Pension and Other Postretirement Benefits

The Company has both funded and unfunded defined benefit pension and other postretirement benefit plans, predominately in the U.S. The U.S. primary pension plan provides benefits based on years of service and final average salary. The U.S. primary postretirement health care plan is contributory with the participants’ contributions adjusted annually. The U.S. primary postretirement life insurance plan is noncontributory. Beginning January 1, 2007, the U.S. primary pension and other postretirement benefit plans were closed to new participants. Newly hired employees and employees from acquired businesses that are not participating in these plans are eligible for additional Company contributions under the existing U.S. primary defined contribution retirement plans. The Company’s expense related to defined contribution plans was $82 million in 2018, $79 million in 2017, and $77 million in 2016. In addition to the U.S. plans, the Company also has defined benefit pension plans in certain other countries, mainly the United Kingdom, Canada, Germany and Switzerland.

Summarized information regarding net periodic benefit cost included in the statement of income related to the Company's significant defined benefit pension and other postretirement benefit plans is as follows:



	Pension									Other Postretirement Benefits
In millions	2018			2017			2016			2018			2017			2016
Components of net periodic benefit cost:
Service cost	$	60		$	63		$	62		$	8		$	9		$	9
Interest cost	72			72			92			18			19			24
Expected return on plan assets	(126		)	(133		)	(144		)	(25		)	(23		)	(23		)
Amortization of actuarial (gain) loss	43			57			44			(2		)	(1		)	—
Amortization of prior service cost	—			—			—			—			—			(1		)
Total net periodic benefit cost	$	49		$	59		$	54		$	(1	)	$	4		$	9

The service cost component of net periodic benefit cost is presented within Cost of revenue and Selling, administrative, and research and development expenses in the statement of income while the other components of net periodic benefit cost are presented within Other income (expense).

The Company used the updated mortality improvement scales from the Society of Actuaries, MP-2018 and MP-2017, to measure its U.S. pension and other postretirement obligations as of December 31, 2018 and 2017, respectively, which did not have a significant impact in either period.

The following tables provide a rollforward of the plan benefit obligations, plan assets and a reconciliation of funded status for the years ended December 31, 2018 and 2017:



	Pension						Other Postretirement Benefits
In millions	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at January 1	$	2,661		$	2,562		$	546		$	551
Service cost	60			63			8			9
Interest cost	72			72			18			19
Plan participants’ contributions	2			2			12			12
Amendments	9			—			—			—
Actuarial (gain) loss	(162		)	26			(35		)	(5		)
Benefits paid	(165		)	(152		)	(40		)	(41		)
Medicare subsidy received	—			—			2			1
Liabilities from other immaterial plans	5			—			—			—
Foreign currency translation	(53		)	88			—			—
Benefit obligation at December 31	$	2,429		$	2,661		$	511		$	546



	Pension						Other Postretirement Benefits
In millions	2018			2017			2018			2017
Change in plan assets:
Fair value of plan assets at January 1	$	2,832		$	2,487		$	373		$	351
Actual return on plan assets	(82		)	227			(19		)	45
Company contributions	23			178			7			6
Plan participants’ contributions	2			2			12			12
Benefits paid	(165		)	(152		)	(40		)	(41		)
Foreign currency translation	(60		)	90			—			—
Fair value of plan assets at December 31	$	2,550		$	2,832		$	333		$	373
Funded status	$	121		$	171		$	(178	)	$	(173	)
Other immaterial plans	(46		)	(65		)	(5		)	(5		)
Net asset (liability) at December 31	$	75		$	106		$	(183	)	$	(178	)
The amounts recognized in the statement of financial position as of December 31 consist of:
Other assets	$	290		$	337		$	—		$	—
Accrued expenses	(12		)	(12		)	(4		)	(4		)
Other noncurrent liabilities	(203		)	(219		)	(179		)	(174		)
Net asset (liability) at end of year	$	75		$	106		$	(183	)	$	(178	)
The pre-tax amounts recognized in accumulated other comprehensive income consist of:
Net actuarial (gain) loss	$	552		$	548		$	(53	)	$	(64	)
Prior service cost	8			—			—			—
	$	560		$	548		$	(53	)	$	(64	)
Accumulated benefit obligation	$	2,299		$	2,499
Plans with accumulated benefit obligation in excess of plan assets as of December 31:
Projected benefit obligation	$	176		$	184
Accumulated benefit obligation	$	170		$	175
Fair value of plan assets	$	28		$	27

Company contributions in 2017 included an additional $115 million discretionary pension contribution related to the U.S. primary pension plan.

Assumptions— The weighted-average assumptions used in the valuations of pension and other postretirement benefits were as follows:



	Pension						Other Postretirement Benefits
	2018		2017		2016		2018		2017		2016
Assumptions used to determine benefit obligations at December 31:
Discount rate	3.66	%	3.12	%	3.41	%	4.40	%	3.72	%	4.30	%
Rate of compensation increases	3.52	%	3.54	%	3.77	%
Assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate	3.12	%	3.41	%	3.95	%	3.72	%	4.30	%	4.55	%
Expected return on plan assets	4.77	%	5.53	%	6.22	%	6.80	%	6.80	%	7.00	%
Rate of compensation increases	3.54	%	3.77	%	3.72	%

The expected long-term rates of return for pension and other postretirement benefit plans were developed using historical asset class returns while factoring in current market conditions such as inflation, interest rates and asset class performance.

