EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company provides defined benefit pension plans and postretirement benefit plans to eligible employees. Non-collectively bargained defined benefit pension benefits accruing under the traditional years of service and compensation formula were amended in 2009 to freeze future service accruals and have been replaced with a cash balance benefit for all current non-collectively bargained employees. Except for the major collectively bargained plan at Ingalls, the Company's qualified defined benefit pension plans are frozen to new entrants. The Company's policy is to fund its qualified defined benefit pension plans at least to the minimum amounts required under U.S. Government regulations.

Plan obligations are measured based on the present value of projected future benefit payments to participants for services rendered to date. The measurement of projected future benefits is dependent on the terms of each individual plan, demographics, and valuation assumptions. No assumption is made regarding any potential changes to the benefit provisions beyond those to which the Company is currently committed, for example under existing collective bargaining agreements.

The Company also sponsors 401(k) defined contribution pension plans in which most employees, including certain hourly employees, are eligible to participate. Company contributions for most defined contribution pension plans are based on the matching of employee contributions up to 4% of eligible compensation. Certain hourly employees are covered under a target benefit plan. In addition to the 401(k) defined contribution pension benefit formula, non-collectively bargained employees hired after June 30, 2008, are eligible to participate in a defined contribution benefit program in lieu of a defined benefit pension plan. The Company's contributions to the qualified defined contribution pension plans for the years ended December 31, 2017, 2016, and 2015, were $78 million, $71 million, and $73 million, respectively.

The Company also sponsors defined benefit and defined contribution pension plans to provide benefits in excess of the qualified limits. The liabilities related to these plans as of December 31, 2017, were $182 million and $32 million, respectively, and as of December 31, 2016, were $154 million and $29 million, respectively. Assets, primarily in the form of Level 1 marketable securities held in grantor trusts, are intended to fund certain of these obligations. The trusts’ fair values supporting these liabilities as of December 31, 2017 and 2016, were $94 million and $82 million, respectively, of which $61 million and $51 million, respectively, were related to the non-qualified defined benefit pension plans.

The Company provides contributory postretirement health care and life insurance benefits to a dominantly closed group of eligible employees, retirees, and their qualifying dependents. Covered employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age, years of service, and grandfathered requirements. Benefits are not guaranteed, and the Company reserves the right to amend or terminate coverage at any time. The Company's contributions for retiree health care benefits are subject to caps, which limit Company contributions when spending thresholds are reached.

The measurement date for all of the Company's retirement related plans is December 31. The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the years ended December 31, 2017, 2016, and 2015, were as follows:



	Pension Benefits									Other Benefits
	Year Ended December 31									Year Ended December 31
($ in millions)	2017			2016			2015			2017			2016			2015
Components of Net Periodic Benefit Cost
Service cost	$	146		$	133		$	150		$	10		$	10		$	13
Interest cost	266			262			242			24			25			27
Expected return on plan assets	(367		)	(346		)	(351		)	—			—			—
Amortization of prior service cost (credit)	20			18			19			(20		)	(19		)	(20		)
Amortization of net actuarial loss (gain)	97			84			86			(4		)	(6		)	2
Net periodic benefit cost	$	162		$	151		$	146		$	10		$	10		$	22

The funded status of the Company's pension and other postretirement plans as of December 31, 2017 and 2016, was as follows:



	Pension Benefits						Other Benefits
	December 31						December 31
($ in millions)	2017			2016			2017			2016
Change in Benefit Obligation
Benefit obligation at beginning of year	$	6,050		$	5,635		$	578		$	566
Service cost	146			133			10			10
Interest cost	266			262			24			25
Plan participants' contributions	4			8			8			8
Plan amendments	74			—			(10		)	—
Actuarial loss (gain)	457			216			(15		)	9
Benefits paid	(219		)	(204		)	(42		)	(40		)
Benefit obligation at end of year	6,778			6,050			553			578
Change in Plan Assets
Fair value of plan assets at beginning of year	4,911			4,613			—			—
Actual return on plan assets	840			321			—			—
Employer contributions	301			173			34			32
Plan participants' contributions	4			8			8			8
Benefits paid	(219		)	(204		)	(42		)	(40		)
Fair value of plan assets at end of year	5,837			4,911			—			—
Funded status	$	(941	)	$	(1,139	)	$	(553	)	$	(578	)

