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Postemployment benefit plans

12 Months Ended

Dec. 31, 2019

We provide defined benefit pension plans, defined contribution plans and/or other postretirement benefit plans (retirement health care and life insurance) to employees in many of our locations throughout the world. Our defined benefit pension plans provide a benefit based on years of service and/or the employee’s average earnings near retirement. Our defined contribution plans allow employees to contribute a portion of their salary to help save for retirement, and in most cases, we provide a matching contribution. The benefit obligation related to our non-U.S. defined benefit pension plans are for employees located primarily in Europe, Japan and Brazil. For other postretirement benefits (OPEB), substantially all of our benefit obligation is for employees located in the United States.

Our U.S. defined benefit pension plans for support and management employees were frozen for certain employees on December 31, 2010 and were frozen for the remaining employees on December 31, 2019. On the respective transition dates employees move to a retirement benefit that provides a frozen pension benefit and a 401(k) plan that will include a matching contribution and a new annual employer contribution.

In the first quarter of 2017, we announced the closure of our Gosselies, Belgium facility. This announcement impacted certain employees that participated in a defined benefit pension plan and resulted in a net loss of $20 million in the first quarter of 2017 for curtailment and termination benefits.

All curtailments and termination benefits were recognized in Other income (expense) in Statement 1.Obligations, assets and funded status



	U.S. Pension Benefits				Non-U.S. Pension Benefits				Other Postretirement Benefits
	2019		2018		2019		2018		2019		2018
Weighted-average assumptions used to determine benefit obligation, end of year:
Discount rate	3.2	%	4.2	%	1.9	%	2.5	%	3.2	%	4.2	%
Rate of compensation increase ¹	—	%	4.0	%	2.0	%	3.0	%	4.0	%	4.0	%

¹Effective December 31, 2019, all U.S. pension benefits were frozen, and accordingly this assumption is no longer applicable.

The assumed discount rate is used to discount future benefit obligations back to today’s dollars. The U.S. discount rate is based on a benefit cash flow-matching approach and represents the rate at which our benefit obligations could effectively be settled as of our measurement date, December 31. The benefit cash flow-matching approach involves analyzing Caterpillar’s projected cash flows against a high quality bond yield curve, calculated using a wide population of corporate Aa bonds available on the measurement date. A similar process is used to determine the assumed discount rate for our most significant non-U.S. plans. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and future expense.



	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
(Millions of dollars)	2019			2018			2019			2018			2019			2018
Accumulated benefit obligation, end of year	$	17,773		$	15,877		$	4,502		$	4,038
Change in benefit obligation:
Benefit obligation, beginning of year	$	15,953		$	17,326		$	4,215		$	4,606		$	3,649		$	4,002
Service cost	115			125			80			89			80			83
Interest cost	600			534			94			96			136			125
Plan amendments	—			—			(5		)	26			8			(25		)
Actuarial losses (gains)	2,090			(1,058		)	424			(88		)	350			(195		)
Foreign currency exchange rates	—			—			95			(205		)	(1		)	(28		)
Participant contributions	—			—			7			6			46			51
Benefits paid - gross	(982		)	(971		)	(237		)	(277		)	(316		)	(369		)
Less: federal subsidy on benefits paid	—			—			—			—			9			7
Curtailments, settlements and termination benefits	(3		)	(3		)	(7		)	(38		)	(1		)	(2		)
Benefit obligation, end of year	$	17,773		$	15,953		$	4,666		$	4,215		$	3,960		$	3,649
Change in plan assets:
Fair value of plan assets, beginning of year	$	12,697		$	13,416		$	4,025		$	4,305		$	328		$	504
Actual return on plan assets	2,740			(784		)	482			13			71			(5		)
Foreign currency exchange rates	—			—			105			(187		)	—			—
Company contributions	1,542			1,039			143			165			127			147
Participant contributions	—			—			7			6			46			51
Benefits paid	(982		)	(971		)	(237		)	(277		)	(316		)	(369		)
Settlements and termination benefits	(3		)	(3		)	—			—			(1		)	—
Fair value of plan assets, end of year	$	15,994		$	12,697		$	4,525		$	4,025		$	255		$	328

Over (under) funded status	$	(1,779	)	$	(3,256	)	$	(141	)	$	(190	)	$	(3,705	)	$	(3,321	)

Components of net amount recognized in financial position:
Other assets (non-current asset)	$	219		$	9		$	485		$	442		$	—		$	—
Accrued wages, salaries and employee benefits (current liability)	(42		)	(40		)	(19		)	(20		)	(161		)	(173		)
Liability for postemployment benefits (non-current liability) ¹	(1,956		)	(3,225		)	(607		)	(612		)	(3,544		)	(3,148		)
Net liability recognized	$	(1,779	)	$	(3,256	)	$	(141	)	$	(190	)	$	(3,705	)	$	(3,321	)




Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of:
Prior service cost (credit)	$	—	$	—	$	16	$	20	$	(78	)	$	(126	)

¹The Liability for postemployment benefits reported in Statement 3 includes our liability for other postemployment benefits and our liability for non-qualified deferred compensation plans. For 2019, these liabilities were $60 million and $432 million, respectively. For 2018, these liabilities were $119 million and $351 million, respectively.



