10. Postretirement benefit plans

Plan descriptions

We have various employee retirement plans, including defined contribution, defined benefit and retiree health care benefit plans. For qualifying employees, we offer deferred compensation arrangements.

U.S. retirement plans

Our principal retirement plans in the U.S. are a defined contribution plan; an enhanced defined contribution plan; and qualified and non-qualified defined benefit pension plans. The defined benefit plans were closed to new participants in 1997, and then current participants were allowed to make a one-time election to continue accruing a benefit in the plans, or to cease accruing a benefit and instead to participate in the enhanced defined contribution plan described below.

Both defined contribution plans offer an employer-matching savings option that allows employees to make pre-tax contributions to various investment choices. Employees who elected to continue accruing a benefit in the qualified defined benefit pension plans may also participate in the defined contribution plan, where employer-matching contributions are provided for up to 2 percent of the employee’s annual eligible earnings. Employees who elected not to continue accruing a benefit in the defined benefit pension plans, and employees hired after November 1997 and through December 31, 2003, may participate in the enhanced defined contribution plan. This plan provides for a fixed employer contribution of 2 percent of the employee’s annual eligible earnings, plus an employer-matching contribution of up to 4 percent of the employee’s annual eligible earnings. Employees hired after December 31, 2003, do not receive the fixed employer contribution of 2 percent of the employee’s annual eligible earnings.

As of December 31, 2016 and 2015, as a result of employees’ elections, TI’s U.S. defined contribution plans held shares of TI common stock totaling 11 million shares and 13 million shares valued at $796 million and $704 million, respectively. Dividends paid on these shares in 2016 and 2015 were $20 million and $19 million, respectively. Effective April 1, 2016, the TI common stock fund was frozen to new contributions or transfers into the fund.

Our aggregate expense for the U.S. defined contribution plans was $60 million in 2016, 2015 and 2014.

The defined benefit pension plans include employees still accruing benefits, as well as employees and participants who no longer accrue service-related benefits, but instead, may participate in the enhanced defined contribution plan. Benefits under the qualified defined benefit pension plan are determined using a formula based upon years of service and the highest five consecutive years of compensation. We intend to contribute amounts to this plan to meet the minimum funding requirements of applicable local laws and regulations, plus such additional amounts as we deem appropriate. The non-qualified defined benefit plans are unfunded and closed to new participants.

U.S. retiree health care benefit plan

U.S. employees who meet eligibility requirements are offered medical coverage during retirement. We make a contribution toward the cost of those retiree medical benefits for certain retirees and their dependents. The contribution rates are based upon various factors, the most important of which are an employee’s date of hire, date of retirement, years of service and eligibility for Medicare benefits. The balance of the cost is borne by the plan’s participants. Employees hired after January 1, 2001, are responsible for the full cost of their medical benefits during retirement.

Non-U.S. retirement plans

We provide retirement coverage for non-U.S. employees, as required by local laws or to the extent we deem appropriate, through a number of defined benefit and defined contribution plans. Retirement benefits are generally based on an employee’s years of service and compensation. Funding requirements are determined on an individual country and plan basis and are subject to local country practices and market circumstances.

As of December 31, 2016 and 2015, as a result of employees’ elections, TI’s non-U.S. defined contribution plans held TI common stock valued at $20 million and $17 million, respectively. Dividends paid on these shares of TI common stock in 2016 and 2015 were not material.

Effects on our Consolidated Statements of Income and Balance Sheets

Expense related to defined benefit and retiree health care benefit plans is as follows:

	U.S. Defined Benefit									U.S. Retiree Health Care									Non-U.S. Defined Benefit
	2016			2015			2014			2016			2015			2014			2016			2015			2014
Service cost	$	22		$	22		$	21		$	5		$	5		$	4		$	34		$	35		$	39
Interest cost		42			43			45			20			20			22			52			53			68
Expected return on plan assets		(41	)		(48	)		(42	)		(20	)		(22	)		(20	)		(68	)		(76	)		(80	)
Amortization of prior service cost (credit)		—			—			—			(3	)		2			4			(2	)		(2	)		(2	)
Recognized net actuarial loss		21			19			26			7			8			7			25			24			24
Net periodic benefit costs		44			36			50			9			13			17			41			34			49
Settlement losses		21			25			5			—			—			—			2			2			1
Curtailment gain		—			—			—			—			—			—			—			—			(2	)
Total, including other postretirement losses (gains)	$	65		$	61		$	55		$	9		$	13		$	17		$	43		$	36		$	48

For the U.S. qualified pension and retiree health care plans, the expected return on plan assets component of net periodic benefit cost is based upon a market-related value of assets. In accordance with U.S. GAAP, the market-related value of assets is the fair value adjusted by a smoothing technique whereby certain gains and losses are phased in over a period of three years.

