Postretirement Benefits

Defined Benefit Plans

We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.

Obligations and Funded Status

A summary of the changes in benefit obligations and plan assets is as follows:



	Pension Benefits						Health and Life Insurance Benefits
(in millions)	2018			2017			2018			2017
Change in benefit obligations
Benefit obligations at beginning of year	$	3,799		$	4,027		$	1,435		$	1,708
Service cost	7			7			4			5
Interest on obligations	108			107			43			47
Actuarial loss (gain)	(251		)	(18		)	(159		)	(183		)
Settlements	(25		)	(52		)	—			—
Contractual termination benefits	—			10			—			4
Curtailments and other	—			(2		)	—			(58		)
Currency translation	(8		)	17			—			—
Plan participants' contributions	—			—			40			36
Subsidy receipts	—			—			42			42
Benefits paid	(286		)	(297		)	(160		)	(166		)
Benefit obligations at end of year	$	3,344		$	3,799		$	1,245		$	1,435
Change in plan assets
Fair value of plan assets at beginning of year	$	2,363		$	2,310		$	333		$	333
Actual return on plan assets	(30		)	256			4			38
Settlements	(25		)	(52		)	—			—
Currency translation	(8		)	18			—			—
Employer contributions	132			112			1			2
Benefits paid	(270		)	(281		)	(41		)	(40		)
Fair value of plan assets at end of year	$	2,162		$	2,363		$	297		$	333
Funded status at year end	$	(1,182	)	$	(1,436	)	$	(948	)	$	(1,102	)



	Pension Benefits						Health and Life Insurance Benefits
(in millions)	2018			2017			2018			2017
Amounts recognized in our Consolidated Balance Sheets consist of:
Noncurrent asset	$	18		$	16		$	—		$	—
Current liability	(17		)	(16		)	(34		)	(41		)
Noncurrent liability	(1,183		)	(1,436		)	(914		)	(1,061		)
Net liability recognized	$	(1,182	)	$	(1,436	)	$	(948	)	$	(1,102	)

Amounts recognized in our accumulated other comprehensive loss consist of:
Net actuarial loss	$	2,007		$	2,183		$	104		$	252
Net prior service benefit	—			—			—			—
Net amount recognized	$	2,007		$	2,183		$	104		$	252

The accumulated benefit obligation for pension benefits, a measure that excludes the effect of prospective salary and wage increases, was $3.3 billion and $3.8 billion for October 31, 2018 and 2017, respectively.

The cumulative postretirement benefit adjustment included in the Consolidated Statement of Stockholders' Deficit at October 31, 2018 is net of $503 million of deferred taxes related to our postretirement benefit plans.

Information for pension plans with accumulated benefit obligations in excess of plan assets were as follows:



	As of October 31,
(in millions)	2018		2017
Projected benefit obligations	$	3,065	$	3,487
Accumulated benefit obligations	3,051		3,471
Fair value of plan assets	1,865		2,035

Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. As of October 31, 2018, we have met all regulatory funding requirements. In 2018, we contributed $132 million to our pension plans to meet regulatory funding requirements. We expect to contribute approximately $140 million to our pension plans during 2019.

We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement, which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. In 2018, we contributed $1 million to our OPEB plans to meet legal funding requirements. We expect to contribute $1 million to our OPEB plans during 2019.

We have certain unfunded pension plans, under which we make payments directly to employees. Benefit payments of $16 million for both October 31, 2018 and 2017 are included within the amount of Benefits paid in the Change in benefit obligation section above, but are not included in the Change in plan assets section, because the payments are made directly by us and not by separate trusts that are used in the funding of our other pension plans.

We also have certain OPEB benefits that are paid from Company assets (instead of trust assets). Payments from Company assets, net of participant contributions and subsidy receipts, result in differences between benefits paid as presented under Change in benefit obligation and Change in plan assets of $37 million and $48 million for 2018 and 2017, respectively.

