Benefit Plans

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

Effective April 1, 2014, the Company replaced its current post-65 group medical coverage with a new approach for retirees age 65 and older and their eligible dependents to access post-65 retiree medical and prescription drug coverage in the U.S. Such changes were communicated to active employees and retirees in early January 2014 and as such, the Company remeasured its U.S. postretirement healthcare benefit plan as of January 1, 2014. The impact of this plan change and remeasurement was immaterial to the Company’s consolidated financial results. The plan design changes included, among other modifications, a replacement of the Company-sponsored healthcare coverage program for post-65 retirees with contributions to a health reimbursement account that can be used to purchase coverage through a Medicare insurance exchange.

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



	Pension Plans									Other Postretirement Benefits
(Millions of dollars)	2016			2015			2014			2016			2015			2014
Service cost	$	81		$	77		$	71		$	3		$	3		$	3
Interest cost	72			87			93			5			7			9
Expected return on plan assets	(109		)	(123		)	(126		)	—			—			—
Amortization of prior service credit	(15		)	(15		)	(15		)	(5		)	(5		)	(4		)
Amortization of loss	77			68			49			2			3			2
Settlements	7			—			3			—			—			—
Net pension and postretirement cost	$	113		$	93		$	74		$	5		$	9		$	10

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. Net pension cost attributable to foreign plans included in the preceding table was $35 million, $32 million and $25 million in 2016, 2015 and 2014, respectively.

The settlement losses recorded in 2016 and 2014 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)	2016			2015			2016			2015
Change in benefit obligation:
Beginning obligation	$	2,426		$	2,366		$	186		$	201
Service cost	81			77			3			3
Interest cost	72			87			5			7
Plan amendments	—			(2		)	(1		)	—
Benefits paid	(116		)	(138		)	(17		)	(18		)
Benefit obligations assumed in acquisition	—			67			—			—
Actuarial loss (gain)	302			49			3			(11		)
Settlements	(15		)	—			—			—
Other, includes translation	(30		)	(81		)	4			3
Benefit obligation at September 30	$	2,719		$	2,426		$	184		$	186
Change in fair value of plan assets:
Beginning fair value	$	1,732		$	1,829		$	—		$	—
Actual return on plan assets	131			(21		)	—			—
Employer contribution	145			65			—			—
Benefits paid	(116		)	(138		)	—			—
Plan assets acquired in acquisition	—			54			—			—
Settlements	(15		)	—			—			—
Other, includes translation	(21		)	(58		)	—			—
Plan assets at September 30	$	1,855		$	1,732		$	—		$	—
Funded Status at September 30:
Unfunded benefit obligation	$	(864	)	$	(694	)	$	(184	)	$	(186	)
Amounts recognized in the Consolidated Balance Sheets at September 30:
Other	$	5		$	7		$	—		$	—
Salaries, wages and related items	(12		)	(10		)	(15		)	(15		)
Long-term Employee Benefit Obligations	(857		)	(691		)	(169		)	(171		)
Net amount recognized	$	(864	)	$	(694	)	$	(184	)	$	(186	)
Amounts recognized in Accumulated other comprehensive income (loss) before income taxes at September 30:
Prior service credit	87			103			33			37
Net actuarial loss	(1,307		)	(1,124		)	(32		)	(30		)
Net amount recognized	$	(1,221	)	$	(1,021	)	$	1		$	7

Foreign pension plan assets at fair value included in the preceding table were $624 million and $575 million at September 30, 2016 and 2015, respectively. The foreign pension plan projected benefit obligations were $951 million and $780 million at September 30, 2016 and 2015, respectively. The benefit obligations assumed and plan assets acquired during the year ended September 30, 2015 relate to the Company's acquisition of CareFusion. Additional disclosures regarding this acquisition are provided in Note 9.

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)	2016		2015		2016		2015
Projected benefit obligation	$	2,616	$	2,339	$	2,682	$	2,394
Accumulated benefit obligation	$	2,529	$	2,265
Fair value of plan assets	$	1,757	$	1,650	$	1,813	$	1,693

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 $(93) million and $14 million, respectively. The estimated net actuarial loss and prior service credit for other postretirement benefits that will be amortized from Accumulated other comprehensive income (loss) into net other postretirement costs over the next fiscal year are expected to be $(2) million and $5 million, respectively.

