Employee Benefit Plans

We sponsor numerous defined benefit and defined contribution pension and other post-retirement benefit plans, primarily retiree health care, in our domestic and international operations. December 31 is the measurement date for all of our post-retirement benefit plans.

Over the past several years, where legally possible, we have amended our major defined benefit pension plans to freeze current benefits and eliminate benefits accruals for future service, including our primary U.S. defined benefit plan for salaried employees, the Canadian Salary Pension Plan and the U.K. Final Salary Pension Plan. The freeze of current benefits is the primary driver of the reduction in pension service costs since 2012. In certain Non-U.S. plans, we are required to continue to consider salary increases and inflation in determining the benefit obligation related to prior service. The Netherlands defined benefit pension plan has also been amended to reflect the Company's ability to reduce the indexation of future pension benefits within the plan in scenarios when the returns on plan assets are insufficient to cover that indexation.

Prior to the freeze of current benefits, most of our defined benefit pension plans generally provided employees a benefit, depending on eligibility, calculated under a highest average pay and years of service formula. Our primary domestic defined benefit pension plans provided a benefit at the greater of (i) the highest average pay and years of service formula, (ii) the benefit calculated under a formula that provides for the accumulation of salary and interest credits during an employee's work life or (iii) the individual account balance from the Company's prior defined contribution plan (Transitional Retirement Account or TRA).

Pension plan assets consist of both defined benefit plan assets and assets legally restricted to the TRA accounts. The combined investment results for these plans, along with the results for our other defined benefit plans, are shown below in the “actual return on plan assets” caption. To the extent that investment results relate to TRA, such results are charged directly to these accounts as a component of interest cost.



	Pension Benefits
	U.S. Plans						Non-U.S. Plans						Retiree Health
	2018			2017			2018			2017			2018			2017
Change in Benefit Obligation:
Benefit obligation, January 1	$	4,180		$	4,161		$	6,703		$	6,160		$	723		$	761
Service cost	2			2			27			29			4			5
Interest cost	63			226			149			158			23			28
Plan participants' contributions	—			—			4			4			3			2
Actuarial (gain) loss	(288		)	392			(293		)	(29		)	(63		)	(16		)
Currency exchange rate changes	—			—			(339		)	635			(11		)	10
Plan Amendments/Curtailments	—			—			41			(4		)	(234		)	—
Benefits paid/settlements	(723		)	(606		)	(281		)	(246		)	(60		)	(66		)
Other	—			5			(4		)	(4		)	—			(1		)
Benefit Obligation, December 31	$	3,234		$	4,180		$	6,007		$	6,703		$	385		$	723

Change in Plan Assets:
Fair value of plan assets, January 1	$	3,224		$	2,774		$	6,308		$	5,384		$	—		$	—
Actual return on plan assets	(170		)	381			(85		)	453			—			—
Employer contributions	27			675			117			161			57			64
Plan participants' contributions	—			—			4			4			3			2
Currency exchange rate changes	—			—			(329		)	557			—			—
Benefits paid/settlements	(723		)	(606		)	(281		)	(246		)	(60		)	(66		)
Other	—			—			(5		)	(5		)	—			—
Fair Value of Plan Assets, December 31	$	2,358		$	3,224		$	5,729		$	6,308		$	—		$	—

Net Funded Status at December 31⁽¹⁾	$	(876	)	$	(956	)	$	(278	)	$	(395	)	$	(385	)	$	(723	)

Amounts Recognized in the Consolidated Balance Sheets:
Other long-term assets	$	—		$	—		$	281		$	193		$	—		$	—
Accrued compensation and benefit costs	(25		)	(26		)	(24		)	(25		)	(35		)	(61		)
Pension and other benefit liabilities	(851		)	(930		)	(535		)	(563		)	—			—
Post-retirement medical benefits	—			—			—			—			(350		)	(662		)
Net Amounts Recognized	$	(876	)	$	(956	)	$	(278	)	$	(395	)	$	(385	)	$	(723	)

Accumulated Benefit Obligation	$	3,234		$	4,179		$	5,847		$	6,483

_____________


(1)	Includes under-funded and unfunded plans.

