Benefit Plans

The pre-Separation period included in the consolidated statement of income for the year ended December 31, 2013, included all of the benefit plan expenses attributable to the animal health operations of Pfizer, including all expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses included allocations of direct expenses, as well as expenses that were deemed attributable to the animal health operations.

Prior to the Separation from Pfizer, employees who met certain eligibility requirements participated in various defined benefit pension plans and postretirement plans administered and sponsored by Pfizer. Effective December 31, 2012, our employees ceased to participate in the Pfizer U.S. qualified defined benefit and U.S. retiree medical plans, and liabilities associated with our employees under these plans were retained by Pfizer. Pfizer is continuing to credit certain employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. defined benefit pension and retiree medical plans. In connection with the employee matters agreement, Zoetis is responsible for payment of three-fifths of the total cost of the service credit continuation (approximately $38 million) for these plans and Pfizer is responsible for the remaining two-fifths of the total cost (approximately $25 million). The $25 million capital contribution from Pfizer and corresponding contra-equity account (which is being reduced as the service credit continuation is incurred) is included in Employee benefit plan contribution from Pfizer Inc. in the consolidated statement of equity. The balance in the contra-equity account was approximately $18 million and $20 million as of December 31, 2015 and 2014, respectively. The amount of the service cost continuation payment to be paid by Zoetis to Pfizer was determined and fixed based on an actuarial assessment of the value of the grow-in benefits and will be paid in equal installments over a period of ten years. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans totaled approximately $6 million per year in 2015 and 2014. For additional information see Note 20B. Transactions and Agreements with Pfizer—Agreements with Pfizer: Employee matters agreement.

Pension expense associated with the U.S. and certain significant international locations totaled approximately $20 million and $19 million in 2015 and 2014, respectively (inclusive of service cost grow-in benefits discussed above), and $15 million in 2013.

A. International Pension Plans

As part of the Separation (see Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation), certain separation adjustments were made to transfer the assets and liabilities of certain international defined benefit pension plans from Pfizer to Zoetis. During 2014, our pension plans in Australia, Belgium, Japan and Switzerland were transferred to us from Pfizer, and the combined net pension obligations (approximately $22 million) and the related accumulated other comprehensive loss (approximately $11 million, net of tax) associated with these plans were recorded. During 2015, our pension plan in the Philippines was transferred to us from Pfizer. The net pension obligation (approximately $1 million) and the related accumulated other comprehensive loss (which was less than $1 million, net of tax) associated with this plan were recorded. Prior to the Separation and transfer, these benefit plans were accounted for as multi-employer plans.

Information about the dedicated pension plans in Germany, India, Korea and the Netherlands, as well as plans transferred to us as part of the Separation, is provided in the tables below.

Obligations and Funded Status––Dedicated Plans

The following table provides an analysis of the changes in the benefit obligations, plan assets and funded status of our dedicated pension plans (including those transferred to us):



	As of and for the
	Year Ended December 31,
(MILLIONS OF DOLLARS)	2015			2014
Change in benefit obligation:
Projected benefit obligation, beginning	$	129		$	73
Service cost	9			4
Interest cost	3			2
Plan combinations / Separation adjustments^(a)	12			78
Changes in actuarial assumptions and other	(4		)	17
Settlements and curtailments^(b)	(4		)	(38		)
Adjustments for foreign currency translation	(18		)	(7		)
Benefit obligation, ending	127			129
Change in plan assets:
Fair value of plan assets, beginning	63			45
Plan combinations / Separation adjustments^(a)	9			56
Actual return on plan assets	4			3
Company contributions	8			3
Settlements and curtailments^(b)	(3		)	(38		)
Adjustments for foreign currency translation	(8		)	(3		)
Other––net	(1		)	(3		)
Fair value of plan assets, ending	72			63
Funded status—Projected benefit obligation in excess of plan assets at end of year^(c)	$	(55	)	$	(66	)


^(a)	Represents the benefit obligations and plan assets acquired in 2015 from Pharmaq (net obligation of approximately $2 million) and transferred to us in 2014 and 2013 from Pfizer as part of the Separation (net obligation of approximately $22 million and $21 million, respectively), as described above.


^(b)	The 2014 settlements and curtailments reflect the impact of the sale of our Netherlands manufacturing facility.


^(c)	Included in Other noncurrent liabilities.

