Pension Benefits

We maintain a number of qualified and nonqualified defined benefit pension plans and defined contribution plans for eligible employees.

Defined Benefit Pension Plans

Eligible U.S. employees who were employed by the Company as of December 31, 1995 are covered under the Company-sponsored defined benefit retirement plan. In 1997, the plan was amended to freeze all plan benefits as of December 31, 1996. Benefits for the defined benefit retirement plan are based primarily on age of employees at date of retirement, years of creditable service and the average of the highest 60 months of pay during the 15 years prior to the plan freeze date. We also have defined benefit pension plans for eligible employees outside of the U.S., as well as an unfunded nonqualified supplemental defined benefit plan for certain U.S. executives. Most of the non-U.S. defined benefit pension plans cover employees located in Germany, Norway and the United Kingdom.

Celesio has defined benefit pension plans for eligible employees located predominately in Germany, Norway and the United Kingdom. Upon the acquisition of Celesio, as required, we consolidated Celesio’s pension assets and obligations on our consolidated balance sheet. Benefits for these plans are based primarily on each employee’s final salary, with annual adjustments for inflation. The obligations in Norway are largely related to the state-regulated pension plan which is managed by the Norwegian Public Service Pension Fund (“SPK”). According to the terms of the SPK, the plan assets of state regulated plans in Norway must correspond very closely to the pension obligation calculated using the principles codified in Norwegian law. The shortfall may not exceed 1% of the obligation. If the shortfall exceeds this threshold, it must be remedied within 2 years. In the United Kingdom, several Celesio subsidiaries participate in a joint pension plan. This plan is largely funded by contractual trust arrangements that hold Company assets that may only be used to pay pension obligations. The Trustee Board decides on the minimum contribution to the plan in association with selected employees of the entity. A valuation is performed at regular intervals in order to determine the amount of the contribution and to ensure that the minimum contribution is made. The pension obligation in Germany is unfunded with the exception of the contractual trust arrangement used to fund pensions of Celesio’s Management Board.

Defined benefit plan assets and obligations are measured as of the Company’s fiscal year-end.

The net periodic expense, which includes net pension expense for Celesio since the date of acquisition, for our pension plans is as follows:



	U.S. Plans									Non-U.S. Plans
	Years Ended March 31,									Years Ended March 31,
(In millions)	2014			2013			2012			2014			2013			2012
Service cost - benefits earned during the year	$	4		$	4		$	4		$	6		$	3		$	3
Interest cost on projected benefit obligation	19			21			24			11			7			7
Expected return on assets	(20		)	(20		)	(23		)	(12		)	(8		)	(8		)
Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation	32			28			24			4			4			3
Curtailment gain	—			—			—			(1		)	—			—
Net periodic pension expense	$	35		$	33		$	29		$	8		$	6		$	5

The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods.

Information regarding the changes in benefit obligations and plan assets for our pension plans is as follows:



	U.S. Plans						Non-U.S. Plans
	Years Ended March 31,						Years Ended March 31,
(In millions)	2014			2013			2014			2013
Change in benefit obligations
Benefit obligation at beginning of period ⁽¹⁾	$	580		$	527		$	156		$	143
Service cost	4			4			6			3
Interest cost	19			21			11			7
Actuarial (gain) loss	(24		)	58			15			15
Benefit payments	(30		)	(29		)	(12		)	(6		)
Amendments	(9		)	—			—			—
Acquisitions	—			—			740			—
Foreign exchange impact and other	—			(1		)	18			(6		)
Benefit obligation at end of period ⁽¹⁾	$	540		$	580		$	934		$	156

Change in plan assets
Fair value of plan assets at beginning of period	$	290		$	284		$	135		$	126
Actual return on plan assets	28			19			11			12
Employer and participant contributions	12			17			12			8
Benefits paid	(30		)	(29		)	(10		)	(6		)
Acquisitions	—			—			426			—
Foreign exchange impact and other	—			(1		)	16			(5		)
Fair value of plan assets at end of period	$	300		$	290		$	590		$	135

Funded status at end of period	$	(240	)	$	(290	)	$	(344	)	$	(21	)

Amounts recognized on the balance sheet
Current liabilities	$	(13	)	$	(3	)	$	(9	)	$	—
Long-term liabilities	(227		)	(287		)	(335		)	(21		)
Total	$	(240	)	$	(290	)	$	(344	)	$	(21	)


(1)	The benefit obligation is the projected benefit obligation.

