million and $366 million in fiscal 2020, 2019 and 2018, 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 recognized in the Consolidated Statement of Earnings was $119 million in fiscal 2020, $124 million in fiscal 2019 and $142 million in fiscal 2018.

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 during the fourth quarter of fiscal 2018 resulted in a reduction in the benefit plan obligation of $201 million and the recognition of a curtailment gain of $112 million. The Company’s postretirement health benefit plan obligation was $182 million and $161 million in fiscal 2020 and 2019, respectively and is not funded. The expected benefit to be paid net of the estimated federal subsidy during fiscal 2021 is $10.6 million.