Components of Net Periodic Benefit Expense and Other Amounts Recognized in Other Comprehensive Loss

The components of our postretirement benefits expense included in our Consolidated Statements of Operations consist of the following:



	For the Years Ended October 31,
(in millions)	2018		2017			2016
Pension expense	$	72	$	121		$	82
Health and life insurance expense	33		(3		)	71
Total postretirement benefits expense	$	105	$	118		$	153

Components of Net Periodic Benefit Expense

Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our Consolidated Statements of Stockholders' Deficit, for the years ended October 31 is comprised of the following:



	For the Years Ended October 31,
	Pension Benefits									Health and Life Insurance Benefits
(in millions)	2018			2017			2016			2018			2017			2016
Service cost for benefits earned during the period	$	7		$	7		$	9		$	4		$	5		$	5
Interest on obligation	108			107			118			43			47			58
Amortization of cumulative loss	106			116			104			9			22			31
Amortization of prior service cost (benefit)	—			—			—			—			—			(1		)
Settlements	9			23			—			—			—			—
Contractual termination benefits	—			10			3			—			4			4
Curtailments and other	—			—			—			—			(58		)	—
Premiums on pension insurance	3			15			15			—			—			—
Expected return on assets	(161		)	(157		)	(167		)	(23		)	(23		)	(26		)
Net periodic benefit expense	$	72		$	121		$	82		$	33		$	(3	)	$	71
Other Changes in plan assets and benefit obligations recognized in other comprehensive loss (income)
Actuarial net loss (gain)	$	(61	)	$	(116	)	$	313		$	(139	)	$	(197	)	$	(115	)
Amortization of cumulative loss	(106		)	(116		)	(104		)	(9		)	(22		)	(31		)
Amortization of prior service benefit (cost)	—			—			—			—			—			1
Settlements	(9		)	(23		)	—			—			—			—
Curtailments	—			(2		)	—			—			—			—
Currency translation	—			—			(1		)	—			—			—
Total recognized in other comprehensive loss (income)	$	(176	)	$	(257	)	$	208		$	(148	)	$	(219	)	$	(145	)
Total net postretirement benefits (income) expense and other comprehensive loss (income)	$	(104	)	$	(136	)	$	290		$	(115	)	$	(222	)	$	(74	)

For the year ended October 31, 2018, we purchased a group annuity contract for certain retired pension plan participants resulting in a plan remeasurement. As a result, a net actuarial loss of $2 million was recognized as a component of Accumulated other comprehensive loss and a pension settlement accounting expense of $9 million was recognized in SG&A expenses in our Consolidated Statements of Operations.

In April 2016, we filed a qualified partial wind-up report for approval by FSCO related to the 2011 closure of our Chatham, Ontario plant. FSCO provided formal approval in January 2017. As a result of an ongoing administration review ordered in conjunction with the partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other postemployment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and impairments for further discussion. As a result of the pension and OPEB plan remeasurements in connection with the finalization of the Chatham closure agreement, net actuarial gains of $21 million were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.

In the third quarter of 2017, we committed to a plan to cease engine production at our Melrose Park Facility in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized $9 million of pension and $4 million of OPEB contractual termination benefits charges and $10 million of OPEB curtailment charges. These charges were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and impairments for further discussion. A pension curtailment gain of $2 million and net actuarial gains of $91 million resulting from pension and OPEB remeasurements in connection with our Melrose Park Facility announcement were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.

Also, during 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $28 million related to domestic continuing operations in Income tax expense in our Consolidated Statements of Operations, and an offsetting reduction in Other comprehensive income due to the remeasurement of certain pension and OPEB plans.

The estimated amounts for the defined benefit pension plans and the other postretirement benefit plans that will be amortized from AOCL into net periodic benefit expense over the next fiscal year are as follows:



(in millions)	Pension Benefits		Health and Life Insurance Benefits
Amortization of prior service cost (benefit)	$	—	$	—
Amortization of cumulative losses/(gains)	98		(1		)

Cumulative unrecognized actuarial gains and losses for postretirement benefit plans, where substantially all of the plan participants are inactive, are amortized over the average remaining life expectancy of the inactive plan participants. Otherwise, cumulative gains and losses are amortized over the average remaining service period of active employees.

Plan amendments unrelated to negotiated labor contracts are amortized over the average remaining service period of active employees or the remaining life expectancy of the inactive participants based upon the nature of the amendment and the participants impacted. Plan amendments arising from negotiated labor contracts are amortized over the length of the contract.

