NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS

Defined Benefit Plans

We sponsor a number of defined benefit plans, the accrual of benefits under some of which has been frozen, covering eligible employees in the U.S. and certain other countries. Benefits payable to an employee are based primarily on years of service and the employee's compensation during the course of his or her employment with us.

We are also obligated to pay unfunded termination indemnity benefits to certain employees outside of the U.S., which are subject to applicable agreements, laws and regulations. We have not incurred significant costs related to these benefits, and, therefore, no related costs are included in the disclosures below.

In December 2015, we offered eligible former employees who were vested participants in the Avery Dennison Pension Plan (the "ADPP"), our U.S. pension plan, the opportunity to receive their benefits immediately as either a lump-sum payment or an annuity, rather than waiting until they are retirement eligible under the terms of the plan. In the second quarter of 2016, approximately $70 million of pension obligations related to this plan were settled from existing plan assets and a non-cash pre-tax settlement charge of $41.4 million was recorded in "Other expense, net" in the Consolidated Statements of Income. This settlement required us to remeasure the remaining net pension obligations of the ADPP. As a result, in 2016, we recognized approximately $72 million of additional net pension obligations with a corresponding increase in actuarial losses recorded in "Accumulated other comprehensive loss," primarily due to lower discount rates in effect when the plan was remeasured.

Plan Assets

Our investment management of the ADPP assets utilizes a liability driven investment (LDI) strategy. Under an LDI strategy, the assets are invested in a diversified portfolio that includes both risk-seeking ("growth portfolio") and liability-hedging components. The growth portfolio consists primarily of equity and high-yield fixed income securities. The liability-hedging portfolio consists primarily of investment grade fixed income securities and cash and is intended, over time, to more closely match the liabilities of the plan. The investment objective of the portfolio is to improve the funded status of the plan; as funded status reaches certain trigger points, the portfolio moves to a more conservative asset allocation by increasing the allocation to the liability-hedging portfolio. The current target allocation is 65% in the growth portfolio and 35% in the liability-hedging portfolio, subject to periodic fluctuations due to market movements. The plan assets are diversified across asset classes, striving to balance risk and return within the limits of prudent risk-taking and Section 404 of the Employee Retirement Income Security Act of 1974, as amended. Because many of the pension liabilities are long-term, the investment horizon is also long-term, but the investment plan must also ensure adequate near-term liquidity to fund benefit payments.

Assets in our international plans are invested in accordance with locally accepted practices and primarily include equity securities, fixed income securities, insurance contracts and cash. Asset allocations and investments vary by country and plan. Our target plan asset investment allocation for our international plans combined is 39% in equity securities, 43% in fixed income securities and cash, and 18% in insurance contracts and other investments, subject to periodic fluctuations in these respective asset classes.

Fair Value Measurements

The following is a description of the valuation methodologies used for assets measured at fair value:

Cash is valued at nominal value. Mutual funds are valued at fair value as determined by quoted market prices, based upon the net asset value ("NAV") of shares held at year-end. Pooled funds are structured as collective trusts, not publicly traded, and valued by calculating NAV per unit based on the NAV of the underlying funds/trusts as a practical expedient for the fair value of the pooled funds. Insurance contracts are valued at book value, which approximates fair value and is calculated using the prior year balance plus or minus investment returns and changes in cash flows.

These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth, by level within the fair value hierarchy (as applicable), U.S. plan assets (all in the ADPP) at fair value:

			Fair Value Measurements Using
(In millions)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)

2017
Cash	$	–	$	–	$	–	$	–
Pooled funds – liability-hedging portfolio (1)		275.6
Pooled funds – growth portfolio (1)		464.6

Total U.S. plan assets	$	740.2

2016
Cash	$	–	$	–	$	–	$	–
Pooled funds – liability-hedging portfolio (1)		269.0
Pooled funds – growth portfolio (1)		403.1

Total U.S. plan assets	$	672.1

(1)	Pooled funds that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to reconcile to total U.S. plan assets.