Actuarial losses were approximately $23 million ($16 million net of tax) at December 31, 2015, and $33 million ($25 million net of tax) at December 31, 2014. The actuarial gains and losses primarily represent the cumulative difference between the actuarial assumptions and actual return on plan assets, changes in discount rates and changes in other assumptions used in measuring the benefit obligations. These actuarial gains and losses are recognized in Accumulated other comprehensive income/(loss). At December 31, 2014, the actuarial losses included approximately $15 million ($11 million, net of tax) associated with the plans transferred to us from Pfizer during 2014. The actuarial losses will be amortized into net periodic benefit costs over an average period of 13.1 years.

The estimated net actuarial loss that will be amortized from Accumulated other comprehensive loss into 2016 net periodic benefit cost is approximately $1 million.

Information related to the funded status of selected plans follows:



	As of December 31,
(MILLIONS OF DOLLARS)	2015		2014
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets	$	37	$	35
Accumulated benefit obligation	69		73
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets	72		63
Projected benefit obligation	127		129

Net Periodic Benefit Costs––Dedicated Plans

The following table provides the net periodic benefit cost associated with dedicated pension plans (including those transferred to us):



	Year Ended December 31,
(MILLIONS OF DOLLARS)	2015			2014			2013
Service cost	$	9		$	4		$	2
Interest cost	3			2			3
Expected return on plan assets	(3		)	(1		)	(2		)
Amortization of net (gains) / losses	1			—			—
Special termination benefits	1			1			—
Settlement loss	2			5			1
Net periodic benefit cost	$	13		$	11		$	4

The settlement loss for the year ended December 31, 2014, includes a settlement charge of approximately $4 million (approximately $3 million, net of tax) associated with the 2012 sale of our Netherlands manufacturing facility. The pension assets associated with this plan were financed through an insurance contract for which the insurer was responsible for the investment of the plan assets. The active participants in the plan were transferred to the buyer at the time of sale and the plan liability associated with inactive participants remained with the insurance contract that was used to finance the plan. The insurance contract was also transferred to the buyer although we remained liable for the proportion of administrative costs that related to inactive members under the terms of this contract through December 31, 2013. Under the terms of the sale agreement, the contract was terminated on December 31, 2013 (fiscal year 2014 for our international operations), and the liability for benefits associated with this plan reverted in full to the insurance company.

Actuarial Assumptions––Dedicated Plans

The following table provides the weighted average actuarial assumptions for the dedicated pension plans (including those transferred to us):



	As of December 31,
(PERCENTAGES)	2015		2014		2013
Weighted average assumptions used to determine benefit obligations:
Discount rate	2.6	%	2.8	%	5.0	%
Rate of compensation increase	3.0	%	3.6	%	4.4	%
Weighted average assumptions used to determine net benefit cost for the year ended December 31:
Discount rate	2.8	%	5.0	%	4.6	%
Expected return on plan assets	4.3	%	4.0	%	4.5	%
Rate of compensation increase	3.6	%	4.4	%	5.3	%

The assumptions above are used to develop the benefit obligations at the end of the year and to develop the net periodic benefit cost for the following year. Therefore, the assumptions used to determine the net periodic benefit cost for each year are established at the end of each previous year, while the assumptions used to determine the benefit obligations are established at each year-end. The net periodic benefit cost and the benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The assumptions are revised based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits. In 2013, the calculation of the weighted average expected rate of compensation increase used to determine benefit obligations excluded the Netherlands plan as that plan had no active participants at December 31, 2013 (the plan was terminated on December 31, 2013).

Actuarial and other assumptions for pension plans can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For a description of the risks associated with estimates and assumptions, see Note 4. Significant Accounting Policies—Estimates and Assumptions.

Plan Assets—Dedicated Plans

The components of plan assets follow:



	As of December 31,
(MILLIONS OF DOLLARS)	2015		2014
Cash and cash equivalents	$	2	$	1
Equity securities: Equity commingled funds	23		27
Debt securities: Government bonds	26		26
Other investments	21		9
Total^(a)	$	72	$	63


^(a)	Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 4. Significant Accounting Policies—Fair Value). All investment plan assets are valued using Level 1 or Level 2 inputs.

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 4. Significant Accounting Policies—Estimates and Assumptions.

Specifically, the following methods and assumptions were used to estimate the fair value of our pension assets:


•	Equity commingled funds––observable market prices.


•	Government bonds and other investments––principally observable market prices.

