Pensions and Other Benefit Plans

The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides post-retirement benefits, primarily health care, to all eligible U.S. retired employees and their dependents.

Many international employees are covered by government-sponsored programs and the cost to the Company is not significant.

Retirement plan benefits for employees are primarily based on the employee’s compensation during the last three to five years before retirement and the number of years of service. Due to an amendment of the formula used to calculate benefits of the U.S. Defined Benefit Plan that occurred in 2014, benefits for employees hired on or after January 1, 2015, are primarily calculated using employee compensation over total years of service.

International subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided.

The Company does not typically fund retiree health care benefits in advance, but may do so at its discretion. The Company also has the right to modify these plans in the future.

In 2017 and 2016 the Company used December 31, 2017 and December 31, 2016, respectively, as the measurement date for all U.S. and international retirement and other benefit plans.

Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for 2017, 2016 and 2015 include the following components:



	Retirement Plans							Other Benefit Plans
(Dollars in Millions)	2017			2016		2015		2017		2016		2015
Service cost	$	1,080		949		1,037		247		224		257
Interest cost	927			927		988		159		158		186
Expected return on plan assets	(2,041		)	(1,962	)	(1,809	)	(6	)	(6	)	(7	)
Amortization of prior service cost (credit)	2			1		2		(30	)	(34	)	(33	)
Recognized actuarial losses	609			496		745		138		135		201
Curtailments and settlements	17			11		8		—		—		—
Net periodic benefit cost	$	594		422		971		508		477		604

Amounts expected to be recognized in net periodic benefit cost in the coming year for the Company’s defined benefit retirement plans and other post-retirement plans:



(Dollars in Millions)
Amortization of net transition obligation	$	—
Amortization of net actuarial losses	931
Amortization of prior service credit	30

Unrecognized gains and losses for the U.S. pension plans are amortized over the average remaining future service for each plan. For plans with no active employees, they are amortized over the average life expectancy. The amortization of gains and losses for the other U.S. benefit plans is determined by using a 10% corridor of the greater of the market value of assets or the accumulated postretirement benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized over the average remaining future service.

Prior service costs/benefits for the U.S. pension plans are amortized over the average remaining future service of plan participants at the time of the plan amendment. Prior service cost/benefit for the other U.S. benefit plans is amortized over the average remaining service to full eligibility age of plan participants at the time of the plan amendment.

The following table represents the weighted-average actuarial assumptions:



	Retirement Plans				Other Benefit Plans
Worldwide Benefit Plans	2017		2016	2015	2017	2016	2015
Net Periodic Benefit Cost
Service cost discount rate	3.59	%	3.98	3.78	4.63	4.77	4.31
Interest cost discount rate	3.98	%	4.24	3.78	3.94	4.10	4.31
Rate of increase in compensation levels	4.01	%	4.02	4.05	4.31	4.32	4.11
Expected long-term rate of return on plan assets	8.43	%	8.55	8.53

Benefit Obligation
Discount rate	3.30	%	3.78	4.11	3.78	4.42	4.63
Rate of increase in compensation levels	3.99	%	4.02	4.01	4.30	4.29	4.28

The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities. For the fiscal year 2016, the Company changed its methodology in determining service and interest cost from the single weighted average discount rate approach to duration specific spot rates along that yield curve to the plans’ liability cash flows, which management has concluded is a more precise estimate. Prior to this change in methodology, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis. This change does not impact the benefit obligation and did not have a material impact to the 2016 full year results.

The expected rates of return on plan asset assumptions represent the Company's assessment of long-term returns on diversified investment portfolios globally. The assessment is determined using projections from external financial sources, long-term historical averages, actual returns by asset class and the various asset class allocations by market.

The following table displays the assumed health care cost trend rates, for all individuals:



Health Care Plans	2017		2016
Health care cost trend rate assumed for next year	6.33	%	6.32	%
Rate to which the cost trend rate is assumed to decline (ultimate trend)	4.55	%	4.50	%
Year the rate reaches the ultimate trend rate	2038		2038

A one-percentage-point change in assumed health care cost trend rates would have the following effect:



	One-Percentage-		One-Percentage-
(Dollars in Millions)	Point Increase		Point Decrease
Health Care Plans
Total interest and service cost	$	29	(23	)
Post-retirement benefit obligation	$	355	(291	)

The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2017 and 2016 for the Company’s defined benefit retirement plans and other post-retirement plans:



