Postemployment benefit plans

12 Months Ended

Dec. 31, 2017

We provide defined benefit pension plans, defined contribution plans and/or other postretirement benefit plans (retirement health care and life insurance) to employees in many of our locations throughout the world. Our defined benefit pension plans provide a benefit based on years of service and/or the employee’s average earnings near retirement. Our defined contribution plans allow employees to contribute a portion of their salary to help save for retirement, and in most cases, we provide a matching contribution. The benefit obligation related to our non-U.S. defined benefit pension plans are for employees located primarily in Europe, Japan and Brazil. For other postretirement benefits (OPEB), substantially all of our benefit obligation is for employees located in the United States.

Our U.S. defined benefit pension plans for support and management employees were frozen for certain employees on December 31, 2010, and will freeze for remaining employees on December 31, 2019. On the respective transition dates employees move to a retirement benefit that provides a frozen pension benefit and a 401(k) plan that will include a matching contribution and a new annual employer contribution.

In the first quarter of 2017, we announced the closure of our Gosselies, Belgium facility. This announcement impacted certain employees that participated in a defined benefit pension plan and resulted in a net loss of $20 million for curtailment and termination benefits. In addition during first quarter of 2017, we announced the decision to phase out production at our Aurora, Illinois, facility, which resulted in termination benefits of $9 million for certain hourly employees that participate in our U.S. hourly defined benefit pension plan.

During 2015 the company offered a voluntary retirement enhancement program to qualifying U.S. employees. This voluntary program impacted employees participating in certain U.S. pension and OPEB plans and resulted in a curtailment loss of $82 million.

All curtailments and termination benefits were recognized in Other operating (income) expenses in Statement 1.

Beginning in 2016, we elected to utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Service and interest costs in 2017 and 2016 were lower by $140 million and $180 million, respectively, under the new method than they would have been under the previous method. This change had no impact on our year-end defined benefit pension and OPEB obligations or our annual net periodic benefit cost as the lower service and interest costs were entirely offset in the actuarial loss (gain) reported for the respective year. This change was accounted for prospectively as a change in accounting estimate.


A.	Benefit obligations



	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
(Millions of dollars)	2017			2016			2017			2016			2017			2016
Change in benefit obligation:
Benefit obligation, beginning of year	$	16,218		$	15,792		$	4,472		$	4,355		$	4,088		$	4,313
Service cost	115			119			95			92			78			82
Interest cost	525			517			101			117			130			131
Plan amendments	—			—			(1		)	(5		)	(79		)	(188		)
Actuarial losses (gains)	1,439			767			(75		)	512			71			60
Foreign currency exchange rates	—			—			312			(369		)	4			14
Participant contributions	—			—			6			7			59			57
Benefits paid - gross	(977		)	(970		)	(203		)	(238		)	(361		)	(388		)
Less: federal subsidy on benefits paid	—			—			—			—			10			11
Curtailments, settlements and termination benefits	6			(7		)	(101		)	1			2			(4		)
Benefit obligation, end of year	$	17,326		$	16,218		$	4,606		$	4,472		$	4,002		$	4,088
Accumulated benefit obligation, end of year	$	17,175		$	16,034		$	4,335		$	4,163

Weighted-average assumptions used to determine benefit obligation:
Discount rate	3.5		%	4.0		%	2.4		%	2.5		%	3.6		%	4.0		%
Rate of compensation increase	4.0		%	4.0		%	4.0		%	4.0		%	4.6		%	4.0		%

The assumed discount rate is used to discount future benefit obligations back to today’s dollars. The U.S. discount rate is based on a benefit cash flow-matching approach and represents the rate at which our benefit obligations could effectively be settled as of our measurement date, December 31. The benefit cash flow-matching approach involves analyzing Caterpillar’s projected cash flows against a high quality bond yield curve, calculated using a wide population of corporate Aa bonds available on the measurement date. The very highest and lowest yielding bonds (top and bottom 10 percent) are excluded from the analysis. A similar process is used to determine the assumed discount rate for our most significant non-U.S. plans. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and future expense.


