Benefit Plans

The Company has defined benefit pension plans covering certain employees in the United States and certain international locations. The Company also provides certain postretirement healthcare and life insurance benefits to qualifying domestic retirees. Other postretirement benefit plans in international countries are not material. The measurement date used for the Company’s employee benefit plans is September 30.

Net pension and other postretirement cost for the years ended September 30 included the following components:



	Pension Plans									Other Postretirement Benefits
(Millions of dollars)	2017			2016			2015			2017			2016			2015
Service cost	$	110		$	81		$	77		$	3		$	3		$	3
Interest cost	61			72			87			4			5			7
Expected return on plan assets	(112		)	(109		)	(123		)	—			—			—
Amortization of prior service credit	(14		)	(15		)	(15		)	(5		)	(5		)	(5		)
Amortization of loss	92			77			68			2			2			3
Settlements	—			7			—			—			—			—
Net pension and postretirement cost	$	138		$	113		$	93		$	4		$	5		$	9

Net pension cost attributable to international plans	$	43		$	35		$	32

The amounts provided above for amortization of prior service credit and amortization of loss represent the reclassifications of prior service credits and net actuarial losses that were recognized in Accumulated other comprehensive income (loss) in prior periods. The settlement loss recorded in 2016 primarily included lump sum benefit payments associated with the Company’s U.S. supplemental pension plan. The Company recognizes pension settlements when payments from the supplemental plan exceed the sum of service and interest cost components of net periodic pension cost associated with this plan for the fiscal year.

The change in benefit obligation, change in fair value of plan assets, funded status and amounts recognized in the Consolidated Balance Sheets for these plans were as follows:



	Pension Plans						Other Postretirement Benefits
(Millions of dollars)	2017			2016			2017			2016
Change in benefit obligation:
Beginning obligation	$	2,719		$	2,426		$	184		$	186
Service cost	110			81			3			3
Interest cost	61			72			4			5
Plan amendments	(1		)	—			—			(1		)
Benefits paid	(123		)	(116		)	(16		)	(17		)
Impact of divestitures	(19		)	—			—			—
Actuarial (gain) loss	(134		)	302			(15		)	3
Settlements	(1		)	(15		)	—			—
Other, includes translation	36			(30		)	4			4
Benefit obligation at September 30	$	2,647		$	2,719		$	165		$	184
Change in fair value of plan assets:
Beginning fair value	$	1,855		$	1,732		$	—		$	—
Actual return on plan assets	134			131			—			—
Employer contribution	54			145			—			—
Benefits paid	(123		)	(116		)	—			—
Impact of divestitures	(13		)	—			—			—
Settlements	(1		)	(15		)	—			—
Other, includes translation	26			(21		)	—			—
Plan assets at September 30	$	1,932		$	1,855		$	—		$	—
Funded Status at September 30:
Unfunded benefit obligation	$	(715	)	$	(864	)	$	(165	)	$	(184	)
Amounts recognized in the Consolidated Balance Sheets at September 30:
Other	$	9		$	5		$	—		$	—
Salaries, wages and related items	(17		)	(12		)	(14		)	(15		)
Long-term Employee Benefit Obligations	(707		)	(857		)	(150		)	(169		)
Net amount recognized	$	(715	)	$	(864	)	$	(165	)	$	(184	)
Amounts recognized in Accumulated other comprehensive income (loss) before income taxes at September 30:
Prior service credit	74			87			28			33
Net actuarial loss	(1,065		)	(1,307		)	(15		)	(32		)
Net amount recognized	$	(991	)	$	(1,221	)	$	14		$	1

International pension plan assets at fair value included in the preceding table were $678 million and $624 million at September 30, 2017 and 2016, respectively. The international pension plan projected benefit obligations were $917 million and $951 million at September 30, 2017 and 2016, respectively.

Pension plans with accumulated benefit obligations in excess of plan assets and plans with projected benefit obligations in excess of plan assets consist of the following at September 30:



	Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets				Projected Benefit Obligation Exceeds the Fair Value of Plan Assets
(Millions of dollars)	2017		2016		2017		2016
Projected benefit obligation	$	2,551	$	2,616	$	2,613	$	2,682
Accumulated benefit obligation	$	2,470	$	2,529
Fair value of plan assets	$	1,833	$	1,757	$	1,889	$	1,813

The estimated net actuarial loss and prior service credit for pension benefits that will be amortized from Accumulated other comprehensive income (loss) into net pension costs over the next fiscal year are expected to be $76 million and $13 million, respectively. The net actuarial loss for other postretirement benefits that will be amortized from Accumulated other comprehensive income (loss) into net other postretirement costs over the next fiscal year is immaterial. The estimated prior service credit that will be amortized from Accumulated other comprehensive income (loss) into net other postretirement costs over the next fiscal year is expected to be $5 million.