Amounts Recognized in the Consolidated Statements of Financial Position:
Pension plan assets⁽¹⁾	$	6		$	—		$	—		$	—
Current liability ⁽²⁾	(25		)	(23		)	(139		)	(147		)
Non-current liability ⁽³⁾	(922		)	(1,116		)	(414		)	(431		)
Accumulated other comprehensive loss (income) (pre-tax) related to:
Prior service costs (credits)	122			68			(75		)	(86		)
Net actuarial loss (gain)	1,477			1,589			(18		)	(6		)


⁽¹⁾	Included in miscellaneous other assets.


⁽²⁾	Included in other current liabilities and current portion of postretirement plan liabilities, respectively.


⁽³⁾	Included in pension plan liabilities and other postretirement plan liabilities, respectively.

The Projected Benefit Obligation ("PBO"), Accumulated Benefit Obligation ("ABO"), and asset values for the Company's qualified pension plans were $6,596 million, $6,202 million, and $5,837 million, respectively, as of December 31, 2017, and $5,896 million, $5,530 million, and $4,911 million, respectively, as of December 31, 2016. The PBO represents the present value of pension benefits earned through the end of the year, with allowance for future salary increases. The ABO is similar to the PBO, but does not provide for future salary increases.

The PBO and fair value of plan assets for all qualified and non-qualified pension plans with PBOs in excess of plan assets were $5,386 million and $4,440 million, respectively, as of December 31, 2017, and $6,050 million and $4,911 million, respectively, as of December 31, 2016.

The ABO and fair value of plan assets for all qualified and non-qualified pension plans with ABOs in excess of plan assets were $5,001 million and $4,440 million, respectively, as of December 31, 2017, and $5,672 million and $4,911 million, respectively, as of December 31, 2016. The ABO for all pension plans was $6,367 million and $5,672 million as of December 31, 2017 and 2016, respectively.

The changes in amounts recorded in accumulated other comprehensive income (loss) were as follows:



	Pension Benefits									Other Benefits
	Year Ended December 31									Year Ended December 31
($ in millions)	2017			2016			2015			2017			2016			2015
Prior service cost (credit)	$	(74	)	$	—		$	—		$	10		$	—		$	—
Amortization of prior service cost (credit)	20			18			19			(20		)	(19		)	(20		)
Net actuarial loss (gain)	16			(241		)	(144		)	15			(9		)	91
Amortization of net actuarial loss (gain)	97			84			86			(4		)	(6		)	2
Other	(1		)	1			(1		)	—			—			1
Total changes in accumulated other comprehensive income (loss)	$	58		$	(138	)	$	(40	)	$	1		$	(34	)	$	74

The amounts included in accumulated other comprehensive income (loss) as of December 31, 2017, expected to be recognized as components of net periodic expense in 2018 were as follows:



($ in millions)	Pension Benefits		Other Benefits
Prior service cost (credit)	$	23	$	(22	)
Net loss	82		(3		)
Total	$	105	$	(25	)

The weighted average assumptions used to determine the net periodic benefit costs for each year ended December 31 were as follows:



	Pension Benefits
	2017		2016		2015
Discount rate	4.47	%	4.73	%	4.34	%
Expected long-term rate on plan assets	7.25	%	7.50	%	7.50	%
Rate of compensation increase	3.68	%	3.66	%	3.64	%



	Other Benefits
	2017		2016		2015
Discount rate	4.38	%	4.58	%	4.22	%
Initial health care cost trend rate assumed for next year	6.50	%	7.00	%	7.00	%
Gradually declining to a rate of	5.00	%	5.00	%	5.00	%
Year in which the rate reaches the ultimate rate	2025		2024		2023

