NOTE 14. Employee Benefit Plans

Defined Benefit Plans

The Company sponsors pay related benefit plans for employees in the U.S., UK, Germany, Brazil, France, Mexico, Japan, India, and Canada. Employees in the U.S. are no longer accruing benefits under the Company's defined benefit plans as these plans were frozen. The Company’s defined benefit plans are partially funded with the exception of certain supplemental benefit plans for executives and certain non-U.S. plans, primarily in Germany, which are unfunded.

On July 22, 2014, the Company purchased a non-participating annuity contract from Prudential Insurance Company of America (“Prudential”) for certain participants under the U.S. defined benefit pension plan (the “Plan”). The annuity purchase covered approximately 3,900 participants and resulted in the use of approximately $350 million of plan assets for the settlement of approximately $350 million of the outstanding pension benefit obligation (“PBO”). In connection with the annuity purchase, the Company recorded a settlement gain of $25 million during the year ended December 31, 2014. This gain is the pro-rata portion of the existing unamortized gain in AOCI and was calculated based on the percentage of the Plan's PBO that was settled as part of the annuity purchase. Prudential has unconditionally and irrevocably guaranteed the full payment of benefits to plan participants associated with the annuity purchase and benefits payment will be in the same form that was in effect under the Plan. Prudential has also assumed all investment risk associated with the assets that were delivered as annuity contract premiums.

The Company's expense for all defined benefit pension plans, including discontinued operations, is as follows:



	U.S. Plans									Non-U.S. Plans
	Year Ended December 31									Year Ended December 31
	2015			2014			2013			2015			2014			2013
	(Dollars in Millions)
Costs Recognized in Income:
Service cost	$	—		$	—		$	—		$	14		$	25		$	23
Interest cost	34			43			47			19			31			27
Expected return on plan assets	(42		)	(54		)	(62		)	(17		)	(22		)	(18		)
Amortization of losses and other	1			—			—			8			3			3
Settlements and curtailments	—			(23		)	—			—			(2		)	(1		)
Net pension (income) expense	$	(7	)	$	(34	)	$	(15	)	$	24		$	35		$	34
Weighted Average Assumptions:
Discount rate	4.00		%	4.75		%	3.95		%	3.17		%	4.30		%	4.10		%
Compensation increase	N/A			N/A			N/A			3.49		%	3.55		%	3.45		%
Long-term return on assets	7.00		%	7.00		%	7.00		%	4.87		%	5.10		%	4.75		%

In addition the Company recorded U.S. retirement benefit related restructuring expenses of $1 million during 2015.

The Company’s obligation for all defined benefit pension plans, is as follows:



	U.S. Plans						Non-U.S. Plans
	Year Ended December 31						Year Ended December 31
	2015			2014			2015			2014
	(Dollars in Millions)
Change in Benefit Obligation:
Benefit obligation — beginning	$	864		$	1,081		$	617		$	701
Service cost	—			—			14			25
Interest cost	34			43			19			31
Actuarial (gain) loss	(51		)	152			(11		)	136
Settlements and curtailments	—			(354		)	(2		)	(4		)
Foreign exchange translation	—			—			(79		)	(83		)
Divestitures	—			—			(312		)	(3		)
Benefits paid and other	(44		)	(58		)	(15		)	(21		)
Benefit obligation including amounts held for sale — ending	803			864			231			782
Less: Amounts held for sale	—			—			—			165
Benefit obligation — ending	$	803		$	864		$	231		$	617
Change in Plan Assets:
Plan assets — beginning	$	676		$	960		$	351		$	434
Actual return on plan assets	(28		)	127			9			45
Sponsor contributions	—			2			22			43
Settlements	—			(354		)	—			—
Foreign exchange translation	—			—			(45		)	(44		)
Divestitures	—			—			(148		)	(1		)
Benefits paid and other	(44		)	(59		)	(15		)	(21		)
Plan assets including amounts held for sale — ending	604			676			174			456
Less: Amounts held for sale	—			—			—			105
Plan assets — ending	$	604		$	676		$	174		$	351
Total funded status at end of period, continuing operations	$	(199	)	$	(188	)	$	(57	)	$	(266	)
Balance Sheet Classification:
Other non-current assets	$	—		$	—		$	2		$	2
Accrued employee liabilities	(3		)	—			(1		)	(3		)
Employee benefits	(196		)	(188		)	(58		)	(265		)
Non-current liabilities held for sale	—			—			—			(60		)
Accumulated other comprehensive loss:
Actuarial loss	22			4			23			182
Tax effects/other				(1		)	(9		)	(29		)
	$	22		$	3		$	14		$	153

