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RETIREMENT PENSION PLANS

12 Months Ended

Sep. 30, 2019

The company sponsors defined benefit pension plans that cover certain of its U.S. and non-U.S. employees. Pension benefits for salaried employees are based on years of credited service and compensation. Pension benefits for hourly employees are based on years of service and specified benefit amounts. The company’s funding policy provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries.

The mortality assumptions for participants in the company’s U.S. plans incorporates future mortality improvements from tables published by the SOA. The company reviewed the new SOA mortality and mortality improvement tables and utilized an actuary to conduct a study based on the company’s plan participants. The company determined that the best representation of the plans' mortality is to utilize the new SOA mortality and mortality improvement tables as the reference table for credibility-weighted mortality rates, blended with company specific mortality based on the study conducted by the actuary. .

On August 1, 2010, the company amended its defined benefit pension plan in the United Kingdom to cease the accrual of future benefits for all of its active plan participants. Subsequent to the freeze date, the company began making contributions to its defined contribution savings plan on behalf of the affected employees. The amount of the savings plan contribution is based on a percentage of the employees’ pay. These changes did not affect then-current retirees. The company began recording the impact of the plan freeze in the fourth quarter of fiscal year 2010. Subsequent to the plan freeze, accumulated actuarial losses are being amortized into net periodic pension expense over the average life expectancy of inactive plan participants of approximately 26 years rather than over their remaining average service life.

The U.K. pension program provides participants with the election to receive a lump-sum settlement of their remaining pension benefit that, if accepted, would settle the company's obligation to them. The company recognized a $6 million settlement loss during the fourth quarter of fiscal year 2018 associated with these payouts.

In April 2007, the company announced a freeze of its defined benefit pension plan for salaried and non-represented employees in the United States, effective January 1, 2008. The change affected approximately 3,800 employees including certain employees who continued to accrue benefits for an additional transition period, ending June 30, 2011. After these freeze dates, the company started making additional contributions to its defined contribution savings plan on behalf of the affected employees. The amount of the savings plan contribution is based on a percentage of the employees’ pay, with the contribution percentage increasing as a function of employees’ age. These changes do not affect plan participants who had retired prior to the freeze dates or represented employees. Accumulated actuarial losses are being amortized into net periodic pension expense over the average life expectancy of inactive plan participants of approximately 16 years.

In June 2013, the company amended its U.S. Retirement Plan to allow all terminated vested participants with an accrued benefit of $5,000 or less to receive a full lump-sum distribution of their benefit. The lump-sum amounts were rolled into individual retirement accounts for those participants that had an accrued benefit of $1,000 to $5,000 who did not make an affirmative election to receive their benefits. For those participants with an accrued benefit of less than $1,000, the benefits were automatically distributed to the participant.

Effective October 2014, the company amended the U.S. Retirement Plan to include an additional distribution option in the form of a lump sum benefit from the plan. The majority of plan members are eligible for this distribution option following termination or when making their retirement payment election. The lump sum benefit equals the present value of a member's vested accrued benefit paid in one lump sum payment.

The company’s pension obligations are measured as of September 30, 2019, 2018 and 2017. The U.S. plans include qualified and non-qualified pension plans. The company’s only significant remaining non-U.S. plan is located in the United Kingdom.

The following are the significant assumptions used in the measurement of the projected benefit obligation ("PBO") and net periodic pension expense:



	U.S. Plans
	2019			2018	2017
Discount rate	3.10%	-	3.15%	4.30%	3.70%	—	3.75%
Assumed return on plan assets (beginning of the year)	7.75%			7.75%	7.75%



	U.K. Plan
	2019	2018	2017
Discount rate	1.80%	2.90%	2.80%
Assumed return on plan assets (beginning of the year)	6.00%	6.00%	6.00%

The discount rate is used to calculate the present value of the PBO at the balance sheet date and net periodic pension expense for the subsequent fiscal year. The rate used reflects a rate of return on high-quality fixed income investments that match the duration of expected benefit payments. Generally, the company uses a portfolio of long-term corporate AA/Aa bonds that match the duration of the expected benefit payments, except for the company's U.K. pension plan which uses an annualized yield curve, to establish the discount rate for this assumption.