The weighted average assumptions used to determine the benefit obligations as of December 31 of each year were as follows:



	Pension Benefits				Other Benefits
	December 31				December 31
	2017		2016		2017		2016
Discount rate	3.82	%	4.47	%	3.85	%	4.38	%
Rate of compensation increase	3.71	%	3.68	%
Initial health care cost trend rate assumed for next year					6.00	%	6.50	%
Gradually declining to a rate of					4.50	%	5.00	%
Year in which the rate reaches the ultimate rate					2025		2025

Health Care Cost Trend Rate - The health care cost trend rate represents the annual rates of change in the cost of health care benefits based on estimates of health care inflation, changes in health care utilization or delivery patterns, technological advances, government mandated benefits, and other considerations. Using a combination of market expectations and economic projections on December 31, 2017, the Company selected an expected initial health care cost trend rate of 6.00% and an ultimate health care cost trend rate of 4.50% to be reached in 2025. On December 31, 2016, the Company assumed an expected initial health care cost trend rate of 6.50% and an ultimate health care cost trend rate of 5.00% to be reached in 2025.

A one percent change in the assumed health care cost trend rates would have the following effects on 2017 results:



	1 Percentage Point
($ in millions)	Increase		Decrease
Effect on postretirement benefit expense	$	2	$	(2	)
Effect on postretirement benefit obligations	26		(25		)

The Employee Retirement Income Security Act of 1974 ("ERISA"), including amendments under pension relief, defines the minimum amount that must be contributed to the Company's qualified defined benefit pension plans. In determining whether to make discretionary contributions to these plans above the minimum required amounts, the Company considers various factors, including attainment of the funded percentage needed to avoid benefit restrictions and other adverse consequences, minimum CAS funding requirements, and the current and anticipated future funding levels of each plan. The Company's contributions to its qualified defined benefit pension plans are affected by a number of factors, including published IRS interest rates, the actual return on plan assets, actuarial assumptions, and demographic experience. These factors and the Company's resulting contributions also impact the funded status of each plan. The Company made the following contributions to its pension and other postretirement plans for the years ended December 31, 2017, 2016, and 2015:



	Year Ended December 31
($ in millions)	2017		2016		2015
Pension plans
Discretionary
Qualified	$	294	$	167	$	99
Non-qualified	7		6		4
Other benefit plans	34		32		33
Total contributions	$	335	$	205	$	136

In the third quarter of 2017, the Company concluded negotiations on one of its collective bargaining agreements, which required an amendment to one of its pension plans. As a result of the amendment, the remeasurement of the plan increased the pension liability and pre-tax accumulated other comprehensive loss by approximately $76 million.

For the year ending December 31, 2018, the Company expects its cash contributions to its qualified defined benefit pension plans to be $508 million, all of which will be discretionary. For the year ending December 31, 2018, the Company expects its cash contributions to its postretirement benefit plans to be approximately $35 million.

The following table presents estimated future benefit payments, using the same assumptions used in determining the Company's benefit obligations as of December 31, 2017. Benefit payments depend on future employment and compensation levels, years of service, and mortality. Changes in any of these factors could significantly affect these estimated amounts.



			Other Benefits
($ in millions)	Pension Benefits		Benefit Payments		Subsidy Receipts
2018	$	233	$	35	$	—
2019	249		36		—
2020	266		38		—
2021	285		40		—
2022	306		41		—
Years 2023 to 2027	$	1,830	$	201	$	2

Pension Plan Assets

Pension assets include public equities, government and corporate bonds, cash and cash equivalents, private real estate funds, private partnerships, hedge funds, and other assets. Plan assets are held in a master trust and overseen by the Company's Investment Committee. All assets are externally managed through a combination of active and passive strategies. Managers may only invest in the asset classes for which they have been appointed.

