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EMPLOYEE BENEFITS
 12 Months Ended
Dec. 31, 2015
EMPLOYEE BENEFITS  
EMPLOYEE BENEFITS

20. EMPLOYEE BENEFITS

Pension Plans

We offer various defined benefit plans to eligible employees.

The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan that is subject to the provisions of ERISA. U.S. salaried employees who are employed by a participating company and who have completed 12 months of continuous service are eligible to participate in the plan. Effective April 1, 2012, the qualified plan was converted to a cash balance formula comprised of pay credits based on six percent of a plan participant’s annual compensation (subject to IRS limitations) and annual interest credits. In addition, employees can take their vested benefits when they leave AIG as a lump sum or an annuity option after completing at least three years of service. However, employees satisfying certain age and service requirements (i.e. grandfathered employees) remain covered under the old plan formula, which is based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Grandfathered employees will receive the higher of the benefits under the cash balance or final average pay formula at retirement. Non-U.S. defined benefit plans are generally either based on the employee’s years of credited service and compensation in the years preceding retirement or on points accumulated based on the employee’s job grade and other factors during each year of service.

In the U.S. we also sponsor several non-qualified unfunded defined benefit plans for certain employees, including key executives, designed to supplement pension benefits provided by the qualified plan. These include the AIG Non-Qualified Retirement Income Plan (AIG NQRIP), which provides a benefit equal to the reduction in benefits under the qualified plan as a result of federal tax limitations on compensation and benefits payable, and the Supplemental Executive Retirement Plan (SERP), which provides additional retirement benefits to designated executives. Under the SERP, an annual benefit accrues at a percentage of final average pay multiplied by each year of credited service, not greater than 60 percent of final average pay, reduced by any benefits from the current and any predecessor retirement plans (including the AIG NQRIP), Social Security, and any benefits accrued under a Company sponsored foreign deferred compensation plan.

Plan Freeze

On August 27, 2015, we amended the qualified plan, the AIG NQRIP and the SERP, to freeze benefit accruals effective January 1, 2016. Consequently, these plans were closed to new participants and current participants ceased earning additional benefits as of December 31, 2015. However, interest credits continue to accrue on the existing cash balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and subsidies as they continue to be employed by AIG.

Postretirement Plans

We also provide postretirement medical care and life insurance benefits in the U.S. and in certain non-U.S. countries. Eligibility in the various plans is generally based upon completion of a specified period of eligible service and attaining a specified age. Overseas, benefits vary by geographic location.

U.S. postretirement medical and life insurance benefits are based upon the employee attaining the age of 55 and having a minimum of ten years of service. Eligible employees who have medical coverage can enroll in retiree medical upon termination of employment. Medical benefits are contributory, while the life insurance benefits are generally non-contributory. Retiree medical contributions vary from none for pre-1989 retirees to actual premium payments reduced by certain subsidies for post-1992 retirees. These contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination. Effective April 1, 2012, the retiree medical employer subsidy for the AIG Postretirement plan was eliminated for employees who were not grandfathered. Additionally, new employees hired after December 31, 2012 are not eligible for retiree life insurance.

The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance Sheets. The measurement date for most of the non-U.S. defined benefit pension and postretirement plans is November 30, consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of December 31.

