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Pension and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2016

Pension and Other Postretirement Benefit Plans [Abstract]

Pension and Other Postretirement Benefit Plans

Note 15 – Pension and Other Postretirement Benefit Plans

About our Plans

Pension plans. The Company's principal qualified defined benefit pension plans, the Cigna Pension Plan and the Cigna Pension Plan for Certain Former Employees, cover approximately 21,700 retirees, 15,700 vested former employees and 14,800 active employees. Current retirees, certain vested former employees and longer-service active employees are entitled to an annuity benefit based on pay and length of service. Most pension-eligible active employees and certain vested former employees are entitled to a cash balance defined benefit. The Cigna Supplemental Pension Plan, a non-qualified and unfunded plan, covers only certain employees. We froze future benefit accruals for all of these domestic pension plans in 2009. Additionally the Company has foreign pension and other postretirement benefit plans that are immaterial to our results of operations, liquidity and financial position.

As further discussed in Note 21, Cigna Corporation and the Cigna Pension Plan are defendants in a class action lawsuit related to the Plan's conversion of certain employees from an annuity to a cash balance benefit in 1997. When the required plan amendment related to this litigation is adopted, the pension benefit obligation will be updated to reflect benefits resulting from this litigation.

Other postretirement benefit plans. The Company's postretirement benefit medical plan covers approximately 19,400 retirees and 19,900 active employees. Post-1988 retirees contribute to the cost of this coverage, whereas pre-1989 retirees do not. For post-1988 retirees, the Company's cost is capped at 200% of the per capita cost in 2000. Pharmacy coverage for Medicare-eligible retirees is delivered using an Employer Group Waiver Plan. Under that plan, the Company receives subsidies from CMS. The postretirement medical plan is unfunded and future benefit accruals were frozen in 2013. The Company also offers certain postretirement life insurance benefits through various plans. Retirees do not contribute to the cost of life insurance benefits.

Accounting policy. The Company measures the assets and liabilities of its domestic pension and other postretirement benefit plans as of December 31. Benefit obligations are measured at the present value of estimated future payments based on actuarial assumptions. The Company uses the “corridor” method to account for changes in the benefit obligation when actual results differ from those assumed, or when assumptions change. These changes are called net unrecognized actuarial gains (losses). Under the corridor method, net unrecognized actuarial gains (losses) are initially recorded in accumulated other comprehensive income. When the unrecognized gain (loss) exceeds 10% of the benefit obligation, that excess is amortized to other operating expense over the expected remaining lives of plan participants.

For balance sheet purposes, we measure plan assets at fair value. When the actual return differs from the expected return, those differences are reflected in the net unrealized actuarial gain (loss) discussed above. However, to measure pension benefit costs, we use a “market-related” asset valuation for domestic pension plan assets invested in non-fixed income investments that is different than the actual fair value. The “market-related” value recognizes the difference between actual and expected long-term returns in the portfolio over five years, a method that reduces the short-term impact of market fluctuations on pension costs. At December 31, 2016, the market-related asset value was approximately $3.9 billion compared with a fair value of approximately $4.0 billion.
Funded Status and Amounts Included in Accumulated Other Comprehensive Income

The following table summarizes the projected benefit obligations and assets related to our domestic and international pension and other postretirement benefit plans as of, and for the years ended, December 31:

		Pension				Other Postretirement
		Benefits				Benefits
(In millions)	2016		2015		2016		2015
Change in benefit obligation
Benefit obligation, January 1	$	4,934	$	5,269	$	295	$	335
Service cost		2		2		-		-
Interest cost		199		194		11		11
(Gain) loss from past experience		57	⁽¹⁾	(239)	⁽²⁾	2		(19)
Benefits paid from plan assets		(284)		(270)		(3)		(3)
Benefits paid — other		(20)		(22)		(28)		(29)
Benefit obligation, December 31		4,888		4,934		277		295
Change in plan assets
Fair value of plan assets, January 1		3,981		4,170		8		12
Actual return on plan assets		279		75		-		(1)
Benefits paid		(284)		(270)		(3)		(3)
Contributions		1		6		-		-
Fair value of plan assets, December 31		3,977		3,981		5		8
Funded Status	$	(911)	$	(953)	$	(272)	$	(287)

(1) Positive amount reflects a decrease in the discount rate, partially offset by a favorable change in the mortality assumption.
(2) Negative amount reflects an increase in the discount rate and a favorable change in the mortality assumption.

