Pensions and Other Postretirement Benefits

Net periodic pension and other post-retirement benefit costs are included in "Cost of sales, exclusive of depreciation and amortization," "Selling, general and administrative" and "Research and development" in the accompanying condensed consolidated statement of income.

The net periodic pension and other post-retirement benefit costs for the three and six months ended June 30, 2016 and 2015 were as follows:



	Pensions
	Three Months Ended June 30						Six Months Ended June 30
($ in millions)	2016			2015			2016			2015
Service cost	$	13		$	15		$	27		$	30
Interest cost	44			53			87			103
Expected return on plan assets	(69		)	(69		)	(138		)	(139		)
Amortization of actuarial losses	31			25			62			55
Amortization of prior service credit	(1		)	—			(1		)	(1		)
Curtailments and special termination benefits	—			1			—			1
Net periodic benefit cost	$	18		$	25		$	37		$	49



	Other Postretirement Benefits
	Three Months Ended June 30						Six Months Ended June 30
($ in millions)	2016			2015			2016			2015
Service cost	$	3		$	5		$	7		$	10
Interest cost	10			12			20			24
Amortization of actuarial losses	5			8			9			16
Amortization of prior service credit	(2		)	(2		)	(4		)	(5		)
Net periodic benefit cost	$	16		$	23		$	32		$	45

PPG expects its net periodic pension and other post-retirement benefit cost, excluding settlement losses, for 2016 will be approximately $140 million, with pension representing approximately $75 million and other post-retirement benefit cost representing approximately $65 million.

In 2016, PPG changed the method it uses to estimate the service and interest cost components of net periodic benefit cost for pension and other postretirement benefit costs for substantially all of its U.S. and foreign plans. Historically, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. PPG has elected to use a full yield curve approach (“Split-rate”) to estimate these components of benefit cost by applying specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. PPG made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change does not affect the measurement of the Company’s total benefit obligations. PPG accounted for this change as a change in estimate and, accordingly, is recognizing its effect prospectively beginning in fiscal year 2016.

Contributions to Defined Benefit Pension Plans



	Three Months Ended June 30				Six Months Ended June 30
($ in millions)	2016		2015		2016		2015
U.S. defined benefit pension voluntary contributions	$	—	$	—	$	—	$	250
Non-U.S. defined benefit pension voluntary contributions	$	—	$	—	$	—	$	21
Non-U.S. defined benefit pension mandatory contributions	$	7	$	—	$	13	$	12

PPG is not required to make any mandatory contributions to its U.S. defined benefit pension plans in 2016. PPG expects to make mandatory contributions to its non-U.S. pension plans in the range of $20 million to $25 million over the remaining six months of 2016. As noted below, we expect to make voluntary contributions to our defined benefit pension plans in 2016 and beyond.

Retained Liabilities and Legacy Settlement Charges

PPG has retained certain liabilities for pension and post-retirement benefits earned for service up to the date of sale of its former automotive glass and service business for employees who were active as of the divestiture date and for individuals who were retirees of the business as of the divestiture date. There have been multiple PPG facilities closures in Canada related to the former automotive glass and services business as well as other PPG businesses. These various plant closures have resulted in partial and full windups, and related settlement charges, of pension plans for various hourly and salary employees employed by these locations. The charges are recorded for the individual plans when a particular windup is approved by the Canadian pension authorities and the Company has made all contributions to the individual plan. There were no charges recorded in the six months ended June 30, 2016 or 2015; however, additional windup charges of $45 million to $55 million are expected during the remaining six months of 2016 related to these plant closures. Cash contributions related to these future windups are expected to be in the range of $5 million to $10 million.

Pension Annuity Contracts

On June 24, 2016, the Company entered into (a) a Definitive Purchase Agreement by and among the Company, Massachusetts Mutual Life Insurance Company (“MassMutual”) and State Street Bank & Trust Company (“State Street”), as independent fiduciary to the Company’s United States defined benefit pension plans (the “Plans”), and (b) a Definitive Purchase Agreement by and among the Company, Metropolitan Life Insurance Company (“MetLife”) and State Street, pursuant to which the Plans will purchase group annuity contracts that will irrevocably transfer to the two insurance companies the future pension benefit obligations for approximately 13,200 of the Company’s retirees in the United States who started receiving their monthly retirement benefit payments on or before April 1, 2016.

Upon issuance of the group annuity contracts, the value of the benefit obligation of each affected former salaried employee’s retirement benefit obligation will be irrevocably guaranteed by, and split equally between, MassMutual and MetLife. Pursuant to these Definitive Purchase Agreements, MassMutual will serve as the lead administrator and, beginning September 1, 2016, it will make each former salaried employee’s full annuity payment on behalf of itself and MetLife. The value of the benefit obligation of each affected former hourly employee’s retirement benefit obligation will be irrevocably guaranteed by MetLife, and MetLife will serve as the administrator. Beginning September 1, 2016, MetLife will make each former hourly employee’s full annuity payment.

The amount of each affected retiree’s annuity payment will be equal to the amount of such individual’s pension benefit. By irrevocably transferring the obligations to MassMutual and MetLife, the Company will reduce its overall pension projected benefit obligation by approximately $1.6 billion. The purchase of group annuity contracts will be funded directly by the assets of the Plans.

The Definitive Purchase Agreements each contain closing conditions customary for a transaction of this nature, including certain termination clauses. Assuming all closing conditions are satisfied, the Company expects the purchase of the irrevocable group annuity contracts would occur in the third quarter of 2016.

The Company expects to make contributions aggregating approximately $175 million to the Plans in 2016 and 2017. These contributions will be funded by cash on hand. The Company expects to recognize a non-cash pension settlement charge of approximately $500 million to $600 million after-tax (approximately $800 million to $1.0 billion pre-tax) in the third quarter of 2016 resulting from the purchase of the group annuity contracts.