PENSION AND POSTRETIREMENT BENEFIT PLANS

BMS sponsors defined benefit pension plans, defined contribution plans and termination indemnity plans for regular full-time employees. The principal defined benefit pension plan is the Bristol-Myers Squibb Retirement Income Plan, covering most U.S. employees and representing approximately 66% of the consolidated pension plan assets and 61% of the obligations. Future benefits related to service for this plan were eliminated in 2009. BMS contributes at least the minimum amount required by the ERISA. Plan benefits are based primarily on the participant’s years of credited service and final average compensation. Plan assets consist principally of equity and fixed-income securities.

The net periodic benefit cost/(credit) of defined benefit pension plans includes:



Dollars in Millions	2016			2015			2014
Service cost — benefits earned during the year	$	24		$	25		$	34
Interest cost on projected benefit obligation	192			242			305
Expected return on plan assets	(418		)	(405		)	(508		)
Amortization of prior service credits	(3		)	(3		)	(3		)
Amortization of net actuarial loss	84			91			110
Curtailments	—			(1		)	1
Settlements	91			161			866
Special termination benefits	1			—			14
Net periodic benefit cost/(credit)	$	(29	)	$	110		$	819

In September 2014, BMS and Fiduciary Counselors Inc., as an independent fiduciary of the Bristol-Myers Squibb Company Retirement Income Plan, entered into a definitive agreement to transfer certain U.S. pension assets to Prudential to settle approximately $1.5 billion of pension obligations. BMS purchased a group annuity contract from Prudential in December 2014, who irrevocably assumed the obligation to make future annuity payments to certain BMS retirees. The transaction does not change the amount of the monthly pension benefit received by affected retirees and surviving beneficiaries and resulted in a pretax settlement charge of $713 million. Pension settlement charges were also recognized after determining the annual lump sum payments will exceed the annual interest and service costs for certain pension plans, including the primary U.S. pension plan in 2016, 2015 and 2014.

Changes in defined benefit pension plan obligations, assets, funded status and amounts recognized in the consolidated balance sheets were as follows:



Dollars in Millions	2016			2015
Benefit obligations at beginning of year	$	6,418		$	7,068
Service cost—benefits earned during the year	24			25
Interest cost	192			242
Settlements	(173		)	(336		)
Actuarial (gains)/losses	253			(321		)
Benefits paid	(109		)	(105		)
Foreign currency and other	(165		)	(155		)
Benefit obligations at end of year	$	6,440		$	6,418

Fair value of plan assets at beginning of year	$	5,687		$	6,148
Actual return on plan assets	513			(5		)
Employer contributions	81			118
Settlements	(173		)	(336		)
Benefits paid	(109		)	(105		)
Foreign currency and other	(168		)	(133		)
Fair value of plan assets at end of year	$	5,831		$	5,687

Funded status	$	(609	)	$	(731	)

Assets/(Liabilities) recognized:
Other assets	$	26		$	71
Accrued liabilities	(35		)	(37		)
Pension and other liabilities	(600		)	(765		)
Funded status	$	(609	)	$	(731	)

Recognized in accumulated other comprehensive loss:
Net actuarial losses	$	3,123		$	3,140
Prior service credit	(39		)	(39		)
Total	$	3,084		$	3,101

The accumulated benefit obligation for defined benefit pension plans was $6,381 million and $6,363 million at December 31, 2016 and 2015, respectively.

Additional information related to pension plans was as follows:



Dollars in Millions	2016		2015
Pension plans with projected benefit obligations in excess of plan assets:
Projected benefit obligation	$	6,195	$	5,310
Fair value of plan assets	5,559		4,508
Pension plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	5,978	$	5,156
Fair value of plan assets	5,380		4,386

Actuarial Assumptions

Weighted-average assumptions used to determine defined benefit pension plan obligations at December 31 were as follows:



	2016		2015
Discount rate	3.5	%	3.8	%
Rate of compensation increase	0.5	%	0.5	%

Weighted-average actuarial assumptions used to determine defined benefit pension plan net periodic benefit (credit)/cost for the years ended December 31 were as follows:



	2016		2015		2014
Discount rate	3.8	%	3.6	%	4.2	%
Expected long-term return on plan assets	7.2	%	7.2	%	7.6	%
Rate of compensation increase	0.5	%	0.8	%	2.3	%

The yield on high quality corporate bonds matching the duration of the benefit obligations is used in determining the discount rate. The Citi Pension Discount curve is used in developing the discount rate for the U.S. plans.

The expected return on plan assets was determined using the expected rate of return and a calculated value of assets, referred to as the “market-related value” which approximated the fair value of plan assets at December 31, 2016. Differences between assumed and actual returns are amortized to the market-related value on a straight-line basis over a three-year period. Several factors are considered in developing the expected return on plan assets, including long-term historical returns and input from external advisors. Individual asset class return forecasts were developed based upon market conditions, for example, price-earnings levels and yields and long-term growth expectations. The expected long-term rate of return is the weighted-average of the target asset allocation of each individual asset class. Historical long-term actual annualized returns for U.S. pension plans were as follows:



	2016		2015		2014
10 years	6.1	%	6.7	%	7.9	%
15 years	7.1	%	6.0	%	6.4	%
20 years	7.7	%	8.1	%	9.3	%

Actuarial gains and losses resulted from changes in actuarial assumptions (such as changes in the discount rate and revised mortality rates) and from differences between assumed and actual experience (such as differences between actual and expected return on plan assets). Gains and losses are amortized over the life expectancy of the plan participants for U.S. plans (34 years in 2017) and expected remaining service periods for most other plans to the extent they exceed 10% of the higher of the market-related value or the projected benefit obligation for each respective plan. The amortization of net actuarial loss and prior service credit is expected to be approximately $75 million in 2017. The periodic benefit cost or credit is included in cost of products sold, research and development, and marketing, selling and administrative expenses, except for curtailments, settlements and other special termination benefits which are included in other expenses.