We fund our qualified pension plans at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. In February 2017, we made a voluntary contribution of $150 million. For the remainder of 2017, we do not expect to make any additional contributions to the qualified pension plans because none are required. Future years' contributions will ultimately be based on a wide range of factors including but not limited to asset returns, discount rates and funding targets. Non-qualified pension and other postretirement benefit plans are generally funded on a pay-as-you-go basis as there are no plan assets for these plans.

Benefit payments. The following benefit payments are expected to be paid in:


	Pension		Other Postretirement
(In millions)	Benefits		Benefits
2017	$	381	$	29
2018	$	325	$	28
2019	$	330	$	27
2020	$	324	$	25
2021	$	323	$	24
2022-2026	$	1,587	$	97

Amounts reflected in the pension and other postretirement benefit liabilities shown above that have not yet been reported in net income and therefore are included in accumulated other comprehensive loss consisted of the following as of December 31:

	Pension				Other
	Benefits				Postretirement Benefits
(In millions)	2016		2015		2016		2015
Unrecognized net gain (loss)	$	(2,163)	$	(2,201)	$	-	$	1
Unrecognized prior service cost		(6)		(7)		49		52
Postretirement benefits liability adjustment	$	(2,169)	$	(2,208)	$	49	$	53

We expect to recognize pre-tax losses of $66 million in 2017 from amortization of the net actuarial loss in our pension plans and pre-tax gains of $2 million in 2017 from amortization of prior service cost in the other postretirement benefit plans. These estimates are based on a weighted average amortization period for the frozen and inactive plans that is based on the average expected remaining life of plan participants of approximately 27 years.

Cost of our Plans

Components of net pension and other postretirement benefits cost for the years ended December 31 were as follows:

	Pension Benefits						Other Postretirement Benefits
(In millions)	2016		2015		2014		2016		2015		2014
Service cost	$	2	$	2	$	2	$	-	$	-	$	-
Interest cost		199		194		206		11		11		12
Expected long-term return on plan assets		(249)		(267)		(264)		-		-		-
Amortization of:
Net loss from past experience		65		70		57		1		-		-
Prior service cost		1		-		-		(3)		(3)		(3)
Settlement loss		-		-		6		-		-		-
Net pension cost	$	18	$	(1)	$	7	$	9	$	8	$	9

Assumptions Used for Pension and other Postretirement Benefit Plans

Management determined the present value of the projected benefit obligation and the accumulated other postretirement benefit obligation and related benefit costs based on the following weighted average assumptions as of and for the years ended December 31:

	2016	2015
Discount rate:
Pension benefit obligation	3.95%	4.17%
Other postretirement benefit obligation	3.70%	3.89%
Pension benefit cost	4.17%	3.75%
Other postretirement benefit cost	3.89%	3.50%
Expected long-term return on plan assets:
Pension benefit cost	7.25%	7.25%
Other postretirement benefit cost	5.00%	5.00%
Mortality table for pension and postretirement benefit obligations	RP 2014 with MP 2016 projection scale	RP 2014 with MP 2015 projection scale

The Company used the Society of Actuaries mortality table RP2014and the updated improvement scales published in 2015 and 2016 to value its benefit obligations because the Company's mortality experience closely matched these tables based on internal studies. The updated improvement scales published in 2015 and 2016 both indicated that mortality improvement is expected to be lower than was originally projected when the study was first published in 2014, resulting in decreases to the benefit obligations in both years.