Assumptions

The weighted average rate assumptions used in determining benefit obligations for the years ended October 31, 2018 and 2017 are:



	Pension Benefits				Health and Life Insurance Benefits
	2018		2017		2018		2017
Discount rate used to determine present value of benefit obligation at end of year	4.4	%	3.5	%	4.4	%	3.6	%
Expected rate of increase in future compensation levels	3.5	%	3.5	%	—		—

The weighted average rate assumptions used in determining net postretirement benefits expense for 2018, 2017, and 2016 were:



	Pension Benefits						Health and Life Insurance Benefits
	2018		2017		2016		2018		2017		2016
Discount rate used to determine service cost	3.9	%	3.9	%	4.5	%	3.9	%	4.0	%	4.6	%
Discount rate used to determine interest cost	3.0	%	2.8	%	3.1	%	3.1	%	2.9	%	3.3	%
Expected long-term rate of return on plan assets	7.2	%	7.2	%	7.5	%	7.5	%	7.5	%	7.5	%
Expected rate of increase in future compensation levels	3.5	%	3.5	%	3.5	%	—		—		—

The actuarial assumptions used to compute the net postretirement benefits expense (income) are based upon information available as of the beginning of the year, specifically market interest rates, past experience, and our best estimate of future economic conditions. Changes in these assumptions may impact the measurement of future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rates, expected returns on plan assets, and expected future cost increases. Three of these items have a significant impact on the level of expense recognized: (i) discount rates, (ii) expected rates of return on plan assets, and (iii) healthcare cost trend rates.

We determine the discount rate for our pension and OPEB obligations by matching anticipated future benefit payments for the plans to a high-quality corporate bond yield curve to establish a weighted average discount rate for each plan.

We determine our assumption as to expected return on plan assets by evaluating historical performance, investment community forecasts, and current market conditions. We consider the current asset mix as well as our targeted asset mix when establishing the expected return on plan assets.

Health care cost trend rates have been established through a review of actual recent cost trends and projected future trends. Our retiree medical and drug cost trend assumptions are our best estimate of expected inflationary increases to healthcare costs. Due to the number of former employees and their beneficiaries included in our retiree population (approximately 30,000), the trend assumptions are based upon both our specific trends and nationally expected trends.

The weighted average rate of increase in the per capita cost of postretirement health care benefits provided through U.S. plans representing 92% of our other postretirement benefit obligation, is projected to be 14.4% in 2019 and was estimated as 7.1% for 2018. Our projections assume that the rate will decrease to 5% by the year 2023 and remain at that level each year thereafter.

The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:



(in millions)	One-Percentage Point Increase		One-Percentage Point Decrease
Effect on total of service and interest cost components	$	8	$	(7	)
Effect on postretirement benefit obligation	169		(143		)

Plan Assets

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 12, Fair Value Measurements, for a discussion of the fair value hierarchy.

The following describes the methods and significant assumptions used to estimate fair value of the investments:


•	Cash and short-term investments—Valued at cost plus earnings from investments for the period, which approximates fair market value due to the short-term duration. Cash equivalents are valued at net asset value as provided by the administrator of the fund.


•	U.S. Government and agency securities—Valued at the closing price reported on the active market on which the security is traded or valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and Telekurs.


•	Corporate debt securities—Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and Telekurs.


•	Common and preferred stock—Valued at the closing price reported on the active market on which the security is traded.


•	Collective trusts, Partnerships/joint venture interests and Hedge funds—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.


•	Insurance Linked Securities—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, then divided by the number of units outstanding.


•	Derivatives -Valued monthly for the trustee using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and Telekurs. Valued monthly by the trustee using various providers of derivatives pricing, most notably Numerix, Markit and Super Derivatives.

Pension Assets

The fair value of the pension plan assets by category is summarized below:



	As of October 31, 2018										As of October 31, 2017
(in millions)	Level 1		Level 2		Level 3		NAV		Total		Level 1		Level 2		Level 3		NAV		Total
Asset Category
Cash and Cash Equivalents	$	77	$	—	$	—	$	—	$	77	$	86	$	—	$	—	$	—	$	86
Collective Trusts and Other
U.S. Equity	293		—		—		—		293		316		—		—		—		316
Canadian Equity	16		—		—		—		16		19		—		—		—		19
International Equity	270		—		—		—		270		327		—		—		—		327
Global Equity	205		—		—		—		205		235		—		—		—		235
Fixed Income - Long Duration Credit	—		283		—		—		283		—		508		—		—		508
Fixed Income - Long Duration Government	—		156		—		—		156		—		20		—		—		20
Fixed Income - Intermediate Duration Government	—		48		—		—		48		—		—		—		—		—
Fixed Income - High Yield	—		157		—		—		157		—		214		—		—		214
Fixed Income - Canadian Bond	—		194		—		—		194		—		213		—		—		213
Global Real Estate	—		135		—		—		135		—		144		—		—		144
Global Infrastructure	—		—		—		9		9		—		—		—		10		10
Insurance linked Securities	—		—		—		45		45		—		—		—		—		—
Hedge Fund of Funds	—		—		—		202		202		—		—		—		210		210
Private Equity	—		—		—		32		32		—		—		—		43		43
Private Credit	—		—		—		22		22		—		—		—		—		—
Real Estate	—		—		—		—		—		—		—		1		—		1
Total^(A)	$	861	$	973	$	—	$	310	$	2,144	$	983	$	1,099	$	1	$	263	$	2,346

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(A)	In addition, the table above includes the fair value of Canadian pension assets translated at the exchange rates as of October 31, 2018 and 2017, respectively, while the change in plan asset table includes the fair value of Canadian pension assets translated at historical foreign currency rates.

