Benefit Plans:

Pension coverage for employees of PMI’s subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are plans outside of the U.S., which are governed by local statutory requirements, and to a lesser extent U.S. plans that are closed to new participants. In addition, PMI provides health care and other benefits to substantially all U.S. retired employees and certain non-U.S. retired employees. In general, health care benefits for non-U.S. retired employees are covered through local government plans.

Pension and Postretirement Benefit Plans

Obligations and Funded Status

The postretirement health care plans are not funded. The projected benefit obligations, plan assets and funded status of PMI’s pension plans, and the accumulated benefit obligation and net amount accrued for PMI's postretirement health care plans, at December 31, 2017 and 2016, were as follows:



	Pension⁽¹⁾						Postretirement
(in millions)	2017			2016			2017			2016
Benefit obligation at January 1,	$	8,387		$	8,086		$	227		$	211
Service cost	208			207			4			3
Interest cost	108			146			8			9
Benefits paid	(226		)	(240		)	(10		)	(10		)
Settlement and curtailment	—			(1		)	—			—
Actuarial losses (gains)	(93		)	427			12			15
Currency	621			(329		)	7			(2		)
Other	23			91			—			1
Benefit obligation at December 31,	9,028			8,387			248			227
Fair value of plan assets at January 1,	6,457			6,404
Actual return on plan assets	742			322
Employer contributions	66			191
Employee contributions	40			39
Benefits paid	(226		)	(240		)
Settlement and curtailment	—			—
Currency	519			(259		)
Fair value of plan assets at December 31,	7,598			6,457
Net pension and postretirement liability recognized at December 31,	$	(1,430	)	$	(1,930	)	$	(248	)	$	(227	)

(1) Primarily non-U.S. based defined benefit retirement plans.

At December 31, 2017 and 2016, the Swiss pension plan represented 57% and 57% of the benefit obligation, respectively, and approximately 57% of the fair value of plan assets for each of the years. At December 31, 2017 and 2016, the U.S. pension plan represented 5% and 5% of the benefit obligation, respectively, and approximately 4% and 5% of the fair value of plan assets at December 31, 2017 and 2016, respectively.

At December 31, 2017 and 2016, the amounts recognized on PMI's consolidated balance sheets for the pension and postretirement plans were as follows:



	Pension						Postretirement
(in millions)	2017			2016			2017			2016
Other assets	$	47		$	33
Accrued liabilities — employment costs	(26		)	(23		)	$	(10	)	$	(10	)
Long-term employment costs	(1,451		)	(1,940		)	(238		)	(217		)
	$	(1,430	)	$	(1,930	)	$	(248	)	$	(227	)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8,496 million and $7,931 million at December 31, 2017 and 2016, respectively.

For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $7,287 million, $6,953 million and $5,835 million, respectively, as of December 31, 2017. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $6,934 million, $6,622 million and $5,009 million, respectively, as of December 31, 2016.

The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at December 31:



	Pension				Postretirement
	2017		2016		2017		2016
Discount rate	1.51	%	1.52	%	3.79	%	3.68	%
Rate of compensation increase	1.65		1.68
Health care cost trend rate assumed for next year					6.17		7.15
Ultimate trend rate					4.62		5.08
Year that rate reaches the ultimate trend rate					2029		2029

The discount rate for the largest pension plans is based on a yield curve constructed from a portfolio of high quality corporate bonds that produces a cash flow pattern equivalent to each plan’s expected benefit payments. The discount rate for the remaining plans is developed from local bond indices that match local benefit obligations as closely as possible.

Components of Net Periodic Benefit Cost

Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2017, 2016 and 2015:



	Pension									Postretirement
(in millions)	2017			2016			2015			2017		2016		2015
Service cost	$	208		$	207		$	205		$	4	$	3	$	4
Interest cost	108			146			156			8		9		9
Expected return on plan assets	(326		)	(346		)	(340		)	—		—		—
Amortization:
Net losses	186			186			194			5		2		4
Prior service cost	6			4			4			—		—		—
Settlement and curtailment	6			4			3			—		—		—
Net periodic pension and postretirement costs	$	188		$	201		$	222		$	17	$	14	$	17