Benefit plans pre-tax amounts recognized in AOCL at December 31:



	Pension Benefits
	U.S. Plans						Non-U.S. Plans					Retiree Health
	2018			2017			2018		2017			2018			2017
Net actuarial loss (gain)	$	933		$	1,178		$	1,457	$	1,562		$	(42	)	$	22
Prior service (credit) cost	(5		)	(7		)	19		(28		)	(240		)	(26		)
Total Pre-tax loss (gain)	$	928		$	1,171		$	1,476	$	1,534		$	(282	)	$	(4	)

Aggregate information for pension plans with an Accumulated benefit obligation in excess of plan assets is presented below:



	December 31, 2018						December 31, 2017
	Projected benefit obligation		Accumulated benefit obligation		Fair value of plan assets		Projected benefit obligation		Accumulated benefit obligation		Fair value of plan assets
Underfunded Plans:
U.S.	$	2,918	$	2,918	$	2,358	$	3,830	$	3,829	$	3,224
Non U.S.	725		713		624		814		799		723

Unfunded Plans:
U.S.	$	316	$	316	$	—	$	350	$	350	$	—
Non U.S.	456		446		—		496		485		—

Total Underfunded and Unfunded Plans:
U.S.	$	3,234	$	3,234	$	2,358	$	4,180	$	4,179	$	3,224
Non U.S.	1,181		1,159		624		1,310		1,284		723
Total	$	4,415	$	4,393	$	2,982	$	5,490	$	5,463	$	3,947

Our pension plan assets and benefit obligations at December 31, 2018 were as follows:



	Fair Value of Pension Plan Assets		Pension Benefit Obligations		Net Funded Status
U.S. funded	$	2,358	$	2,918	$	(560	)
U.S. unfunded	—		316		(316		)
Total U.S.	2,358		3,234		(876		)
U.K.	3,730		3,501		229
Netherlands	968		1,040		(72		)
Canada	653		656		(3		)
Germany	—		355		(355		)
Other	378		455		(77		)
Total	$	8,087	$	9,241	$	(1,154	)

The components of Net periodic benefit cost and other changes in plan assets and benefit obligations were as follows:



	Year Ended December 31,
	Pension Benefits
	U.S. Plans									Non-U.S. Plans									Retiree Health
	2018			2017			2016			2018			2017			2016			2018			2017			2016
Components of Net Periodic Benefit Costs:
Service cost	$	2		$	2		$	4		$	27		$	29		$	31		$	4		$	5		$	6
Interest cost⁽¹⁾	63			226			184			149			158			195			23			28			32
Expected return on plan assets⁽²⁾	(67		)	(227		)	(190		)	(244		)	(221		)	(249		)	—			—			—
Recognized net actuarial loss	22			21			26			56			79			65			—			1			2
Amortization of prior service credit	(2		)	(2		)	(2		)	(4		)	(4		)	(3		)	(19		)	(4		)	(5		)
Recognized settlement loss	173			133			65			1			2			1			—			—			—
Recognized curtailment gain	—			—			—			(1		)	(2		)	—			—			—			—
Defined Benefit Plans	191			153			87			(16		)	41			40			8			30			35
Defined contribution plans⁽³⁾	37			38			43			29			29			31			n/a			n/a			n/a
Net Periodic Benefit Cost	228			191			130			13			70			71			8			30			35

Other changes in plan assets and benefit obligations recognized in Other Comprehensive Income (Loss):
Net actuarial (gain) loss⁽⁴⁾	(50		)	238			84			33			(273		)	76			(63		)	(16		)	(75		)
Prior service cost (credit)	—			—			—			41			(1		)	—			(234		)	—			—
Amortization of net actuarial loss	(195		)	(154		)	(92		)	(57		)	(81		)	(66		)	—			(1		)	(2		)
Amortization of net prior service credit	2			2			2			4			4			3			19			4			5
Curtailment gain	—			—			—			1			—			—			—			—			—
Total Recognized in Other Comprehensive Income (Loss)⁽⁵⁾	(243		)	86			(6		)	22			(351		)	13			(278		)	(13		)	(72		)
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income (Loss)	$	(15	)	$	277		$	124		$	35		$	(281	)	$	84		$	(270	)	$	17		$	(37	)

_____________


(1)	Interest cost for Pension Benefits includes interest expense on non-TRA obligations of $258, $257 and $296 and interest (income) expense directly allocated to TRA participant accounts of $(46), $127 and $83 for the years ended December 31, 2018, 2017 and 2016, respectively.