Other Postretirement Benefits

The fair value of other postretirement benefit plan assets by category is summarized below:



	As of October 31, 2018										As of October 31, 2017
(in millions)	Level 1		Level 2		Level 3		NAV		Total		Level 1		Level 2		Level 3		NAV		Total
Asset Category
Cash and Cash Equivalents	$	11	$	—	$	—	$	—	$	11	$	6	$	—	$	—	$	—	$	6
Fixed Income
U.S. Credit Bonds	—		61		—		—		61		—		—		—		—		—
Corporate and Government Bonds	—		—		—		—		—		—		62		—		—		62
Government Bonds	—		—		—		—		—		—		8		—		—		8
Collective Trusts and Other
U.S. Equity	59		—		—		—		59		71		—		—		—		71
International Equity	59		—		—		—		59		74		—		—		—		74
Fixed Income - Multi-Asset Credit	9		17		—		—		26		—		29		—		—		29
Real Estate (REITs)	—		—		—		26		26		—		—		—		24		24
Mutual Fund	—		—		—		—		—		9		—		—		—		9
Insurance Linked Securities	—		—		—		8		8		—		—		—		—		—
Hedge Fund of Funds	—		—		—		39		39		—		—		—		39		39
Private Equity	—		—		—		8		8		—		—		—		11		11
Total	$	138	$	78	$	—	$	81	$	297	$	160	$	99	$	—	$	74	$	333

The investment strategy of the postretirement pension plans (the "Plans") is based on many factors including broad economic factors, historical and prospective information regarding capital market performance, investment strategies available to an asset pool of this size, the current regulatory environment, the Plans’ liabilities and the expected interaction between assets and liabilities. The primary objective of the strategy is to manage assets in such a way that will allow the eventual satisfaction of obligations to the Plans’ participants and beneficiaries. To meet the primary objective the portfolios will be structured to provide liquidity to meet the Plans’ benefit payment obligations and administration expenses, offer a reasonable probability of achieving growth in assets that will assist in closing the Plans’ funding gap and enable the Plans to satisfy their liabilities.

Given the relationship between risk and return a moderately aggressive risk profile was implemented. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation.

In line with the Plans' return objectives and risk parameters, target asset allocations, which were established following a 2015 asset liability study, are approximately 70% return-seeking assets and 30% liability-hedging assets. The return-seeking assets include long only equities (both active and passive, domestic and international, across the capitalization range) to capture long-term growth opportunities, hedge fund of funds to diversify the equity beta, return seeking credit (including high yield debt, emerging market debt and bank loans) to provide a meaningful level of absolute return and diversify equity beta, global real estate to diversify the equity beta and private equity. The liability-hedging assets are invested in high-quality, investment grade bonds with durations that approximate the durations of the liabilities. The objective of the liability hedging assets is to dampen the Plans’ surplus volatility.

All assets are managed by external investment managers. Each investment manager is expected to prudently manage the assets in a manner consistent with the investment objectives, guidelines, and constraints outlined in their Investment Management Agreements and the Investment Policy Statement. Managers are not permitted to invest outside of the asset class mandate (e.g., equity, fixed income, alternatives) or strategy for which they are appointed.

Expected Future Benefit Payments

The expected future benefit payments for the years ending October 31, 2019 through 2023 and the five years ending October 31, 2028 are estimated as follows:



(in millions)	Pension Benefit Payments		Other Postretirement Benefit Payments^(A)
2019	$	283	$	76
2020	278		85
2021	271		91
2022	264		93
2023	257		95
2024 through 2028	1,173		454

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(A)	Payments are net of expected participant contributions and expected federal subsidy receipts.

Defined Contribution Plans and Other Contractual Arrangements

Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. We deposit the matching contribution annually. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $33 million in 2018, and $29 million in both 2017 and 2016.

In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.

Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. In 2018, we recorded $30 million in profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 13, Commitments and Contingencies.