The discount rate reflects the current rate at which the associated liabilities could theoretically be effectively settled at the end of the year. In estimating this rate, the Company looks at rates of return on high-quality fixed income investments, with similar duration to the liabilities in the plan. Beginning in 2017, the Company changed the method used to estimate the service and interest cost components of net periodic pension and other postretirement benefit costs. The new method provides a more precise measure of the service and interest cost components of net periodic benefit cost by applying specific spot rates along the yield curve to the projected cash flows rather than a single weighted-average rate.

Assumed health care cost trend rates have an effect on the amounts reported for the postretirement health care benefit plans. The assumed health care cost trend rates used to determine the postretirement benefit obligation at December 31 were as follows:



	2018		2017		2016
Health care cost trend rate assumed for the next year	7.00	%	6.25	%	6.00	%
Ultimate trend rate	4.50	%	4.50	%	4.50	%
Year the rate reaches the ultimate trend rate	2026		2025		2023

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



In millions	1 Percentage-Point Increase		1 Percentage-Point Decrease
Change in service cost and interest cost for 2018	$	—	$	(1	)
Change in postretirement benefit obligation at December 31, 2018	$	5	$	(8	)

Plan assets— The Company’s overall investment strategy for the assets in the pension funds is to achieve a balance between the goals of growing plan assets and keeping risk at a reasonable level over a long-term investment horizon. In order to reduce unnecessary risk, the pension funds are diversified across several asset classes, securities and investment managers. The target allocations for plan assets are 15% to 25% equity investments, 75% to 85% fixed income investments and 0% to 10% in other types of investments. The Company does not use derivatives for the purpose of speculation, leverage, circumventing investment guidelines or taking risks that are inconsistent with specified guidelines.

The assets in the Company’s postretirement health care plan are primarily invested in life insurance policies. The Company’s overall investment strategy for the assets in the postretirement health care fund is to invest in assets that provide a reasonable tax exempt rate of return while preserving capital.

The following tables present the fair value of the Company’s pension and other postretirement benefit plan assets at December 31, 2018 and 2017, by asset category and valuation methodology. Level 1 assets are valued using unadjusted quoted prices for identical assets in active markets. Level 2 assets are valued using quoted prices or other observable inputs for similar assets. Level 3 assets are valued using unobservable inputs, but reflect the assumptions market participants would be expected to use in pricing the assets. Each financial instrument’s categorization is based on the lowest level of input that is significant to the fair value measurement.



	2018
In millions	Total		Level 1		Level 2		Level 3
Pension Plan Assets:
Cash and equivalents	$	28	$	27	$	1	$	—
Fixed income securities:
Government securities	371		—		371		—
Corporate debt securities	853		—		853		—
Investment contracts with insurance companies	1		—		—		1
Commingled funds:
Collective trust funds	1,257
Partnerships/private equity interests	36
Other	4		—		4		—
Total fair value of pension plan assets	$	2,550	$	27	$	1,229	$	1

Other Postretirement Benefit Plan Assets:
Life insurance policies	$	333
Total fair value of other postretirement benefit plan assets	$	333	$	—	$	—	$	—



	2017
In millions	Total		Level 1		Level 2		Level 3
Pension Plan Assets:
Cash and equivalents	$	43	$	34	$	9	$	—
Fixed income securities:
Government securities	371		—		371		—
Corporate debt securities	943		—		943		—
Investment contracts with insurance companies	1		—		—		1
Commingled funds:
Collective trust funds	1,424
Partnerships/private equity interests	41
Other	9		—		9		—
Total fair value of pension plan assets	$	2,832	$	34	$	1,332	$	1

Other Postretirement Benefit Plan Assets:
Cash and equivalents	$	2	$	2	$	—	$	—
Life insurance policies	371
Total fair value of other postretirement benefit plan assets	$	373	$	2	$	—	$	—

Cash and equivalents include cash on hand and instruments with original maturities of three months or less and are valued at cost, which approximates fair value. Fixed income securities primarily consist of U.S. and foreign government bills, notes and bonds, corporate debt securities and investment contracts. The majority of the assets in this category are valued by evaluating bid prices provided by independent financial data services. For securities where market data is not readily available, unobservable market data is used to value the security. The underlying investments include small-cap equity, international equity and long- and short-term fixed income instruments.

Pension assets measured at net asset value include collective trust funds, partnerships/private equity interests and life insurance policies. Collective trust funds are private funds that are valued based on the value of the underlying investments which can be redeemed on a daily basis. The underlying investments include both passively and actively managed U.S. and foreign large- and mid-cap equity funds and short-term investment funds. Partnerships/private equity interests are investments in partnerships where the benefit plan is a limited partner. The investments are valued by the investment managers on a periodic basis using pricing models that use market, income and cost valuation methods. Distributions are received from these funds on a periodic basis through the liquidation of the underlying assets of the fund. Life insurance policies are used to fund other postretirement benefits in order to obtain favorable tax treatment and are valued based on the cash surrender value of the underlying policies. The Company has selected the funds in which these assets are invested and may elect to withdraw funds with proper notice to the insurance company or maintain the policies and receive death benefits as determined by the contracts.

Cash flows— The Company generally funds its pension and other postretirement benefit plans as required by law or to the extent such contributions are tax deductible. The Company expects to contribute approximately $28 million to its pension plans and $5 million to its other postretirement benefit plans in 2019. The Company’s portion of the benefit payments that are expected to be paid during the years ending December 31 is as follows:



In millions	Pension		Other Postretirement Benefits
2019	$	162	$	35
2020	165		36
2021	169		36
2022	172		37
2023	180		37
Years 2024-2028	895		182