The assumed return on plan assets is used to determine net periodic pension expense. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. An incremental amount for active plan asset management and diversification, where appropriate, is included in the rate of return assumption. The return assumption is reviewed annually.

The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans. The accompanying disclosures include pension obligations associated with businesses classified as discontinued operations.

The following table reconciles the change in the PBO, the change in plan assets and amounts included in the Consolidated Balance Sheet for the years ended September 30, 2019 and 2018, respectively (in millions):



	2019									2018
	U.S.			Non- U.S.			Total			U.S.			Non- U.S.			Total
PBO — beginning of year	$	922		$	554		$	1,476		$	1,036		$	599		$	1,635
Interest cost	37			16			53			38			16			54
Actuarial (gain) loss	122			111			233			(70		)	(9		)	(79		)
Prior service cost	—			8			8			—			—			—
Acquisitions	—			1			1			—			—			—
Settlements	—			(3		)	(3		)	—			(18		)	(18		)
Benefit payments	(75		)	(30		)	(105		)	(82		)	(19		)	(101		)
Foreign currency rate changes	—			(36		)	(36		)	—			(15		)	(15		)
PBO — end of year	$	1,006		$	621		$	1,627		$	922		$	554		$	1,476
Change in plan assets
Fair value of assets — beginning of year	$	744		$	702		$	1,446		$	821		$	730		$	1,551
Actual return on plan assets	67			139			206			—			32			32
Employer contributions	5			—			5			5			1			6
Settlements	—			(3		)	(3		)	—			(22		)	(22		)
Benefit payments	(75		)	(30		)	(105		)	(82		)	(19		)	(101		)
Foreign currency rate changes	—			(44		)	(44		)	—			(20		)	(20		)
Fair value of assets — end of year	$	741		$	764		$	1,505		$	744		$	702		$	1,446
Funded status	$	(265	)	$	143		$	(122	)	$	(178	)	$	148		$	(30	)

Amounts included in the Consolidated Balance Sheet at September 30, 2019 and 2018 are comprised of the following (in millions):



	2019									2018
	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Non-current assets	$	—		$	149		$	149		$	—		$	152		$	152
Current liabilities	(5		)	—			(5		)	(5		)	—			(5		)
Retirement benefits-non-current	(260		)	(6		)	(266		)	(173		)	(4		)	(177		)
Net amount recognized	$	(265	)	$	143		$	(122	)	$	(178	)	$	148		$	(30	)

The following tables summarize the amounts included in AOCL net of tax related to pension liabilities as of September 30, 2019 and 2018 and changes recognized in Other Comprehensive Income (Loss) net of tax for the year ended September 30, 2019.



	Net Actuarial Loss
	U.S.			Non-U.S.			Total
Balance at September 30, 2018	$	394		$	184		$	578
Net actuarial loss for the year	113			20			133
Amortization for the year	(20		)	(4		)	(24		)
Deferred tax impact	(20		)	—			(20		)
Balance at September 30, 2019	$	467		$	200		$	667

Balance at September 30, 2017	$	418		$	193		$	611
Net actuarial gain for the year	(11		)	3			(8		)
Amortization for the year	(23		)	(6		)	(29		)
Deferred tax impact	10			—			10
Settlements	—			(6		)	(6		)
Balance at September 30, 2018	$	394		$	184		$	578

The company estimates that $32 million of net actuarial losses will be amortized from AOCL into net periodic pension expense during fiscal year 2020. The non-current portion of the pension liability is included in Retirement Benefits in the Consolidated Balance Sheet as follows (in millions):



	September 30,
	2019		2018
Pension liability	$	266	$	177
Retiree medical liability — long term (see Note 22)	56		73
Other	14		12
Total retirement benefits	$	336	$	262

In accordance with FASB guidance, the PBO, accumulated benefit obligation ("ABO") and fair value of plan assets are required to be disclosed for all plans where the ABO is in excess of plan assets. The difference between the PBO and ABO is that the PBO includes projected compensation increases.