The projected and accumulated benefit obligations for our pension plans increased significantly from last year due to the acquisition of Celesio. The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all our pension plans with an accumulated benefit obligation in excess of plan assets.



	U.S. Plans				Non-U.S. Plans
	March 31,				March 31,
(In millions)	2014		2013		2014		2013
Projected benefit obligation	$	540	$	580	$	934	$	156
Accumulated benefit obligation	540		579		894		154
Fair value of plan assets	300		290		590		135

Amounts recognized in accumulated other comprehensive income (pre-tax) consist of:



	U.S. Plans					Non-U.S. Plans
	March 31,					March 31,
(In millions)	2014			2013		2014		2013
Net actuarial loss	$	188		$	251	$	71	$	59
Prior service (credit) cost	(7		)	2		—		(2		)
Total	$	181		$	253	$	71	$	57

Other changes in accumulated other comprehensive income (pre-tax) during the reporting periods were as follows:



	U.S. Plans									Non-U.S. Plans
	Years Ended March 31,									Years Ended March 31,
(In millions)	2014			2013			2012			2014			2013			2012
Net actuarial (gain) loss	$	(31	)	$	59		$	42		$	12		$	11		$	19
Prior service credit	(8		)	—			—			—			—			—
Amortization of:
Net actuarial loss	(32		)	(27		)	(23		)	(4		)	(4		)	(2		)
Prior service (cost) credit	—			(1		)	(1		)	2			—			(1		)
Foreign exchange impact and other	(1		)	—			—			4			(4		)	—
Total recognized in other comprehensive loss (income)	$	(72	)	$	31		$	18		$	14		$	3		$	16

We expect to amortize $7 million of prior service credit and $31 million of actuarial loss for the pension plans from stockholders’ equity to pension expense in 2015. Comparable 2014 amounts were $36 million of actuarial loss and $2 million of prior service credit.

Projected benefit obligations relating to our unfunded U.S. plans were $188 million and $205 million at March 31, 2014 and 2013. Pension obligations for our unfunded plans are based on the recommendations of independent actuaries. Projected benefit obligations relating to our unfunded non-U.S. plans were $260 million and $7 million at March 31, 2014 and 2013. Funding obligations for our non-U.S. plans vary based on the laws of each non-U.S. jurisdiction.

Expected benefit payments, including assumed executive lump sum payments, for our pension plans are as follows: $84 million, $190 million, $74 million, $86 million and $105 million for 2015 to 2019 and $413 million for 2020 through 2024. Expected benefit payments are based on the same assumptions used to measure the benefit obligations and include estimated future employee service. Expected contributions to be made for our pension plans are $67 million for 2015.

Weighted-average assumptions used to estimate the net periodic pension expense and the actuarial present value of benefit obligations were as follows:



	U.S. Plans						Non-U.S. Plans
	Years Ended March 31,						Years Ended March 31,
	2014		2013		2012		2014		2013		2012
Net periodic pension expense
Discount rates	3.39	%	4.11	%	4.82	%	3.95	%	4.50	%	5.42	%
Rate of increase in compensation	4.00		4.00		4.00		2.66		3.10		3.45
Expected long-term rate of return on plan assets	7.25		7.25		8.00		5.71		6.13		6.42
Benefit obligation
Discount rates	3.58	%	3.40	%	4.15	%	3.92	%	4.10	%	4.51	%
Rate of increase in compensation	4.00		4.00		4.00		3.27		3.05		3.06

Our defined benefit pension plan liabilities are valued using a discount rate based on a yield curve developed from a portfolio of high quality corporate bonds rated AA or better whose maturities are aligned with the expected benefit payments of our plans. For March 31, 2014, our U.S. defined benefit liabilities are valued using a weighted average discount rate of 3.58%, which represents an increase of 18 basis points from our 2013 weighted-average discount rate of 3.40%. Our non-U.S defined benefit pension plan liabilities are valued using a weighted-average discount rate of 3.92%.