The Investment Committee is responsible for setting the policy that provides the framework for management of the plan assets. The Investment Committee has set the minimum and maximum permitted values for each asset class in the Company's pension plan master trust for the year ended December 31, 2017, as follows:



	Range
U.S. equities	15	-	37%
International equities	10	-	28%
Fixed income securities	25	-	50%
Alternative investments	10	-	25%

The general objectives of the Company's pension asset strategy are to earn a rate of return over time to satisfy the benefit obligations of the plans, meet minimum ERISA funding requirements, and maintain sufficient liquidity to pay benefits and address other cash requirements within the master trust. Specific investment objectives include reducing the volatility of pension assets relative to benefit obligations, achieving a competitive, total investment return, achieving diversification between and within asset classes, and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified. Decisions regarding investment policies and asset allocation are made with the understanding of the historical and prospective return and risk characteristics of various asset classes, the effect of asset allocations on funded status, future Company contributions, and projected expenditures, including benefits. The Company updates its asset allocations periodically. The Company uses various analytics to determine the optimal asset mix and considers plan obligation characteristics, duration, liquidity characteristics, funding requirements, expected rates of return, regular rebalancing, and the distribution of returns. Actual allocations to each asset class could vary from target allocations due to periodic investment strategy changes, short-term market value fluctuations, the length of time it takes to fully implement investment allocation positions, such as real estate and other alternative investments, and the timing of benefit payments and Company contributions.

Taking into account the asset allocation ranges, the Company determines the specific allocation of the master trust's investments within various asset classes. The master trust utilizes select investment strategies, which are executed through separate account or fund structures with external investment managers who demonstrate experience and expertise in the appropriate asset classes and styles. The selection of investment managers is done with careful evaluation of all aspects of performance and risk, demonstrated fiduciary responsibility, investment management experience, and a review of the investment managers' policies and processes. Investment performance is monitored frequently against appropriate benchmarks and tracked to compliance guidelines with the assistance of third party consultants and performance evaluation tools and metrics.

Plan assets are stated at fair value. The Company employs a variety of pricing sources to estimate the fair value of its pension plan assets, including independent pricing vendors, dealer or counterparty-supplied valuations, third-party appraisals, and appraisals prepared by the Company's investment managers or other experts.

Investments in equity securities, common and preferred, are valued at the last reported sales price when an active market exists. Securities for which official or last trade pricing on an active exchange is available are classified as Level 1. If closing prices are not available, securities are valued at the last trade price, if deemed reasonable, or a broker's quote in a non-active market, and are typically categorized as Level 2.

Investments in fixed-income securities are generally valued by independent pricing services or dealers who make markets in such securities. Pricing methods are based upon market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders, and fixed-income securities typically are categorized as Level 2.

Investments in collective trust funds and commingled funds based on the use of Net Asset Values (“NAV”) are valued based on the redemption price of units owned by the master trust, which is based on the current fair values of the funds’ underlying assets, as reported by the investment manager.

Investments in hedge funds generally do not have readily available market quotations and are estimated at fair value, which primarily utilizes NAV or the equivalent, as a practical expedient, as reported by the investment manager. Hedge funds usually have restrictions on redemptions that might affect the ability to sell the investment at NAV in the short term.

Real estate funds are typically valued through updated independent third-party appraisals, which are adjusted for changes in cash flows, market conditions, property performance, and leasing status. Since real estate funds do not have readily available market quotations, they are generally valued at NAV or its equivalent, as a practical expedient, as reported by the asset manager. Redemptions from real estate funds are also subject to various restrictions.

Private partnership interests include debt and equity investments. These investments are valued based on NAVs or their equivalents, adjusted for capital calls and distributions, from the respective general partners. The terms of the partnerships range from seven to ten or more years, and investors do not have the option to redeem their interests in these partnerships. As of December 31, 2017, unfunded commitments to private partnerships were $112 million.

Management reviews independently appraised values, audited financial statements, and additional pricing information to evaluate the net asset values. For the very limited group of investments for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value.

