EMPLOYEE BENEFIT PLANS

Pension and other postretirement plans

The majority of U.S. pension plans have been closed to new participants since January 1, 2011 and effective September 30, 2016, the accrual of pension benefits for participants were frozen. In addition, most international pension plans are closed to new participants while those that remain open relate to areas where local laws require plans to operate within the applicable country.

Valvoline also sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees. These other postretirement benefit plans were amended to reduce retiree life and medical benefits effective October 1, 2016 and January 1, 2017, respectively. These plans have limited the annual per capita costs to an amount equivalent to base year per capita costs, plus annual increases of up to 1.5% per year for costs incurred. As a result, health care cost trend rates do not have a significant impact on the Company’s future obligations for these plans. The assumed pre-65 health care cost trend rate as of September 30, 2018 was 7.5% and continues to be reduced to 4.5% in 2037 and thereafter.

Components of net periodic benefit income

The following table summarizes the components of pension and other postretirement plans net periodic benefit income and the assumptions used in this determination for the years ended September 30:



(In millions)	Pension benefits									Other postretirement benefits
(In millions)	2018			2017			2016			2018			2017			2016
Net periodic benefit income
Service cost	$	2		$	2		$	3		$	—		$	—		$	—
Interest cost	75			86			11			2			1			—
Expected return on plan assets	(103		)	(145		)	(17		)	—			—			—
Amortization of prior service credit ^(a)	—			—			—			(12		)	(12		)	(1		)
Actuarial loss (gain)	38			(63		)	(42		)	—			(5		)	—
Pre-separation allocation from Ashland ^(b)	—			—			21			—			—			—
Net periodic benefit costs (income)	$	12		$	(120	)	$	(24	)	$	(10	)	$	(16	)	$	(1	)
Weighted-average plan assumptions ^(c)
Discount rate for service cost ^(d)	2.94		%	2.15		%	4.10		%	4.05		%	2.95		%	4.25		%
Discount rate for interest cost ^(d)	3.23		%	2.84		%	3.23		%	3.11		%	2.64		%	2.92		%
Rate of compensation increase	3.05		%	2.99		%	3.23		%	—			—			—
Expected long-term rate of return on plan assets	5.17		%	6.56		%	6.77		%	—			—			—


(a)	Other postretirement plan amendments noted above resulted in negative plan amendments that are amortized within this caption during all periods presented.


(b)	The pre-Contribution allocation from Ashland in fiscal 2016 until the transfer of plans to Valvoline at September 1, 2016 consist of service cost of $7 million, non-service income of $10 million, and actuarial losses of $24 million.

(c)

The plan assumptions are a blended weighted-average rate for Valvoline’s U.S. and non-U.S. plans. The 2016 assumptions reflect a combination of a full year of Valvoline stand-alone plans and one month for the plans transferred to Valvoline on September 1, 2016. The U.S. pension plans represented approximately 97% of the total pension projected benefit obligation as of September 30, 2018. Other postretirement benefit plans consist of U.S. and Canada, with the U.S. plan representing approximately 75% of the total other postretirement projected benefit obligation as of September 30, 2018. Non-U.S. plans use assumptions generally consistent with those of U.S. plans.


(d)	Weighted-average discount rates reflect the adoption of the full yield curve approach in fiscal 2016.

The following table summarizes the amortization of prior service credit recognized in accumulated other comprehensive loss:



	Pension benefits					Other postretirement benefits
(In millions)	2018		2017			2018			2017
Amortization of prior service credit recognized in accumulated other comprehensive income	$	—	$	—		$	12		$	12
Net periodic benefit costs (income)	12		(120		)	(10		)	(16		)
Total amount recognized in net periodic benefit cost (income) and accumulated other comprehensive income	$	12	$	(120	)	$	2		$	(4	)

Obligations and funded status

The following table summarizes the changes in benefit obligations and the fair value of plan assets, as well as key assumptions used to determine the benefit obligations, and the amounts recognized in the Consolidated Balance Sheets as of September 30, 2018 and 2017 for the Company’s pension and other postretirement benefit plans:



(In millions)	Pension benefits						Other postretirement benefits
(In millions)	2018			2017			2018			2017
Change in benefit obligations
Benefit obligations as of October 1	$	2,381		$	3,138		$	57		$	73
Service cost	2			2			—			—
Interest cost	75			86			2			1
Participant contributions	—			—			—			3
Benefits paid	(146		)	(210		)	(7		)	(16		)
Actuarial gain	(95		)	(60		)	—			(5		)
Currency exchange rate changes	(3		)	4			(1		)	1
Transfers in	9			6			—			—
Settlements	(136		)	(585		)	—			—
Benefit obligations as of September 30	$	2,087		$	2,381		$	51		$	57
Change in plan assets
Fair value of plan assets as of October 1	$	2,081		$	2,307		$	—		$	—
Actual return on plan assets	(30		)	148			—			—
Employer contributions	16			412			7			13
Participant contributions	—			—			—			3
Benefits paid	(146		)	(210		)	(7		)	(16		)
Currency exchange rate changes	(3		)	3			—			—
Settlements	(136		)	(585		)	—			—
Transfers in	10			6			—			—
Fair value of plan assets as of September 30	$	1,792		$	2,081		$	—		$	—

Unfunded status of the plans as of September 30	$	295		$	300		$	51		$	57

Amounts recognized in the Consolidated Balance Sheets
Current benefit liabilities	$	10		$	11		$	6		$	8
Noncurrent benefit liabilities	285			289			45			49
Net amount recognized	$	295		$	300		$	51		$	57

Amounts recognized in accumulated other comprehensive income (loss)
Prior service cost (credit)	$	2		$	2		$	(56	)	$	(68	)

Weighted-average plan assumptions
Discount rate	4.28		%	3.76		%	4.08		%	3.48		%
Rate of compensation increase	3.10		%	3.13		%	—			—

Valvoline recognizes the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. Such gains and losses are reported within Net pension and other postretirement plan income in the Consolidated Statements of Comprehensive Income and were a loss of $38 million and a gain of $68 million for the years ended September 30, 2018 and 2017, respectively.

The fiscal 2018 loss was primarily attributed to lower than expected return on plan assets, which was partially offset by the benefit obligation actuarial gain for increases in discount rates and reduced mortality improvements. The fiscal 2017 gain was primarily attributed to the higher than expected return on assets and the benefit obligation actuarial gain for increases in discount rates and reduced mortality improvements. The fiscal 2017 gain also included the effect of the other postretirement benefit plan amendment to reduce retiree medical benefits that resulted in a remeasurement gain of $8 million during the first fiscal quarter of 2017.

Pension settlement program

During 2018, Valvoline offered the option of receiving a lump sum payment to certain participants with vested qualified U.S. pension plan retirement benefits in lieu of receiving monthly annuity payments. Approximately 2,600 participants elected to receive the settlement, and lump sum payments were made from plan assets to these participants in September 2018 for approximately $134 million. The benefit obligation settled approximated payments to plan participants and did not generate a material settlement adjustment during fiscal 2018.

Pension annuity program

On August 29, 2017, Valvoline used pension assets to purchase a non-participating annuity contract from an insurer that will pay and administer future pension benefits for approximately 6,000 participants within the qualified U.S. pension plan. Valvoline transferred approximately $585 million of the outstanding pension benefit obligation in exchange for pension trust assets that approximated the liability.

The annuity purchase transaction did not generate a material settlement adjustment during fiscal 2017. The insurer unconditionally and irrevocably guaranteed the full payment of benefits to plan participants associated with the annuity purchase and benefit payments are in the same form that was in effect under the plan. The insurer also assumed all investment risk associated with the pension assets that were delivered as annuity contract premiums.

Accumulated benefit obligation

The accumulated benefit obligation for all pension plans was $2.1 billion as of September 30, 2018 and $2.4 billion as of September 30, 2017. Information for pension plans with a benefit obligation in excess of the fair value of plan assets follows for the Company’s plans as of September 30:



(In millions)	2018				2017
(In millions)	Benefit obligation		Plan assets		Benefit obligation		Plan assets
Plans with projected benefit obligation in excess of plan assets	$	2,045	$	1,749	$	2,381	$	2,081
Plans with accumulated benefit obligation in excess of plan assets	$	2,034	$	1,741	$	2,368	$	2,072

Plan assets

The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair value hierarchy as described in Note 3 that the financial instruments are classified within these investment categories as of September 30, 2018:



	Total fair value		Quoted prices in active markets for identical assets			Significant other observable inputs		Significant unobservable inputs		Assets measured at NAV
(In millions)	Total fair value		Level 1			Level 2		Level 3		Assets measured at NAV
Cash and cash equivalents	$	100	$	100		$	—	$	—	$	—
U.S. government securities and futures ^(a)	74		(3		)	77		—		—
Other government securities	92		1			91		—		—
Corporate debt instruments	1,056		661			395		—		—
Insurance contracts	4		—			—		4		—
Private equity and hedge funds	60		—			—		—		60
Common collective trusts	406		—			—		—		406
Total assets at fair value	$	1,792	$	759		$	563	$	4	$	466


(a)	Level 1 investments are in a liability position as of September 30, 2018 and represent exchange-traded futures contracts that are used to manage the interest rate risk in the plan asset portfolio.

The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair value hierarchy that the financial instruments are classified within these investment categories as of September 30, 2017:



	Total fair value		Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Assets measured at NAV
(In millions)	Total fair value		Level 1		Level 2		Level 3		Assets measured at NAV
Cash and cash equivalents	$	13	$	13	$	—	$	—	$	—
U.S. government securities and futures	339		207		132		—		—
Other government securities	86		—		86		—		—
Corporate debt instruments	1,197		934		263		—		—
International equity	16		—		16		—		—
Private equity and hedge funds	414		—		—		—		414
Other investments	16		—		—		16		—
Total assets at fair value	$	2,081	$	1,154	$	497	$	16	$	414

Cash and cash equivalents

The carrying value of cash and cash equivalents approximates fair value.

Government securities

Government securities that trade in an active market are valued using quoted market prices, which are Level 1 inputs. Other government securities are valued based on Level 2 inputs, which include yields available on comparable securities of issuers with similar credit ratings. Treasury futures are used to manage interest rate risk and are valued at the closing price reported on the exchange market for exchange-traded futures, which is a Level 1 input.

Corporate debt instruments

Corporate debt instruments that trade in an active market are valued using quoted market prices, which are Level 1 inputs. Other corporate debt instruments are valued based on Level 2 inputs, which includes quoted market prices in inactive markets and observable market quotations for similar bonds.

Insurance contracts

Insurance contracts are arrangements with insurance companies that guarantee the payment of the pension entitlements and are valued based on Level 3 inputs, which are neither quoted prices nor observable inputs for pricing. Insurance contracts are valued at cash surrender value, which approximates fair value.

International equity

International equity includes investments in equity securities generally traded in inactive markets, which include Level 2 inputs.

Private equity and hedge funds

Private equity and hedge funds primarily represent alternative investments not traded on an active market which are valued at the NAV per share determined by the manager of the fund based on the fair value of the underlying net assets owned by the fund divided by the number of shares or units outstanding.

Common collective trusts

Common collective trusts are comprised of a diversified portfolio of investments across various asset classes, including U.S. and international equities, fixed-income securities, commodities and currencies. The collective trust funds are valued using a NAV provided by the manager of each fund, which is based on the underlying net assets owned by the fund, divided by the number of shares outstanding.

The following table provides a reconciliation of the beginning and ending balances for Level 3 plan assets:



(In millions)	Total Level 3 assets
Balance at September 30, 2016	$	23
Actual return on assets held at end of year	(7		)
Balance at September 30, 2017	$	16
Purchases	3
Sales	(8		)
Actual return on assets held at end of year	1
Actual return on assets sold during year	(8		)
Balance at September 30, 2018	$	4

Level 3 assets that were liquidated during fiscal 2018 and represented real estate investments that were valued using DCF and unobservable inputs, including future rentals, expenses and residual values from a market participant view of the highest and best use of the real estate.

The following table summarizes investments for which fair value is measured using the NAV per share practical expedient as of September 30, 2018:



(In millions)	Fair value		Unfunded commitments		Redemption frequency (if currently eligible)	Redemption notice period
Long/short hedge funds	$	38	$	—	None ^(a)	None ^(a)
Relative value hedge funds	11		—		None ^(b)	None ^(b)
Multi-strategy hedge funds	2		—		None ^(b)	None ^(b)
Event driven hedge funds	1		—		None ^(b)	None ^(b)
Common collective trusts	386		—		Daily	Up to 3 days
	12				Monthly	5 days
	8		—		N/A ^(c)	N/A ^(c)
Private equity	8		6		None ^(d)	None ^(d)
	$	466	$	6


(a)	These hedge funds are in the process of liquidation and approximately 88% will be liquidated over the next year.


