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Employee Retirement Benefits
12 Months Ended
Dec. 31, 2016
Compensation and Retirement Disclosure [Abstract]  
Employee Retirement Benefits
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, is as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
Year Ended December 31
 
Year Ended December 31
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
(Dollars in Millions)
Costs Recognized in Income:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$

 
$

 
$

 
$
3

 
$
14

 
$
25

Interest cost
28

 
34

 
43

 
10

 
19

 
31

Expected return on plan assets
(42
)
 
(42
)
 
(54
)
 
(10
)
 
(17
)
 
(22
)
Amortization of losses and other

 
1

 

 
1

 
8

 
3

Settlements and curtailments

 

 
(23
)
 
1

 

 
(2
)
Special termination benefits (a)
6

 

 

 
1

 

 

Net pension (income) expense
$
(8
)
 
$
(7
)
 
$
(34
)
 
$
6

 
$
24

 
$
35

Weighted Average Assumptions:
 
 
 
 
 
 
 
 
 
 
Discount rate
4.37
%
 
4.00
%
 
4.75
%
 
4.60
%
 
3.17
%
 
4.30
%
Compensation increase
N/A

 
N/A

 
N/A

 
3.70
%
 
3.49
%
 
3.55
%
Long-term return on assets        
7.00
%
 
7.00
%
 
7.00
%
 
4.87
%
 
4.87
%
 
5.10
%
(a) Primarily related to restructuring actions announced and recognized in during the fourth quarter


The Company's total accumulated benefit obligations for all defined benefit plans was $1,047 million and $860 million as of December 31, 2016 and 2015, respectively. The benefit plan obligations for employee retirement plans with accumulated benefit obligations in excess of plan assets were as follows:
 
Year Ended December 31
 
2016
 
2015
 
(Dollars in Millions)
Accumulated benefit obligation
$
1,019

 
$
860

Projected benefit obligation
1.049

 
847

Fair value of plan assets
764

 
615








Assumptions used by the Company in determining its defined benefit pension obligations as of December 31, 2016 and 2015 are summarized in the following table:
 
 
U.S. Plans
 
Non-U.S. Plans
Weighted Average Assumptions
 
2016
 
2015
 
2016
 
2015
Discount rate
 
4.12
%
 
4.37
%
 
4.39
%
 
4.60
%
Rate of increase in compensation
 
N/A

 
N/A

 
3.70
%
 
3.70
%

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
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Change in Benefit Obligation:
 
 
 
 
 
 
 
Benefit obligation — beginning
$
803

 
$
864

 
$
231

 
$
617

Service cost

 

 
3

 
14

Interest cost
28

 
34

 
10

 
19

Actuarial loss (gain)
34

 
(51
)
 
46

 
(11
)
Settlements and curtailments

 

 
(5
)
 
(2
)
Special termination benefits
6

 

 
1

 

Foreign exchange translation

 

 
(27
)
 
(79
)
Divestitures

 

 
(4
)
 
(312
)
Benefits paid and other
(43
)
 
(44
)
 
(6
)
 
(15
)
Benefit obligation — ending
$
828

 
$
803

 
$
249

 
$
231

Change in Plan Assets:
 
 


 
 
 


Plan assets — beginning
$
604

 
$
676

 
$
174

 
$
351

Actual return on plan assets
43

 
(28
)
 
43

 
9

Sponsor contributions
4

 

 
8

 
22

Settlements

 

 
(4
)
 

Foreign exchange translation

 

 
(21
)
 
(45
)
Divestitures

 

 
(4
)
 
(148
)
Benefits paid and other
(43
)
 
(44
)
 
(6
)
 
(15
)
Plan assets — ending
$
608

 
$
604

 
$
190

 
$
174

Total funded status at end of period, continuing operations
$
(220
)
 
$
(199
)
 
$
(59
)
 
$
(57
)
Balance Sheet Classification:
 
 


 
 
 


Other non-current assets
$

 
$

 
$
6

 
$
2

Accrued employee liabilities

 
(3
)
 

 
(1
)
Employee benefits
(220
)
 
(196
)
 
(67
)
 
(58
)
Accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss
54

 
22

 
31

 
23

Tax effects/other


 


 
(10
)
 
(9
)
 
$
54

 
$
22

 
$
21

 
$
14



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 years ended December 31, 2016 and 2015, are as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Millions)
Actuarial loss (gain)
$
32

 
$
18

 
$
15

 
$
(4
)
Deferred taxes

 

 
(3
)
 
3

Currency/other

 
1

 
(4
)
 
(18
)
Reclassification to net income

 

 
(1
)
 
(7
)
Divestitures

 

 

 
(113
)
 
$
32

 
$
19

 
$
7

 
$
(139
)

Actuarial losses for the year ended December 31, 2016 are primarily related to a decrease in discount rates. Actuarial losses of $2 million for the non-U.S. retirement plans are expected to be amortized to income during 2017. Actuarial gains and losses are amortized using the 10% corridor approach representing 10% times the greater of plan assets and the projected benefit obligation. Generally, the expected return is determined using a market-related value of assets where gains (losses) are recognized in a systematic manner over five years. For less significant plans, fair value is used.

Benefit payments, which reflect expected future service, are expected to be paid by the Company plans as follows:
 
U.S. Plans
 
Non-U.S. Plans
 
(Dollars in Millions)
2017
$
45

 
$
5

2018
40

 
6

2019
39

 
6

2020
40

 
7

2021
40

 
8

Years 2022 - 2026
213

 
52


During the year ended December 31, 2016, cash contributions to the Company's U.S. defined benefit plans were $4 million and non-U.S. defined benefit pension plans were $8 million. Additionally, the Company expects to make cash contributions to its U.S. defined benefit pension plans of $1 million in 2017. Contributions to non-U.S. defined benefit pension plans are expected to be $6 million during 2017. The Company’s expected 2017 contributions may be revised.

On April 28, 2016, the Company purchased a non-participating annuity contract for all participants of the Canada non-represented plan. The annuity purchase covered 52 participants and resulted in the use of $5 million of plan assets for pension benefit obligation settlements of approximately $5 million. In connection with the annuity purchase, the Company recorded a settlement loss of approximately $1 million during the year ended December 31, 2016.

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 advisers. 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 engage in unrelated speculation is expressly prohibited.

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 as of December 31, 2016 and 2015 and target allocation for 2017 are as follows:
 
Target Allocation
 
Percentage of Plan Assets
 
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
 
2017
 
2017
 
2016
 
2015
 
2016
 
2015
Equity securities
36
%
 
31
%
 
38
%
 
33
%
 
25
%
 
34
%
Fixed income
19
%
 
46
%
 
16
%
 
22
%
 
52
%
 
55
%
Alternative strategies
45
%
 
14
%
 
45
%
 
44
%
 
16
%
 
8
%
Cash
%
 
9
%
 
1
%
 
1
%
 
7
%
 
3
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%

The expected long-term rate of return for defined benefit pension plan assets was selected 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 resulted in a decrease in the service and interest components of benefit cost in 2016. The service cost and interest cost for the affected plans reduced by approximately $6 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 $6 million in 2016, $10 million in 2015, and $13 million in 2014.

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 $2 million as of December 31, 2016 and 2015, respectively.