The weighted average assumptions used in determining pension plan information were as follows:



	2017		2016		2015
Net Cost
Discount rate:
U.S. plans (A)	3.42	%	4.15	%	4.15	%
International plans	1.70		2.84		3.14
Expected return on plan assets:
U.S. plans	7.25		7.50		7.50
International plans	4.65		5.02		5.45
Rate of compensation increase:
U.S. plans	4.25		4.25		4.25
International plans	2.33		2.33		2.49
Benefit Obligation
Discount rate:
U.S. plans	3.72		3.42		4.15
International plans	2.25		1.70		2.84
Rate of compensation increase:
U.S. plans	4.51		4.25		4.25
International plans	2.30		2.33		2.33

(A)

In 2015 the Company calculated the service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Effective September 30, 2015, the Company elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. The Company accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and as such, the change was accounted for prospectively.

At September 30, 2017 the assumed healthcare trend rates were 7.0%, gradually decreasing to an ultimate rate of 5.0% beginning in 2027. At September 30, 2016 the assumed healthcare trend rates were 6.6% pre and post age 65, gradually decreasing to an ultimate rate of 5.0% beginning in 2024. A one percentage point increase or decrease in assumed healthcare cost trend rates in each year would not materially impact the accumulated postretirement benefit obligation as of September 30, 2017 or the aggregate of the service cost and interest cost components of 2017 annual expense.

Expected Rate of Return on Plan Assets

The expected rate of return on plan assets is based upon expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, the Company considers many factors, including historical assumptions compared with actual results; benchmark data; expected returns on various plan asset classes, as well as current and expected asset allocations.

Expected Funding

The Company’s funding policy for its defined benefit pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that may be appropriate considering the funded status of the plans, tax consequences, the cash flow generated by the Company and other factors. The Company made a discretionary contribution of $112 million to its U.S. pension plan in October 2017. The Company does not anticipate any significant required contributions to its pension plans in 2018.

Expected benefit payments are as follows:



(Millions of dollars)	Pension Plans		Other Postretirement Benefits
2018	$	173	$	14
2019	158		14
2020	159		14
2021	163		13
2022	165		13
2023-2027	859		56

Investments

The Company’s primary objective is to achieve returns sufficient to meet future benefit obligations. It seeks to generate above market returns by investing in more volatile asset classes such as equities while at the same time controlling risk through diversification in non-correlated asset classes and through allocations to more stable asset classes like fixed income.

U.S. Plans

The Company’s U.S. pension plans comprise 65% of total benefit plan investments, based on September 30, 2017 market values and have a target asset mix of 40% fixed income, 28% diversifying investments and 32% equities. This mix was established based on an analysis of projected benefit payments and estimates of long-term returns, volatilities and correlations for various asset classes. The asset allocations to diversifying investments include high-yield bonds, hedge funds, real estate, infrastructure, commodities, leveraged loans and emerging markets bonds.

The actual portfolio investment mix may, from time to time, deviate from the established target mix due to various factors such as normal market fluctuations, the reliance on estimates in connection with the determination of allocations and normal portfolio activity such as additions and withdrawals. Rebalancing of the asset portfolio on a quarterly basis is required to address any allocations that deviate from the established target allocations in excess of defined allowable ranges. The target allocations are subject to periodic review, including a review of the asset portfolio’s performance, by the named fiduciary of the plans. Any tactical deviations from the established asset mix require the approval of the named fiduciary.

The U.S. plans may enter into both exchange traded and non-exchange traded derivative transactions in order to manage interest rate exposure, volatility, term structure of interest rates, and sector and currency exposures within the fixed income portfolios. The Company has established minimum credit quality standards for counterparties in such transactions.

The following table provides the fair value measurements of U.S. plan assets, as well as the measurement techniques and inputs utilized to measure fair value of these assets, at September 30, 2017 and 2016. The categorization of fund investments is based upon the categorization of these funds’ underlying assets.



(Millions of dollars)	Total U.S. Plan Asset Balances				Investments Measured at Net Asset Value (A)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
Fixed Income:
Mortgage and asset-backed securities	$	155	$	169	$	—	$	—	$	—	$	—	$	155	$	169	$	—	$	—
Corporate bonds	232		197		—		—		89		68		144		129		—		—
Government and agency-U.S.	107		103		—		—		83		67		25		36		—		—
Government and agency-Foreign	98		90		12		32		63		52		22		6		—		—
Equity securities	369		348		307		287		62		61		—		—		—		—
Cash and cash equivalents	40		89		—		—		40		89		—		—		—		—
Other	252		234		217		201		34		33		—		—		—		—
Fair value of plan assets	$	1,254	$	1,231	$	537	$	520	$	371	$	371	$	346	$	340	$	—	$	—


(A)	As per applicable disclosure requirements, certain investments that were measured at net asset value per share or its equivalent have not been categorized within the fair value hierarchy. Values of such assets are based on the corroborated net asset value provided by the fund administrator.