	Retirement Plans					Other Benefit Plans
(Dollars in Millions)	2017			2016		2017		2016
Change in Benefit Obligation
Projected benefit obligation — beginning of year	$	28,116		25,855		4,605		4,669
Service cost	1,080			949		247		224
Interest cost	927			927		159		158
Plan participant contributions	60			54		—		—
Amendments	(7		)	(48	)	(17	)	—
Actuarial (gains) losses	2,996			2,302		(166	)	(73	)
Divestitures & acquisitions	201			(24	)	88		—
Curtailments, settlements & restructuring	(35		)	(25	)	2		—
Benefits paid from plan*	(1,050		)	(1,210	)	(351	)	(378	)
Effect of exchange rates	933			(664	)	15		5
Projected benefit obligation — end of year	$	33,221		28,116		4,582		4,605
Change in Plan Assets
Plan assets at fair value — beginning of year	$	23,633		22,254		75		74
Actual return on plan assets	4,274			2,286		12		7
Company contributions	664			838		545		372
Plan participant contributions	60			54		—		—
Settlements	(32		)	(25	)	—		—
Divestitures & acquisitions	173			(24	)	—		—
Benefits paid from plan assets*	(1,050		)	(1,210	)	(351	)	(378	)
Effect of exchange rates	682			(540	)	—		—
Plan assets at fair value — end of year	$	28,404		23,633		281		75
Funded status — end of year	$	(4,817	)	(4,483	)	(4,301	)	(4,530	)
Amounts Recognized in the Company’s Balance Sheet consist of the following:
Non-current assets	$	526		227		—		—
Current liabilities	(92		)	(86	)	(228	)	(315	)
Non-current liabilities	(5,251		)	(4,624	)	(4,073	)	(4,215	)
Total recognized in the consolidated balance sheet — end of year	$	(4,817	)	(4,483	)	(4,301	)	(4,530	)
Amounts Recognized in Accumulated Other Comprehensive Income consist of the following:
Net actuarial loss	$	8,140		7,749		1,500		1,804
Prior service cost (credit)	(25		)	(12	)	(137	)	(150	)
Unrecognized net transition obligation	—			—		—		—
Total before tax effects	$	8,115		7,737		1,363		1,654

Accumulated Benefit Obligations — end of year	$	29,793		25,319

*In 2016, the Company offered a voluntary lump-sum payment option below a pre-determined threshold for certain eligible former employees who are vested participants of the U.S. Qualified Defined Benefit Pension Plan. The distribution of the lump-sums was completed by the end of fiscal 2017. The amounts distributed in 2017 and 2016 were approximately $127 million and $420 million, respectively. These distributions from the plan did not have a material impact on the Company’s financial position.



	Retirement Plans					Other Benefit Plans
(Dollars in Millions)	2017			2016		2017		2016
Amounts Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
Net periodic benefit cost	$	594		422		508		477
Net actuarial (gain) loss	740			1,965		(169	)	(72	)
Amortization of net actuarial loss	(609		)	(496	)	(138	)	(135	)
Prior service cost (credit)	(7		)	(48	)	(17	)	—
Amortization of prior service (cost) credit	(2		)	(1	)	30		34
Effect of exchange rates	256			(218	)	3		(1	)
Total loss/(income) recognized in other comprehensive income, before tax	$	378		1,202		(291	)	(174	)
Total recognized in net periodic benefit cost and other comprehensive income	$	972		1,624		217		303

The Company plans to continue to fund its U.S. Qualified Plans to comply with the Pension Protection Act of 2006. International Plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently, the Company has several pension plans that are not funded.

In 2017, the Company contributed $72 million and $592 million to its U.S. and international pension plans, respectively.

The following table displays the funded status of the Company's U.S. Qualified & Non-Qualified pension plans and international funded and unfunded pension plans at December 31, 2017 and December 31, 2016, respectively:



	U.S. Plans									International Plans
	Qualified Plans					Non-Qualified Plans				Funded Plans				Unfunded Plans
(Dollars in Millions)	2017			2016		2017		2016		2017		2016		2017		2016
Plan Assets	$	18,681		16,057		—		—		9,723		7,576		—		—
Projected Benefit Obligation	19,652			16,336		2,257		1,905		10,863		9,502		449		373
Accumulated Benefit Obligation	17,654			14,759		1,849		1,568		9,893		8,663		397		329
Over (Under) Funded Status
Projected Benefit Obligation	$	(971	)	(279	)	(2,257	)	(1,905	)	(1,140	)	(1,926	)	(449	)	(373	)
Accumulated Benefit Obligation	1,027			1,298		(1,849	)	(1,568	)	(170	)	(1,087	)	(397	)	(329	)

Plans with accumulated benefit obligations in excess of plan assets have an accumulated benefit obligation, projected benefit obligation and plan assets of $3.8 billion, $4.6 billion and $0.7 billion, respectively, at the end of 2017, and $8.8 billion, $9.9 billion and $5.6 billion, respectively, at the end of 2016.