As of or for the Years EndedPension Postretirement(a)
December 31,U.S. Plans(b)Non-U.S. Plans(b)U.S. Plans Non-U.S. Plans
(in millions)20152014201520142015201420152014
Change in projected benefit obligation:
Benefit obligation, beginning of year$5,769$4,882$1,099$1,072$229$217$64$52
Service cost19217343425432
Interest cost22022825298932
Actuarial (gain) loss(423)780(16)114(23)10911
Benefits paid:
AIG assets(17)(15)(9)(15)(11)(11)(1)(1)
Plan assets(285)(279)(24)(24)----
Plan amendment(132)-24(1)----
Settlements--(15)(9)----
Foreign exchange effect--(67)(107)--(3)(2)
Acquisitions--72-----
Other--14(2)----
Projected benefit obligation, end of year$5,324$5,769$1,146$1,099$208$229$75$64
Change in plan assets:
Fair value of plan assets, beginning
of year$4,111$4,024$708$738$-$-$-$-
Actual return on plan assets, net of expenses(8)2664771----
AIG contributions5581156267111111
Benefits paid:
AIG assets(17)(15)(9)(15)(11)(11)(1)(1)
Plan assets(285)(279)(24)(24)----
Settlements--(15)(8)----
Foreign exchange effect--(44)(75)----
Acquisitions--35-----
Other--13(46)----
Fair value of plan assets, end of year$4,359$4,111$773$708$-$-$-$-
Funded status, end of year$(965)$(1,658)$(373)$(391)$(208)$(229)$(75)$(64)
Amounts recognized in the balance
sheet:
Assets$-$-$46$46$-$-$-$-
Liabilities(965)(1,658)(419)(437)(208)(229)(75)(64)
Total amounts recognized$(965)$(1,658)$(373)$(391)$(208)$(229)$(75)$(64)
Pre-tax amounts recognized in Accumulated
other comprehensive income:
Net gain (loss)$(1,324)$(1,667)$(161)$(227)$13$(9)$(16)$(8)
Prior service (cost) credit-200(16)111324-1
Total amounts recognized$(1,324)$(1,467)$(177)$(216)$26$15$(16)$(7)

(a) We do not currently fund postretirement benefits.

(b) Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $299 million and $325 million for the U.S. and $199 million and $295 million for the non-U.S. at December 31, 2015 and 2014, respectively.

The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:

At December 31,
(in millions)20152014
U.S. pension benefit plans$5,324$5,601
Non-U.S. pension benefit plans$1,109$1,040

Defined benefit plan obligations in which the projected benefit obligation was in excess of the related plan assets and the accumulated benefit obligation was in excess of the related plan assets were as follows:

At December 31,PBO Exceeds Fair Value of Plan Assets ABO Exceeds Fair Value of Plan Assets
U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans
(in millions)20152014201520142015201420152014
Projected benefit obligation$5,324$5,769$999$843$5,324$5,769$912$757
Accumulated benefit obligation5,3245,6018967465,3245,601889740
Fair value of plan assets4,3594,1115063424,3594,111497329

The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:

Pension Postretirement
U.S. PlansNon-U.S. PlansU.S. PlansNon-U.S. Plans
(in millions)201520142013201520142013201520142013201520142013
Components of net periodic benefit cost:
Service cost$192$173$205$43$42$47$5$4$5$3$2$3
Interest cost220228201252929898322
Expected return on assets(295)(288)(257)(25)(22)(19)------
Amortization of prior service credit(22)(33)(33)(2)(3)(3)(11)(11)(11)(1)--
Amortization of net loss92421389713--1---
Curtailment (gain) loss(179)--(1)1(1)-----(2)
Settlement loss---1-5------
Other-----1------
Net periodic benefit cost$8$122$254$50$54$72$2$2$3$5$4$3
Total recognized in Accumulated other comprehensive income (loss)$143$(793)$823$38$(40)$103$12$(21)$30$(9)$(11)$16
Total recognized in net periodic benefit cost and other comprehensive income (loss)$135$(915)$569$(12)$(94)$31$10$(23)$27$(14)$(15)$13

The estimated net loss and prior service credit that will be amortized from Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $32 million and $1 million, respectively, for our combined defined benefit pension plans. For the defined benefit postretirement plans, the estimated amortization from Accumulated other comprehensive income for net loss and prior service credit that will be amortized into net periodic benefit cost over the next fiscal year is a $9 million credit in the aggregate.

At the end of 2015, we changed the method used to measure interest costs for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans. Previously, we measured interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations. For 2016, interest costs will be measured by applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation (i.e., the Spot Rate Approach). The new method provides a more precise measurement of interest costs by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve; the measurement of our pension and postretirement benefit obligations is not affected. We have accounted for this change as a change in accounting estimate, which is applied prospectively. Consequently, combined estimated 2016 pension expense for the AIG U.S. and non-U.S. defined benefit pension plans under the Spot Rate Approach is approximately $86 million, which is a $52 million reduction when compared to the prior approach.

