Pension and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2022

Retirement Benefits [Abstract]

Pension and Other Postretirement Benefit Plans

Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension plans covering eligible employees in the U.S. and in certain of its international subsidiaries. In addition, the Company provides medical benefits, principally to its eligible U.S. retirees and their dependents, through its other postretirement benefit plans. The Company uses December 31 as the year-end measurement date for all of its pension plans and other postretirement benefit plans.

Net Periodic Benefit Cost

The net periodic benefit cost (credit) for pension and other postretirement benefit plans (including certain costs reported as part of discontinued operations) consisted of the following components:

	Pension Benefits
	U.S.						International						Other Postretirement Benefits
Years Ended December 31	2022		2021		2020		2022		2021		2020		2022		2021		2020
Service cost	$	372	$	403	$	360	$	283	$	328	$	297	$	48	$	48	$	52
Interest cost	457		404		431		145		123		136		46		45		57
Expected return on plan assets	(753)		(755)		(774)		(383)		(416)		(414)		(86)		(79)		(75)
Amortization of unrecognized prior service cost	(32)		(38)		(49)		(14)		(16)		(18)		(57)		(63)		(73)
Net loss (gain) amortization	128		298		303		96		142		127		(43)		(42)		(18)
Termination benefits	2		56		10		1		5		3		—		37		2
Curtailments	12		16		10		—		(26)		—		(1)		(29)		(4)
Settlements	239		216		13		1		8		15		—		—		—
Net periodic benefit cost (credit)	$	425	$	600	$	304	$	129	$	148	$	146	$	(93)	$	(83)	$	(59)

Net periodic benefit cost (credit) for pension and other postretirement benefit plans in 2021 includes expenses for curtailments, settlements and termination benefits provided to certain employees in connection with the spin-off of Organon.

In connection with restructuring actions (see Note 6), termination charges were recorded in 2022, 2021 and 2020 on pension and other postretirement benefit plans related to expanded eligibility for certain employees exiting Merck. Also, in connection with these restructuring activities, curtailments and settlements were recorded on certain pension plans. An increase in lump sum payments to U.S. pension plan participants also contributed to the settlements recorded during 2022 and 2021.

The components of net periodic benefit cost (credit) other than the service cost component are included in Other (income) expense, net (see Note 15), with the exception of certain amounts for termination benefits, curtailments and settlements, which are recorded in Restructuring costs if the event giving rise to the termination benefits, curtailment or settlement is related to restructuring actions or in Income from Discontinued Operations, Net of Taxes and Amounts Attributable to Noncontrolling Interests if related to the spin-off of Organon (each as noted above).

Obligations and Funded Status

Summarized information about the changes in plan assets and benefit obligations, the funded status and the amounts recorded at December 31 is as follows:

	Pension Benefits								Other Postretirement Benefits
	U.S.				International
	2022		2021		2022		2021		2022		2021
Fair value of plan assets January 1	$	13,067	$	12,672	$	12,195	$	12,009	$	1,292	$	1,221
Actual return on plan assets	(3,129)		1,250		(2,793)		891		(306)		118
Company contributions	293		305		155		189		46		33
Effects of exchange rate changes	—		—		(848)		(671)		—		—
Benefits paid	(219)		(219)		(250)		(233)		(90)		(86)
Settlements	(918)		(941)		(16)		(55)		—		—
Spin-off of Organon	—		—		—		(55)		—		—
Other	—		—		30		120		5		6
Fair value of plan assets December 31	$	9,094	$	13,067	$	8,473	$	12,195	$	947	$	1,292
Benefit obligation January 1	$	13,999	$	14,613	$	11,575	$	12,458	$	1,541	$	1,607
Service cost	372		403		283		328		48		48
Interest cost	457		404		145		123		46		45
Actuarial (gains) losses (1)	(3,851)		(332)		(3,283)		(240)		(392)		(103)
Benefits paid	(219)		(219)		(250)		(233)		(90)		(86)
Effects of exchange rate changes	—		—		(732)		(678)		(1)		(1)
Plan amendments	—		—		4		4		—		—
Curtailments	12		15		—		(38)		—		(12)
Termination benefits	2		56		1		5		—		37
Settlements	(918)		(941)		(16)		(55)		—		—
Spin-off of Organon	—		—		—		(118)		—		—
Other	—		—		28		19		5		6
Benefit obligation December 31	$	9,854	$	13,999	$	7,755	$	11,575	$	1,157	$	1,541
Funded status December 31	$	(760)	$	(932)	$	718	$	620	$	(210)	$	(249)
Recognized as:
Other Assets	$	5	$	9	$	1,052	$	1,395	$	—	$	—
Accrued and other current liabilities	(59)		(64)		(19)		(22)		(8)		(8)
Other Noncurrent Liabilities	(706)		(877)		(315)		(753)		(202)		(241)