The Company sets discount rates by applying actual annualized yields for high quality bonds at various durations to the expected cash flows of the pension and other postretirement benefits liabilities. The discount rate curve is constructed using an array of bonds in various industries throughout the domestic market, but only selects those for the curve that have an above average return at each duration. Management believes that this curve is representative of the yields that the Company is able to achieve through its plan asset investment strategy.

Expected long-term rates of return on plan assets were developed considering actual long-term historical returns, expected long-term market conditions, plan asset mix and management's investment strategy that continues a significant allocation to domestic and foreign equity securities as well as securities partnerships, real estate and hedge funds. Expected long-term market conditions take into consideration certain key macroeconomic trends including expected domestic and foreign GDP growth, employment levels and inflation.

The estimated rate of future increases in the per capita cost of postretirement health care benefits is 6.50% in 2017, decreasing by 0.25% per year to 4.75% in 2024 and beyond. The impact of a 1% increase or decrease in the estimated rate would be immaterial to postretirement cost and benefit obligation.

Pension Plan Assets

As of December 31, 2016, pension assets included $3.7 billion invested in the separate accounts of Connecticut General Life Insurance Company and Life Insurance Company of North America, subsidiaries of the Company, as well as an additional $276 million invested directly in funds offered by the buyer of the retirement benefits business.

The fair values of pension assets by category are as follows as of December 31, 2016 and 2015.

(In millions)		2016		2015
Pension assets at fair value:
Fixed maturities:
Federal government and agency	$	1	$	2
Corporate		1,125		1,067
Asset-backed		22		21
Fund investments		630		556
Total fixed maturities		1,778		1,646
Equity securities:
Domestic		681		677
International, including funds and pooled separate accounts⁽¹⁾		350		383
Total equity securities		1,031		1,060
Securities partnerships		424		406
Real estate funds, including pooled separate accounts⁽¹⁾		289		362
Hedge funds		196		256
Commercial mortgage loans		129		131
Guaranteed deposit account contract		67		58
Cash equivalents and other current assets, net		63		62
Total pension assets at fair value	$	3,977	$	3,981

(1) A pooled separate account has several participating benefit plans and each owns a share of the total pool of investments.

The Company's current target investment allocation percentages (50% fixed income, 25% public equity securities, and 25% in other investments, including private equity (securities partnerships), real estate and hedge funds) are developed by management as guidelines, although the fair values of each asset category are expected to vary as a result of changes in market conditions. The Company would expect to further reduce the allocation to equity securities and other investments and increase the allocation to fixed income investments as funding levels improve.

See Note 10 for further details regarding how fair value is determined, including the level within the fair value hierarchy and the procedures we use to validate fair value measurements. The Company classifies substantially all pension assets fixed maturities in Level 2. These assets are valued using recent trades of similar securities or are fund investments priced using their daily net asset value that is the exit price. Within pension assets, a substantial portion of domestic equity securities are classified as Level 1, while international equity funds are predominantly classified in Level 2 using daily net asset value.

Securities partnerships, real estate and hedge funds are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. See Note 10 for additional disclosures related to these assets invested in the separate accounts of the Company's subsidiaries. Certain securities as described in Note 10, as well as commercial mortgage loans and guaranteed deposit account contracts, are classified in Level 3 because unobservable inputs used in their valuation are significant.

401(k) Plans

The Company sponsors a 401(k) plan in which the Company matches a portion of employees' pre-tax contributions. Participants in the plan may invest in various funds that invest in the Company's common stock, several diversified stock funds, a bond fund or a fixed-income fund.

The Company may elect to increase its matching contributions if the Company's annual performance meets certain targets. The Company's annual expense for these plans was as follows:

(In millions)	2016		2015		2014
Expense	$	113	$	106	$	98