Pension and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2018

Pension and Other Postretirement Benefit Plans [Abstract]

Pension and Other Postretirement Benefit Plans

Note 13 – Pension and Other Postretirement Benefit Plans

About our Plans

Pension plans. We froze future benefit accruals for the Company’s principal domestic defined benefit pension plans in 2009. The Company also has foreign pension and other postretirement benefit plans that are immaterial to our results of operations, liquidity and financial position. Additionally, in connection with the acquisition of Express Scripts on December 20, 2018, the Company assumed a frozen cash balance retirement plan, the results of which are immaterial to our results of operations, liquidity and financial position.

Other postretirement benefit plans. The Company’s postretirement medical plan was frozen in 2013. The Company also offers certain postretirement life insurance benefits through various plans.

Accounting policy. The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. Benefit obligations are measured at the present value of estimated future payments based on actuarial assumptions. Changes in these assumptions are called net unrecognized actuarial gains (losses) because the Company uses the “corridor” method to account for changes in the benefit obligation when actual results differ from those assumed, or when assumptions change. Under the corridor method, net unrecognized actuarial gains (losses) are initially recorded in accumulated other comprehensive income. When the unrecognized gain (loss) exceeds 10% of the benefit obligation, that excess is amortized to expense over the expected remaining lives of plan participants. The net plan expense is reported in interest expense and other in the Consolidated Statements of Income.

For balance sheet purposes, we measure plan assets at fair value. When the actual return differs from the expected return, those differences are reflected in the net unrealized actuarial gain (loss) discussed above. However, to measure pension benefit costs, we use a “market-related” asset valuation that differs from the actual fair value for domestic pension plan assets invested in non-fixed income investments. The “market-related” value recognizes the difference between actual and expected long-term returns in the portfolio over five years, a method that reduces the short-term impact of market fluctuations on pension costs. The market-related asset value was approximately $4.0 billion, compared with a fair value of approximately $4.2 billion at December 31, 2018.

Funded Status and Amounts Included in Accumulated Other Comprehensive Income

The following table summarizes the projected benefit obligations and assets related to our domestic and international pension and other postretirement benefit plans as of, and for the years ended, December 31:

		Pension				Other Postretirement
		Benefits				Benefits
(In millions)	2018		2017		2018		2017
Change in benefit obligation
Benefit obligation, January 1	$	4,969	$	4,888	$	258	$	277
Service cost		3		3		-		-
Interest cost		169		186		8		9
Assumed in acquisition		137		-		-		-
Partial litigation settlement-attorneys' fees		32		-		-		-
(Gain) loss from past experience		(235)	⁽¹⁾	181	⁽²⁾	(31)		1
Benefits paid from plan assets		(314)		(277)		-		(3)
Benefits paid — other		(20)		(12)		(25)		(26)
Benefit obligation, December 31		4,741		4,969		210		258
Change in plan assets
Fair value of plan assets, January 1		4,281		3,977		2		5
Assumed in acquisition		96		-		-		-
Actual return on plan assets		85		418		-		-
Benefits paid		(314)		(277)		(2)		(3)
Contributions		3		163		-		-
Fair value of plan assets, December 31		4,151		4,281		-		2
Funded status	$	(590)	$	(688)	$	(210)	$	(256)

Liability in Consolidated Balance Sheets
Accrued expenses and other liabilities	$	(30)	$	(25)	$	(23)	$	(27)
Other non-current liabilities	$	(560)	$	(663)	$	(187)	$	(229)
(1) Gain reflects an increase in the discount rate and a favorable change in the mortality assumption.
(2) Loss reflects a decrease in the discount rate, partially offset by a favorable change in the mortality assumption.

We fund our qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. For 2019, contributions to the qualified pension plans are expected to be immaterial. Future years’ contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates and funding targets. Non-qualified pension and other postretirement benefit plans are generally funded on a pay-as-you-go basis as there are no plan assets for these plans.

Benefit payments. The following benefit payments are expected to be paid in:


	Pension		Other Postretirement
(In millions)	Benefits		Benefits
2019	$	324	$	25
2020	$	311	$	23
2021	$	313	$	22
2022	$	316	$	20
2023	$	318	$	19
2024-2028	$	1,549	$	72

Amounts reflected in the pension and other postretirement benefit liabilities shown above that have not yet been reported in net income and therefore are included in accumulated other comprehensive loss consisted of the following as of December 31:

	Pension				Other
	Benefits				Postretirement Benefits
(In millions)	2018		2017		2018		2017
Unrecognized net gains (losses)	$	(1,980)	$	(2,113)	$	32	$	-
Unrecognized prior service cost		(6)		(6)		44		46
Postretirement benefits liability adjustment	$	(1,986)	$	(2,119)	$	76	$	46

Cost of Our Plans

Net pension and other postretirement benefits cost was as follows for the years ended December 31:

	Pension Benefits						Other Postretirement Benefits
(In millions)	2018		2017		2016		2018		2017		2016
Service cost	$	3	$	3	$	2	$	-	$	-	$	-
Interest cost		169		186		199		8		9		11
Expected long-term return on plan assets		(257)		(260)		(249)		-		-		-
Partial litigation settlement - attorneys' fees		32		-		-		-		-		-
Amortization of:
Net loss from past experience		70		66		65		1		1		1
Prior service cost		-		-		1		(2)		(3)		(3)
Settlement loss		-		7		-		-		-		-
Net plan cost	$	17	$	2	$	18	$	7	$	7	$	9