Fixed Income Securities

U.S. pension plan assets categorized above as fixed income securities include fund investments comprised of mortgage-backed, corporate, government and agency and asset-backed instruments. Mortgage-backed securities consist of residential mortgage pass-through certificates. Investments in corporate bonds are diversified across industry and sector and consist of investment-grade, as well as high-yield debt instruments. U.S. government investments consist of obligations of the U.S. Treasury, other U.S. government agencies, state governments and local municipalities. Assets categorized as foreign government and agency debt securities included investments in developed and emerging markets.

The values of fixed income investments classified within Level 1 are based on the closing price reported on the major market on which the investments are traded. A portion of the fixed income instruments classified within Level 2 are valued based upon estimated prices from independent vendors’ pricing models and these prices are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and other market-related data.

Equity Securities

U.S. pension plan assets categorized as equity securities consist of fund investments in publicly-traded U.S. and non-U.S. equity securities. In order to achieve appropriate diversification, these portfolios are invested across market sectors, investment styles, capitalization weights and geographic regions. The values of equity securities classified within Level 1 are based on the closing price reported on the major market on which the investments are traded.

Cash and Cash Equivalents

A portion of the U.S. plans’ assets consists of investments in cash and cash equivalents, primarily to accommodate liquidity requirements relating to trade settlement and benefit payment activity, and the values of these assets are based upon quoted market prices.

Other Securities

Other U.S. pension plan assets include fund investments comprised of underlying assets of real estate, infrastructure, commodities and hedge funds. The values of such instruments classified within Level 1 are based on the closing price reported on the major market on which the investments are traded.

International Plans

International plan assets comprise 35% of the Company’s total benefit plan assets, based on market value at September 30, 2017. Such plans have local independent fiduciary committees, with responsibility for development and oversight of investment policy, including asset allocation decisions. In making such decisions, consideration is given to local regulations, investment practices and funding rules.

The following table provides the fair value measurements of international plan assets, as well as the measurement techniques and inputs utilized to measure fair value of these assets, at September 30, 2017 and 2016.



(Millions of dollars)	Total International Plan Asset Balances				Investments Measured at Net Asset Value (A)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
	2017		2016		2017		2016		2017		2016		2017		2016		2017		2016
Fixed Income:
Corporate bonds	$	14	$	34	$	—	$	—	$	—	$	—	$	13	$	34	$	—	$	—
Government and agency-U.S.	5		5		—		—		1		2		3		3		—		—
Government and agency-Foreign	127		119		—		—		83		73		45		46		—		—
Other fixed income	64		51		—		—		57		46		7		5		—		—
Equity securities	256		228		13		14		242		214		—		—		—		—
Cash and cash equivalents	28		13		—		—		28		13		—		—		—		—
Real estate	26		17		—		—		—		—		26		17		—		—
Insurance contracts	98		102		—		—		—		—		—		—		98		102
Other	62		57		—		—		47		43		15		14		—		—
Fair value of plan assets	$	678	$	624	$	13	$	14	$	459	$	391	$	108	$	119	$	98	$	102


(A)	As per applicable disclosure requirements, certain investments that were measured at net asset value per share or its equivalent have not been categorized within the fair value hierarchy. Values of such assets are based on the corroborated net asset value provided by the fund administrator.

Fixed Income Securities

Fixed income investments held by international pension plans include corporate, U.S. government and non-U.S. government securities. The values of fixed income securities classified within Level 1 are based on the closing price reported on the major market on which the investments are traded. Values of investments classified within Level 2 are based upon estimated prices from independent vendors’ pricing models and these prices are derived from market observable sources.

Equity Securities

Equity securities included in the international plan assets consist of publicly-traded U.S. and non-U.S. equity securities. The values of equity securities classified within Level 1 are based on the closing price reported on the major market on which the investments are traded.

Other Securities

The international plans hold a portion of assets in cash and cash equivalents, in order to accommodate liquidity requirements and the values are based upon quoted market prices. Real estate investments consist of investments in funds holding an interest in real properties and the corresponding values represent the estimated fair value based on the fair value of the underlying investment value or cost, adjusted for any accumulated earnings or losses. The values of insurance contracts approximately represent cash surrender value. Other investments include fund investments for which values are based upon either quoted market prices or market observable sources.

The following table summarizes the changes, for the years ended September 30, 2017 and 2016, in the fair value of international pension assets measured using Level 3 inputs:



(Millions of dollars)	Insurance Contracts
Balance at September 30, 2015	$	90
Actual return on plan assets:
Relating to assets held at September 30, 2015	8
Purchases, sales and settlements, net	2
Exchange rate changes	1
Balance at September 30, 2016	$	102
Actual return on plan assets:
Relating to assets held at September 30, 2016	1
Purchases, sales and settlements, net	(11		)
Transfers in from other categories	1
Exchange rate changes	4
Balance at September 30, 2017	$	98

Savings Incentive Plan

The Company has voluntary defined contribution plans covering eligible employees in the United States which provide for a Company match. The cost of these plans was $67 million in 2017, $61 million in 2016 and $54 million in 2015.