	U.S. Pension Benefits				Non-U.S. Pension Benefits
(Millions of dollars)	2019		2018		2019		2018
Pension plans with projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	14,037	$	15,614	$	2,010	$	1,821
Accumulated benefit obligation	$	14,037	$	15,541	$	1,896	$	1,723
Fair value of plan assets	$	12,039	$	12,349	$	1,384	$	1,189

Pension plans with accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	14,037	$	15,614	$	1,875	$	1,655
Accumulated benefit obligation	$	14,037	$	15,541	$	1,799	$	1,603
Fair value of plan assets	$	12,039	$	12,349	$	1,269	$	1,047

The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans for all years presented.

t periodic benefit cost



	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
(Millions of dollars)	2019			2018			2017			2019			2018			2017			2019			2018			2017
Components of net periodic benefit cost:
Service cost	$	115		$	125		$	115		$	80		$	89		$	95		$	80		$	83		$	78
Interest cost	600			534			525			94			96			101			136			125			130
Expected return on plan assets	(721		)	(808		)	(734		)	(148		)	(221		)	(231		)	(18		)	(32		)	(37		)
Curtailments, settlements and termination benefits	(1		)	—			9			(7		)	(33		)	15			—			(2		)	—
Amortization of prior service cost (credit) ¹	—			—			—			—			—			(2		)	(40		)	(36		)	(23		)
Actuarial loss (gain) ²	72			534			481			90			111			(195		)	306			(150		)	15
Net Periodic benefit cost (benefit) ³	$	65		$	385		$	396		$	109		$	42		$	(217	)	$	464		$	(12	)	$	163

Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax):
Current year prior service cost (credit)	$	—		$	—		$	—		$	(4	)	$	20		$	3		$	8		$	(20	)	$	(77	)
Amortization of prior service (cost) credit ¹	—			—			—			—			—			2			40			36			23
Total recognized in other comprehensive income	—			—			—			(4		)	20			5			48			16			(54		)
Total recognized in net periodic cost and other comprehensive income	$	65		$	385		$	396		$	105		$	62		$	(212	)	$	512		$	4		$	109

Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate used to measure service cost	4.3		%	3.7		%	4.2		%	2.5		%	2.3		%	2.4		%	4.1		%	3.5		%	3.9		%
Discount rate used to measure interest cost	3.9		%	3.2		%	3.3		%	2.3		%	2.2		%	2.3		%	3.9		%	3.2		%	3.3		%
Expected rate of return on plan assets⁴	5.9		%	6.3		%	6.7		%	3.8		%	5.2		%	5.9		%	7.2		%	7.5		%	7.5		%
Rate of compensation increase	4.0		%	4.0		%	4.0		%	3.0		%	4.0		%	4.0		%	4.1		%	4.0		%	4.0		%


¹	The estimated amount of prior service cost (credit) that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2019 into net periodic benefit cost (pre-tax) in 2020 is a credit of $38 million for Other Postretirement Benefits.


²	Actuarial loss (gain) represents the effects of actual results differing from our assumptions and the effects of changing assumptions. We recognize actuarial loss (gain) immediately through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.


³	The service cost component is included in Operating costs and all other components are included in Other income (expense) in Statement 1.


⁴	The weighted-average rates for 2020 are 5.1 percent and 3.2 percent for U.S. and non-U.S. pension plans, respectively.

The discount rates used in the determination of our service and interest cost components are determined by utilizing a full yield curve approach which applies specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

Our U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. To arrive at our expected long-term return, the amount added for active management was 0.40 percent for 2019, 0.75 percent for 2018 and 0.80 percent for 2017. A similar process is used to determine this rate for our non-U.S. plans.