The long-term target asset allocations and the percentage of the fair value of plans assets for dedicated benefit plans follow:



	As of December 31,
	Target allocation
	percentage		Percentage of Plan Assets
(PERCENTAGES)	2015		2015		2014
Cash and cash equivalents	0-10%		2.4	%	2.1	%
Equity securities	0-50%		31.8	%	42.5	%
Debt securities	20-70%		36.2	%	41.3	%
Other investments	0-40%		29.6	%	14.1	%
Total	100	%	100	%	100	%

Zoetis utilizes long-term asset allocation ranges in the management of our plans’ invested assets. Long-term return expectations are developed with input from outside investment consultants based on the company’s investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the investment consultant’s view of current and future economic and financial market conditions. As market conditions and other factors change, the targets may be adjusted accordingly and actual asset allocations may vary from the target allocations.

The long-term asset allocation ranges reflect the asset class return expectations and tolerance for investment risk within the context of the respective plans’ long-term benefit obligations. These ranges are supported by an analysis that incorporates historical and expected returns by asset class, as well as volatilities and correlations across asset classes and our liability profile. This analysis, referred to as an asset-liability analysis, also provides an estimate of expected returns on plan assets, as well as a forecast of potential future asset and liability balances.

The investment consultants review investment performance with Zoetis on a quarterly basis in total, as well as by asset class, relative to one or more benchmarks.

Cash Flows—Dedicated Plans

Our plans are generally funded in amounts that are at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax and other laws.

We expect to contribute approximately $8 million to our dedicated pension plans in 2016. Benefit payments are expected to be approximately $5 million for 2016, $4 million for 2017, $5 million per year for 2018 and 2019, and $6 million for 2020. Benefit payments are expected to be approximately $34 million in the aggregate for the five years thereafter. These expected benefit payments reflect the future plan benefits subsequent to 2016 projected to be paid from the plans or from the general assets of Zoetis entities under the current actuarial assumptions used for the calculation of the projected benefit obligation and, therefore, actual benefit payments may differ from projected benefit payments.

Multi-employer Plans

Pension expense associated with international benefit plans accounted for as multi-employer plans was approximately $5 million in 2014 and $7 million in 2013. Contributions to these plans were approximately $5 million and $7 million in 2014 and 2013, respectively. There were no plans accounted for as multi-employer plans in 2015.

B. Postretirement Plans

Prior to the Separation from Pfizer, many of our employees were eligible to participate in postretirement plans sponsored by Pfizer. As discussed above, Pfizer is continuing to credit certain United States employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier), for certain early retirement benefits with respect to Pfizer's U.S. retiree medical plans. Postretirement benefit expense associated with these U.S. retiree medical plans totaled approximately $4 million per year in 2015, 2014 and 2013 (inclusive of service cost grow-in benefits discussed above). The expected benefit payments for each of the next five years is approximately $4 million per year, and approximately $6 million in the aggregate over the remaining two years of the agreement with Pfizer.

Employees in the United States who meet certain eligibility requirements participate in a supplemental (non-qualified) savings plan sponsored by Zoetis. The cost of the supplemental savings plan was $2 million and $3 million in 2015 and 2014, respectively.

C. Defined Contribution Plans

Zoetis has a voluntary defined contribution plan (Zoetis Savings Plan) that allows participation by substantially all U. S. employees. Zoetis matches 100% of employee contributions, up to a maximum of 5% of each employee’s eligible compensation. The Zoetis Savings Plan also includes a profit-sharing feature that provides for an additional contribution ranging between 0 and 8 percent of each employee’s eligible compensation. All eligible employees receive the profit-sharing contribution regardless of the amount they choose to contribute to the Zoetis Savings Plan. The profit-sharing contribution is a discretionary amount provided by Zoetis and is determined on an annual basis. Employees can direct their contributions and the company's matching and profit-sharing contributions into any of the funds offered. These funds provide participants with a cross section of investing options, including the Zoetis stock fund. Through December 31, 2014, matching and profit-sharing contributions were funded through the issuance of Zoetis common stock. Beginning in 2015, these contributions were cash funded.

Employees are permitted to diversify all or any portion of their company matching or profit-sharing contribution. Once the contributions have been paid, Zoetis has no further payment obligations. Contribution expense, associated with the U.S. defined contribution plans, totaled approximately $43 million in 2015, $38 million in 2014 and $35 million in 2013.