(b)	These hedge funds are in the process of liquidation and the timing of such is unknown.


(c)	These assets are held in Australia and are investments in funds that include a diversified portfolio across various asset classes. The time period for redemption of these assets is not determinable.


(d)	These private equity instruments are estimated to be liquidated over the next 1 to 5 years.

Investments and strategy

In developing an investment strategy for its defined benefit plans, Valvoline considered the following factors: the nature of the plans’ liabilities, the allocation of liabilities between active, deferred and retired plan participants, the funded status of the plans, the applicable investment horizon, the respective size of the plans and historical and expected investment returns. Valvoline’s U.S. pension plan assets are managed by outside investment managers, which are monitored against investment return benchmarks and Valvoline’s established investment strategy. Investment managers are selected based on an analysis of, among other things, their investment process, historical investment results, frequency of management turnover, cost structure and assets under management. Assets are periodically reallocated between investment managers to maintain an appropriate asset mix and diversification of investments and to optimize returns.

The current target asset allocation for the U.S. plan is 75% fixed securities and 25% equity-based securities. Fixed income securities primarily include long duration high grade corporate debt obligations. Equity-based securities include both traditional equities as well as a mix of non-traditional assets such as hedge and commingled funds and private equity. Investment managers may employ a limited use of futures or other derivatives to manage risk within the portfolio through efficient exposure to markets.

Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent with those for U.S. plans, except in those countries where the investment of plan assets is dictated by applicable regulations. The weighted-average asset allocations for Valvoline’s U.S. and non-U.S. plans by asset category follow as of September 30:



	Target	2018		2017
Plan assets allocation
Equity securities	15-25%	23	%	20	%
Debt securities	65-85%	76	%	78	%
Other	0-20%	1	%	2	%
Total		100	%	100	%

The basis for determining the expected long-term rate of return is a combination of future return assumptions for the various asset classes in Valvoline’s investment portfolio based on active management, historical analysis of previous returns, market indices, and a projection of inflation, net of plan expenses.

Funding and benefit payments

Valvoline contributed $16 million and $412 million to its pension plans during fiscal 2018 and 2017, respectively. The 2017 contributions include $394 million of discretionary contributions made to the U.S. qualified pension plan funded by the proceeds received from the 2025 Notes described in Note 10. Valvoline does not plan to contribute to the U.S. qualified pension plan in fiscal 2019, but expects to contribute approximately $13 million to its U.S. non-qualified and non-U.S. pension plans.

The following benefit payments, which reflect future service expectations, are projected to be paid in each of the next five years and five years thereafter in aggregate:



(In millions)	Pension benefits		Other postretirement benefits
2019	$	142	$	6
2020	142		5
2021	143		4
2022	142		4
2023	141		3
Thereafter	695		15
Total	$	1,405	$	37

Other plans

Defined contribution and other defined benefit plans

Valvoline’s savings plan provides matching contributions subject to a maximum percentage. Expense associated with this plan was $14 million in both fiscal 2018 and 2017. In fiscal 2016, qualifying Valvoline employees were eligible to participate in Ashland’s savings plan, and Valvoline’s allocated expense was $11 million.

Valvoline also sponsors various other benefit plans, some of which are required by local laws within the certain countries. Total current and noncurrent liabilities associated with these plans were $1 million and $3 million, respectively, as of September 30, 2018, and $1 million and $4 million, respectively, as of September 30, 2017.

Multiemployer pension plans

Valvoline participates in two multiemployer pension plans that provide pension benefits to certain union-represented employees under the terms of collective bargaining agreements. Valvoline assumed responsibility for contributions to these plans in connection with the separation from Ashland. Contributions to these plans were not material for fiscal 2018, 2017 or 2016.

In April 2018, Valvoline received a demand for payment of a partial withdrawal liability assessment of approximately $30 million related to the sale of a business by Ashland in fiscal 2011 and the associated reduction in contributions and the number of employees covered by one of the multiemployer pension plans. The Company is vigorously contesting the assessment and the calculation method utilized in its determination and received information in October 2018 indicating the multiemployer plan may accept approximately $10 million to settle this liability. The Company is evaluating the potential settlement options and submitted a formal arbitration request on October 31, 2018. The Company’s current best estimate of cost associated with this assessment is not material to the consolidated financial statements as of and for the periods ended September 30, 2018.