Note 10. Benefit Plans

Pension Plans

Obligations and Funded Status:

The projected benefit obligations, plan assets and funded status of our pension plans were:


	U.S. Plans						Non-U.S. Plans
	2014			2013			2014			2013
	(in millions)

Benefit obligation at January 1	$	1,266		$	1,389		$	9,920		$	9,786
Service cost		57			71			184			172
Interest cost		67			60			388			358
Benefits paid		(20	)		(14	)		(446	)		(420	)
Settlements paid		(52	)		(59	)		–			–
Actuarial (gains) / losses		266			(182	)		1,604			(184	)
Currency		–			–			(949	)		183
Other		22			1			153			25

Benefit obligation at December 31		1,606			1,266			10,854			9,920

Fair value of plan assets at January 1		1,118			903			8,122			7,381
Actual return on plan assets		159			111			971			675
Contributions		11			178			353			350
Benefits paid		(20	)		(14	)		(446	)		(420	)
Settlements paid		(52	)		(59	)		–			–
Currency		–			–			(681	)		136
Other		–			(1	)		43			–

Fair value of plan assets at December 31		1,216			1,118			8,362			8,122

Net pension liability at December 31	$	(390	)	$	(148	)	$	(2,492	)	$	(1,798	)

The accumulated benefit obligation, which represents benefits earned to the measurement date, was $1,474 million at December 31, 2014 and $1,133 million at December 31, 2013 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $10,462 million at December 31, 2014 and $9,605 million at December 31, 2013.

For salaried and non-union hourly employees hired after January 1, 2009, we discontinued benefits under our U.S. pension plans and replaced them with an enhanced Company contribution to our employee defined contribution plan. Effective December 31, 2019, benefit accruals will cease under the U.S. non-union pension plan. For non-union employees participating in that plan on December 31, 2019, we will calculate the pension benefit obligation based on pay and service as of that date and no longer accrue new benefits.

The combined U.S. and non-U.S. pension plans resulted in a net pension liability of $2,882 million at December 31, 2014 and $1,946 million at December 31, 2013. We recognized these amounts in our consolidated balance sheets as follows:


	As of December 31,
	2014			2013
	(in millions)

Prepaid pension assets	$	53		$	54
Other accrued liabilities		(23	)		(38	)
Accrued pension costs		(2,912	)		(1,962	)

	$	(2,882	)	$	(1,946	)

Certain of our U.S. and non-U.S. plans are underfunded and have accumulated benefit obligations in excess of plan assets. For these plans, the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets were:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2014		2013		2014		2013
	(in millions)

Projected benefit obligation	$	1,606	$	86	$	10,108	$	8,379
Accumulated benefit obligation		1,474		73		9,763		8,197
Fair value of plan assets		1,216		2		7,576		6,571

We used the following weighted-average assumptions to determine our benefit obligations under the pension plans:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2014		2013		2014		2013

Discount rate		4.20%		5.10%		2.99%		4.00%
Expected rate of return on plan assets		7.25%		7.75%		5.96%		6.18%
Rate of compensation increase		4.00%		4.00%		3.26%		3.61%

Year-end discount rates for our U.S., Canadian, Eurozone and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.

Components of Net Pension Cost:

Net pension cost consisted of the following:


	U.S. Plans									Non-U.S. Plans
	For the Years Ended December 31,									For the Years Ended December 31,
	2014			2013			2012			2014			2013			2012
	(in millions)

Service cost	$	57		$	71		$	142		$	184		$	172		$	172
Interest cost		67			60			275			388			358			425
Expected return on plan assets		(81	)		(67	)		(358	)		(485	)		(435	)		(494	)
Amortization:
Net loss from experience differences		29			55			253			106			136			121
Prior service cost		2			2			6			–			1			3
Other expenses		28			1			113			14			3			22
Net pension costs related to discontinued operations		–			–			(263	)		–			–			(29	)

Net pension cost included in continuing operations	$	102		$	122		$	168		$	207		$	235		$	220

The following costs are included within other expenses above. Employees who elected lump-sum payments in connection with our 2012-2014 Restructuring Program and cost saving initiatives and retired employees who elected lump-sum payments resulted in net settlement losses for our U.S. plans of $28 million in 2014, $1 million in 2013, and $113 million in 2012 (2012 includes amounts related to the discontinued operation of Kraft Foods Group). Curtailment and settlement losses for our non-U.S. plans in 2014 included $12 million related to employees affected by our 2014-2018 Restructuring Program and retired employees who elected lump-sum payments. Non-U.S. plant closures and early retirement benefits resulted in curtailment and settlement losses of $2 million in 2013 and $9 million in 2012. In addition, we incurred special termination benefit costs of $2 million in 2014 and $1 million in 2013 in the non-U.S. plans related to the 2012-2014 Restructuring Program. We incurred special termination benefit costs of $13 million in 2012 in the non-U.S. plans related to the Cadbury integration.