The accumulated benefit obligation for all defined benefit pension plans, excluding those held for sale, was $1.00 billion and $1.42 billion at December 31, 2015 and 2014, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for employee retirement plans with accumulated benefit obligations in excess of plan assets, excluding those held for sale, were $0.86 billion, $0.85 billion, and $0.62 billion, respectively, at December 31, 2015 and $1.28 billion, $1.24 billion and $0.85 billion, respectively, at December 31, 2014.

Assumptions used by the Company in determining its defined benefit pension obligations, excluding those held for sale, as of December 31, 2015 and 2014 are summarized in the following table:



	U.S. Plans				Non-U.S. Plans
Weighted Average Assumptions	2015		2014		2015		2014
Discount rate	4.37	%	4.00	%	4.60	%	3.20	%
Expected rate of return on assets	7.00	%	7.00	%	4.87	%	4.70	%
Rate of increase in compensation	N/A		N/A		3.70	%	3.30	%

Components of the net change in AOCI related to all defined benefit pension plans, exclusive of amounts attributable to non-controlling interests on the Company’s Consolidated Statements of Changes in Equity for the year ended December 31, 2015 and 2014, are as follows:



	U.S. Plans				Non-U.S. Plans
	2015		2014		2015			2014
	(Dollars in Millions)
Actuarial loss (gain)	$	18	$	79	$	(4	)	$	113
Prior service credit	—		1		—			—
Deferred taxes	—		—		3			(8		)
Currency/other	1		—		(18		)	(24		)
Reclassification to net income	—		23		(7		)	(3		)
Divestitures	—		—		(113		)	—
	$	19	$	103	$	(139	)	$	78

Actuarial losses for the year ended December 31, 2015 are primarily related to lower than expected return on plan assets. Actuarial losses of $1 million for the non-U.S. retirement plans, excluding those held for sale, are expected to be amortized to income during 2016.

Benefit payments, which reflect expected future service, are expected to be paid by the Company plans, excluding those held for sale, as follows:



	U.S. Plans		Non-U.S. Plans
	(Dollars in Millions)
2016	$	48	$	9
2017	44		5
2018	45		5
2019	45		6
2020	45		7
Years 2021 - 2025	208		50

During the year ended December 31, 2015, cash contributions to the Company's U.S. and non-U.S. defined benefit pension plans, excluding those held for sale, were $22 million. Additionally, the Company expects to make cash contributions to its U.S. defined benefit pension plans of $4 million in 2016. Contributions to non-U.S. defined benefit pension plans, excluding those held for sale, are expected to be $8 million during 2016. The Company’s expected 2016 contributions may be revised.

Substantially all of the Company’s defined benefit pension plan assets are managed by external investment managers and held in trust by third-party custodians. The selection and oversight of these external service providers is the responsibility of the investment committees and their advisors. The selection of specific securities is at the discretion of the investment manager and is subject to the provisions set forth by written investment management agreements and related policy guidelines regarding permissible investments, risk management practices and the use of derivative securities. Derivative securities may be used by investment managers as efficient substitutes for traditional securities, to reduce portfolio risks or to hedge identifiable economic exposures. The use of derivative securities to create economic leverage to engage in unrelated speculation is expressly prohibited. External investment managers are prohibited from investing in any debt or equity securities related to the Company or its affiliates. Investments in the Company's equity is permitted when it is the result of a corporate contribution to the plan.