Additional information is as follows (in millions):



	2019						2018
	ABO Exceeds Assets		Assets Exceed ABO		Total		ABO Exceeds Assets		Assets Exceed ABO		Total
PBO	$	1,012	$	615	$	1,627	$	926	$	550	$	1,476
ABO	1,012		615		1,627		926		550		1,476
Plan Assets	741		764		1,505		744		702		1,446

The components of net periodic pension expense are as follows (in millions):



	2019			2018			2017
Service cost	$	—		$	—		$	—
Interest cost	53			54			53
Assumed rate of return on plan assets	(97		)	(99		)	(96		)
Amortization of —
Actuarial losses	24			29			30
Settlement loss	—			6			—
Net periodic pension income	$	(20	)	$	(10	)	$	(13	)

Disclosures on investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk are included below.

Investment Policy and Strategy

The company’s primary investment objective for its pension plan assets is to generate a total investment return sufficient to meet present and future benefit payments while minimizing the company’s cash contributions over the life of the plans. In order to accomplish this objective, the company maintains target allocations to identify and manage exposures. The target asset allocation ranges for the U.S. plan are 20–50 percent equity investments, 30–60 percent fixed income investments and 10–25 percent alternative investments. Alternative investments include private equities, real estate, hedge funds, diversified growth funds, and partnership interests. The target asset allocation ranges for the non-U.S. plans are 15–35 percent equity investments, 30–60 percent fixed income investments, 0–10 percent real estate and 10–30 percent alternative investments.

Investment strategies and policies for the company’s pension plan assets reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset diversification. Assets are broadly diversified across several asset classes to achieve risk-adjusted returns that accomplish this objective.

The majority of pension plan assets are externally managed through active managers. Managers are only permitted to invest within established asset classes and follow the strategies for which they have been appointed. The company uses investment guidelines and reviews asset returns and investment decisions made by the managers to ensure that they are in accordance with the company’s strategies.

Concentration of Risk

The company seeks to mitigate risks relative to performance of the plan assets. Assets are invested in various classes with different risk and return characteristics in order to ensure that they are sufficient to pay benefits. The company’s investment strategies incorporate a return-seeking approach through equity and alternative investments, while seeking to minimize the volatility of the plans’ assets relative to its liabilities through investments in fixed income securities. The significant areas of risk related to these strategies include equity, interest rate, and operating risk.

A portion of plan assets is allocated to equity and alternative investments that are expected, over time, to earn higher returns. Within this return-seeking portfolio, asset diversification is utilized to reduce uncompensated risk.

Plan assets are also allocated to fixed income investments, which seek to minimize interest rate risk volatility relative to pension liabilities. The fixed income portfolio partially matches the long-dated nature of the pension liabilities reducing interest rate risk. Interest rate decreases generally increase the value of fixed income assets, partially offsetting the related increase in the liabilities, while interest rate increases generally result in a decline in the value of fixed income assets while reducing the present value of the liabilities.

Operating risks consist of the risks of inadequate diversification and weak controls. The company has established policies and procedures in order to mitigate this risk by monitoring investment manager performance, reviewing periodic compliance information, and ensuring that the plans’ managers invest in accordance with the company’s investment strategies.

Fair Value of Investments

The current FASB guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:


•	Level 1 inputs use quoted prices in active markets for identical assets that the Plan has the ability to access.


•	Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.


•	Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest priority level input that is significant to the valuation. The company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Following are descriptions, valuation methodologies and other information related to plan assets.

Cash and cash equivalents: The fair value of cash and cash equivalents is valued at cost.

Equity Securities: The overall equity category includes common and preferred stocks issued by U.S. and international companies as well as equity funds that invest in these instruments. All investments generally allow near-term (within 90 days of the measurement date) liquidity and are held in issues that are actively traded to facilitate transactions at minimum cost. The aggregate equity portfolio is diversified to avoid exposure to any investment strategy, single economic sector, industry group, or individual security.

The fair value of equity securities is determined by either direct or indirect quoted market prices. When the value of assets held in separate accounts is not published, the value is based on the underlying holdings, which are primarily direct quoted market prices on regulated financial exchanges.