B.	Plan assets



	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
(Millions of dollars)	2017			2016			2017			2016			2017			2016
Change in plan assets:
Fair value of plan assets, beginning of year	$	11,354		$	11,440		$	3,887		$	3,890		$	550		$	650
Actual return on plan assets	1,692			860			350			503			101			55
Foreign currency exchange rates	—			—			278			(392		)	—			—
Company contributions	1,350			36			107			117			155			176
Participant contributions	—			—			6			7			59			57
Benefits paid	(977		)	(970		)	(203		)	(238		)	(361		)	(388		)
Settlements and termination benefits	(3		)	(12		)	(120		)	—			—			—
Fair value of plan assets, end of year	$	13,416		$	11,354		$	4,305		$	3,887		$	504		$	550

In general, our strategy for both the U.S. and non-U.S. pensions includes ongoing alignment of our investments to our liabilities, while reducing risk in our portfolio. The current U.S. pension target asset allocation is 30 percent equities and 70 percent fixed income. This target allocation will be revisited periodically to ensure it reflects our overall objectives. The non-U.S. pension weighted-average target allocations are 38 percent equities, 54 percent fixed income, 5 percent real estate and 3 percent other. The target allocations for each plan vary based upon local statutory requirements, demographics of plan participants and funded status. The non-U.S. plan assets are primarily invested in non-U.S. securities.

Our target allocation for the other postretirement benefit plans is 70 percent equities and 30 percent fixed income.

The U.S. plans are rebalanced to plus or minus 5 percentage points of the target asset allocation ranges on a monthly basis. The frequency of rebalancing for the non-U.S. plans varies depending on the plan. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments.

The use of certain derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The plans do not engage in derivative contracts for speculative purposes.

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 18 for a discussion of the fair value hierarchy.

Fair values are determined as follows:


•	Equity securities are primarily based on valuations for identical instruments in active markets.


•	Fixed income securities are primarily based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.


•	Real estate is stated at the fund’s net asset value or at appraised value.


•	Cash, short-term instruments and other are based on the carrying amount, which approximates fair value, or the fund’s net asset value.

The fair value of the pension and other postretirement benefit plan assets by category is summarized below:



	December 31, 2017
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	2,745	$	—	$	20	$	165	$	2,930
Non-U.S. equities	1,573		15		—		—		1,588

Fixed income securities:
U.S. corporate bonds	—		5,886		60		49		5,995
Non-U.S. corporate bonds	—		1,165		—		—		1,165
U.S. government bonds	—		793		—		—		793
U.S. governmental agency mortgage-backed securities	—		369		—		—		369
Non-U.S. government bonds	—		68		—		—		68

Real estate	—		—		10		—		10

Cash, short-term instruments and other	173		101		—		224		498
Total U.S. pension assets	$	4,491	$	8,397	$	90	$	438	$	13,416



	December 31, 2016
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	2,816	$	—	$	5	$	174	$	2,995
Non-U.S. equities	1,653		5		—		—		1,658

Fixed income securities:
U.S. corporate bonds	—		4,273		31		85		4,389
Non-U.S. corporate bonds	—		710		—		—		710
U.S. government bonds	—		647		—		—		647
U.S. governmental agency mortgage-backed securities	—		491		—		—		491
Non-U.S. government bonds	—		90		—		—		90

Real estate	—		—		10		—		10

Cash, short-term instruments and other	93		74		11		186		364
Total U.S. pension assets	$	4,562	$	6,290	$	57	$	445	$	11,354



	December 31, 2017
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	55	$	—	$	—	$	137	$	192
Non-U.S. equities	400		34		—		929		1,363
Global equities ¹	116		33		—		—		149

Fixed income securities:
U.S. corporate bonds	—		156		—		—		156
Non-U.S. corporate bonds	—		363		5		6		374
U.S. government bonds	—		64		—		—		64
Non-U.S. government bonds	—		1,229		—		—		1,229
Global fixed income ¹	—		250		—		218		468

Real estate	—		186		—		—		186

Cash, short-term instruments and other ²	64		60		—		—		124
Total non-U.S. pension assets	$	635	$	2,375	$	5	$	1,290	$	4,305



	December 31, 2016
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	405	$	—	$	—	$	108	$	513
Non-U.S. equities	639		38		—		119		796
Global equities ¹	122		34		—		—		156

Fixed income securities:
U.S. corporate bonds	—		151		1		—		152
Non-U.S. corporate bonds	—		345		1		10		356
U.S. government bonds	—		44		—		—		44
Non-U.S. government bonds	—		1,172		—		—		1,172
Global fixed income ¹	—		221		—		199		420

Real estate	—		179		—		—		179

Cash, short-term instruments and other ²	53		46		—		—		99
Total non-U.S. pension assets	$	1,219	$	2,230	$	2	$	436	$	3,887
¹ Includes funds that invest in both U.S. and non-U.S. securities.
² Includes funds that invest in multiple asset classes, hedge funds and other.