For the U.S. plans, we determine the expected return on plan assets component of net periodic benefit cost using a calculated market return value that recognizes the cost over a four year period. For our non-U.S. plans, we utilize a similar approach with varying cost recognition periods for some plans, and with others, we determine the expected return on plan assets based on asset fair values as of the measurement date.

As of December 31, 2014, for the combined U.S. and non-U.S. pension plans, we expected to amortize from accumulated other comprehensive earnings / (losses) into net periodic pension cost during 2015:

•

an estimated $224 million of net loss from experience differences; and

•

less than $1 million of estimated prior service cost.

We used the following weighted-average assumptions to determine our net pension cost:


	U.S. Plans						Non-U.S. Plans
	For the Years Ended December 31,						For the Years Ended December 31,
	2014		2013		2012		2014		2013		2012
Discount rate		5.10%		4.20%		4.56%		4.03%		3.81%		4.62%
Expected rate of return on plan assets		7.75%		7.75%		8.00%		6.17%		6.08%		6.47%
Rate of compensation increase		4.00%		4.00%		4.00%		3.63%		3.47%		3.58%

Plan Assets:

The fair value of pension plan assets was determined using the following fair value measurements:


	As of December 31, 2014
			Quoted Prices		Significant
Asset Category	Total Fair Value		in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)

U.S. equity securities	$	124	$	124	$	–	$	–
Non-U.S. equity securities		698		698		–		–
Pooled funds - equity securities		2,192		538		1,654		–

Total equity securities		3,014		1,360		1,654		–

Government bonds		2,283		234		2,049		–
Pooled funds - fixed-income securities		1,151		311		743		97
Corporate bonds and other fixed-income securities		1,174		314		111		749

Total fixed-income securities		4,608		859		2,903		846

Real estate		406		110		4		292
Hedge funds		829		–		–		829
Private equity		237		–		–		237
Cash		253		246		7		–
Other		157		124		30		3

Total	$	9,504	$	2,699	$	4,598	$	2,207


	As of December 31, 2013
			Quoted Prices		Significant
Asset Category	Total Fair Value		in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)

U.S. equity securities	$	104	$	104	$	–	$	–
Non-U.S. equity securities		665		665		–		–
Pooled funds - equity securities		2,571		799		1,772		–

Total equity securities		3,340		1,568		1,772		–

Government bonds		1,560		308		1,252		–
Pooled funds - fixed-income securities		1,176		311		850		15
Corporate bonds and other fixed-income securities		1,350		108		462		780

Total fixed-income securities		4,086		727		2,564		795

Real estate		381		110		4		267
Hedge funds		820		–		–		820
Private equity		227		–		–		227
Cash		251		251		–		–
Other		54		–		54		–

Total	$	9,159	$	2,656	$	4,394	$	2,109

We excluded plan assets of $74 million at December 31, 2014 and $81 million at December 31, 2013 from the above tables related to certain insurance contracts as they are reported at contract value, in accordance with authoritative guidance.

Fair value measurements:

•

Level 1 – includes primarily U.S and non-U.S. equity securities and government bonds valued using quoted prices in active markets.

•

Level 2 – includes primarily pooled funds, including assets in real estate pooled funds, valued using net asset values of participation units held in common collective trusts, as reported by the managers of the trusts and as supported by the unit prices of actual purchase and sale transactions. Level 2 plan assets also include corporate bonds and other fixed-income securities, valued using independent observable market inputs, such as matrix pricing, yield curves and indices.

•

Level 3 – includes investments valued using unobservable inputs that reflect the plans’ assumptions that market participants would use in pricing the assets, based on the best information available.

•

Fair value estimates for pooled funds are calculated by the investment advisor when reliable quotations or pricing services are not readily available for certain underlying securities. The estimated value is based on either cost, or last sale price for most of the securities valued in this fashion.