As of December 31, 2016, PMI elected to change the method used to calculate the service and interest cost components of the net periodic pension benefit costs. Historically, these costs were determined utilizing a single weighted-average discount rate based on a yield curve used to measure the benefit obligation at the beginning of the period. As of January 1, 2017, PMI utilized a full yield curve approach in the estimation of the service and interest costs by applying the specific spot rates along the yield curve to the relevant projected cash flows. Specifically, service costs were determined based on duration-specific spot rates applied to service cost cash flows, and interest costs were determined by applying duration-specific spot rates to the year-by-year projected benefit payments. PMI changed to the new method to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit cash flows to the corresponding spot rates along the yield curve. PMI accounted for this change as a change in accounting estimate on a prospective basis. This change did not affect the measurement of PMI’s pension plan obligations and did not have a material impact on PMI’s consolidated results of operations, financial position or cash flows.

Settlement and curtailment charges were due primarily to early retirement programs.

For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive earnings into net periodic benefit cost during 2018 are $171 million and $2 million, respectively.

The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:



	Pension						Postretirement
	2017		2016		2015		2017		2016		2015
Discount rate - service cost	1.68	%	1.81	%	2.04	%	3.68	%	4.45	%	4.20	%
Discount rate - interest cost	1.27		1.81		2.04		3.68		4.45		4.20
Expected rate of return on plan assets	4.80		5.36		5.38
Rate of compensation increase	1.68		2.03		2.12
Health care cost trend rate							7.15		6.23		6.62

PMI’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.

PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled $58 million, $56 million and $52 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Plan Assets

PMI’s investment strategy for pension plans is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, the target allocation of PMI’s plan assets is broadly characterized as approximately a 60%/40% split between equity and debt securities. The strategy primarily utilizes indexed U.S. equity securities, international equity securities and investment-grade debt securities. PMI’s plans have no investments in hedge funds, private equity or derivatives. PMI attempts to mitigate investment risk by rebalancing between equity and debt asset classes once a year or as PMI’s contributions and benefit payments are made.

The fair value of PMI’s pension plan assets at December 31, 2017 and 2016, by asset category was as follows:



Asset Category (in millions)	At December 31, 2017		Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	17	$	17
Equity securities:
U.S. securities	146		146
International securities	518		518
Investment funds^(a)	6,219		4,191		$	2,028
International government bonds	119		119
Corporate bonds	247		247
Other	22		22
Total assets in the fair value hierarchy	$	7,288	$	5,260	$	2,028	$	—
Investment funds measured at net asset value^(b)	310
Total assets	$	7,598

^(a) Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60% are invested in U.S. and international equities; 20% are invested in U.S. and international government bonds; 10% are invested in real estate and other money markets, and 10% are invested in corporate bonds.

^(b) In accordance with FASB ASC Subtopic 820-10, certain investments measured at fair value using the net asset value per share 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.



Asset Category (in millions)	At December 31, 2016		Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	8	$	8
Equity securities:
U.S. securities	131		131
International securities	432		432
Investment funds^(a)	5,270		3,530		$	1,740
International government bonds	309		309
Other	10		10
Total assets in the fair value hierarchy	$	6,160	$	4,420	$	1,740	$	—
Investment funds measured at net asset value^(b)	297
Total assets	$	6,457

^(a)Investment funds whose objective seeks to replicate the returns and characteristics of specified market indices (primarily MSCI — Europe, Switzerland, North America, Asia Pacific, Japan; Russell 3000; S&P 500 for equities, and Citigroup EMU and Barclays Capital U.S. for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60% were invested in U.S. and international equities; 19% were invested in U.S. and international government bonds; 11% were invested in real estate and other money markets, and 10% were invested in corporate bonds.

See Note 16. Fair Value Measurements for a discussion of the fair value of pension plan assets.

PMI makes, and plans to make, contributions to the extent that they are tax deductible and to meet specific funding requirements of its funded pension plans. Currently, PMI anticipates making contributions of approximately $53 million in 2018 to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.

The estimated future benefit payments from PMI pension plans at December 31, 2017, are as follows:



(in millions)
2018	$	295
2019	290
2020	309
2021	318
2022	330
2023 - 2027	1,879

PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2027.