The following table sets forth, by level within the fair value hierarchy (as applicable), international plan assets at fair value:

			Fair Value Measurements Using
(In millions)	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)

2017
Cash	$	1.7	$	1.7	$	–	$	–
Insurance contracts		35.7		–		–		35.7
Pooled funds – fixed income securities (1)		278.5
Pooled funds – equity securities (1)		277.3
Pooled funds – other investments (1)		90.5

Total international plan assets at fair value	$	683.7

2016
Cash	$	3.0	$	3.0	$	–	$	–
Insurance contracts		30.5		–		–		30.5
Pooled funds – fixed income securities (1)		284.2
Pooled funds – equity securities (1)		223.4
Pooled funds – other investments (1)		43.1

Total international plan assets at fair value	$	584.2

(1)	Pooled funds that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to reconcile to total international plan assets.

The following table presents a reconciliation of Level 3 international plan asset activity during the year ended December 30, 2017:

	Level 3 Assets
(In millions)	Insurance Contracts

Balance at December 31, 2016	$	30.5
Net realized and unrealized gain		.7
Purchases		2.8
Settlements		(1.4	)
Impact of changes in foreign currency exchange rates		3.1

Balance at December 30, 2017	$	35.7

Postretirement Health Benefits

We provide postretirement health benefits to certain retired U.S. employees up to the age of 65 under a cost-sharing arrangement and provide supplemental Medicare benefits to certain U.S. retirees over the age of 65. Our policy is to fund the cost of the postretirement benefits from operating cash flows. While we have not expressed any intent to terminate postretirement health benefits, we may do so at any time, subject to applicable laws and regulations.

Plan Assumptions

Discount Rate

In consultation with our actuaries, we annually review and determine the discount rates used to value our postretirement obligations. The assumed discount rate for each pension plan reflects market rates for high quality corporate bonds currently available. Our discount rate is determined by evaluating yield curves consisting of large populations of high quality corporate bonds. The projected pension benefit payment streams are then matched with bond portfolios to determine a rate that reflects the liability duration unique to our plans.

In 2016, we began using the full yield curve approach to estimate the service and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans. Under this approach, we applied multiple discount rates from a yield curve composed of the rates of return on several hundred high-quality, fixed income corporate bonds available at the measurement date. We believe this approach provides a more precise measurement of service and interest cost by aligning the timing of the plans' liability cash flows to the corresponding rates on the yield curve. Historically, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period.

Long-term Return on Assets

We determine the long-term rate of return assumption for plan assets by reviewing the historical and expected returns of both the equity and fixed income markets, taking into account our asset allocation, the correlation between returns in our asset classes, and the mix of active and passive investments. Additionally, current market conditions, including interest rates, are evaluated and market data is reviewed for reasonableness and appropriateness.

Healthcare Cost Trend Rate

Our practice is to fund the cost of postretirement benefits from operating cash flows. For measurement purposes, we assumed a 7% annual rate of increase in the per capita cost of covered health care benefits for 2018. This rate is expected to decrease to 5% by 2024.

A one-percentage-point change in assumed health care cost trend rates would have the following effects:

(In millions)	One-percentage-point Increase		One-percentage-point Decrease

Effect on total of service and interest cost components	$	.01	$	(.01	)
Effect on postretirement benefit obligations		.3		(.2	)

Measurement Date

We measure the actuarial value of our benefit obligations and plan assets using the calendar month-end closest to our fiscal year-end and adjust for any contributions or other significant events between the measurement date and our fiscal year-end.