•

Fair value estimates for private equity investments are calculated by the general partners using the market approach to estimate the fair value of private investments. The market approach utilizes prices and other relevant information generated by market transactions, type of security, degree of liquidity, restrictions on the disposition, latest round of financing data, company financial statements, relevant valuation multiples and discounted cash flow analyses.

•

Fair value estimates for real estate investments are calculated by the investment managers using the present value of future cash flows expected to be received from the investments, based on valuation methodologies such as appraisals, local market conditions, and current and projected operating performance.

•

Fair value estimates for investments in hedge fund-of-funds are calculated by the investment managers using the net asset value per share of the investment as reported by the money managers of the underlying funds.

•

Fair value estimates for certain fixed-income securities such as insurance contracts are calculated based on the future stream of benefit payments discounted using prevailing interest rates based on the valuation date.

Changes in our Level 3 plan assets, which are recorded in other comprehensive earnings / (losses), included:


Asset Category	January 1, 2014 Balance		Net Realized and Unrealized Gains/(Losses)			Net Purchases, Issuances and Settlements			Net Transfers Into/(Out of) Level 3			Currency Impact			December 31, 2014 Balance
	(in millions)
Pooled funds- fixed-income securities	$	15	$	(15	)	$	15		$	87		$	(5	)	$	97
Corporate bond and other fixed-income securities		780		80			(64	)		–			(47	)		749
Real estate		267		37			(2	)		10			(20	)		292
Hedge funds		820		40			20			–			(51	)		829
Private equity		227		45			(19	)		2			(15	)		240

Total Level 3 investments	$	2,109	$	187		$	(50	)	$	99		$	(138	)	$	2,207


Asset Category	January 1, 2013 Balance		Net Realized and Unrealized Gains/(Losses)			Net Purchases, Issuances and Settlements			Net Transfers Into/(Out of) Level 3			Currency Impact			December 31, 2013 Balance
	(in millions)
Pooled funds- fixed-income securities	$	10	$	(1	)	$	2		$	4		$	–		$	15
Corporate bond and other fixed-income securities		794		17			(48	)		(1	)		18			780
Real estate		239		10			12			–			6			267
Hedge funds		263		(11	)		535			–			33			820
Private equity		210		15			(4	)		–			6			227

Total Level 3 investments	$	1,516	$	30		$	497		$	3		$	63		$	2,109

The increases in Level 3 pension plan investments during 2014 were primarily due to unrealized gains across most of the Level 3 asset categories and net transfers into pooled funds-fixed income securities offset by the effects of currency. The increases in Level 3 pension plan investments during 2013 were primarily due to net purchases in hedge funds.

The percentage of fair value of pension plan assets was:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
Asset Category	2014		2013		2014		2013

Equity securities		45%		53%		30%		34%
Fixed-income securities		52%		44%		48%		45%
Real estate		3%		3%		4%		4%
Hedge funds		–		–		10%		10%
Private equity		–		–		3%		3%
Cash		–		–		3%		3%
Other		–		–		2%		1%

Total		100%		100%		100%		100%

For our U.S. plans, our investment strategy is based on our expectation that equity securities will outperform fixed-income securities over the long term. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments. Due to the nature and timing of our expected pension liabilities, in the first quarter of 2014, we strategically reduced the risk level of the investment portfolio relative to the liabilities of our plans by lowering our target allocation to equity securities (including investments in real estate) to 50% and increasing the fixed-income allocation target to 50%. Historically we targeted an allocation of approximately 60% of our plan assets in equity securities and approximately 40% in fixed-income securities. The strategy uses indexed U.S. equity securities, actively managed and indexed international equity securities and actively managed U.S. investment grade fixed-income securities (which constitute 95% or more of fixed-income securities) with lesser allocations to high yield fixed-income securities. At December 31, 2013, we had a higher allocation to fixed income due to a voluntary $163 million contribution that was made on December 27, 2013 and temporarily invested in a short-term fixed income investment at year-end.