(1)    Actuarial (gains) losses primarily reflect changes in discount rates.

At December 31, 2022 and 2021, the accumulated benefit obligation was $17.2 billion and $24.9 billion, respectively, for all pension plans, of which $9.7 billion and $13.8 billion, respectively, related to U.S. pension plans.

Information related to the funded status of selected pension plans at December 31 is as follows:

	U.S.				International
	2022		2021		2022		2021
Pension plans with a projected benefit obligation in excess of plan assets
Projected benefit obligation	$	9,186	$	13,013	$	2,779	$	2,507
Fair value of plan assets	8,421		12,072		2,445		1,731
Pension plans with an accumulated benefit obligation in excess of plan assets
Accumulated benefit obligation	$	9,081	$	12,916	$	1,226	$	2,462
Fair value of plan assets	8,421		12,072		948		1,723

Plan Assets

Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value with Level 1 having the highest priority and Level 3 having the lowest:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity. The Level 3 assets are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as instruments for which the determination of fair value requires significant judgment or estimation. At December 31, 2022 and 2021, $765 million and $943 million, respectively, or approximately 4% of the Company’s pension investments were categorized as Level 3 assets.

If the inputs used to measure the financial assets fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The fair values of the Company’s pension plan assets at December 31 by asset category are as follows:

	Fair Value Measurements Using										Fair Value Measurements Using
	Level 1		Level 2		Level 3		NAV (1)		Total		Level 1		Level 2		Level 3		NAV (1)		Total
	2022										2021
U.S. Pension Plans
Cash and cash equivalents	$	49	$	—	$	—	$	98	$	147	$	3	$	—	$	—	$	289	$	292
Investment funds
Developed markets equities	211		—		—		2,443		2,654		236		—		—		3,799		4,035
Emerging markets equities	—		—		—		707		707		—		—		—		919		919
Real estate	—		—		—		131		131		—		—		—		—		—
Equity securities
Developed markets	1,956		—		—		—		1,956		2,915		—		—		—		2,915
Fixed income securities
Government and agency obligations	—		1,934		—		—		1,934		—		2,870		—		—		2,870
Corporate obligations	—		1,438		—		—		1,438		—		2,005		—		—		2,005
Mortgage and asset-backed securities	—		22		—		—		22		—		23		—		—		23
Other investments
Derivatives	—		101		—		—		101		—		—		—		—		—
Other	—		—		4		—		4		2		—		6		—		8
Plan assets at fair value	$	2,216	$	3,495	$	4	$	3,379	$	9,094	$	3,156	$	4,898	$	6	$	5,007	$	13,067
International Pension Plans
Cash and cash equivalents	$	57	$	8	$	—	$	13	$	78	$	82	$	10	$	—	$	18	$	110
Investment funds
Developed markets equities	375		2,957		—		90		3,422		531		4,292		—		121		4,944
Government and agency obligations	177		2,656		—		130		2,963		240		4,025		—		171		4,436
Emerging markets equities	52		—		—		59		111		137		—		—		72		209
Corporate obligations	8		9		—		129		146		9		8		—		171		188
Other fixed income obligations	10		7		—		4		21		15		8		—		3		26
Real estate	—		1		—		10		11		—		1		—		16		17
Equity securities
Developed markets	263		—		—		—		263		369		—		—		—		369
Fixed income securities
Government and agency obligations	—		448		—		—		448		3		591		—		3		597
Corporate obligations	—		157		—		—		157		—		223		—		2		225
Mortgage and asset-backed securities	—		69		—		—		69		—		90		—		—		90
Other investments
Insurance contracts (2)	—		18		761		1		780		—		44		937		1		982
Other	1		3		—		—		4		1		1		—		—		2
Plan assets at fair value	$	943	$	6,333	$	761	$	436	$	8,473	$	1,387	$	9,293	$	937	$	578	$	12,195

(1)    Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2022 and 2021.