Changes in the benefit obligations and plan assets for defined benefit and retiree health care benefit plans are as follows:

	U.S.						U.S.						Non-U.S.
	Defined Benefit						Retiree Health Care						Defined Benefit
	2016			2015			2016			2015			2016			2015
Change in plan benefit obligation
Benefit obligation at beginning of year:	$	1,033		$	1,076		$	463		$	513		$	2,231		$	2,316
Service cost		22			22			5			5			34			35
Interest cost		42			43			20			20			52			53
Participant contributions		—			—			10			19			6			6
Benefits paid		(9	)		(8	)		(38	)		(46	)		(77	)		(73	)
Medicare subsidy		—			—			1			3			—			—
Actuarial loss (gain)		27			(6	)		(27	)		(21	)		259			14
Settlements		(85	)		(94	)		—			—			(8	)		(18	)
Plan amendments		—			—			—			(30	)		—			—
Effects of exchange rate changes		—			—			—			—			(136	)		(102	)
Benefit obligation at end of year (BO)	$	1,030		$	1,033		$	434		$	463		$	2,361		$	2,231

Change in plan assets
Fair value of plan assets at beginning of year:	$	1,019		$	1,082		$	441		$	497		$	2,134		$	2,213
Actual return on plan assets		79			(24	)		20			—			227			25
Employer contributions (funding of qualified plans)		15			52			1			1			160			72
Employer contributions (payments for non-qualified plans)		15			11			—			—			—			—
Participant contributions		—			—			10			19			6			6
Benefits paid		(9	)		(8	)		(38	)		(46	)		(77	)		(73	)
Settlements		(85	)		(94	)		—			—			(8	)		(18	)
Effects of exchange rate changes		—			—			—			—			(133	)		(91	)
Other		—			—			—			(30	)		—			—
Fair value of plan assets at end of year (FVPA)	$	1,034		$	1,019		$	434		$	441		$	2,309		$	2,134

Funded status (FVPA – BO) at end of year	$	4		$	(14	)	$	—		$	(22	)	$	(52	)	$	(97	)

Amounts recognized on our Consolidated Balance Sheets as of December 31, are as follows:

	U.S. Defined			U.S. Retiree			Non-U.S.
	Benefit			Health Care			Defined Benefit			Total
2016
Overfunded retirement plans	$	66		$	3		$	27		$	96
Accrued expenses and other liabilities & Deferred credits and other liabilities		(9	)		—			(6	)		(15	)
Underfunded retirement plans		(53	)		(3	)		(73	)		(129	)
Funded status (FVPA – BO) at end of 2016	$	4		$	—		$	(52	)	$	(48	)

2015
Overfunded retirement plans	$	51		$	—		$	34		$	85
Accrued expenses and other liabilities & Deferred credits and other liabilities		(16	)		—			(6	)		(22	)
Underfunded retirement plans		(49	)		(22	)		(125	)		(196	)
Funded status (FVPA – BO) at end of 2015	$	(14	)	$	(22	)	$	(97	)	$	(133	)

Contributions to the plans meet or exceed all minimum funding requirements. We expect to contribute about $100 million to our retirement benefit plans in 2017. The amounts shown for underfunded U.S. defined benefit plans were for non-qualified pension plans, which we do not fund because contributions to them are not tax deductible.

Accumulated benefit obligations, which are generally less than the projected benefit obligations as they exclude the impact of future salary increases, were $926 million and $948 million as of December 31, 2016 and 2015, respectively, for the U.S. defined benefit plans, and $2.22 billion and $2.09 billion as of December 31, 2016 and 2015, respectively, for the non-U.S. defined benefit plans.

