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," "Pension settlement charges" and "Research and development" in the accompanying condensed consolidated statements of income.

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



	Pensions
	Three Months Ended September 30						Nine Months Ended September 30
($ in millions)	2016			2015			2016			2015
Service cost	$	11		$	14		$	38		$	42
Interest cost	21			48			108			150
Expected return on plan assets	(31		)	(76		)	(169		)	(209		)
Amortization of actuarial losses	24			34			85			84
Amortization of prior service credit	(1		)	(1		)	(2		)	(2		)
Pension settlement charges	968			7			968			7
Curtailments and special termination benefits	—			1			—			2
Net periodic benefit cost	$	992		$	27		$	1,028		$	74



	Other Postretirement Benefits
	Three Months Ended September 30						Nine Months Ended September 30
($ in millions)	2016			2015			2016			2015
Service cost	$	8		$	4		$	14		$	13
Interest cost	12			11			30			35
Amortization of actuarial losses	10			7			20			23
Amortization of prior service credit	(28		)	(2		)	(32		)	(7		)
Net periodic benefit cost	$	2		$	20		$	32		$	64

PPG expects its net periodic pension and other post-retirement benefit cost, excluding settlement losses, for 2016 will be approximately $120 million, with pension representing approximately $90 million and other post-retirement benefit cost representing approximately $30 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 September 30				Nine Months Ended September 30
($ in millions)	2016		2015		2016		2015
U.S. defined benefit pension contributions	$	50	$	—	$	50	$	250
Non-U.S. defined benefit pension voluntary contributions	$	—	$	—	$	—	$	21
Non-U.S. defined benefit pension mandatory contributions	$	15	$	—	$	28	$	15

PPG expects to make additional contributions to its U.S. defined benefit pension plans of approximately $125 million in the fourth quarter 2016 and the first half of 2017, associated with the annuity transactions discussed below. PPG expects to make mandatory contributions to its non-U.S. pension plans in the range of $5 million to $15 million during the fourth quarter of 2016. As noted below, we expect to make voluntary contributions to our defined benefit pension plans in 2016 and beyond.

Approximately $16 million of the contributions to PPG's U.S. defined benefit pension plans were attributable to the flat glass business and were classified as cash outflows for discontinued operations on the condensed consolidated cash flow statement for the nine months ended September 30, 2015.

Retained Liabilities and Legacy Settlement Charges

PPG has retained certain liabilities for defined benefit 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, the Company has made all contributions to the individual plan and has discharged the liability through either lump sum payments to participants or purchasing annuities.

During August and September 2016, PPG completed the wind-up of two legacy Canadian plans and recorded after-tax wind-up charges of $34 million (approximately $47 million pre-tax). Cash contributions made in conjunction with these windups were approximately $1 million. The Company recorded a settlement charge of $7 million in 2015 related to legacy plant closures. We expect limited additional settlement charges related to these legacy plant closures; although the Company retains the right to continue to review and potentially change other PPG defined benefit plans in the future.

Pension Annuity Contracts

In June 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.

On August 3, 2016, pursuant to the two Definitive Purchase Agreements, the Plans purchased group annuity contracts that irrevocably transferred 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. The value of the benefit obligation of each affected former salaried employee’s retirement benefit obligation is irrevocably guaranteed by, and split equally between, MassMutual and MetLife. Pursuant to these Definitive Purchase Agreements, MassMutual serves as the lead administrator. The value of each affected former hourly employee’s retirement benefit obligation is irrevocably guaranteed by MetLife, and MetLife will serve as the administrator. The amount of each affected retiree’s annuity payment is equal to the amount of such individual’s pension benefit. The purchase of group annuity contracts was funded directly by the assets of the Plans.

By irrevocably transferring the obligations to MassMutual and MetLife, the Company reduced its overall pension projected benefit obligation by approximately $1.6 billion and recognized a non-cash pension settlement charge of approximately $535 million after-tax (approximately $857 million pre-tax) in the third quarter of 2016.

The Company made contributions aggregating $50 million to the Plans during the third quarter 2016 and expects to make contributions aggregating approximately $125 million to the Plans in the fourth quarter 2016 and the first half of 2017. These contributions will be funded by cash on hand.

U.S. Plan Merger & Remeasurement

During the third quarter 2016, as a result of the purchase of group annuity contracts, PPG merged two of its qualified defined benefit pension plans that contained retired plan participants into one surviving plan. Prior to the merger and the calculation of the settlement charge, as required, PPG remeasured its qualified pension plan obligations using prevailing discount rates as of July 31, 2016 which averaged 3.6% as compared to a 4.5% discount rate as of December 31, 2015. The remeasurement increased the Company's cumulative pension benefit obligation of its remaining plans by $306 million and increased the Company's full year 2016 qualified defined benefit pension expense by approximately $10 million.

Canadian Pension Annuity Contracts

On August 25, 2016, the Company purchased group annuity contracts that transferred pension benefit obligations for certain of the Company’s retirees and terminated vested participants in Canada who started receiving their monthly retirement benefit payments on or before April 1, 2016 to Sun Life Assurance Company of Canada (“Sun Life”) and The Canada Life Assurance Company (“Canada Life”). The amount of each affected retiree’s annuity payment is equal to the amount of such individual’s pension benefit. The purchase of group annuity contracts was funded directly by the assets of the Canadian plans. By transferring the obligations to Sun Life and Canada Life, the Company reduced its overall pension projected benefit obligation by approximately $200 million and recognized a non-cash pension settlement charge of $47 million after-tax ($64 million pre-tax) in the third quarter of 2016. The Company made contributions aggregating approximately $7 million to the Canadian plans in the third quarter 2016. These contributions were funded by cash on hand.

U.S. Postretirement Medical

On August 4, 2016, the Company communicated plan design changes to certain Medicare-eligible retiree plan participants. Effective January 1, 2017, the Company-sponsored Medicare-eligible plans will be replaced by a Medicare private exchange. By offering retiree health coverage through a private Medicare exchange, PPG is able to provide Medicare-eligible participants with more choice of plans and plan designs, greater flexibility, and different price points for coverage. After January 1, 2017, PPG’s contribution to coverage for Medicare-eligible retirees will be in the form of a tax-free account known as a Health Reimbursement Arrangement (HRA). The HRA can be used to pay for healthcare and prescription drug plan premiums and certain out-of-pocket medical costs; unused funds can be carried over to future years. PPG has the right to amend, modify, or terminate this benefit plan at any time.

The announcement of these plan design changes triggered a remeasurement of PPG’s retiree medical benefit obligation using prevailing interest rates. The remeasurement and announced plan design change resulted in a $190 million net reduction in the Company's postretirement benefit obligation. PPG will account for the plan design change prospectively, and the plan change will reduce net periodic postretirement benefit cost by $54 million annually for 5.6 years. The Company's 2016 net periodic postretirement benefit cost will be approximately $25 million lower during the second half of the year than previously estimated.