Sensitivity to changes in the weighted-average discount rate for our pension plans is as follows:



	U.S. Plans				Non-U.S. Plans
(In millions)	One Percentage Point Increase		One Percentage Point Decrease		One Percentage Point Increase		One Percentage Point Decrease
Increase (decrease) on projected benefit obligation	$	(35)	$	40	$	(97)	$	119
Increase (decrease) on net periodic pension cost		(2)		2		(3)		4

Plan Assets

Investment Strategy: The overall objective for U. S. pension plan assets is to generate long-term investment returns consistent with capital preservation and prudent investment practices, with a diversification of asset types and investment strategies. Periodic adjustments are made to provide liquidity for benefit payments and to rebalance plan assets to their target allocations.

The target allocations for U.S. plan assets at March 31, 2014 and 2013 are 50% equity investments, 45% fixed income investments including cash and cash equivalents and 5% real estate. Equity investments include common stock, preferred stock, and equity commingled funds. Fixed income investments include corporate bonds, government securities, mortgage-backed securities, asset-backed securities, other directly held fixed income investments, and fixed income commingled funds. The real estate investment is in a commingled real estate fund.

For both our and Celesio’s plan assets outside of the U.S., the investment strategies are subject to local regulations and the asset/liability profiles of the plans in each individual country. Plan assets of the non-U.S. plans are broadly invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the plans. Plan assets are primarily invested in high-quality corporate and government bond funds and equity securities. Assets are properly diversified to avoid excessive reliance on any particular asset, issuer or group of undertakings so as to avoid accumulations of risk in the portfolio as a whole.

We develop the expected long-term rate of return assumption based on the projected performance of the asset classes in which plan assets are invested. The target asset allocation was determined based on the liability and risk tolerance characteristics of the plans and at times may be adjusted to achieve overall investment objectives.

Fair Value Measurements: The following tables represent our pension plan assets as of March 31, 2014 and 2013, using the fair value hierarchy by asset class. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on unadjusted quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.



	U.S. Plans								Non-U.S. Plans
	March 31, 2014								March 31, 2014
(In millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	8	$	—	$	—	$	8	$	7	$	—	$	—	$	7
Equity securities:
Common and preferred stock	19		—		—		19		—		—		—		—
Equity commingled funds	—		132		—		132		6		157		—		163
Fixed income securities:
Government securities	—		7		—		7		4		—		—		4
Corporate bonds	—		22		—		22		6		236		—		242
Mortgage-backed securities	—		10		—		10		—		—		—		—
Asset-backed securities and other	—		22		—		22		—		—		—		—
Fixed income commingled funds	—		63		—		63		—		45		—		45
Other:
Real estate funds	—		—		16		16		—		19		7		26
Other commingled funds	—		—		—		—		3		49		—		52
Other	—		—		—		—		—		46		5		51
Total	$	27	$	256	$	16	299		$	26	$	552	$	12	590
Receivables⁽¹⁾							1								—
Total							$	300							$	590


(1)	Represents pending trades at March 31, 2014.



	U.S. Plans								Non-U.S. Plans
	March 31, 2013								March 31, 2013
(In millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	—	$	8	$	—	$	8	$	3	$	—	$	—	$	3
Equity securities:
Common and preferred stock	20		—		—		20		—		—		—		—
Equity commingled funds	—		127		—		127		—		82		—		82
Fixed income securities:
Government securities	—		12		—		12		—		—		—		—
Corporate bonds	—		19		—		19		—		9		—		9
Mortgage-backed securities	—		6		—		6		—		—		—		—
Asset-backed securities and other	—		22		—		22		—		—		—		—
Fixed income commingled funds	—		61		—		61		—		36		—		36
Other:
Real estate funds	—		—		14		14		—		—		5		5
Total	$	20	$	255	$	14	289		$	3	$	127	$	5	135
Receivables ⁽¹⁾							1								—
Total							$	290							$	135


(1)	Represents pending trades at March 31, 2013.

Cash and cash equivalents - Cash and cash equivalents include short-term investment funds that maintain daily liquidity and aim to have constant unit values of $1.00. The funds invest in short-term fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and high credit quality. Directly held cash and cash equivalents are classified as Level 1 investments. Cash and cash equivalents include money market funds and other commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 1 or Level 2 investments.

Common and preferred stock - This investment class consists of common and preferred shares issued by U.S. and non-U.S. corporations. Common shares are traded actively on exchanges and price quotes are readily available. Preferred shares may not be actively traded. Holdings of common shares are generally classified as Level 1 investments. Preferred shares are classified as Level 2 investments.