Most of the equity investments allow daily redemptions, with some providing monthly liquidity or requiring a 30-day notice.

Fixed Income Securities: The overall fixed income category includes U.S. dollar-denominated and international marketable bonds and convertible debt securities as well as fixed income funds that invest in these instruments. All assets generally allow near-term liquidity and are held in issues which are actively traded to facilitate transactions at minimum cost. The aggregate fixed income portfolio is diversified to avoid exposure to any investment strategy, maturity, issuer or credit quality.

The fair value of fixed income securities is determined by either direct or indirect quoted market prices. When the value of assets held in separate accounts is not published, the value is based on the underlying holdings, which are primarily direct quoted market prices on regulated financial exchanges.

U.S. fixed income securities typically offer daily liquidity, with only one investment allowing quarterly redemptions. International and emerging fixed income investment vehicles generally provide daily liquidity.

Commingled Funds: The fair value of commingled funds is determined by a custodian. The custodian obtains valuations from underlying fund managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading activity to derive prices. The company and custodian review the methods used by the underlying managers to value the assets.

Real Estate: Real estate provides an indirect investment into a diversified and multi-sector portfolio of property assets. The fair value of real estate investments is valued by the fund managers. The fund managers value the real estate investments via independent third-party appraisals on a periodic basis. Assumptions used to revalue the properties are updated every quarter. For the component of the real estate portfolio under development, the investments are carried at cost, which approximates fair value, until they are completed and valued by a third-party appraiser.

Due to the long-term nature of real estate investments, liquidity is provided on a quarterly basis.

Futures Contracts: The plan enters into futures contracts in the normal course of its investing activities to manage market risk and to achieve overall investment portfolio objectives. The credit risk associated with these contracts is minimal as they are traded on organized exchanges and settled daily. The fair value of futures contracts is determined by direct quoted market prices. Cash margin for these futures contracts is included in Cash and Cash Equivalents in the leveling table.

Alternatives/Partnerships/Private Equity: This category includes investments in private equity and hedge funds. Such investments may be made directly or through pooled funds, including fund of funds structures. The fair market value of the company’s interest in partnerships and private equity is valued by the fund managers. The valuation is based on the net present value of observable inputs (dividends, cash flows, earnings, etc.), which are discounted at applicable discount rates. The company and custodian review the methods used by the underlying managers to value the assets.

Most of these investments offer quarterly redemption opportunities. Some partnerships and private equity investments, due to the nature of their investment strategy and underlying holdings, offer less frequent liquidity. When available, liquidity events are closely evaluated.

The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The fair value of plan assets at September 30, 2019 by asset category is as follows (in millions):



U.S. Plans	2019
Asset Category	Level 1		Level 2		Level 3		Total
Equity investments
U.S. – Large cap	$	38	$	—	$	—	$	38
U.S. – Small cap	15		—		—		15
Private equity	—		—		19		19
International equity	21		—		—		21
Equity investments measured at net asset value ⁽¹⁾	—		—		—		154
Total equity investments	$	74	$	—	$	19	$	247
Fixed income investments
U.S. fixed income	$	3	$	233	$	—	$	236
Emerging fixed income	—		16		—		16
Partnerships fixed income	12		—		—		12
Fixed income investments measured at net asset value ⁽¹⁾	—		—		—		27
Total fixed income	$	15	$	249	$	—	$	291
Alternatives – Partnerships	—		—		86		86
Alternatives – Partnerships measured at net asset value ⁽¹⁾	—		—		—		78
Cash and cash equivalents	—		39		—		39
Total assets at fair value	$	89	$	288	$	105	$	741

Non-U.S. Plans	2019
Asset Category	Level 1		Level 2		Level 3		Total
Equity investments
International equity	$	170	$	—	$	—	$	170
Total equity investments	$	170	$	—	$	—	$	170
Fixed income investments
Other fixed income investments	$	6	$	222	$	—	$	228
Fixed income investments measured at net asset value ⁽¹⁾	—		—		—		189
Total fixed income	$	6	$	222	$	—	$	417
Commingled funds	—		3		—		3
Alternative investments measured at net asset value ⁽¹⁾	—		—		—		124
Real estate measured at net asset value ⁽¹⁾	—		—		—		38
Cash and cash equivalents	—		12		—		12
Total assets at fair value	$	176	$	237	$	—	$	764