(2)	Expected return on plan assets includes expected investment (loss) income on non-TRA assets of $(357), $321 and $356 and actual investment (loss) income on TRA assets of $(46), $127 and $83 for the years ended December 31, 2018, 2017 and 2016, respectively.


(3)	Prior year amounts have been revised to reflect additional cost for previously excluded plans.


(4)	The non-U.S. plans Net actuarial (gain) loss for 2018 reflects an out-of-period adjustment in third quarter 2018 of $(53) to correct an overstated benefit obligation for our U.K. Final Salary Pension Plan at December 31, 2017. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding this adjustment.


(5)	Amounts represent the pre-tax effect included in Other Comprehensive Income (Loss). Refer to Note 23 - Other Comprehensive Income (Loss) for the related tax effects and the net of tax amounts.

The net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $(63) and $4, respectively, excluding amounts that may be recognized through settlement losses. The net actuarial gain and prior service credit for the retiree health benefit plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $3 and $76, respectively.

Plan Amendments

Pension:

On October 26, 2018, the High Court of Justice in the United Kingdom (the "High Court") ruled that Lloyds Bank PLC was required to equalize benefits payable to men and women under its U.K. defined benefit pension plans by amending those plans to increase the pension benefits payable to participants that accrued such benefits during the period from 1990 to 1997. The inequalities arose from statutory differences in the retirement ages and rates of accrual of benefits for men and women related to Guaranteed Minimum Pension ("GMP") benefits that are included in U.K. defined benefit pension plans.

Based on the above ruling, we currently estimate the cost of equalization under the minimum cost approach permitted by the High Court’s ruling to be approximately 1.2% of our U.K. defined benefit plan obligation at December 31, 2018 or approximately GBP 33 million (approximately USD $42). This increase in the benefit obligation was recorded as a plan amendment in 2018 and will be amortized as prior service cost over 24 years (approximately USD $2 per year) through 2019 and future years’ Net periodic benefit costs. Although the recorded impact reflects our best estimate, there are several significant uncertainties in our estimate and therefore it is subject to future change and adjustment. In particular, the cost is very sensitive to i) the method of GMP equalization; ii) actuarial assumptions and market conditions; iii) the benefit structure of our plan and operational practices; and iv) the demographic profile of our plan. In addition, we are continuing to evaluate the acceptable methodologies that the High Court has determined, and we still need to discuss and agree upon the appropriate methodology to use with our plan trustees.

Retiree Health Plans:

In December 2018, we amended our Canadian Retiree Health Plan to eliminate coverage for certain future and existing retirees. This negative plan amendment resulted in a reduction in the postretirement benefit obligation of $19, which is expected to be amortized to future net periodic benefit costs as a prior service credit and is expected to reduce 2019 costs by approximately $2. The amendment also resulted in an immaterial curtailment gain and is not expected to have a material impact on 2019 cash contributions from Xerox.

In October 2018, we amended our U.S. Retiree Health Plan effective January 1, 2019, to reduce certain benefits for existing non-union retirees through the reduction or elimination of coverage or cost-sharing subsidies for retiree health care and life insurance costs. This negative plan amendment resulted in a reduction in the postretirement benefit obligation of $283, which consisted of $216 for the plan amendment and an actuarial gain of $67 related to the required plan remeasurement upon amendment. The amount for the plan amendment is expected to be amortized to future net periodic benefit costs as a prior service credit and is expected to reduce 2019 costs by approximately $70 (approximately $15 for the fourth quarter of 2018). The plan amendment is also expected to reduce 2019 cash contributions from Xerox by approximately $20.

Plan Assets

Current Allocation

As of the 2018 and 2017 measurement dates, the global pension plan assets were $8,087 and $9,532, respectively. These assets were invested among several asset classes.

The following tables present the defined benefit plans assets measured at fair value and the basis for that measurement.