The following table displays the projected future benefit payments from the Company’s retirement and other benefit plans:



(Dollars in Millions)	2018		2019	2020	2021	2022	2023-2027
Projected future benefit payments
Retirement plans	$	970	1,007	1,057	1,131	1,190	7,062
Other benefit plans	$	322	312	306	301	297	1,395

The following table displays the projected future minimum contributions to the unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future.



(Dollars in Millions)	2018		2019	2020	2021	2022	2023-2027
Projected future contributions	$	88	89	94	100	108	651

Each pension plan is overseen by a local committee or board that is responsible for the overall administration and investment of the pension plans. In determining investment policies, strategies and goals, each committee or board considers factors including, local pension rules and regulations; local tax regulations; availability of investment vehicles (separate accounts, commingled accounts, insurance funds, etc.); funded status of the plans; ratio of actives to retirees; duration of liabilities; and other relevant factors including: diversification, liquidity of local markets and liquidity of base currency. A majority of the Company’s pension funds are open to new entrants and are expected to be on-going plans. Permitted investments are primarily liquid and/or listed, with little reliance on illiquid and non-traditional investments such as hedge funds.

The Company’s retirement plan asset allocation at the end of 2017 and 2016 and target allocations for 2018 are as follows:



	Percent of Plan Assets				Target Allocation
	2017		2016		2018
Worldwide Retirement Plans
Equity securities	76	%	75	%	73	%
Debt securities	24		25		27
Total plan assets	100	%	100	%	100	%

Determination of Fair Value of Plan Assets

The Plan has an established and well-documented process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves.

While the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Valuation Hierarchy

The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described in the table below with Level 1 having the highest priority and Level 3 having the lowest.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for the investments measured at fair value.

•

Short-term investment funds — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. Other investments are through investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in a market that is not active and classified as Level 2.

•

Government and agency securities — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. When quoted market prices for a security are not available in an active market, they are classified as Level 2.

•

Debt instruments — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified as Level 1. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. Level 3 debt instruments are priced based on unobservable inputs.


•	Equity securities — Equity securities are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all common stock is classified within Level 1 of the valuation hierarchy.


•	Commingled funds — These investment vehicles are valued using the NAV provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Assets in the Level 2 category have a quoted market price.

•

Insurance contracts — The instruments are issued by insurance companies. The fair value is based on negotiated value and the underlying investments held in separate account portfolios as well as considering the credit worthiness of the issuer. The underlying investments are government, asset-backed and fixed income securities. In general, insurance contracts are classified as Level 3 as there are no quoted prices nor other observable inputs for pricing.


•	Other assets — Other assets are represented primarily by limited partnerships and real estate investments, as well as commercial loans and commercial mortgages that are not classified as corporate debt. Other assets that are exchange listed and actively traded are classified as Level 1, while inactively traded assets are classified as Level 2.

The following table sets forth the Retirement Plans' investments measured at fair value as of December 31, 2017 and December 31, 2016:



	Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs		Significant Unobservable Inputs^(a)		Investments Measured at Net Asset Value
	(Level 1)			(Level 2)		(Level 3)				Total Assets
(Dollars in Millions)	2017		2016	2017	2016	2017	2016	2017	2016	2017	2016
Short-term investment funds	$	429	145	427	652	—	—	—	—	856	797
Government and agency securities	—		—	3,094	2,655	—	—	—	—	3,094	2,655
Debt instruments	—		—	2,013	1,237	—	—	—	—	2,013	1,237
Equity securities	13,848		11,433	—	12	—	—	—	—	13,848	11,445
Commingled funds	—		—	1,780	1,316	57	—	6,158	5,767	7,995	7,083
Insurance contracts	—		—	—	—	199	24	—	—	199	24
Other assets	—		—	121	—	—	—	278	392	399	392
Investments at fair value	$	14,277	11,578	7,435	5,872	256	24	6,436	6,159	28,404	23,633

^(a) The activity for the Level 3 assets is not significant for all years presented.

The Company's Other Benefit Plans are unfunded except for U.S. commingled funds (Level 2) of $81 million and $75 million and U.S. short-term investment funds (Level 2) of $200 million and $0 at December 31, 2017 and December 31, 2016, respectively.

The fair value of Johnson & Johnson Common Stock directly held in plan assets was $938 million (3.3% of total plan assets) at December 31, 2017 and $847 million (3.6% of total plan assets) at December 31, 2016.