For our non-U.S. plans, the investment strategy is subject to local regulations and the asset / liability profiles of the plans in each individual country. These specific circumstances result in a level of equity exposure that is typically less than the U.S. plans. In aggregate, the asset allocation targets of our non-U.S. plans are broadly characterized as a mix of approximately 35% equity securities (including investments in real estate), approximately 50% fixed-income securities and approximately 15% other alternative securities. Our investment strategy for our largest non-U.S. plan, which comprises 50% of our non-U.S. pension assets, is designed to balance risk and return by diversifying across a wide range of return-seeking and liability matching assets, invested in a range of both active and passive mandates. We target an allocation of approximately 15% in equity securities, 18% credit, 13% private markets, 16% other diversifying assets, and 38% liability matching assets. The strategy uses actively managed and indexed global developed and emerging market equities, actively managed global investment grade and alternative credit, global private equity and real estate, other diversifying assets including hedge funds, and other liability matching assets including a buy-in annuity policy. During 2013, the level of diversification was strategically increased by reducing the plan’s equity exposure by approximately 10% and investing the majority of the proceeds in hedge funds and other diversifying assets.

Employer Contributions:

In 2014, we contributed $11 million to our U.S. pension plans and $334 million to our non-U.S. pension plans. In addition, employees contributed $19 million to our non-U.S. plans. We make contributions to our U.S. and non-U.S. pension plans primarily to the extent that they are tax deductible and do not generate an excise tax liability.

In 2015, we estimate that our pension contributions will be $210 million to our U.S. plans and $319 million to our non-U.S. plans based on current tax laws. Of the total 2015 pension contributions, $200 million is expected to be voluntary. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates, or other factors.

Future Benefit Payments:

The estimated future benefit payments from our pension plans at December 31, 2014 were (in millions):


Year ending:	2015		2016		2017		2018		2019		2020-2024

U.S. Plans	$	73	$	82	$	89	$	99	$	114	$	593
Non-U.S. Plans	$	434	$	437	$	451	$	462	$	476	$	2,569

Multiemployer Pension Plans:

We made contributions to multiemployer pension plans of $32 million in 2014, $32 million in 2013 and $30 million in 2012. These plans provide pension benefits to retirees under certain collective bargaining agreements. The following is the only individually significant multiemployer plan we participate in as of December 31, 2014:

Expiration Date

Pension

FIP / RP

of Collective-

EIN / Pension

Protection Act

Status Pending /

Surcharge

Bargaining

Pension Fund

Plan Number

Zone Status

Implemented

Imposed

Agreements

Bakery and Confectionery

Union and Industry International Pension Fund

526118572

Red

Implemented

Yes

2/29/2016

Our contributions exceeded 5% of total contributions to the Bakery and Confectionery Union and Industry International Pension Fund (the “Fund”) for fiscal years 2014, 2013 and 2012. Our contributions to the Fund were $25 million in 2014, $26 million in 2013 and $25 million in 2012. Our contribution to the Fund is based on our contribution rates under our collective bargaining agreements, the number of our eligible employees and Fund surcharges. We expect our contribution for the next year to be approximately $30 million under the current collective bargaining arrangements. The Fund’s actuarial valuation has been completed and the zone status was changed to “Red” in 2012. As a result of this certification, we are being charged a 10% surcharge on our contribution rates. Our expected future contributions include the surcharge. The Fund adopted a rehabilitation plan on November 7, 2012 that requires contribution increases and reduction to benefit provisions.

Our contributions to other multiemployer pension plans that were not individually significant were $7 million in 2014, $6 million in 2013 and $5 million in 2012. These contributions include contributions related to Kraft Foods Group employees who participated in our multiemployer pension plans through October 1, 2012 of $2 million in 2012.

Other Costs:

We sponsor and contribute to employee defined contribution plans. These plans cover eligible salaried, non-union and union employees. Our contributions and costs are determined by the matching of employee contributions, as defined by the plans. Amounts charged to expense in continuing operations for defined contribution plans totaled $46 million in 2014, $66 million in 2013 and $74 million in 2012.

Postretirement Benefit Plans

Obligations:

Our postretirement health care plans are not funded. The changes in and the amount of the accrued benefit obligation were:


	As of December 31,
	2014			2013
	(in millions)

Accrued benefit obligation at January 1	$	422		$	458
Service cost		13			15
Interest cost		22			20
Benefits paid		(9	)		(7	)
Plan amendments		–			(3	)
Currency		(11	)		(7	)
Assumption changes		75			(56	)
Actuarial (gains) / losses		14			(4	)
Other		12			6

Accrued benefit obligation at December 31	$	538		$	422

The current portion of our accrued postretirement benefit obligation of $11 million at December 31, 2014 and $9 million at December 31, 2013 was included in other accrued liabilities.