	December 31, 2018
	U.S. Plans												Non-U.S. Plans
Asset Class	Level 1		Level 2			Level 3		Assets measured at NAV⁽¹⁾		Total			Level 1		Level 2		Level 3		Assets measured at NAV⁽¹⁾		Total
Cash and cash equivalents	$	1	$	—		$	—	$	—	$	1		$	370	$	—	$	—	$	—	$	370
Equity Securities:
U.S.	82		—			—		35		117			103		42		—		—		145
International	97		—			—		52		149			359		111		—		112		582
Fixed Income Securities:
U.S. treasury securities	—		248			—		—		248			—		57		—		—		57
Debt security issued by government agency	—		81			—		—		81			—		1,861		—		—		1,861
Corporate bonds	—		1,363			—		—		1,363			—		736		—		—		736
Asset backed securities	—		—			—		—		—			—		—		—		—		—
Derivatives	—		(26		)	—		—		(26		)	—		99		—		—		99
Real estate	19		—			—		9		28			—		—		210		157		367
Private equity/venture capital	—		—			—		353		353			—		—		6		1,386		1,392
Guaranteed insurance contracts	—		—			—		—		—			—		—		92		—		92
Other⁽²⁾	12		—			—		32		44			5		23		—		—		28
Total Fair Value of Plan Assets	$	211	$	1,666		$	—	$	481	$	2,358		$	837	$	2,929	$	308	$	1,655	$	5,729

_____________


(1)	Certain assets 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.


(2)	Other Level 1 includes net non-financial (liabilities) assets of $12 U.S. and $5 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses.



	December 31, 2017
	U.S. Plans												Non-U.S. Plans
Asset Class	Level 1		Level 2			Level 3		Assets measured at NAV⁽¹⁾		Total			Level 1		Level 2		Level 3		Assets measured at NAV⁽¹⁾		Total
Cash and cash equivalents	$	2	$	—		$	—	$	—	$	2		$	686	$	—	$	—	$	—	$	686
Equity Securities:
U.S.	104		—			—		31		135			310		24		—		—		334
International	134		—			—		52		186			441		676		—		127		1,244
Fixed Income Securities:
U.S. treasury securities	—		384			—		—		384			—		42		—		—		42
Debt security issued by government agency	—		127			—		—		127			—		1,938		—		—		1,938
Corporate bonds	—		1,866			—		—		1,866			—		784		—		—		784
Asset backed securities	—		—			—		—		—			—		—		—		—		—
Derivatives	—		(20		)	—		—		(20		)	—		74		—		—		74
Real estate	24		—			—		11		35			—		—		137		176		313
Private equity/venture capital	—		—			—		433		433			—		58		7		662		727
Guaranteed insurance contracts	—		—			—		—		—			—		—		100		—		100
Other⁽²⁾	33		—			—		43		76			6		60		—		—		66
Total Fair Value of Plan Assets	$	297	$	2,357		$	—	$	570	$	3,224		$	1,443	$	3,656	$	244	$	965	$	6,308

_____________


(1)	Certain assets 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.


(2)	Other Level 1 includes net non-financial (liabilities) assets of $33 U.S. and $15 Non-U.S., respectively, such as due to/from broker, interest receivables and accrued expenses.

The following tables represents a roll-forward of the defined benefit plans assets measured at fair value using significant unobservable inputs (Level 3 assets):



	U.S.			Non-U.S.
	Real Estate			Real Estate			Private Equity/Venture Capital			Guaranteed Insurance Contracts			Total
Balance at December 31, 2016	$	12		$	121		$	6		$	104		$	231
Purchases	—			1			—			—			1
Transfers out of Level 3	(7		)	—			—			—			—
Sales	(5		)	—			—			(2		)	(2		)
Realized losses	(9		)	(1		)	—			—			(1		)
Unrealized gains (losses)	9			7			(16		)	(15		)	(24		)
Currency translation	—			9			17			13			39
Balance at December 31, 2017	$	—		$	137		$	7		$	100		$	244
Purchases	—			22			—			1			23
Sales	—			(1		)	—			(6		)	(7		)
Realized losses	(4		)	—			—			—			—
Unrealized gains (losses)	4			62			(4		)	—			58
Currency translation	—			(10		)	3			(3		)	(10		)
Balance at December 31, 2018	$	—		$	210		$	6		$	92		$	308

Level 3 Valuation Method

Our primary Level 3 assets are Real Estate and Private Equity/Venture Capital investments. The fair value of our real estate investment funds are based on the Net Asset Value (NAV) of our ownership interest in the funds. NAV information is received from the investment advisers and is primarily derived from third-party real estate appraisals for the properties owned. The fair value for our private equity/venture capital partnership investments are based on our share of the estimated fair values of the underlying investments held by these partnerships as reported (or expected to be reported) in their audited financial statements. The valuation techniques and inputs for our Level 3 assets have been consistently applied for all periods presented.