Equity commingled funds - Some equity investments are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 1 or Level 2 investments.

Fixed income securities - Government securities consist of bonds and debentures issued by central governments or federal agencies; corporate bonds consist of bonds and debentures issued by corporations; mortgage-backed securities consist of debt obligations secured by a mortgage or pool of mortgages; and asset-backed securities primarily consist of debt obligations secured by an asset or pool of assets other than mortgages. Inputs to the valuation methodology include quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Multiple prices and price types are obtained from pricing vendors whenever possible, enabling cross-provider price validations. Fixed income securities are generally classified as Level 1 or Level 2 investments.

Fixed income commingled funds - Some fixed income investments are held in commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 2 investments.

Real estate funds - The value of the real estate funds is reported by the fund manager and is based on a valuation of the underlying properties. Inputs used in the valuation include items such as cost, discounted future cash flows, independent appraisals and market based comparable data. The real estate funds are classified as Level 2 and Level 3 investments.

Other commingled funds - The other commingled funds are invested in equities, bonds, commodities, other alternative investments and cash and cash equivalents. These funds are valued based on the weekly net asset values derived from the quoted prices for the underlying securities in active markets and, for alternative investments, based on other valuation techniques. Other commingled funds are classified as Level 1 or Level 2 investments.

Other - At March 31, 2014, this includes $46 million of plan asset value relating to the Norwegian Public Service Pension Fund (“SPK”). In principle, the SPK is organized as a pay-as-you-go system guaranteed by the Norwegian government as it holds no Company-owned assets to back the pension liabilities. The Company pays a pension premium used to fund the plan, which is paid directly to the Norwegian government and is accounted for as governmental income in the annual budget for Norway. To be able to report back plan asset values for the participating employers, SPK has established an annual account for each participating employer to keep track of the financial status of the plan, including managing the contributions and the payments. Further, the investment return credited to this account is determined annually by the SPK based on the performance of long-term government bonds.

The following table represents a reconciliation of Level 3 plan assets held during the years ended March 31, 2014 and 2013:



	U.S. Plans						Non-U.S. Plans
(In millions)	Real Estate Funds		Other		Total		Real Estate Funds		Other		Total
Balance at March 31, 2012	$	12	$	—	$	12	$	5	$	—	$	5
Unrealized gain on plan assets still held	1		—		1		—		—		—
Purchases, sales and settlements	1		—		1		—		—		—
Balance at March 31, 2013	$	14	$	—	$	14	$	5	$	—	$	5
Acquisitions	—		—		—		1		5		6
Unrealized gain on plan assets still held	2		—		2		1		—		1
Purchases, sales and settlements	—		—		—		—		—		—
Balance at March 31, 2014	$	16	$	—	$	16	$	7	$	5	$	12

Multiemployer Plans

The Company contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover union-represented employees in the U.S. In 2014, as a result of our acquisition of Celesio, we also contribute to the Pensjonsordningen for Apoteketaten (“POA”), a mandatory multiemployer pension scheme for our Pharmacy employees in Norway, managed by the association of Norwegian Pharmacies.

The risks of participating in these multiemployer plans are different from single-employer pension plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Actions taken by other participating employers may lead to adverse changes in the financial condition of a multiemployer benefit plan and our withdrawal liability and contributions may increase.

Contributions and amounts accrued for U.S. Plans were not material for the years ended March 31, 2014, 2013, and 2012. Celesio’s contributions to the POA exceeding 5% of total plan contributions were $5 million since our acquisition of Celesio in February 2014. Based on actuarial calculations, we estimate Celesio’s funded status to be less than 65% as of March 31, 2014. No amounts were accrued for liability associated with the POA as Celesio has no intention to withdraw from the plan.

Defined Contribution Plans

We have a contributory profit sharing investment plan (“PSIP”) for U.S. employees not covered by collective bargaining agreements. Eligible employees may contribute to the PSIP up to 75% of their eligible compensation on a pre-tax basis not to exceed IRS limits. The Company makes matching contributions in an amount equal to 100% of the employee’s first 3% of pay contributed and 50% for the next 2% of pay contributed. The Company also may make an additional annual matching contribution for each plan year to enable participants to receive a full match based on their annual contribution. Contribution expenses for the PSIP were $71 million, $61 million and $58 million for the years ended March 31, 2014, 2013, and 2012.