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



	2016		2015		2014
Net Cost
Discount rate:
U.S. plans (A) (B)	4.15	%	4.15	%	4.95	%
Foreign plans	2.84		3.14		3.87
Expected return on plan assets:
U.S. plans	7.50		7.50		7.75
Foreign plans	5.02		5.45		5.68
Rate of compensation increase:
U.S. plans (A)	4.25		4.25		4.25
Foreign plans	2.33		2.49		2.46
Benefit Obligation
Discount rate:
U.S. plans (C)	3.42		4.15		4.15
Foreign plans	1.70		2.84		3.14
Rate of compensation increase:
U.S. plans (A)	4.25		4.25		4.25
Foreign plans	2.33		2.33		2.49


(A)	The same rates were also used to determine other postretirement and postemployment benefit information.

(B)

In 2015 and 2014 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.


(C)	The discount rates used to determine other postretirement benefit plan information in fiscal years 2016, 2015 and 2014 were 3.14%, 3.95% and 3.85%, respectively. The discount rates used to determine postemployment benefit plan information in fiscal years 2016, 2015 and 2014 were 3.10%, 3.75% and 3.75%, respectively.

At September 30, 2016 the assumed healthcare trend rates were 6.6%, gradually decreasing to an ultimate rate of 5.0% beginning in 2024. At September 30, 2015 the assumed healthcare trend rates were 6.8% 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, 2016 or the aggregate of the service cost and interest cost components of 2016 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 $100 million to its U.S. pension plan in September 2016. The Company does not anticipate any significant required contributions to its pension plans in 2017.

Expected benefit payments are as follows:



(Millions of dollars)	Pension Plans		Other Postretirement Benefits
2017	$	169	$	15
2018	163		15
2019	174		15
2020	172		14
2021	178		14
2022-2026	883		61

As previously discussed, the Company replaced its Company-sponsored healthcare coverage program for post-65 retirees with a health reimbursement plan on April 1, 2014. As such, the Company no longer receives subsidies under the Medicare Prescription Drug Improvement and Modernization Act of 2003.

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 66% of total benefit plan investments, based on September 30, 2016 market values and have a target asset mix of 35% fixed income, 34% diversifying investments and 31% 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, 2016 and 2015. The categorization of fund investments is based upon the categorization of these funds’ underlying assets.



(Millions of dollars)	Total U.S. Plan Asset Balances at September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed Income:
Mortgage and asset-backed securities	$	169	$	—	$	169	$	—
Corporate bonds	197		68		129		—
Government and agency-U.S.	103		67		36		—
Government and agency-Foreign	90		52		37		—
Equity securities	459		61		398		—
Cash and cash equivalents	89		89		—		—
Other	124		33		90		1
Fair value of plan assets	$	1,231	$	371	$	859	$	1



(Millions of dollars)	Total U.S. Plan Asset Balances at September 30, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed Income:
Mortgage and asset-backed securities	$	192	$	—	$	192	$	—
Corporate bonds	240		100		139		—
Government and agency-U.S.	78		53		24		—
Government and agency-Foreign	95		46		49		—
Equity securities	335		75		260		—
Cash and cash equivalents	96		96		—		—
Other	123		30		91		2
Fair value of plan assets	$	1,157	$	401	$	755	$	2

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. Values of other instruments classified within Level 2 are based on the corroborated net asset value provided by the fund administrator, which is based on the value of the underlying assets owned by the fund, less its liabilities and then divided by the number of fund units outstanding.

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. The values of equity security investments classified within Level 2 are based on the corroborated net asset value provided by the fund administrator.

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. Investments classified within Level 2 are valued based on the net asset value provided by the fund administrator when such net asset value represents the price at which the pension plan assets could be redeemed at period end. Investments classified within Level 3 are valued based on the net asset value provided by the fund administrator when the pension plan assets could not be redeemed at period end (for example, if the assets are subject to a lock-up period). The activity related to such assets was immaterial for the years ended September 30, 2016 and 2015.