Investment Strategy

The target asset allocations for our worldwide defined benefit pension plans were:



	2018		2017
	U.S.	Non-U.S.	U.S.	Non-U.S.
Equity investments	12%	13%	12%	24%
Fixed income investments	73%	46%	73%	45%
Real estate	3%	6%	3%	5%
Private equity/venture capital	6%	24%	6%	12%
Other	6%	11%	6%	14%
Total Investment Strategy	100%	100%	100%	100%

We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by exceeding the interest growth in long-term plan liabilities. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. This consideration involves the use of long-term measures that address both return and risk. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value and small and large capitalizations. Other assets such as real estate, private equity, and hedge funds are used to improve portfolio diversification. Derivatives may be used to hedge market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risks and returns are measured and monitored on an ongoing basis through annual liability measurements and quarterly investment portfolio reviews.

Expected Long-term Rate of Return

We employ a “building block” approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established giving consideration to investment diversification and rebalancing. Peer data and historical returns are reviewed periodically to assess reasonableness and appropriateness.

Contributions

The following table summarizes cash contributions to our defined benefit pension plans and retiree health benefit plans.



	Year Ended December 31,
	2018		Estimated 2019
U.S. Plans	$	27	$	25
Non-U.S. Plans	117		110
Total	$	144	$	135

Retiree Health	$	57	$	35

The 2018 U.S. pension plan contributions did not include any contributions for our domestic tax-qualified defined benefit plans because none were required to meet the minimum funding requirements. There are no contributions required in 2019 for our U.S. tax-qualified defined benefit plans to meet the minimum funding requirements.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years:



	Pension Benefits
	U.S.		Non-U.S.		Total		Retiree Health
2019	$	394	$	276	$	670	$	35
2020	273		281		554		33
2021	260		287		547		32
2022	267		293		560		31
2023	269		301		570		30
Years 2024-2028	1,195		1,595		2,790		130

Assumptions

Weighted-average assumptions used to determine benefit obligations at the plan measurement dates:



	Pension Benefits
	2018				2017				2016
	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Discount rate	4.2	%	2.6	%	3.6	%	2.3	%	4.0	%	2.5	%
Rate of compensation increase	0.2	%	2.6	%	0.2	%	2.6	%	0.2	%	2.6	%



	Retiree Health
	2018		2017		2016
Discount rate	4.1	%	3.5	%	3.9	%

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:



	Pension Benefits
	2019				2018				2017				2016
	U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.		U.S.		Non-U.S.
Discount rate	4.2	%	2.6	%	3.6	%	2.3	%	4.0	%	2.5	%	4.3	%	3.3	%
Expected return on plan assets	6.0	%	4.0	%	5.8	%	3.8	%	7.0	%	4.1	%	7.5	%	4.8	%
Rate of compensation increase	0.2	%	2.6	%	0.2	%	2.6	%	0.2	%	2.6	%	0.2	%	2.7	%



	Retiree Health
	2019		2018		2017		2016
Discount rate	4.1	%	3.5	%	3.9	%	4.1	%

_____________

Note: Expected return on plan assets is not applicable to retiree health benefits as these plans are not funded. Rate of compensation increase is not applicable to retiree health benefits as compensation levels do not impact earned benefits.

Assumed health care cost trend rates were as follows:



	December 31,
	2018		2017
Health care cost trend rate assumed for next year	6.3	%	6.8	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.7	%	4.8	%
Year that the rate reaches the ultimate trend rate	2025		2026

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



	1% increase		1% decrease
Effect on total service and interest cost components	$	2	$	(1	)
Effect on post-retirement benefit obligation	33		(29		)

Defined Contribution Plans

We have post-retirement savings and investment plans in several countries, including the U.S., the U.K. and Canada. In many instances, employees who participated in the defined benefit pension plans that have been amended to freeze future service accruals were transitioned to an enhanced defined contribution plan. In these plans employees are allowed to contribute a portion of their salaries and bonuses to the plans, and we match a portion of the employee contributions. We recorded charges related to our defined contribution plans of $66 in 2018, $67 in 2017 and $74 in 2016. Prior year amounts have been revised to reflect additional cost for previously excluded plans.