The assumed health care trend rate represents the rate at which health care costs are assumed to increase. We assumed a weighted-average increase of 6.1 percent in our calculation of 2019 benefit expense. We expect a weighted-average increase of 6.1 percent during 2020. The 2020 rates are assumed to decrease gradually to the ultimate health care trend rate of 5 percent in 2025. This rate represents 3 percent general inflation plus 2 percent additional health care inflation.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects:



(Millions of dollars)	One-percentage- point increase		One-percentage- point decrease
Effect on 2019 service and interest cost components of other postretirement benefit cost	$	13	$	(11	)
Effect on accumulated postretirement benefit obligation	$	158	$	(133	)

Expected contributions and benefit payments

Information about expected contributions and benefit payments for pension and other postretirement benefit plans is as follows:



(Millions of dollars)	2020
Expected employer contributions:
U.S. Pension Benefits	$	40
Non-U.S. Pension Benefits	$	105
Other Postretirement Benefits	$	135

Expected benefit payments:	2020		2021		2022		2023		2024		2025- 2029		Total
U.S. Pension Benefits	$	1,020	$	1,010	$	1,010	$	1,010	$	1,010	$	5,005	$	10,065
Non-U.S. Pension Benefits	$	280	$	175	$	180	$	185	$	190	$	1,055	$	2,065
Other Postretirement Benefits	$	290	$	285	$	280	$	275	$	270	$	1,340	$	2,740

Expected Medicare Part D subsidy:	$	9	$	9	$	9	$	8	$	8	$	35	$	78

The above table reflects the total expected employer contributions and expected benefits to be paid from the plan or from company assets and does not include the participants’ share of the cost. The expected benefit payments for our other postretirement benefits include payments for prescription drug benefits. The above table also includes Medicare Part D subsidy amounts expected to be received by the company which will offset other postretirement benefit payments.

Plan assets

In general, our strategy for both the U.S. and non-U.S. pensions includes ongoing alignment of our investments to our liabilities, while reducing risk in our portfolio. The current U.S. pension target asset allocation is 70 percent fixed income and 30 percent equities. This target allocation will be revisited periodically to ensure it reflects our overall objectives. The non-U.S. pension weighted-average target allocations are 79 percent fixed income, 12 percent equities, 5 percent real estate and 4 percent other. The target allocations for each plan vary based upon local statutory requirements, demographics of plan participants and funded status. The non-U.S. plan assets are primarily invested in non-U.S. securities.

Our target allocation for the other postretirement benefit plans is 70 percent equities and 30 percent fixed income.

The U.S. plans are rebalanced to within the appropriate target asset allocation ranges on a monthly basis. The frequency of rebalancing for the non-U.S. plans varies depending on the plan. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments.

The use of certain derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The plans do not use derivative contracts for speculative purposes.

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 18 for a discussion of the fair value hierarchy.

Fair values are determined as follows:


•	Equity securities are primarily based on valuations for identical instruments in active markets.


•	Fixed income securities are primarily based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.


•	Real estate is stated at the fund’s net asset value or at appraised value.


•	Cash, short-term instruments and other are based on the carrying amount, which approximates fair value, or the fund’s net asset value.

The fair value of the pension and other postretirement benefit plan assets by category is summarized below:



	December 31, 2019
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	2,578	$	—	$	23	$	133	$	2,734
Non-U.S. equities	2,068		—		—		—		2,068

Fixed income securities:
U.S. corporate bonds	—		6,577		57		—		6,634
Non-U.S. corporate bonds	—		1,414		—		—		1,414
U.S. government bonds	—		2,220		—		—		2,220
U.S. governmental agency mortgage-backed securities	—		63		—		—		63
Non-U.S. government bonds	—		96		—		—		96

Real estate	—		—		10		—		10

Cash, short-term instruments and other	230		10		—		515		755
Total U.S. pension assets	$	4,876	$	10,380	$	90	$	648	$	15,994



	December 31, 2018
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	1,971	$	—	$	35	$	155	$	2,161
Non-U.S. equities	1,279		—		1		—		1,280

Fixed income securities:
U.S. corporate bonds	—		6,371		61		52		6,484
Non-U.S. corporate bonds	—		1,332		—		—		1,332
U.S. government bonds	—		590		—		—		590
U.S. governmental agency mortgage-backed securities	—		384		—		—		384
Non-U.S. government bonds	—		79		—		—		79

Real estate	—		—		10		—		10

Cash, short-term instruments and other	202		9		—		166		377
Total U.S. pension assets	$	3,452	$	8,765	$	107	$	373	$	12,697



	December 31, 2019
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	58	$	—	$	—	$	—	$	58
Non-U.S. equities	346		29		—		65		440
Global equities ¹	26		16		—		111		153

Fixed income securities:
U.S. corporate bonds	—		253		—		—		253
Non-U.S. corporate bonds	—		808		—		7		815
U.S. government bonds	—		65		—		—		65
Non-U.S. government bonds	—		1,952		—		—		1,952
Global fixed income ¹	—		182		—		208		390