(2)    The plans’ Level 3 investments in insurance contracts are generally valued using a crediting rate that approximates market returns and invest in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.

The table below provides a summary of the changes in fair value, including transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3) for the Company’s pension plan assets:

	2022								2021
	Insurance Contracts		Real Estate		Other		Total		Insurance Contracts		Real Estate		Other		Total
U.S. Pension Plans
Balance January 1	$	—	$	—	$	6	$	6	$	—	$	—	$	7	$	7
Actual return on plan assets:
Relating to assets still held at December 31	—		—		(3)		(3)		—		—		(5)		(5)
Relating to assets sold during the year	—		—		2		2		—		—		7		7
Purchases and sales, net	—		—		(1)		(1)		—		—		(3)		(3)
Balance December 31	$	—	$	—	$	4	$	4	$	—	$	—	$	6	$	6
International Pension Plans
Balance January 1	$	937	$	—	$	—	$	937	$	935	$	—	$	—	$	935
Actual return on plan assets:
Relating to assets still held at December 31	(147)		—		—		(147)		(34)		—		—		(34)
Purchases and sales, net	(39)		—				(39)		(42)		—		—		(42)
Transfers into Level 3	10		—				10		78		—		—		78
Balance December 31	$	761	$	—	$	—	$	761	$	937	$	—	$	—	$	937

The fair values of the Company’s other postretirement benefit plan assets at December 31 by asset category are as follows:

	Fair Value Measurements Using										Fair Value Measurements Using
	Level 1		Level 2		Level 3		NAV (1)		Total		Level 1		Level 2		Level 3		NAV (1)		Total
	2022										2021
Cash and cash equivalents	$	2	$	—	$	—	$	8	$	10	$	11	$	—	$	—	$	28	$	39
Investment funds
Developed markets equities	22		—		—		257		279		24		—		—		378		402
Emerging markets equities	—		—		—		74		74		—		—		—		92		92
Real estate	—		—		—		14		14		—		—		—		—		—
Government and agency obligations	1		—		—		—		1		1		—		—		—		1
Equity securities																			—
Developed markets	206		—		—		—		206		290		—		—		—		290
Fixed income securities
Government and agency obligations	—		212		—		—		212		—		275		—		—		275
Corporate obligations	—		137		—		—		137		—		191		—		—		191
Mortgage and asset-backed securities	—		2		—		—		2		—		2		—		—		2
Other Investments
Derivatives	—		12		—		—		12		—		—		—		—		—
Plan assets at fair value	$	231	$	363	$	—	$	353	$	947	$	326	$	468	$	—	$	498	$	1,292

(1)    Certain investments that were measured at net asset value (NAV) per share or its equivalent have not been classified in the fair value hierarchy. The NAV amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at December 31, 2022 and 2021.

The Company has established investment guidelines for its U.S. pension and other postretirement plans to create an asset allocation that is expected to deliver a rate of return sufficient to meet the long-term obligation of each plan, given an acceptable level of risk. The target investment portfolio of the Company’s U.S. pension and other postretirement benefit plans is allocated 25% to 40% in U.S. equities, 10% to 20% in international equities, 35% to 45% in fixed-income investments, and up to 8% in cash and other investments. The portfolio’s equity weighting is consistent with the long-term nature of the plans’ benefit obligations. The expected annual standard deviation of

returns of the target portfolio, which approximates 10%, reflects both the equity allocation and the diversification benefits among the asset classes in which the portfolio invests. For international pension plans, the targeted investment portfolio varies based on the duration of pension liabilities and local government rules and regulations. Although a significant percentage of plan assets are invested in U.S. equities, concentration risk is mitigated through the use of strategies that are diversified within management guidelines.

Expected Contributions

Contributions during 2023 are expected to be approximately $270 million for U.S. pension plans, approximately $150 million for international pension plans and approximately $20 million for other postretirement benefit plans.