	December 31, 2017
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	255	$	1	$	—	$	—	$	256
Non-U.S. equities	103		—		—		—		103

Fixed income securities:
U.S. corporate bonds	—		60		—		1		61
Non-U.S. corporate bonds	—		15		—		—		15
U.S. government bonds	—		17		—		—		17
U.S. governmental agency mortgage-backed securities	—		34		—		—		34
Non-U.S. government bonds	—		4		—		—		4

Cash, short-term instruments and other	—		3		—		11		14
Total other postretirement benefit assets	$	358	$	134	$	—	$	12	$	504



	December 31, 2016
(Millions of dollars)	Level 1		Level 2		Level 3		Measured at NAV		Total Assets at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	276	$	1	$	—	$	—	$	277
Non-U.S. equities	110		—		—		—		110

Fixed income securities:
U.S. corporate bonds	—		69		—		1		70
Non-U.S. corporate bonds	—		17		—		—		17
U.S. government bonds	—		16		—		—		16
U.S. governmental agency mortgage-backed securities	—		31		—		—		31
Non-U.S. government bonds	—		4		—		—		4

Cash, short-term instruments and other	5		1		—		19		25
Total other postretirement benefit assets	$	391	$	139	$	—	$	20	$	550

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2017 and 2016. These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.



(Millions of dollars)	Equities			Fixed Income			Real Estate		Other
U.S. Pension
Balance at December 31, 2015	$	5		$	42		$	9	$	3
Unrealized gains (losses)	—			4			1		—
Realized gains (losses)	—			(5		)	—		—
Purchases, issuances and settlements, net	1			(9		)	—		8
Transfers in and/or out of Level 3	(1		)	(1		)	—		—
Balance at December 31, 2016	$	5		$	31		$	10	$	11
Unrealized gains (losses)	15			13			—		—
Realized gains (losses)	(1		)	—			—		—
Purchases, issuances and settlements, net	—			16			—		(11		)
Transfers in and/or out of Level 3	1			—			—		—
Balance at December 31, 2017	$	20		$	60		$	10	$	—

Non-U.S. Pension
Balance at December 31, 2015	$	2		$	5		$	—	$	—
Unrealized gains (losses)	—			—			—		—
Realized gains (losses)	(1		)	—			—		—
Purchases, issuances and settlements, net	(1		)	(1		)	—		—
Transfers in and/or out of Level 3	—			(2		)	—		—
Balance at December 31, 2016	$	—		$	2		$	—	$	—
Unrealized gains (losses)	—			—			—		—
Realized gains (losses)	—			—			—		—
Purchases, issuances and settlements, net	—			2			—		—
Transfers in and/or out of Level 3	—			1			—		—
Balance at December 31, 2017	$	—		$	5		$	—	$	—


C.	Funded status

The funded status of the plans, reconciled to the amount reported on Statement 3, is as follows:



	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
(Millions of dollars)	2017			2016			2017			2016			2017			2016
End of Year
Fair value of plan assets	$	13,416		$	11,354		$	4,305		$	3,887		$	504		$	550
Benefit obligations	17,326			16,218			4,606			4,472			4,002			4,088
Over (under) funded status recognized in financial position	$	(3,910	)	$	(4,864	)	$	(301	)	$	(585	)	$	(3,498	)	$	(3,538	)

Components of net amount recognized in financial position:
Other assets (non-current asset)	$	19		$	4		$	358		$	152		$	—		$	—
Accrued wages, salaries and employee benefits (current liability)	(38		)	(35		)	(20		)	(20		)	(163		)	(162		)
Liability for postemployment benefits (non-current liability)	(3,891		)	(4,833		)	(639		)	(717		)	(3,335		)	(3,376		)
Net liability recognized	$	(3,910	)	$	(4,864	)	$	(301	)	$	(585	)	$	(3,498	)	$	(3,538	)

Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of:
Prior service cost (credit)	$	—		$	—		$	—		$	(5	)	$	(138	)	$	(85	)

The estimated amount of prior service cost (credit) that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2017 into net periodic benefit cost (pre-tax) in 2018 are as follows:



(Millions of dollars)	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
Prior service cost (credit)	$	—	$	—	$	(35	)

The following amounts relate to our pension plans with projected benefit obligations in excess of plan assets:



	U.S. Pension Benefits at Year-end				Non-U.S. Pension Benefits at Year-end
(Millions of dollars)	2017		2016		2017		2016
Projected benefit obligation	$	16,904	$	16,163	$	1,853	$	4,098
Accumulated benefit obligation	$	16,761	$	15,979	$	1,708	$	3,835
Fair value of plan assets	$	12,975	$	11,295	$	1,194	$	3,361

The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:



	U.S. Pension Benefits at Year-end				Non-U.S. Pension Benefits at Year-end
(Millions of dollars)	2017		2016		2017		2016
Projected benefit obligation	$	16,904	$	16,163	$	1,720	$	1,707
Accumulated benefit obligation	$	16,761	$	15,979	$	1,641	$	1,607
Fair value of plan assets	$	12,975	$	11,295	$	1,107	$	1,024

The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans for all years presented.


D.	Expected contributions and benefit payments

Information about expected contributions and benefit payments for pension and other postretirement benefit plans is as follows:



(Millions of dollars)	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
Employer contributions:
2018 (expected)	$	40	$	150	$	175

Expected benefit payments:
2018	$	1,010	$	220	$	300
2019	990		170		300
2020	990		180		290
2021	990		180		290
2022	1,000		190		280
2023-2027	4,960		1,040		1,380
Total	$	9,940	$	1,980	$	2,840

The above table reflects the total employer contributions and benefits expected to be paid from the plan or from company assets and does not include the participants’ share of the cost. The expected benefit payments for our other postretirement benefits include payments for prescription drug benefits. Medicare Part D subsidy amounts expected to be received by the company which will offset other postretirement benefit payments are as follows:



(Millions of dollars)	2018		2019		2020		2021		2022		2023-2027		Total
Other postretirement benefits	$	15	$	15	$	15	$	15	$	15	$	60	$	135


E.	Net periodic cost



	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
(Millions of dollars)	2017			2016			2015			2017			2016			2015			2017			2016			2015
Components of net periodic benefit cost:
Service cost	$	115		$	119		$	181		$	95		$	92		$	110		$	78		$	82		$	101
Interest cost	525			517			608			101			117			146			130			131			181
Expected return on plan assets ¹	(734		)	(757		)	(890		)	(231		)	(227		)	(273		)	(37		)	(44		)	(56		)
Curtailments and termination benefits ²	9			6			32			15			1			(1		)	—			(9		)	27
Amortization of prior service cost (credit) ³	—			—			1			(2		)	3			—			(23		)	(59		)	(54		)
Actuarial loss (gain) ⁴	481			664			732			(195		)	262			8			15			59			(561		)
Total cost (benefit) included in operating profit	$	396		$	549		$	664		$	(217	)	$	248		$	(10	)	$	163		$	160		$	(362	)

Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax):
Current year prior service cost (credit)	$	—		$	—		$	—		$	3		$	(3	)	$	(8	)	$	(77	)	$	(184	)	$	16
Amortization of prior service (cost) credit	—			—			(1		)	2			(3		)	—			23			59			54
Total recognized in other comprehensive income	—			—			(1		)	5			(6		)	(8		)	(54		)	(125		)	70
Total recognized in net periodic cost and other comprehensive income	$	396		$	549		$	663		$	(212	)	$	242		$	(18	)	$	109		$	35		$	(292	)

Weighted-average assumptions used to determine net cost:
Discount rate used to measure service cost	4.2		%	4.5		%	3.8		%	2.4		%	2.9		%	3.3		%	3.9		%	4.2		%	3.9		%
Discount rate used to measure interest cost	3.3		%	3.4		%	3.8		%	2.3		%	2.8		%	3.3		%	3.3		%	3.3		%	3.9		%
Expected rate of return on plan assets⁵	6.7		%	6.9		%	7.4		%	5.9		%	6.1		%	6.8		%	7.5		%	7.5		%	7.8		%
Rate of compensation increase	4.0		%	4.0		%	4.0		%	4.0		%	3.6		%	4.0		%	4.0		%	4.0		%	4.0		%


¹	Expected return on plan assets developed using the fair value of plan assets.