The primary objective of the pension funds is to pay the plans’ benefit and expense obligations when due. Given the relatively long time horizon of these obligations and their sensitivity to interest rates, the investment strategy is intended to improve the funded status of its U.S. and non-U.S. plans over time while maintaining a prudent level of risk. Risk is managed primarily by diversifying each plan’s target asset allocation across equity, fixed income securities and alternative investment strategies, and then maintaining the allocation within a specified range of its target. In addition, diversification across various investment subcategories within each plan is also maintained within specified ranges.

The Company’s retirement plan asset allocation, excluding those held for sale, at December 31, 2015 and 2014 and target allocation for 2016 are as follows:



	Target Allocation				Percentage of Plan Assets
	U.S.		Non-U.S.		U.S.				Non-U.S.
	2016		2016		2015		2014		2015		2014
Equity securities	33	%	23	%	33	%	34	%	34	%	21	%
Fixed income	22	%	61	%	22	%	21	%	55	%	67	%
Alternative strategies	45	%	9	%	44	%	44	%	8	%	8	%
Cash	—	%	7	%	1	%	1	%	3	%	4	%
	100	%	100	%	100	%	100	%	100	%	100	%

The expected long-term rate of return for defined benefit pension plan assets has been chosen based on various inputs, including returns projected by various external sources for the different asset classes held by and to be held by the Company’s trusts and its targeted asset allocation. These projections incorporate both historical returns and forward looking views regarding capital market returns, inflation and other variables. Pension plan assets are valued at fair value using various inputs and valuation techniques. A description of the inputs and valuation techniques used to measure the fair value for each class of plan assets is included in Note 19 Fair Value Measurements.

2016 Discount Rate for Estimated Service and Interest Cost: Through December 31, 2015, the Company recognized service and interest cost components of pension expense using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The single weighted average discount method represents the constant annual rate required to discount all future benefit payments related to past service from the date of expected future payment to the measurement date, such that the aggregate present value equals the obligation. The U.S. and certain non-U.S. frozen plans do not have a service component, as additional benefits are no longer accrued.

During the fourth quarter of 2015, the Company changed the method used to estimate the service and interest components of net periodic benefit cost for pension benefits for its U.S. and certain non-U.S. plans. The Company has elected to utilize an approach that discounts individual expected cash flows underlying interest and service costs using the applicable spot rates derived from the yield curve used to determine the benefit obligation to the relevant projected cash flows. The election and adoption of this method provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. The use of disaggregated discount rates results in a different amount of interest cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments. The use of disaggregated discount rates affects the amount of service cost because the benefit payments associated with new service credits for active employees tend to be of longer duration than the overall benefit payments associated with the plan’s benefit obligation. As a result, the payments would be associated with longer-term spot rates on the yield curve, resulting in lower present values than the calculations using the traditional single weighted-average discount rate.

This change does not affect the measurement of the total benefit obligation, but will result in a decrease in the service and interest components of benefit cost beginning in 2016. Based on current economic conditions, the Company estimates that the service cost and interest cost for the affected plans will be reduced by approximately $7 million in 2016 as a result of the change in method. The Company has accounted for this as a change in accounting estimate that is inseparable from a change in accounting principle, and accordingly has accounted for it on a prospective basis.

Defined Contribution Plans

Most U.S. salaried employees and certain non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which is partially matched by the Company. Matching contributions for the U.S. defined contribution plan are 100% on the first 6% of pay contributed. The expense related to all matching contributions was approximately $10 million in 2015, $13 million in 2014, and $11 million in 2013.

Other Postretirement Employee Benefit Plans

In the U.S. and Canada, the Company has a financial obligation for the cost of providing other postretirement health care and life insurance benefits to certain of its employees under Company-sponsored plans. These plans generally pay for the cost of health care and life insurance for retirees and dependents, less retiree contributions and co-pays. Other postretirement benefit obligations were $2 million and $6 million at December 31, 2015 and 2014, respectively.