EMPLOYEE BENEFIT PLANS

GE MULTI-EMPLOYER PLANS

Certain of our U.S. employees are covered under various U.S. GE employee benefit plans, including GE's retirement plans (pension, retiree health and life insurance, and savings benefit plans). In addition, certain United Kingdom (UK) employees participate in the GE UK Pension Plan. We are allocated relevant participation costs for these GE employee benefit plans as part of multi-employer plans. As such, we have not recorded any liabilities associated with our participation in these plans. Expenses associated with our participation in these plans was $158 million, $132 million and $140 million in the years ended December 31, 2018, 2017 and 2016, respectively. In November 2018, the Company entered into an agreement with GE whereby GE will transfer the assets and liabilities of the GE UK Pension Plan related to the oil & gas businesses to BHGE on what is intended to be a fully funded basis. Subsequent to this transfer, BHGE shall cease to participate in the GE UK Pension Plan. This transfer is expected to close in 2019. Additionally, beginning in 2019, legacy GE O&G U.S. employees will cease to participate in the GE U.S. plans above.

DEFINED BENEFIT PLANS

In addition to these GE plans, certain of our employees are also covered by company sponsored pension plans. Our primary pension plans in 2018 included four U.S. plans and six non-U.S. pension plans, primarily in the UK, Germany, and Canada, all with pension assets or obligations greater than $20 million. We use a December 31 measurement date for these plans. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings; however, over half of these plans are either frozen or closed to new entrants. We also provide certain postretirement health care benefits (Other Postretirement Benefits), through an unfunded plan, to a closed group of U.S. employees who retire and meet certain age and service requirements.

Funded Status

The funded status position represents the difference between the benefit obligation and the plan assets. The projected benefit obligation (PBO) for pension benefits represents the actuarial present value of benefits attributed to employee services and compensation and includes an assumption about future compensation levels. The accumulated benefit obligation (ABO) is the actuarial present value of pension benefits attributed to employee service to date and present compensation levels. The ABO differs from the PBO in that the ABO does not include any assumptions about future compensation levels. Below is the reconciliation of the beginning and ending balances of benefit obligations, fair value of plan assets and the funded status of our plans.



	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Change in benefit obligation:
Benefit obligation at beginning of year	$	2,418		$	820		$	187		$	117
Service cost	21			37			2			2
Interest cost	71			51			5			6
Plan amendment	20			—			1			(23		)
Actuarial loss (gain)	(93		)	41			(23		)	—
Benefits paid	(67		)	(65		)	(21		)	(13		)
Curtailments	(7		)	(45		)	(5		)	5
Settlements	(59		)	(10		)	—			—
Business acquisition ⁽¹⁾	—			1,546			—			93
Other	16			(2		)	(39		)	—
Foreign currency translation adjustments	(59		)	45			—			—
Benefit obligation at end of year	2,261			2,418			107			187

Change in plan assets:
Fair value of plan assets at beginning of year	2,059			567			—			—
Actual return on plan assets	(60		)	152			—			—
Employer contributions	51			50			21			13
Benefits paid	(67		)	(65		)	(21		)	(13		)
Settlements	(59		)	(10		)	—			—
Business acquisition ⁽¹⁾	—			1,342			—			—
Other	(9		)	(2		)	—			—
Foreign currency translation adjustments	(49		)	25			—			—
Fair value of plan assets at end of year	1,866			2,059			—			—

Funded status - underfunded at end of year	$	(395	)	$	(359	)	$	(107	)	$	(187	)

Accumulated benefit obligation	$	2,225		$	2,373		$	107		$	187


⁽¹⁾	Relates to the acquisition of Baker Hughes on July 3, 2017.