A 100 basis point increase in the discount rate or expected long-term rate of return would decrease the 2016 expense by approximately $56 million and $45 million, respectively, with all other items remaining the same. Conversely, a 100 basis point decrease in the discount rate or expected long-term rate of return would increase the 2016 expense by approximately $71 million and $45 million, respectively, with all other items remaining the same.

Assumptions

The following table summarizes the weighted average assumptions used to determine the benefit obligations:

Pension Postretirement
U.S. PlansNon-U.S. Plans(a)U.S. PlansNon-U.S. Plans(a)
December 31, 2015
Discount rate4.32%2.17%4.21%4.09%
Rate of compensation increaseN/A%(b)2.64%N/A3.43%
December 31, 2014
Discount rate3.94%2.33%3.78%4.04%
Rate of compensation increase3.40%2.89%N/A3.29%

(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.

(b) Compensation increases are no longer applicable due to the plan freeze that became effective 1/1/2016.

The following table summarizes assumed health care cost trend rates for the U.S. plans:

At December 31,20152014
Following year:
Medical (before age 65)6.79%7.07%
Medical (age 65 and older)6.64%6.75%
Ultimate rate to which cost increase is assumed to decline4.50%4.50%
Year in which the ultimate trend rate is reached:
Medical (before age 65)20272027
Medical (age 65 and older)20272027

A one percent point change in the assumed healthcare cost trend rate would have the following effect on our postretirement benefit obligations:

One PercentOne Percent
At December 31,Increase Decrease
(in millions)2015201420152014
U.S. plans$6$5$(4)$(5)
Non-U.S. plans$17$12$(12)$(12)

Our postretirement plans provide benefits primarily in the form of defined employer contributions rather than defined employer benefits. Changes in the assumed healthcare cost trend rate have a minimal impact for U.S. plans because for post-1992 retirees, benefits are fixed dollar amounts based on service at retirement. Our non-U.S. postretirement plans are not subject to caps.

The following table presents the weighted average assumptions used to determine the net periodic benefit costs:

Pension Postretirement
At December 31,U.S. Plans Non-U.S. Plans*U.S. Plans Non-U.S. Plans*
2015
Discount rate3.94%2.33%3.77%4.04%
Rate of compensation increase3.40%2.89%N/A3.29%
Expected return on assets7.25%3.33%N/AN/A
2014
Discount rate4.83%2.77%4.59%4.77%
Rate of compensation increase3.50%2.89%N/A3.34%
Expected return on assets7.25%2.93%N/AN/A
2013
Discount rate3.93%2.62%3.67%3.45%
Rate of compensation increase4.00%2.86%N/A3.55%
Expected return on assets7.25%2.60%N/AN/A

* The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of the subsidiaries providing such benefits.

Discount Rate Methodology

The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates derived from the Mercer US Pension Discount Yield Curve at December 31, 2015 and 2014, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 4.32 percent at December 31, 2015 and 3.95 percent at December 31, 2014. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. plans.

In general, the discount rates for non-U.S. pension plans were developed based on the duration of liabilities on a plan by plan basis and were selected by reference to high quality corporate bonds in developed markets or local government bonds where developed markets are not as robust or are nonexistent.

The projected benefit obligation for Japan represents approximately 50 percent and 47 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 2015 and 2014, respectively. The weighted average discount rate of 0.99 percent at December 31, 2015 was selected by reference to the Mercer Yield Curve (Japan) based on the duration of the plans’ liabilities. The weighted average discount rate of 1.22 percent at December 31, 2014 for Japan was selected by reference to the AA rated corporate bonds reported by Rating and Investment Information, Inc. based on the duration of the plans’ liabilities.

Plan Assets

The investment strategy with respect to assets relating to our U.S. and non-U.S. pension plans is designed to achieve investment returns that will provide for the benefit obligations of the plans over the long term, limit the risk of short-term funding shortfalls and maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the investment rate of return while managing various risk factors, including but not limited to, volatility relative to the benefit obligations, diversification and concentration, and the risk and rewards profile applicable to each asset class.