The Company might be unable to quickly liquidate some assets at amounts close or equal to fair value in order to meet the plans' liquidity requirements or respond to specific events, such as the creditworthiness of any particular issuer or counterparty. Illiquid assets are generally long-term investments that complement the long-term nature of the Company's pension obligations and are generally not used to fund benefit payments in the short term. Management monitors liquidity risk on an ongoing basis and has procedures designed to maintain adequate liquidity for plan requirements.

The master trust has considerable investments in fixed income securities for which changes in the relevant interest rate of a particular instrument might result in the inability to secure similar returns upon the maturity or sale. Changes in prevailing interest rates might result in an increase or decrease in fair value of the instrument. Investment managers are permitted to use interest rate swaps and other financial derivatives to manage interest rate and credit risks.

Counterparty risk is the risk that a counterparty to a financial instrument held by the master trust will default on its commitment. Counterparty risk is generally related to over-the-counter derivative instruments used to manage risk exposure to interest rates on long-term debt securities. Certain agreements with counterparties employ set-off agreements, collateral support arrangements, and other risk mitigation practices designed to reduce the net credit risk exposure in the event of a counterparty default. Credit policies and processes are in place to manage concentrations of risk by seeking to undertake transactions with large well-capitalized counterparties and by monitoring the creditworthiness of these counterparties.

Certain investments that are measured at fair value using NAV per share (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy table. The total fair value of these investments is included in the table below to permit reconciliation of the fair value hierarchy to amounts presented in the funded status table above.



	December 31, 2017
($ in millions)	Total		Level 1		Level 2		Level 3
Plan assets subject to leveling
U.S. and international equities	$	1,270	$	1,270	$	—	$	—
Government and agency debt securities	409		—		409		—
Corporate and other debt securities	1,287		—		1,287		—
Group annuity contract	3		—		3		—
Cash and cash equivalents	—		—		—		—

Net plan assets subject to leveling	$	2,969	$	1,270	$	1,699	$	—

Plan assets not subject to leveling
U.S. and international equities (a)	2,012
Corporate and other debt securities	165
Real estate investments	279
Private partnerships	16
Hedge funds	281
Cash and cash equivalents, net (b)	115
Total plan assets not subject to leveling	2,868

Net plan assets	$	5,837


^(a)	U.S. and international equity securities include investments in small, medium, and large capitalization stocks of public companies held in commingled trust funds.


^(b)	Cash and cash equivalents are liquid short-term investment funds and include net receivables and payables of the trust. These funds are available for immediate use to fund daily operations, execute investment policies, and serve as a temporary investment vehicle.



	December 31, 2016
($ in millions)	Total		Level 1		Level 2		Level 3
Plan assets subject to leveling
U.S. and international equities	$	988	$	988	$	—	$	—
Government and agency debt securities	391		—		391		—
Corporate and other debt securities	1,126		—		1,126		—
Group annuity contract	3		—		3		—
Cash and cash equivalents	16		16		—		—

Net plan assets subject to leveling	$	2,524	$	1,004	$	1,520	$	—

Plan assets not subject to leveling
U.S. and international equities (a)	1,653
Corporate and other debt securities	119
Real estate investments	309
Hedge funds	262
Cash and cash equivalents, net (b)	44
Total plan assets not subject to leveling	2,387

Net plan assets	$	4,911


^(a)	U.S. and international equity securities include investments in small, medium, and large capitalization stocks of public companies held in commingled trust funds.


^(b)	Cash and cash equivalents are liquid short-term investment funds and include net receivables and payables of the trust. These funds are available for immediate use to fund daily operations, execute investment policies, and serve as a temporary investment vehicle.

The master trust limits the use of derivatives through direct or separate account investments, such that the derivatives used are liquid and able to be readily valued in the market. Derivative usage in separate account structures is primarily for gaining market exposure in an unlevered manner or hedging investment risks. The fair market value of the pension master trust's derivatives through direct or separate account investments resulted in a net liability of approximately $1 million and $2 million as of December 31, 2017 and 2016, respectively.

There was no activity attributable to Level 3 retirement plan assets during the years ended December 31, 2017 and 2016.