²	Curtailments and termination benefits were recognized in Other operating (income) expenses in Statement 1.

Prior service cost (credit) for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For pension plans in which all or almost all of the plan's participants are inactive and other postretirement benefit plans in which all or almost all of the plan's participants are fully eligible for benefits under the plan, prior service cost (credit) are amortized using the straight-line method over the remaining life expectancy of those participants.


⁴	Actuarial loss (gain) represent the effects of actual results differing from our assumptions and the effects of changing assumptions. We recognize actuarial loss (gain) immediately through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.


⁵	The weighted-average rates for 2018 are 6.3 percent and 5.2 percent for U.S. and non-U.S. pension plans, respectively.

The discount rates used in the determination of our service and interest cost components are determined by utilizing a full yield curve approach which applies specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. In 2015, the discount rates used to determine these cost components were based on a single weighted-average discount rate based on the yield curve used to measure the benefit obligation at the beginning of the period.

Our U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. To arrive at our expected long-term return, the amount added for active management was 0.80 percent for 2017 and 0.90 percent for 2016 and 0.95 percent for 2015. A similar process is used to determine this rate for our non-U.S. plans.

The assumed health care trend rate represents the rate at which health care costs are assumed to increase. We assumed a weighted-average increase of 6.6 percent in our calculation of 2017 benefit expense. We expect a weighted-average increase of 6.1 percent during 2018. The 2018 rates are assumed to decrease gradually to the ultimate health care trend rate of 5 percent in 2022. This rate represents 3 percent general inflation plus 2 percent additional health care inflation.

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 cost trend rates would have the following effects:



(Millions of dollars)	One-percentage- point increase		One-percentage- point decrease
Effect on 2017 service and interest cost components of other postretirement benefit cost	$	14	$	(12	)
Effect on accumulated postretirement benefit obligation	$	161	$	(136	)


F.	Other postemployment benefit plans

We offer long-term disability benefits, continued health care for disabled employees, survivor income benefit insurance and supplemental unemployment benefits to substantially all U.S. employees.


G.	Defined contribution plans

We have both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. Our primary U.S. 401(k) plan allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis. Employees with frozen defined benefit pension accruals are eligible for matching contributions equal to 100 percent of employee contributions to the plan up to 6 percent of cash compensation and an annual employer contribution that ranges from 3 to 5 percent of cash compensation (depending on years of service and age). Employees that are still accruing benefits under a defined benefit pension plan are eligible for matching contributions equal to 50 percent of employee contributions up to 6 percent of cash compensation. These 401(k) plans include various investment funds, including a non-leveraged employee stock ownership plan (ESOP). As of December 31, 2017 and December 31, 2016, the ESOP held 17.7 million and 21.3 million shares, respectively. All of the shares held by the ESOP were allocated to participant accounts. Dividends paid to participants are automatically reinvested into company shares unless the participant elects to have all or a portion of the dividend paid to the participant. Various other U.S. and non-U.S. defined contribution plans allow eligible employees to contribute a portion of their salary to the plans, and in most cases, we provide a matching contribution to the funds.

Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:



(Millions of dollars)	2017		2016		2015
U.S. plans	$	375	$	301	$	267
Non-U.S. plans	73		68		76
	$	448	$	369	$	343


H.	Summary of long-term liability:



	December 31,
(Millions of dollars)	2017		2016
Pensions:
U.S. pensions	$	3,891	$	4,833
Non-U.S. pensions	639		717
Total pensions	4,530		5,550
Postretirement benefits other than pensions	3,335		3,376
Other postemployment benefits	109		106
Defined contribution	391		325
	$	8,365	$	9,357