There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2015 or 2014.

U.S. Pension Plan

The assets of the qualified plan are monitored by the investment committee and actively managed by the investment managers, and involves allocating the plan’s assets among approved asset classes within ranges as permitted by the strategic allocation. The long-term strategic asset allocation historically has been reviewed and revised approximately every three years. Beginning in 2016, the investment strategy will focus on de-risking the Plan via regular monitoring.  This will be implemented through liability driven investing and the adoption of the glide path approach, where the glide path defines the target allocation for the “Return-Seeking” portion of the portfolio (i.e., growth assets) based on the funded ratio. Under this approach, the allocation to growth assets is reduced and the allocation to liability-hedging assets is increased as the Plan’s funded ratio increases in accordance with the defined glide path.

The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation for 2016 based on the plan’s funded status at December 31, 2015:

TargetActualActual
At December 31,201620152014
Asset class:
Equity securities35%35%55%
Fixed maturity securities45%41%28%
Other investments20%24%17%
Total100%100%100%

For both 2015 and 2014, the expected long-term rate of return for the plan was 7.25 percent. The expected rate of return is an aggregation of expected returns within each asset class category, weighted for the investment mix of the assets. The combination of the expected asset return and any contributions made by us are expected to maintain the plan’s ability to meet all required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the expectations for future market returns.

Non-U.S. Pension Plans

The assets of the non-U.S. pension plans are held in various trusts in multiple countries and are invested primarily in equities and fixed maturity securities to maximize the long-term return on assets for a given level of risk.

The following table presents the asset allocation percentage by major asset class for Non-U.S. pension plans and the target allocation:

TargetActualActual
At December 31,201620152014
Asset class:
Equity securities32%45%50%
Fixed maturity securities48%35%35%
Other investments18%13%8%
Cash and cash equivalents2%7%7%
Total100%100%100%

The assets of AIG’s Japan pension plans represent approximately 54 percent and 55 percent of total non-U.S. assets at December 31, 2015 and 2014 respectively. The expected long term rate of return was 1.71 percent and 1.24 percent, for 2015 and 2014, respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annual basis along with various investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the funding policy is revised in accordance with local regulation every five years.

The expected weighted average long-term rate of return for all our non-U.S. pension plans was 3.33 percent and 2.93 percent for the years ended December 31, 2015 and 2014, respectively. It is an aggregation of expected returns within each asset class that was generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns.

Assets Measured at Fair Value

The following table presents information about our plan assets and indicates the level of the fair value measurement based on the observability of the inputs used. The inputs and methodology used in determining the fair value of these assets are consistent with those used to measure our assets as discussed in Note 4 herein.

U.S. PlansNon-U.S. Plans
(in millions)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
At December 31, 2015
Assets:
Cash and cash equivalents$239$-$-$239$49$-$-$49
Equity securities:
U.S.(a)924388-1,31235--35
International(b)2621-26324867-315
Fixed maturity securities:
U.S. investment grade(c)-1,45291,461----
International investment grade(c)-----190-190
U.S. and international high yield(d)-322-322-66-66
Mortgage and other asset-backed
securities(e)-7-7----
Other fixed maturity securities-----12-12
Other investment types:
Hedge funds(f)-46931500----
Futures2--2----
Real Estate----11--11
Private equity(g)--230230----
Insurance contracts-23-23--9595
Total$1,427$2,662$270$4,359$343$335$95$773
At December 31, 2014
Assets:
Cash and cash equivalents$80$-$-$80$50$-$-$50
Equity securities:
U.S.(a)1,244239-1,48330--30
International(b)7871-78827448-322
Fixed maturity securities:
U.S. investment grade(c)-7688776----
International investment grade(c)----2160-162
U.S. and international high yield(d)-347-347-61-61
Mortgage and other asset-backed
securities(e)-6-6----
Other fixed maturity securities-----101727
Other investment types:
Hedge funds(f)-33736373----
Futures4--4----
Private equity(g)--228228----
Insurance contracts-26-26--5656
Total$2,115$1,724$272$4,111$356$279$73$708

(a) Includes index funds that primarily track several indices including S&P 500 and S&P Small Cap 600 as well as other actively managed accounts composed of investments in large cap companies.