We used the following weighted-average assumptions to determine our postretirement benefit obligations:


	U.S. Plans				Non-U.S. Plans
	As of December 31,				As of December 31,
	2014		2013		2014		2013

Discount rate		4.20%		5.10%		4.52%		4.81%
Health care cost trend rate assumed for next year		6.50%		7.00%		5.18%		4.76%
Ultimate trend rate		5.00%		5.00%		5.53%		5.54%
Year that the rate reaches the ultimate trend rate		2018		2018		2018		2019

Year-end discount rates for our U.S., Canadian and U.K. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the benefit obligations. Year-end discount rates for our remaining non-U.S. plans were developed from local bond indices that match local benefit obligations as closely as possible. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. Our expected health care cost trend rate is based on historical costs.

Assumed health care cost trend rates have a significant impact 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:


	As of December 31, 2014
	One-Percentage-Point
	Increase		Decrease
	(in millions)

Effect on postretirement benefit obligation	$	90	$	(71	)
Effect on annual service and interest cost	$	6	$	(5	)

Components of Net Postretirement Health Care Costs:

Net postretirement health care costs consisted of the following:


	For the Years Ended December 31,
	2014			2013			2012
				(in millions)

Service cost	$	13		$	15		$	35
Interest cost		22			20			121
Amortization:
Net loss from experience differences		5			12			65
Prior service credit		(10	)		(12	)		(31	)
Other⁽¹⁾		–			–			29
Net postretirement health care costs related to discontinued operations		–			–			(135	)

Net postretirement health care costs included within continuing operations	$	30		$	35		$	84

(1)

In 2012, we recorded a $23 million unfunded U.S. postretirement plan obligation related to long-term disability benefits.

As of December 31, 2014, we expected to amortize from accumulated other comprehensive earnings / (losses) into pre-tax net postretirement health care costs during 2015:

•

an estimated $13 million of net loss from experience differences, and

•

an estimated $7 million of prior service credit.

We used the following weighted-average assumptions to determine our net postretirement cost:


	U.S. Plans			Non-U.S. Plans
	For the Years Ended December 31,			For the Years Ended December 31,
	2014	2013	2012	2014	2013	2012

Discount rate	5.10%	4.20%	4.47%	5.17%	4.39%	4.14%
Health care cost trend rate	7.00%	7.50%	7.00%	5.11%	6.47%	6.21%

Future Benefit Payments:

Our estimated future benefit payments for our postretirement health care plans at December 31, 2014 were (in millions):


Year ending:	2015	2016	2017	2018	2019	2020-2024

U.S. Plans	$7	$8	$10	$11	$13	$86
Non-U.S. Plans	$5	$6	$6	$6	$7	$38

Other Costs:

We made contributions to multiemployer medical plans totaling $18 million in 2014, $18 million in 2013 and $31 million in 2012. The contributions include contributions related to Kraft Foods Group employees who participated in our multiemployer medical plans through October 1, 2012 of $13 million in 2012. These plans provide medical benefits to active employees and retirees under certain collective bargaining agreements.

Postemployment Benefit Plans

Obligations:

Our postemployment plans are primarily not funded. The changes in and the amount of the accrued benefit obligation at December 31, 2014 and 2013 were:


	2014			2013
	(in millions)

Accrued benefit obligation at January 1	$	103		$	100
Service cost		9			8
Interest cost		6			5
Benefits paid		(17	)		(21	)
Assumption changes		2			(2	)
Actuarial losses		(9	)		13

Accrued benefit obligation at December 31	$	94		$	103

The accrued benefit obligation was determined using a weighted-average discount rate of 5.6% in 2014 and 6.2% in 2013, an assumed weighted-average ultimate annual turnover rate of 0.3% in 2014 and 2013, assumed compensation cost increases of 4.0% in 2014 and 2013 and assumed benefits as defined in the respective plans.

Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Components of Net Postemployment Costs:

Net postemployment costs consisted of the following:


	For the Years Ended December 31,
	2014		2013			2012
			(in millions)

Service cost	$	9	$	8		$	12
Interest cost		6		5			8
Amortization of net (gains) / losses		–		(1	)		(3	)
Other		–		(1	)		3
Net postemployment costs related to discontinued operations		–		–			(5	)

Net postemployment costs included in continuing operations	$	15	$	11		$	15

As of December 31, 2014, the estimated net gain for the postemployment benefit plans that we expected to amortize from accumulated other comprehensive earnings / (losses) into net postemployment costs during 2015 was insignificant.