⁽¹⁾	In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

The fair value of plan assets at September 30, 2018 by asset category is as follows (in millions):



U.S. Plans	2018
Asset Category	Level 1		Level 2		Level 3		Total
Equity investments
U.S. – Large cap	$	51	$	—	$	—	$	51
U.S. – Small cap	24		—		—		24
Private equity	—		—		17		17
International equity	29		—		—		29
Equity investments measured at net asset value ⁽¹⁾	—		—		—		191
Total equity investments	$	104	$	—	$	17	$	312
Fixed income investments
U.S. fixed income	$	1	$	164	$	—	$	165
Emerging fixed income	—		20		—		20
Partnerships fixed income	13		—		—		13
Fixed income investments measured at net asset value ⁽¹⁾	—		—		—		34
Total fixed income	$	14	$	184	$	—	$	232
Alternatives – Partnerships	—		—		83		83
Alternatives – Partnerships measured at net asset value ⁽¹⁾	—		—		—		85
Cash and cash equivalents	—		32		—		32
Total assets at fair value	$	118	$	216	$	100	$	744

Non-U.S. Plans	2018
Asset Category	Level 1		Level 2		Level 3		Total
Equity investments
International equity	$	171	$	—	$	—	$	171
Total equity investments	$	171	$	—	$	—	$	171
Fixed income investments
Other fixed income investments	$	5	$	145	$	—	$	150
Fixed income investments measured at net asset value ⁽¹⁾	—		—		—		194
Total fixed income	$	5	$	145	$	—	$	344
Commingled funds	—		5		—		5
Alternative investments measured at net asset value ⁽¹⁾	—		—		—		137
Real estate measured at net asset value⁽¹⁾	—		—		—		41
Cash and cash equivalents	—		4		—		4
Total assets at fair value	$	176	$	154	$	—	$	702


⁽¹⁾	In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.

Unfunded Commitment

As of September 30, 2019, the U.S. plan had $13 million of unfunded investment commitments related to plan assets. The majority of this amount is attributed to partnership investments that the plan will invest in gradually over the course of several years. Non-U.S. plans currently do not have any unfunded commitments.

The following table summarizes the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the year ended September 30, 2019 (in millions):



U.S. Plans	2019
	Fair Value at October 1, 2018		Return on Plan Assets: Attributable to Assets Held at September 30, 2019		Purchases		Settlements			Net Transfers Into (Out of) Level 3		Fair Value at September 30, 2019
Asset Category
Private equity	$	17	$	2	$	—	$	—		$	—	$	19
Alternatives –
Partnerships	83		4		—		(1		)	—		86
Total Level 3 fair value	$	100	$	6	$	—	$	(1	)	$	—	$	105

The following table summarizes the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the year ended September 30, 2018 (in millions):



U.S. Plans	2018
	Fair Value at October 1, 2017		Return on Plan Assets: Attributable to Assets Held at September 30, 2018			Purchases		Settlements		Net Transfers Into (Out of) Level 3		Fair Value at September 30, 2018
Asset Category
Private equity	$	19	$	(3	)	$	1	$	—	$	—	$	17
Alternatives –
Partnerships	77		6			—		—		—		83
Total Level 3 fair value	$	96	$	3		$	1	$	—	$	—	$	100

Information about the expected cash flows for the U.S. and non-U.S. pension plans is as follows (in millions):



	U.S.		Non U.S.		Total
Expected employer contributions:
Fiscal 2020	$	5	$	1	$	6
Expected benefit payments:
Fiscal 2020	71		30		101
Fiscal 2021	70		30		100
Fiscal 2022	70		30		100
Fiscal 2023	67		30		97
Fiscal 2024	67		30		97
Fiscal 2025-2029	308		152		460

The company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans, including company matching contributions, was $21 million, $21 million and $18 million for fiscal years 2019, 2018 and 2017, respectively.