Plan Balance Sheet Reconciliations

The following table provides a reconciliation of benefit obligations, plan assets, funded status of the plans and accumulated other comprehensive loss for our defined benefit plans:

Plan Benefit Obligations

	Pension Benefits												U.S. Postretirement Health Benefits
	2017						2016						2017			2016
(In millions)	U.S.			Int'l			U.S.			Int'l

Change in projected benefit obligations
Projected benefit obligations at beginning of year	$	1,033.7		$	762.9		$	1,088.9		$	674.7		$	5.0		$	5.9
Service cost		.5			18.2			.4			13.9			–			–
Interest cost		35.3			14.3			34.4			16.4			.1			.2
Participant contribution		–			3.4			–			2.9			.5			.5
Amendments		–			(2.1	)		–			(.6	)		–			–
Actuarial loss (gain)		73.1			(26.4	)		39.1			123.8			(.1	)		(.2	)
Plan transfers		–			(1.3	)		–			–			–			–
Acquisition (1)		–			–			–			14.6			–			–
Benefits paid		(60.5	)		(22.5	)		(59.9	)		(21.8	)		(1.4	)		(1.4	)
Curtailments		–			–			–			(.3	)		–			–
Settlements (2)		–			–			(69.2	)		–			–			–
Foreign currency translation		–			90.2			–			(60.7	)		–			–

Projected benefit obligations at end of year	$	1,082.1		$	836.7		$	1,033.7		$	762.9		$	4.1		$	5.0

Accumulated benefit obligations at end of year	$	1,082.1		$	355.6		$	1,033.7		$	704.8

(1)	In connection with the Mactac acquisition in August 2016, we assumed benefit obligations associated with two defined benefit plans in Belgium.
(2)	In 2016, settlements were related to the lump-sum pension payments associated with the ADPP.

Plan Assets

	Pension Benefits												U.S. Postretirement Health Benefits
	2017						2016						2017			2016
(In millions)	U.S.			Int'l			U.S.			Int'l

Change in plan assets
Plan assets at beginning of year	$	672.1		$	584.2		$	704.9		$	552.1		$	–		$	–
Actual return on plan assets		90.1			34.2			42.9			79.4			–			–
Plan transfers		–			(.7	)		–			–			–			–
Acquisition (1)		–			–			–			8.9			–			–
Employer contributions		38.5			14.0			53.4			13.8			.9			.9
Participant contributions		–			3.4			–			2.9			.5			.5
Benefits paid		(60.5	)		(22.5	)		(59.9	)		(21.8	)		(1.4	)		(1.4	)
Settlements (2)		–			–			(69.2	)		–			–			–
Foreign currency translation		–			71.1			–			(51.1	)		–			–

Plan assets at end of year	$	740.2		$	683.7		$	672.1		$	584.2		$	–		$	–

(1)	In connection with the Mactac acquisition in August 2016, we assumed plan assets associated with two defined benefit plans in Belgium.
(2)	In 2016, settlements were related to the lump-sum pension payments associated with the ADPP.

Funded Status

	Pension Benefits												U.S. Postretirement Health Benefits
	2017						2016						2017			2016
(In millions)	U.S.			Int'l			U.S.			Int'l

Funded status of the plans
Other accrued liabilities	$	(33.4	)	$	(2.4	)	$	(13.5	)	$	(2.0	)	$	(.5	)	$	(.8	)
Long-term retirement benefits and other liabilities (1)		(308.5	)		(150.6	)		(348.1	)		(176.7	)		(3.6	)		(4.2	)

Plan assets less than benefit obligations	$	(341.9	)	$	(153.0	)	$	(361.6	)	$	(178.7	)	$	(4.1	)	$	(5.0	)

(1)	In accordance with our funding strategy, we have the option to fund certain of these liabilities with proceeds from our corporate-owned life insurance policies.

													U.S. Postretirement
	Pension Benefits												Health Benefits
	2017						2016						2017			2016
	U.S.			Int'l			U.S.			Int'l

Weighted-average assumptions used to determine year-end benefit obligations
Discount rate		3.71	%		2.25	%		4.25	%		2.12	%		3.55	%		3.95	%
Compensation rate increase		–			2.29			–			2.27			–			–

For U.S. and international plans combined, the projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $1.92 billion and $1.42 billion, respectively, at year-end 2017 and $1.80 billion and $1.26 billion, respectively, at year-end 2016.