The amounts recognized in the consolidated and combined statements of financial position consist of the following at December 31:



	Pension Benefits						Other Postretirement Benefits
	2018			2017			2018			2017
Noncurrent assets	$	47		$	46		$	—		$	—
Current liabilities	(13		)	(10		)	(19		)	(24		)
Noncurrent liabilities	(429		)	(395		)	(88		)	(163		)
Net amount recognized	$	(395	)	$	(359	)	$	(107	)	$	(187	)

Information for the plans with ABOs in excess of plan assets is as follows at December 31:



	Pension Benefits				Other Postretirement Benefits
	2018		2017		2018		2017
Projected benefit obligation	$	1,621	$	1,692	n/a		n/a
Accumulated benefit obligation	$	1,585	$	1,647	$	107	$	187
Fair value of plan assets	$	1,179	$	1,286	n/a		n/a

Net Periodic Cost (Income)

The components of net periodic cost (income) are as follows for the years ended December 31:



	Pension Benefits											Other Postretirement Benefits
	2018			2017				2016				2018			2017			2016
Service cost	$	21		$	37			$	18			$	2		$	2		$	2
Interest cost	71			51				34				5			6			5
Expected return on plan assets	(121		)	(81		)		(46		)		—			—			—
Amortization of prior service credit	—			—				—				(5		)	(3		)	(2		)
Amortization of net actuarial loss (gain)	10			12				14				(2		)	(2		)	—
Curtailment / settlement loss (gain)	2			(45		)	⁽²⁾	(26		)	⁽¹⁾	(5		)	2			(2		)
Net periodic cost (income)	$	(17	)	$	(26	)		$	(6	)		$	(5	)	$	5		$	3


⁽¹⁾	Primarily associated with two UK plans merging into the GE UK Pension Plan.

⁽²⁾

As a result of the acquisition of Baker Hughes, we obtained a non-contributory pension plan (the Baker Hughes Incorporated Pension Plan or BHIPP). In 2017, the Compensation Committee of the Board of Directors approved amendments to the BHIPP to close the plan to new participants and freeze accruals of future service-related benefits effective as of December 31, 2017. As a result of these actions, the Company recorded a curtailment gain of $45 million. The curtailment was recorded by the Company during the fourth quarter of 2017 and included in the “Other non-operating income (loss), net” caption of the consolidated and combined statements of income (loss).

The service cost component of the net periodic cost (benefit) is included in "operating income (loss)" and all other components are included in "Other non operating income, net" caption of the consolidated and combined statements of income (loss).

Assumptions Used in Benefit Calculations

Accounting requirements necessitate the use of assumptions to reflect the uncertainties and the length of time over which the pension obligations will be paid. The actual amount of future benefit payments will depend upon when participants retire, the amount of their benefit at retirement and how long they live. To reflect the obligation in today’s dollars, we discount the future payments using a rate that matches the time frame over which the payments will be made. We also need to assume a long-term rate of return that will be earned on investments used to fund these payments.

Weighted average assumptions used to determine benefit obligations for these plans are as follows for the years ended December 31:



	Pension Benefits				Other Postretirement Benefits
	2018		2017		2018		2017
Discount rate	3.43	%	2.99	%	3.92	%	3.32	%
Rate of compensation increase	3.78	%	3.82	%	n/a		n/a

Weighted average assumptions used to determine net periodic cost for these plans are as follows for the years ended December 31:



	Pension Benefits						Other Postretirement Benefits
	2018		2017		2016		2018		2017		2016
Discount rate	2.99	%	3.24	%	3.83	%	3.32	%	3.72	%	4.25	%
Expected long-term return on plan assets	5.94	%	6.26	%	6.86	%	n/a		n/a		n/a

We determine the discount rate using a bond matching model, whereby the weighted average yields on high-quality fixed-income securities have maturities consistent with the timing of benefit payments. Lower discount rates increase the size of the benefit obligations and pension expense in the following year; higher discount rates reduce the size of the benefit obligation and subsequent-year pension expense. The compensation assumption is used in our active plans to estimate the annual rate at which pay of plan participants will grow. If the rate of growth assumed increases, the size of the pension obligations will increase.

The expected return on plan assets is the estimated long-term rate of return that will be earned on the investments used to fund the pension obligations. To determine this rate, we consider the current and target composition of plan investments, our historical returns earned, and our expectations about the future.

Assumed health care cost trend rates can have a significant effect on the amounts reported for Other Postretirement Benefits. As of December 31, 2018, the health care cost trend rate was 6.50%, declining gradually each successive year until it reaches 4.68%. A one percentage point change in assumed health care cost trend rates would have been immaterial in 2018.