The change in AOCI is as follows:

	U.S. Defined			U.S. Retiree						Non-U.S.
	Benefit			Health Care						Defined Benefit						Total
	Net Actuarial Loss			Net Actuarial Loss			Prior Service Credit			Net Actuarial Loss			Prior Service Credit			Net Actuarial Loss			Prior Service Credit
AOCI balance, net of taxes, December 31, 2015	$	167		$	80		$	(13	)	$	303		$	(7	)	$	550		$	(20	)
Changes in AOCI by category:
Adjustments		(10	)		(27	)		—			86			—			49			—
Recognized within Net income		(42	)		(7	)		3			(27	)		2			(76	)		5
Tax effect		18			12			(1	)		(11	)		(1	)		19			(2	)
Total change to AOCI		(34	)		(22	)		2			48			1			(8	)		3
AOCI balance, net of taxes, December 31, 2016	$	133		$	58		$	(11	)	$	351		$	(6	)	$	542		$	(17	)

The estimated amounts of net actuarial loss and unrecognized prior service credit included in AOCI as of December 31, 2016, that are expected to be amortized into net periodic benefit cost over the next fiscal year are: $15 million and none for the U.S. defined benefit plans; $4 million and ($4) million for the U.S. retiree health care benefit plan; and $27 million and ($2) million for the non-U.S. defined benefit plans.

Information on plan assets

We report and measure the plan assets of our defined benefit pension and other postretirement plans at fair value. The tables below set forth the fair value of our plan assets using the same three-level hierarchy of fair-value inputs described in Note 8. With the adoption of ASU 2015-07, certain assets are no longer subject to disclosure by level of fair value but have been included in the tables below to permit reconciliation to the total plan assets. See Note 2 for more information.

	December 31, 2016
	Level 1		Level 2		Level 3		Other (a)		Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$	—	$	—	$	—	$	685	$	685
Equity securities		—		—		—		349		349
Total	$	—	$	—	$	—	$	1,034	$	1,034

Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$	180	$	3	$	—	$	44	$	227
Equity securities		—		—		—		207		207
Total	$	180	$	3	$	—	$	251	$	434

Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$	19	$	127	$	—	$	1,508	$	1,654
Equity securities		5		18		—		629		652
Other		—		—		3		—		3
Total	$	24	$	145	$	3	$	2,137	$	2,309

(a)Consists of bond index and equity index funds, measured at net asset value per share.

	December 31, 2015
	Level 1		Level 2		Level 3		Other (a)		Total
Assets of U.S. defined benefit plan:
Fixed income securities and cash equivalents	$	—	$	249	$	—	$	415	$	664
Equity securities		—		—		—		355		355
Total	$	—	$	249	$	—	$	770	$	1,019

Assets of U.S. retiree health care plan:
Fixed income securities and cash equivalents	$	178	$	5	$	—	$	37	$	220
Equity securities		—		—		—		221		221
Total	$	178	$	5	$	—	$	258	$	441

Assets of non-U.S. defined benefit plans:
Fixed income securities and cash equivalents	$	4	$	109	$	—	$	1,385	$	1,498
Equity securities		6		18		—		608		632
Other		—		—		4		—		4
Total	$	10	$	127	$	4	$	1,993	$	2,134

(a)Consists of bond index and equity index funds, measured at net asset value per share.

The investments in our major benefit plans largely consist of low-cost, broad-market index funds to mitigate risks of concentration within market sectors. Our investment policy is designed to better match the interest rate sensitivity of the plan assets and liabilities. The appropriate mix of equity and bond investments is determined primarily through the use of detailed asset-liability modeling studies that look to balance the impact of changes in the discount rate against the need to provide asset growth to cover future service cost. Most of our plans around the world have a greater proportion of fixed income securities with return characteristics that are more closely aligned with changes in the liabilities caused by discount rate volatility. For the U.S. plans, we utilize an option collar strategy to reduce the volatility of returns on investments in U.S. equity funds.

The only Level 3 asset in our worldwide benefit plans for the periods presented is a diversified property fund in a non-U.S. pension plan. These investments are valued using inputs from the fund managers and internal models. Changes to the fair value of this fund since December 31, 2014, have not been material, and are due to redemptions.