For U.S. and international plans combined, the accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $1.44 billion and $994 million, respectively, at year-end 2017 and $1.74 billion and $1.26 billion, respectively, at year-end 2016.

Accumulated Other Comprehensive Loss

The following table sets forth the pre-tax amounts recognized in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets:

	Pension Benefits										U.S. Postretirement Health Benefits
	2017					2016					2017			2016
(In millions)	U.S.		Int'l			U.S.		Int'l

Net actuarial loss	$	567.2	$	186.5		$	564.2	$	213.6		$	17.0		$	18.5
Prior service cost (credit)		16.7		(7.4	)		17.5		(4.9	)		(13.1	)		(16.4	)
Net transition obligation		–		.1			–		.2			–			–

Net amount recognized in accumulated other comprehensive loss	$	583.9	$	179.2		$	581.7	$	208.9		$	3.9		$	2.1

The following table sets forth the pre-tax amounts, including those of discontinued operations, recognized in "Other comprehensive loss (income)":

	Pension Benefits																		U.S. Postretirement Health Benefits
	2017						2016						2015						2017			2016			2015
(In millions)	U.S.			Int'l			U.S.			Int'l			U.S.			Int'l

Net actuarial loss (gain)	$	21.8		$	(17.2	)	$	39.1		$	48.9		$	21.1		$	11.3		$	–		$	(.2	)	$	(1.4	)
Prior service (credit) cost		–			(2.1	)		–			(.6	)		–			(.7	)		–			–			–
Amortization of unrecognized:
Net actuarial loss		(18.7	)		(10.8	)		(19.0	)		(7.0	)		(20.0	)		(9.4	)		(1.5	)		(1.7	)		(2.2	)
Prior service (cost) credit		(.9	)		.4			(1.2	)		.4			(1.2	)		.3			3.3			3.2			3.3
Net transition obligation		–			–			–			(.1	)		–			–			–			–			–
Curtailments		–			–			–			–			–			.2			–			–			–
Settlements		–			–			(41.4	)		–			–			(4.3	)		–			–			–

Net amount recognized in other comprehensive (income) loss	$	2.2		$	(29.7	)	$	(22.5	)	$	41.6		$	(.1	)	$	(2.6	)	$	1.8		$	1.3		$	(.3	)

Plan Income Statement Reconciliations

The following table sets forth the components of net periodic benefit cost, which are recorded in income from continuing operations, for our defined benefit plans:

	Pension Benefits																		U.S. Postretirement Health Benefits
	2017						2016						2015						2017			2016			2015
(In millions)	U.S.			Int'l			U.S.			Int'l			U.S.			Int'l

Service cost	$	.5		$	18.2		$	.4		$	13.9		$	.4		$	13.8		$	–		$	–		$	–
Interest cost		35.3			14.3			34.4			16.4			45.8			17.3			.1			.1			.3
Actuarial (gain) loss		1.7			–			(.2	)		–			.4			–			–			–			–
Expected return on plan assets		(40.5	)		(21.1	)		(42.7	)		(21.4	)		(51.5	)		(21.5	)		–			–			–
Amortization of actuarial loss		18.7			10.8			19.0			7.0			20.0			9.4			1.5			1.7			2.2
Amortization of prior service cost (credit)		.9			(.4	)		1.2			(.4	)		1.2			(.3	)		(3.3	)		(3.2	)		(3.3	)
Amortization of transition obligation		–			–			–			.1			–			–			–			–			–
Recognized net (gain) loss on curtailments		–			–			–			(.2	)		–			(.2	)		–			–			–
Recognized loss on settlements (1)		–			–			41.4			–			–			4.3			–			–			–

Net periodic benefit cost (credit)	$	16.6		$	21.8		$	53.5		$	15.4		$	16.3		$	22.8		$	(1.7	)	$	(1.4	)	$	(.8	)

(1)

In 2016, we recognized a loss on settlements related to the ADPP as a result of making the lump-sum pension payments described above. In 2015, we recognized a loss on settlements related to pension plans in Germany and France as a result of the sale of a product line in our RBIS reportable segment. We also recognized a loss on settlements in Switzerland in 2015. These losses on settlements were recorded in "Other expense, net" in the Consolidated Statements of Income.