Accumulated Other Comprehensive Loss

The amount recorded before-tax in accumulated other comprehensive loss related to employee benefit plans consists of the following at December 31:



	Pension Benefits				Other Postretirement Benefits
	2018		2017		2018			2017
Net actuarial loss (gain)	$	177	$	117	$	(29	)	$	(16	)
Net prior service cost (credit)	20		—		(18		)	(25		)
Total	$	197	$	117	$	(47	)	$	(41	)

The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2019 is $15 million and $1 million, respectively. The estimated net actuarial gain and prior service credit for the other postretirement benefits that will be amortized from accumulated other comprehensive loss and included in net periodic benefit cost in 2019 is $7 million and $3 million, respectively.

Plan Assets

We have investment committees that meet regularly to review the portfolio returns and to determine asset-mix targets based on asset/liability studies. Third-party investment consultants assist such committees in developing asset allocation strategies to determine our expected rates of return and expected risk for various investment portfolios. The investment committees considered these strategies in the formal establishment of the current asset-mix targets based on the projected risk and return levels for all major asset classes.

The table below presents the fair value of the pension assets at December 31:



	2018		2017
Equity securities
U.S. equity securities ⁽¹⁾	$	215	$	207
Global equity securities ⁽¹⁾	338		551
Debt securities
Fixed income and cash investment funds	937		658
U.S. corporate	—		70
Other debt securities	4		55
Private equities	60		107
Real estate	35		44
Other investments ⁽²⁾	277		367
Total plan assets	$	1,866	$	2,059


⁽¹⁾	Include direct investments and investment funds.


⁽²⁾	Substantially all represented hedge fund and asset allocation fund investments.

Plan assets valued using Net Asset Value (NAV) as a practical expedient amounted to $1,802 million and $1,684 million as of December 31, 2018 and 2017, respectively. The percentages of plan assets valued using NAV by investment fund type for equity securities, fixed income and cash, and alternative investments were 30%, 48%, and 19% as of December 31, 2018, respectively, and 30%, 28%, and 24% as of December 31, 2017, respectively. Those investments that were measured at fair value using NAV as practical expedient were excluded from the fair value hierarchy. The practical expedient was not applied for investments with a fair value of $64 million and $375 million as of December 31, 2018 and 2017, respectively. There were no investments classified within Level 3 in 2018. Investments classified within Level 3 in 2017 were $86 million. The remaining investments were considered Level 1 and 2.

Funding Policy

The funding policy for our Pension Benefits is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. In 2018, we contributed approximately $51 million. We expect to contribute approximately $22 million to our pension plans in 2019.

We fund our Other Postretirement Benefits on a pay-as-you-go basis. In 2018, we contributed $21 million to these plans. In 2019, we expect to contribute approximately $19 million to fund such benefits.

The following table presents the expected benefit payments over the next 10 years. The U.S. and non-U.S. pension benefit payments are made by the respective pension trust funds.



Year	Pension Benefits			Other Postretirement Benefits
2019		$	113		$	19
2020		109			17
2021		112			12
2022		113			9
2023		113			8
2024-2028		594			31

Defined Contribution Plans

Our primary defined contribution plan during 2018 was the Company sponsored U.S. 401(k) plan (401(k) Plan). The 401(k) Plan allows eligible employees to elect to contribute portions of their eligible compensation to an investment trust. Employee contributions are matched by the Company in cash at the rate of $1.00 per $1.00 employee contribution for the first 5% of the employee's eligible compensation, and such contributions vest immediately. In addition, we make cash contributions for all eligible employees of 4% of their eligible compensation and such contributions are fully vested to the employee after three years of employment. During 2018 and 2017, the legacy Baker Hughes employees participated in the 401(k) Plan whereas the legacy GE O&G employees continued to participate in the GE sponsored plan. The 401(k) Plan provides several investment options, for which the employee has sole investment discretion, however, the 401(k) Plan does not offer the Company's common stock as an investment option. Our costs for the 401(k) Plan and several other U.S. and non-U.S. defined contribution plans amounted to $137 million and $71 million, in 2018 and 2017, respectively. Beginning in 2019, certain legacy GE O&G employees are eligible to participate in our defined contribution plans, including our 401(k) Plan.

Other

We have two non-qualified defined contribution plans that are invested through trusts. The assets and corresponding liabilities were $233 million and $278 million at December 31, 2018 and 2017, respectively, and are included in "All other assets" and "Liabilities for pensions and other employee benefits" captions in our consolidated and combined statements of financial position.