Foreign Plans

Foreign plan assets comprise 34% of the Company’s total benefit plan assets, based on market value at September 30, 2016. 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 foreign plan assets, as well as the measurement techniques and inputs utilized to measure fair value of these assets, at September 30, 2016 and 2015.



(Millions of dollars)	Total Foreign Plan Asset Balances at September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed Income:
Corporate bonds	$	34	$	—	$	34	$	—
Government and agency-U.S.	5		2		3		—
Government and agency-Foreign	119		73		46		—
Other fixed income	51		46		5		—
Equity securities	228		214		14		—
Cash and cash equivalents	13		13		—		—
Real estate	17		—		17		—
Insurance contracts	102		—		—		102
Other	57		43		14		—
Fair value of plan assets	$	624	$	391	$	132	$	102



(Millions of dollars)	Total Foreign Plan Asset Balances at September 30, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed Income:
Corporate bonds	$	33	$	3	$	30	$	—
Government and agency-U.S.	1		1		—		—
Government and agency-Foreign	101		65		36		—
Other fixed income	48		46		2		—
Equity securities	206		187		19		—
Cash and cash equivalents	8		8		—		—
Real estate	13		—		13		—
Insurance contracts	90		—		—		90
Other	74		53		21		—
Fair value of plan assets	$	575	$	364	$	121	$	90

Fixed Income Securities

Fixed income investments held by foreign 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 foreign 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. The values of equity security investments classified within Level 2 are based on the corroborated net asset value provided by the fund administrator.

Other Securities

The foreign 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, 2016 and 2015, in the fair value of foreign pension assets measured using Level 3 inputs:



(Millions of dollars)	Insurance Contracts
Balance at September 30, 2014	$	78
Actual return on plan assets:
Relating to assets held at September 30, 2014	4
Purchases, sales and settlements, net	16
Transfers in from other categories	1
Exchange rate changes	(9		)
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

Postemployment Benefits

The Company utilizes a service-based approach in accounting for most of its postemployment benefits. Under this approach, the costs of benefits are recognized over the eligible employees’ service period. The Company has elected to delay recognition of actuarial gains and losses that result from changes in assumptions.

Postemployment benefit costs for the years ended September 30 included the following components:



(Millions of dollars)	2016		2015			2014
Service cost	$	23	$	18		$	20
Interest cost	4		6			7
Amortization of prior service credit	—		(2		)	(2		)
Amortization of loss	13		18			21
Net postemployment benefit cost	$	40	$	42		$	47

The changes in benefit obligation for these postemployment benefits were as follows:



	Postemployment benefits
(Millions of dollars)	2016			2015
Change in benefit obligation:
Beginning obligation	$	163		$	184
Service cost	23			18
Interest cost	4			6
Benefits paid	(21		)	(25		)
Actuarial (gain) loss	—			(22		)
Benefit obligation at September 30	$	168		$	163

The postemployment benefit plan obligations as of September 30, 2016 and 2015 were unfunded. The amounts recognized in Accumulated other comprehensive income (loss) before income taxes for the net actuarial loss were $94 million and $107 million at September 30, 2016 and 2015, respectively. The estimated net actuarial loss that will be amortized from the Accumulated other comprehensive income (loss) into postemployment benefit cost over the next fiscal year is $11 million.

During fiscal years 2016 and 2015, the Company recognized charges of $40 million and $126 million, respectively, for employee termination costs in connection with its acquisition of CareFusion. Additional disclosures regarding the CareFusion acquisition are provided in Note 9 and additional disclosures regarding the Company’s restructuring activities that relate to this acquisition are provided in Note 11. During the fourth quarter of fiscal year 2014, the Company recognized a $36 million charge associated with unusually broad and significant workforce reduction actions that were not contemplated when the postemployment benefit plan obligation was measured on September 30, 2013.

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 $61 million in 2016, $54 million in 2015 and $39 million in 2014. The fiscal year 2015 increase in the cost associated with these plans is attributable to the Company's acquisition of CareFusion. The Company guarantees employees' contributions to the fixed income fund of one of these plans, which typically consists of high quality bonds, including U.S. government securities, corporate bonds, mortgage-backed and asset-backed securities and cash equivalents. The amount guaranteed was $256 million at September 30, 2016.