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 trend rates would have the following effects as of December 31, 2017:



	One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total service and interest cost	21.7	%	(16.7	)%
Effect on postretirement benefit obligation	16.3		(13.0	)

Postemployment Benefit Plans

PMI and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs were $144 million, $166 million and $187 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The estimated net loss for the postemployment benefit plans that will be amortized from accumulated other comprehensive losses into net postemployment costs during 2018 is approximately $60 million.

The amounts recognized in accrued postemployment costs on PMI's consolidated balance sheets at December 31, 2017 and 2016, were $671 million and $727 million, respectively.

The accrued postemployment costs were determined using a weighted-average discount rate of 3.0% and 2.8% in 2017 and 2016, respectively; an assumed ultimate annual weighted-average turnover rate of 2.6% and 2.8% in 2017 and 2016, respectively; assumed compensation cost increases of 2.3% in 2017 and 2.6% in 2016, and assumed benefits as defined in the respective plans. In accordance with local regulations, certain postemployment plans are funded. As a result, the accrued postemployment costs disclosed above are presented net of the related assets of $33 million and $25 million at December 31, 2017 and 2016, respectively. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Comprehensive Earnings (Losses)

The amounts recorded in accumulated other comprehensive losses at December 31, 2017, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(2,624	)	$	(80	)	$	(617	)	$	(3,321	)
Prior service cost	(35		)	4			—			(31		)
Net transition obligation	(5		)	—			—			(5		)
Deferred income taxes	327			28			186			541
Losses to be amortized	$	(2,337	)	$	(48	)	$	(431	)	$	(2,816	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2016, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(3,314	)	$	(73	)	$	(713	)	$	(4,100	)
Prior service cost	(53		)	4			—			(49		)
Net transition obligation	(5		)	—			—			(5		)
Deferred income taxes	350			24			215			589
Losses to be amortized	$	(3,022	)	$	(45	)	$	(498	)	$	(3,565	)

The amounts recorded in accumulated other comprehensive losses at December 31, 2015, consisted of the following:



(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(3,074	)	$	(61	)	$	(710	)	$	(3,845	)
Prior service cost	(40		)	5			—			(35		)
Net transition obligation	(5		)	—			—			(5		)
Deferred income taxes	320			20			213			553
Losses to be amortized	$	(2,799	)	$	(36	)	$	(497	)	$	(3,332	)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2017, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	175		$	5		$	68		$	248
Prior service cost	5			—			—			5
Other income/expense:
Net losses	6			—			—			6
Prior service cost	—			—			—			—
Deferred income taxes	(10		)	(1		)	(20		)	(31		)
	176			4			48			228
Other movements during the year:
Net losses	509			(12		)	28			525
Prior service cost	13			—			—			13
Deferred income taxes	(13		)	5			(9		)	(17		)
	509			(7		)	19			521
Total movements in other comprehensive earnings (losses)	$	685		$	(3	)	$	67		$	749

The movements in other comprehensive earnings (losses) during the year ended December 31, 2016, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	193		$	2		$	62		$	257
Prior service cost	6			—			—			6
Other income/expense:
Net losses	4			—			—			4
Prior service cost	—			—			—			—
Deferred income taxes	(26		)	—			(17		)	(43		)
	177			2			45			224
Other movements during the year:
Net losses	(437		)	(15		)	(65		)	(517		)
Prior service cost	(18		)	—			—			(18		)
Deferred income taxes	55			4			19			78
	(400		)	(11		)	(46		)	(457		)
Total movements in other comprehensive earnings (losses)	$	(223	)	$	(9	)	$	(1	)	$	(233	)

The movements in other comprehensive earnings (losses) during the year ended December 31, 2015, were as follows:



(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	194		$	4		$	69		$	267
Prior service cost	4			—			—			4
Other income/expense:
Net losses	3			—			—			3
Prior service cost	1			—			—			1
Deferred income taxes	(26		)	(2		)	(20		)	(48		)
	176			2			49			227
Other movements during the year:
Net losses	(510		)	12			(58		)	(556		)
Deferred income taxes	4			(4		)	17			17
	(506		)	8			(41		)	(539		)
Total movements in other comprehensive earnings (losses)	$	(330	)	$	10		$	8		$	(312	)