As further discussed in Note 19, Old Cigna and the Cigna Pension Plan are defendants in a class action lawsuit related to the Plan’s conversion of certain employees from an annuity to a cash balance benefit in 1997. In the fourth quarter of 2018, the Court ordered the Plan to pay $32 million representing the attorney fee portion of the settlement. This payment was recognized as an expense in 2018. An offsetting expense credit of $32 million was also recorded to reduce the litigation reserve held, resulting in no impact to net income in 2018 related to this matter. In 2019, barring any new order from the Court, it is expected that: 1) class participants will be notified of their increased benefits; 2) the plan will be amended; and 3) benefits will begin to be paid. However, the exact timing and amount of these actions remain uncertain. The Company’s remaining litigation reserve is adequate to cover the expected benefits due to class participants.

Assumptions Used for Pension and Other Postretirement Benefit Plans

Management determined the present value of the projected benefit obligation and the accumulated other postretirement benefit obligation and related benefit costs based on the following weighted average assumptions as of and for the years ended December 31:

	2018	2017
Discount rate:
Pension benefit obligation	4.23%	3.51%
Other postretirement benefit obligation	4.09%	3.37%
Pension benefit cost	3.51%	3.95%
Other postretirement benefit cost	3.37%	3.70%
Expected long-term return on plan assets:
Pension benefit cost	7.00%	7.25%
Other postretirement benefit cost	5.00%	5.00%
Mortality table for pension and postretirement benefit obligations	RP 2014 with MP 2018 projection scale	RP 2014 with MP 2017 projection scale

The Company used the Society of Actuaries mortality table RP2014 and the updated improvement scales published in 2017 and 2018 to value its benefit obligations because the Company’s mortality experience closely matched these tables based on internal studies. The updated improvement scales published in 2017 and 2018 both indicated that mortality improvement is expected to be lower than was originally projected when the study was first published in 2014, resulting in decreases to the benefit obligations in both years.

The Company sets discount rates by applying actual annualized yields for high quality bonds at various durations to the expected cash flows of the pension and other postretirement benefits liabilities. A discount rate curve is constructed using an array of bonds in various industries throughout the domestic market, but only selects those for the curve that have an above average return at each duration. Management believes that this curve is representative of the yields that the Company is able to achieve through its plan asset investment strategy.

Expected long-term rates of return on plan assets were developed considering actual long-term historical returns, expected long-term market conditions, plan asset mix and management’s investment strategy that continues a significant allocation to domestic and foreign equity securities as well as securities partnerships, real estate and hedge funds. Expected long-term market conditions take into consideration certain key macroeconomic trends including expected domestic and foreign GDP growth, employment levels and inflation.

Pension Plan Assets

As of December 31, 2018, pension assets included $3.8 billion invested in the separate accounts of Connecticut General Life Insurance Company and Life Insurance Company of North America, subsidiaries of the Company, as well as an additional $265 million invested directly in funds offered by the buyer of the retirement benefits business, and $116 million invested by others.

The fair values of pension assets by category are as follows as of December 31, 2018 and 2017.

(In millions)		2018		2017
Fixed maturities:
Federal government and agency	$	-	$	1
Corporate		1,446		1,124
Asset-backed		32		22
Fund investments		768		884
Total fixed maturities		2,246		2,031
Equity securities:
Domestic		506		689
International, including funds and pooled separate accounts⁽¹⁾		360		476
Total equity securities		866		1,165
Securities partnerships		477		457
Real estate funds, including pooled separate accounts⁽¹⁾		250		300
Commercial mortgage loans		110		140
Hedge funds		36		73
Guaranteed deposit account contract		107		63
Cash equivalents and other current assets, net		59		52
Total pension assets at fair value	$	4,151	$	4,281

(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

The Company’s current target investment allocation percentages (55% fixed income, 25% public equity securities and 20% in other investments, including private equity (securities partnerships) and real estate, are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. The Company would expect to further reduce the allocation to equity securities and other investments and increase the allocation to fixed income investments as funding levels improve.

See Note 10 for further details regarding how fair value is determined, including the level within the fair value hierarchy and the procedures we use to validate fair value measurements. The Company classifies substantially all fixed maturities in Level 2 for pension plan assets. These assets are valued using recent trades of similar securities or are fund investments priced using their daily net asset value that is the exit price. A substantial portion of domestic equity securities within pension assets are classified as Level 1, while international equity funds within pension assets are predominantly classified in Level 2 using daily net asset value.

Securities partnerships, real estate and hedge funds are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. See Note 10 for additional disclosures related to these assets invested in the separate accounts of the Company’s subsidiaries. Certain securities as described in Note 10, as well as commercial mortgage loans and guaranteed deposit account contracts, are classified in Level 3 because unobservable inputs used in their valuation are significant.

401(k) Plans

The Company sponsors a 401(k) plan in which the Company matches a portion of employees’ pre-tax contributions. Participants in the plan may invest in various funds that invest in the Company’s common stock, several diversified stock funds, a bond fund or a fixed-income fund.

The Company may elect to increase its matching contributions if the Company’s annual performance meets certain targets. The Company’s annual expense for these plans was as follows:

(In millions)	2018		2017		2016
Expense	$	196	$	122	$	113