The following table sets forth the weighted-average assumptions used to determine net periodic cost:

	Pension Benefits																		U.S. Postretirement Health Benefits
	2017						2016						2015						2017			2016			2015
	U.S.			Int'l			U.S.			Int'l			U.S.			Int'l

Discount rate		4.18	%		2.12	%		4.55	%		2.95	%		4.00	%		2.54	%		3.95	%		4.13	%		3.50	%
Expected return on assets		7.00			3.77			7.25			4.14			7.50			4.27			–			–			–
Compensation rate increase		–			2.27			–			2.24			–			2.22			–			–			–

Plan Contributions

We make contributions to our defined benefit plans sufficient to meet the minimum funding requirements of applicable laws and regulations, plus additional amounts, if any, we determine to be appropriate. The following table sets forth our expected contributions in 2018:

(In millions)

U.S.	$	34.0
Int'l		14.9
U.S. postretirement health benefits		.5

Future Benefit Payments

Anticipated future benefit payments, which reflect expected service periods for eligible participants, were as follows:

	Pension Benefits				U.S. Postretirement Health Benefits
(In millions)	U.S.		Int'l

2018	$	83.0	$	20.4	$	.5
2019		58.9		21.8		.4
2020		59.0		21.3		.3
2021		60.6		23.0		.3
2022		60.5		25.9		.3
2023 - 2027		305.9		145.5		1.3

Estimated Amortization Amounts in Accumulated Other Comprehensive Loss

Our estimates of fiscal year 2018 amortization of amounts included in "Accumulated other comprehensive loss" were as follows:

	Pension Benefits					U.S. Postretirement Health Benefits
(In millions)	U.S.		Int'l

Net actuarial loss	$	20.8	$	8.1		$	1.4
Prior service cost (credit)		.8		(.5	)		(3.3	)
Net transition obligation		–		.1			–

Net loss (gain) to be recognized	$	21.6	$	7.7		$	(1.9	)

Defined Contribution Plans

We sponsor various defined contribution plans worldwide, the largest of which is the Avery Dennison Corporation Employee Savings Plan ("Savings Plan"), a 401(k) plan for our U.S. employees.

We recognized expense from continuing operations of $20.2 million, $20 million, and $20.2 million in 2017, 2016, and 2015, respectively, related to our employer contributions and employer match of participant contributions to the Savings Plan.

Other Retirement Plans

We have deferred compensation plans that permit eligible employees and directors to defer a portion of their compensation. The compensation voluntarily deferred by the participant, together with certain employer contributions, earns specified and variable rates of return. As of year-end 2017 and 2016, we had accrued $86.9 million and $78.7 million, respectively, for our obligations under these plans. A portion of the interest on certain of our contributions may be forfeited by participants if their employment terminates before age 55 other than by reason of death or disability.

Our Directors Deferred Equity Compensation Plan allows our non-employee directors to elect to receive their cash compensation in deferred stock units ("DSUs") issued under our equity plans. Dividend equivalents, representing the value of dividends per share paid on shares of our common stock and calculated with reference to the number of DSUs held as of a quarterly dividend record date, are credited in the form of additional DSUs on the applicable payable date. A director's DSUs are converted into shares of our common stock upon his or her resignation or retirement. Approximately .2 million and .1 million DSUs were outstanding as of year-end 2017 and 2016, respectively, with an aggregate value of $17.8 million and $10.2 million, respectively.

We hold corporate-owned life insurance policies, the proceeds from which are payable to us upon the death of covered participants. The cash surrender values of these policies, net of outstanding loans, which are included in "Other assets" in the Consolidated Balance Sheets, were $243.5 million and $230.6 million at year-end 2017 and 2016, respectively.