Expected Benefit Payments

Expected benefit payments are as follows:

	U.S. Pension Benefits		International Pension Benefits		Other Postretirement Benefits
2023	$	627	$	271	$	84
2024	634		257		86
2025	650		262		87
2026	676		283		89
2027	694		297		90
2028 — 2032	3,948		1,704		474

Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service.

Amounts Recognized in Other Comprehensive Income

Net gain/loss amounts reflect differences between expected and actual returns on plan assets as well as the effects of changes in actuarial assumptions. Net gain/loss amounts in excess of certain thresholds are amortized into net periodic benefit cost over the average remaining service life of employees. The following amounts were reflected as components of OCI:

	Pension Plans												Other Postretirement Benefit Plans
	U.S.						International
Years Ended December 31	2022		2021		2020		2022		2021		2020		2022		2021		2020
Net (loss) gain arising during the period	$	(42)	$	813	$	(472)	$	116	$	772	$	(424)	$	—	$	156	$	199
Prior service (cost) credit arising during the period	—		—		—		(4)		(4)		64		—		—		—
	$	(42)	$	813	$	(472)	$	112	$	768	$	(360)	$	—	$	156	$	199
Net loss (gain) amortization included in benefit cost	$	128	$	298	$	303	$	96	$	142	$	127	$	(43)	$	(42)	$	(18)
Prior service credit amortization included in benefit cost	(32)		(38)		(49)		(14)		(16)		(18)		(57)		(63)		(73)
Settlements and curtailments	251		232		23		1		(18)		15		(1)		(29)		(4)
	$	347	$	492	$	277	$	83	$	108	$	124	$	(101)	$	(134)	$	(95)

Actuarial Assumptions

The Company reassesses its benefit plan assumptions on a regular basis. The weighted average assumptions used in determining U.S. pension and other postretirement benefit plan and international pension plan information are as follows:

	U.S. Pension and Other Postretirement Benefit Plans						International Pension Plans
December 31	2022		2021		2020		2022		2021		2020
Net periodic benefit cost
Discount rate	3.00	%	2.70	%	3.40	%	1.50	%	1.10	%	1.50	%
Expected rate of return on plan assets	6.70	%	6.70	%	7.30	%	3.70	%	3.80	%	4.40	%
Salary growth rate	4.60	%	4.60	%	4.20	%	2.90	%	2.80	%	2.80	%
Interest crediting rate	5.00	%	4.70	%	4.90	%	3.00	%	3.00	%	2.80	%
Benefit obligation
Discount rate	5.50	%	3.00	%	2.70	%	3.90	%	1.50	%	1.10	%
Salary growth rate	4.60	%	4.60	%	4.60	%	3.20	%	2.90	%	2.80	%
Interest crediting rate	5.30	%	5.00	%	4.70	%	3.30	%	3.00	%	3.00	%

For both the pension and other postretirement benefit plans, the discount rate is evaluated on measurement dates and modified to reflect the prevailing market rate of a portfolio of high-quality fixed-income debt instruments that would provide the future cash flows needed to pay the benefits included in the benefit obligation as they come due. The expected rate of return for both the pension and other postretirement benefit plans represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid and is determined on a plan basis. The expected rate of return for each plan is developed considering long-term historical returns data, current market conditions, and actual returns on the plan assets. Using this reference information, the long-term return expectations for each asset category and a weighted-average expected return for each plan’s target portfolio is developed according to the allocation among those investment categories. The expected portfolio performance reflects the contribution of active management as appropriate. For 2023, the expected rate of return for the Company’s U.S. pension and other postretirement benefit plans will be 7.00%, as compared to 6.70% in 2022.

The health care cost trend rate assumptions for other postretirement benefit plans are as follows:

December 31	2022		2021
Health care cost trend rate assumed for next year	7.8	%	6.4	%
Rate to which the cost trend rate is assumed to decline	4.5	%	4.5	%
Year that the trend rate reaches the ultimate trend rate	2038		2032

Savings Plans

The Company also maintains defined contribution savings plans in the U.S. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which the employee is eligible. Total employer contributions to these plans in 2022, 2021 and 2020 were $175 million, $158 million and $158 million, respectively.