(b) Includes investments in companies in emerging and developed markets.

(c) Represents investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.

(d) Consists primarily of investments in securities or debt obligations that have a rating below investment grade.

(e) Comprised primarily of investments in U.S. government agency or U.S. government sponsored agency bonds.

(f) Includes funds composed of macro, event driven, long/short equity, and controlled risk hedge fund strategies and a separately managed controlled risk strategy.

(g) Includes funds that are diverse by geography, investment strategy, sector and vintage year.

The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2015.

The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $23 million and $26 million at December 31, 2015 and 2014, respectively.

Changes in Level 3 fair value measurements

The following table presents changes in our U.S. and non-U.S. Level 3 plan assets measured at fair value:

Changes in
NetUnrealized Gains
BalanceRealized and Balance(Losses) on
At December 31, 2015BeginningUnrealizedTransfersTransfersat EndInstruments Held
(in millions)of yearGains (Losses)PurchasesSalesIssuancesSettlementsInOutof yearat End of year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$8$(1)$17$(15)$-$-$-$-$9$(1)
Hedge funds36111(10)--8(15)31(1)
Private equity228(1)86(83)----2305
Total$272$(1)$114$(108)$-$-$8$(15)$270$3
Non-U.S. Plan Assets:
Other fixed maturity securities$17$(1)$-$-$-$-$-$(16)$-$-
Insurance contracts56(7)1---53(8)95-
Total$73$(8)$1$-$-$-$53$(24)$95$-

Changes in
NetUnrealized Gains
BalanceRealized and Balance(Losses) on
At December 31, 2014BeginningUnrealizedTransfersTransfersat EndInstruments Held
(in millions)of yearGains (Losses)PurchasesSalesIssuancesSettlementsInOutof yearat End of year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$9$2$18$(21)$-$-$-$-$8$1
Hedge funds35315(32)--15-36(1)
Private equity2481173(104)----22810
Total$292$16$106$(157)$-$-$15$-$272$10
Non-U.S. Plan Assets:
Other fixed maturity securities$19$-$-$(2)$-$-$-$-$17$-
Insurance contracts4493-----56-
Total$63$9$3$(2)$-$-$-$-$73$-

Transfers of Level 1 and Level 2 Assets

Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. We had no transfers between Level 1 and Level 2 during the years ended December 31, 2015 and 2014.

Transfers of Level 3 Assets

We record transfers of assets into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the year ended December 31, 2015, we transferred certain investments in hedge funds into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

Expected Cash Flows

Funding for the U.S. pension plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no minimum required cash contributions in 2016 for the AIG Retirement Plan. SERP, AIG NQRIP, and postretirement plan payments are deductible when paid to participants.

Our annual pension contribution in 2016 is expected to be approximately $67 million for our U.S. and non-U.S. plans. These estimates are subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management’s discretion.

The expected future benefit payments, net of participants’ contributions, with respect to the defined benefit pension plans and other postretirement benefit plans, are as follows:

Pension Postretirement
U.S.Non-U.S.U.S.Non-U.S.
(in millions)PlansPlansPlansPlans
2016$759$36$14$1
201731038151
201832340152
201931946152
202031345162
2021-20251,4872828312

Defined Contribution Plans

We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by employees. The most significant plan is the AIG Incentive Savings Plan, for which the Company’s matching contribution is 100 percent of the first six percent of a participant’s contributions, subject to the IRS-imposed limitations. Our pre-tax expenses associated with these plans were $166 million, $156 million and $155 million in 2015, 2014 and 2013 respectively. Effective January 1, 2016, we provide participants in the AIG Incentive Savings Plan an additional fully vested, non-elective, non-discretionary Company contribution equal to 3 percent of the participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the IRS-imposed limitations.