Real estate	—		211		—		—		211

Cash, short-term instruments and other ²	68		120		—		—		188
Total non-U.S. pension assets	$	498	$	3,636	$	—	$	391	$	4,525



	December 31, 2018
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	43	$	—	$	—	$	—	$	43
Non-U.S. equities	259		28		—		53		340
Global equities ¹	23		23		—		90		136

Fixed income securities:
U.S. corporate bonds	—		206		—		—		206
Non-U.S. corporate bonds	—		690		—		6		696
U.S. government bonds	—		74		—		—		74
Non-U.S. government bonds	—		1,721		—		—		1,721
Global fixed income ¹	—		261		—		215		476

Real estate	—		185		—		—		185

Cash, short-term instruments and other ²	66		82		—		—		148
Total non-U.S. pension assets	$	391	$	3,270	$	—	$	364	$	4,025
¹ Includes funds that invest in both U.S. and non-U.S. securities.
² Includes funds that invest in multiple asset classes, hedge funds and other.

We have reclassified $143 million from Level 1 to measured at net assets value for 2018. The reclassification did not impact total assets.



	December 31, 2019
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	119	$	—	$	—	$	—	$	119
Non-U.S. equities	56		—		—		—		56

Fixed income securities:
U.S. corporate bonds	—		33		—		—		33
Non-U.S. corporate bonds	—		6		—		—		6
U.S. government bonds	—		9		—		—		9
U.S. governmental agency mortgage-backed securities	—		16		—		—		16
Non-U.S. government bonds	—		3		—		—		3

Cash, short-term instruments and other	2		1		—		10		13
Total other postretirement benefit assets	$	177	$	68	$	—	$	10	$	255



	December 31, 2018
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	151	$	1	$	—	$	—	$	152
Non-U.S. equities	64		—		—		—		64

Fixed income securities:
U.S. corporate bonds	—		45		—		—		45
Non-U.S. corporate bonds	—		11		—		—		11
U.S. government bonds	—		8		—		—		8
U.S. governmental agency mortgage-backed securities	—		25		—		—		25
Non-U.S. government bonds	—		3		—		—		3

Cash, short-term instruments and other	3		1		—		16		20
Total other postretirement benefit assets	$	218	$	94	$	—	$	16	$	328

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2019 and 2018. These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.



(Millions of dollars)	Equities			Fixed Income			Real Estate
U.S. Pension
Balance at December 31, 2017	$	20		$	60		$	10
Unrealized gains (losses)	(6		)	(12		)	—
Realized gains (losses)	—			—			—
Purchases, issuances and settlements, net	21			11			—
Transfers in and/or out of Level 3	1			2			—
Balance at December 31, 2018	$	36		$	61		$	10
Unrealized gains (losses)	(9		)	—			—
Realized gains (losses)	7			—			—
Purchases, issuances and settlements, net	(10		)	(4		)	—
Transfers in and/or out of Level 3	(1		)	—			—
Balance at December 31, 2019	$	23		$	57		$	10

Defined contribution plans

We have both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. Our primary U.S. 401(k) plan allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis. Employees with frozen defined benefit pension accruals are eligible for matching contributions equal to 100 percent of employee contributions to the plan up to 6 percent of cash compensation and an annual employer contribution that ranges from 3 to 5 percent of cash compensation (depending on years of service and age). Employees that were still accruing benefits under a defined benefit pension plan up to December 31, 2019 were eligible for matching contributions equal to 50 percent of employee contributions up to 6 percent of cash compensation. All our U.S. defined benefit pension plans were frozen on December 31, 2019 for remaining employees still accruing a benefit. Starting in 2020, these employees will receive matching contributions equal to 100 percent of employee contributions to the plan up to 6 percent of cash compensation and an annual employer contribution that ranges from 3 to 5 percent of cash compensation (depending on years of service and age).

These 401(k) plans include various investment funds, including a non-leveraged employee stock ownership plan (ESOP). As of December 31, 2019 and 2018, the ESOP held 14.9 million and 17.2 million shares, respectively. All of the shares held by the ESOP were allocated to participant accounts. Dividends paid to participants are automatically reinvested into company shares unless the participant elects to have all or a portion of the dividend paid to the participant. Various other U.S. and non-U.S. defined contribution plans generally allow eligible employees to contribute a portion of their cash compensation to the plans, and in most cases, we provide a matching contribution to the funds.

Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:



(Millions of dollars)	2019		2018		2017
U.S. plans	$	414	$	271	$	375
Non-U.S. plans	83		89		73
	$	497	$	360	$	448