Postretirement Benefit Plans

Comprehensive medical and group life benefits are provided for substantially all U.S. retirees electing to participate in comprehensive medical and group life plans and to a lesser extent certain benefits for non-U.S. employees. The medical plan is contributory. Contributions are adjusted periodically and vary by date of retirement. The life insurance plan is noncontributory. Plan assets consist principally of equity and fixed-income securities. Postretirement benefit plan obligations were $308 million and $355 million at December 31, 2016 and 2015, respectively, and the fair value of plan assets were $331 million and $328 million at December 31, 2016 and 2015, respectively. The weighted-average discount rate used to determine benefit obligations was 3.6% at December 31, 2016 and 2015. The net periodic benefit credits were not material.

Plan Assets

The fair value of pension and postretirement plan assets by asset category at December 31, 2016 and 2015 was as follows:



	December 31, 2016								December 31, 2015
Dollars in Millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Plan Assets
Equity securities	$	833	$	—	$	—	$	833	$	785	$	—	$	—	$	785
Equity funds	138		1,230		—		1,368		452		748		—		1,200
Fixed income funds	—		804		—		804		249		724		—		973
Corporate debt securities	—		1,405		—		1,405		—		1,382		—		1,382
U.S. Treasury and agency securities	—		536		—		536		—		517		—		517
Short-term investment funds	—		90		—		90		—		103		—		103
Insurance contracts	—		—		112		112		—		—		115		115
Cash and cash equivalents	81		—		—		81		106		—		—		106
Other	—		93		—		93		4		14		—		18
Plan assets subject to leveling	$	1,052	$	4,158	$	112	$	5,322	$	1,596	$	3,488	$	115	$	5,199

Plan assets measured at NAV as a practical expedient
Equity funds							$	476							$	495
Venture capital and limited partnerships							198								249
Other							166								72
Total plan assets measured at NAV as a practical expedient							840								816
Net plan assets							$	6,162							$	6,015

The investment valuation policies per investment class are as follows:

Level 1 inputs utilize unadjusted quoted prices in active markets accessible at the measurement date for identical assets or liabilities. The fair value hierarchy provides the highest priority to Level 1 inputs. These instruments include equity securities, equity funds and fixed income funds publicly traded on a national securities exchange, and cash and cash equivalents. Cash and cash equivalents are highly liquid investments with original maturities of three months or less at the time of purchase and are recognized at cost, which approximates fair value. Pending trade sales and purchases are included in cash and cash equivalents until final settlement.

Level 2 inputs utilize observable prices for similar instruments, quoted prices for identical or similar instruments in non-active markets, and other observable inputs that can be corroborated by market data for substantially the full term of the assets or liabilities. Equity funds, fixed income funds, and short-term investment funds classified as Level 2 within the fair value hierarchy are valued at the net asset value of their shares held at year end, which represents fair value. Corporate debt securities and U.S. Treasury and agency securities classified as Level 2 within the fair value hierarchy are valued utilizing observable prices for similar instruments and quoted prices for identical or similar instruments in markets that are not active.

Level 3 unobservable inputs are used when little or no market data is available. Insurance contracts are held by certain foreign pension plans and are carried at contract value, which approximates the estimated fair value and is based on the fair value of the underlying investment of the insurance company.

In May 2015, the FASB issued amended guidance removing the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient. The guidance is applied retrospectively in the table above. Venture capital and limited partnership investments are typically only redeemable through distributions upon liquidation of the underlying assets. There were no significant unfunded commitments for these investments and essentially all liquidations are expected to occur by 2019. Most of the remaining investments using the practical expedient are redeemable on a weekly or monthly basis.

The following summarizes the activity for financial assets utilizing Level 3 fair value measurements:



Dollars in Millions	Insurance contracts
Fair value at January 1, 2015	$	119
Purchases, sales and settlements, net	7
Realized losses	(11		)
Fair value at December 31, 2015	115
Purchases, sales and settlements, net	(3		)
Fair value at December 31, 2016	$	112

The investment strategy is to maximize return while maintaining an appropriate level of risk to provide sufficient liquidity for benefit obligations and plan expenses. A target asset allocation of 43% public equity (16% international, 14% global and 13% U.S.), 7% private equity and 50% long-duration fixed income is maintained for the U.S. pension plans. Investments are diversified within each of the three major asset categories. Approximately 90% of the U.S. pension plans equity investments are actively managed. BMS common stock represents less than 1% of the plan assets at December 31, 2016 and 2015.

Contributions and Estimated Future Benefit Payments

Contributions to pension plans were $81 million in 2016, $118 million in 2015 and $124 million in 2014 and are expected to be approximately $100 million in 2017. Estimated annual future benefit payments (including lump sum payments) range from approximately $250 million to $400 million in each of the next five years, and aggregate $1.4 billion in the subsequent five year period.

Savings Plans

The principal defined contribution plan is the Bristol-Myers Squibb Savings and Investment Program. The contribution is based on employee contributions and the level of Company match. The expense attributed to defined contribution plans in the U.S. was approximately $190 million in 2016, 2015 and 2014.