Assumptions and investment policies

	U.S.				U.S. Retiree				Non-U.S.
	Defined Benefit				Health Care				Defined Benefit
	2016		2015		2016		2015		2016		2015
Weighted average assumptions used to determine benefit obligations:
Discount rate		4.29%		4.62%		4.08%		4.40%		1.76%		2.41%
Long-term pay progression		3.30%		3.30%	n/a		n/a			3.11%		3.21%

Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		4.40%		4.33%		4.40%		4.15%		2.41%		2.34%
Long-term rate of return on plan assets		4.60%		5.10%		4.40%		4.70%		3.18%		3.55%
Long-term pay progression		3.30%		3.30%	n/a		n/a			3.21%		3.27%

We utilize a variety of methods to select an appropriate discount rate depending on the depth of the corporate bond market in the country in which the benefit plan operates. In the United States, we use a settlement approach whereby a portfolio of bonds is selected from the universe of actively traded high-quality U.S. corporate bonds. The selected portfolio is designed to provide cash flows sufficient to pay the plan’s expected benefit payments when due. The resulting discount rate reflects the rate of return of the selected portfolio of bonds. For our non-U.S. locations with a sufficient number of actively traded high-quality bonds, an analysis is performed in which the projected cash flows from the defined benefit plans are discounted against a yield curve constructed with an appropriate universe of high-quality corporate bonds available in each country. In this manner, a present value is developed. The discount rate selected is the single equivalent rate that produces the same present value. For countries that lack a sufficient corporate bond market, a government bond index adjusted for an appropriate risk premium is used to establish the discount rate.

Assumptions for the expected long-term rate of return on plan assets are based on future expectations for returns for each asset class and the effect of periodic target asset allocation rebalancing. We adjust the results for the payment of reasonable expenses of the plan from plan assets. We believe our assumptions are appropriate based on the investment mix and long-term nature of the plans’ investments. Assumptions used for the non-U.S. defined benefit plans reflect the different economic environments within the various countries.

The target allocation ranges for the plans that hold a substantial majority of the defined benefit assets are as follows:

	U.S. Defined		U.S. Retiree	Non-U.S.
Asset Category	Benefit		Health Care	Defined Benefit
Fixed income securities and cash equivalents		65%	50% - 65%	60% - 100%
Equity securities		35%	35% - 50%	0% - 40%

We rebalance the plans’ investments when they are not within the target allocation ranges.

Weighted average asset allocations as of December 31 are as follows:

	U.S. Defined				U.S. Retiree				Non-U.S. Defined
	Benefit				Health Care				Benefit
Asset Category	2016		2015		2016		2015		2016		2015
Fixed income securities and cash equivalents		66%		65%		52%		50%		72%		70%
Equity securities		34%		35%		48%		50%		28%		30%

None of the plan assets related to the defined benefit pension plans and retiree health care benefit plan are directly invested in TI common stock. As of December 31, 2016, we do not expect to return any of the defined benefit pension plans’ assets to TI in the next 12 months.

The following assumed future benefit payments to plan participants in the next 10 years are used to measure our benefit obligations. Almost all of the payments, which may vary significantly from these assumptions, will be made from plan assets and not from company assets.

	U.S. Defined		U.S. Retiree		Non-U.S.
	Benefit		Health Care		Defined Benefit
2017	$	128	$	32	$	82
2018		120		32		84
2019		86		33		87
2020		91		33		89
2021		101		32		91
2022 - 2026		450		151		489

Assumed health care cost trend rates for the U.S. retiree health care benefit plan as of December 31 are as follows:

	2016		2015
Assumed health care cost trend rate for next year		6.75%		7.00%
Ultimate trend rate		5.00%		5.00%
Year in which ultimate trend rate is reached		2024		2024

A one percentage point increase or decrease in health care cost trend rates over all future periods would have increased or decreased the accumulated postretirement benefit obligation for the U.S. retiree health care benefit plan as of December 31, 2016, by $2 million. The service cost and interest cost components of 2016 plan expense would have increased or decreased by less than $1 million.

Deferred compensation arrangements

We have a deferred compensation plan that allows U.S. employees whose base salary and management responsibility exceed a certain level to defer receipt of a portion of their cash compensation. Payments under this plan are made based on the participant’s distribution election and plan balance. Participants can earn a return on their deferred compensation based on notional investments in the same investment funds that are offered in our defined contribution plans.

As of December 31, 2016, our liability to participants of the deferred compensation plans was $218 million and is recorded in Deferred credits and other liabilities on our Consolidated Balance Sheets. This amount reflects the accumulated participant deferrals and earnings thereon as of that date. As of December 31, 2016, we held $201 million in mutual funds related to these plans that are recorded in Long-term investments on our Consolidated Balance Sheets, and serve as an economic hedge against changes in fair values of our other deferred compensation liabilities. We record changes in the fair value of the liability and the related investment in SG&A as discussed in Note 8.