Pensions and Other Benefit Plans

The Company sponsors various retirement and pension plans, including defined benefit, defined contribution and termination indemnity plans, which cover most employees worldwide. The Company also provides post-retirement benefits, primarily health care, to all eligible U.S. retired employees and their dependents.

Many international employees are covered by government-sponsored programs and the cost to the Company is not significant.

Retirement plan benefits for employees hired before January 1, 2015 are primarily based on the employee’s compensation during the last three to five years before retirement and the number of years of service. In 2014, the Company announced that the U.S. Defined Benefit plan was amended to adopt a new benefit formula, effective for employees hired on or after January 1, 2015. The benefits are calculated using a new formula based on employee compensation over total years of service.

International subsidiaries have plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided.

The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future.

In 2016 and 2015 the Company used December 31, 2016 and December 31, 2015, respectively, as the measurement date for all U.S. and international retirement and other benefit plans.

Net periodic benefit costs for the Company’s defined benefit retirement plans and other benefit plans for 2016, 2015 and 2014 include the following components:



	Retirement Plans							Other Benefit Plans
(Dollars in Millions)	2016			2015		2014		2016		2015		2014
Service cost	$	949		1,037		882		224		257		211
Interest cost	927			988		1,018		158		186		197
Expected return on plan assets	(1,962		)	(1,809	)	(1,607	)	(6	)	(7	)	(7	)
Amortization of prior service cost (credit)	1			2		6		(34	)	(33	)	(34	)
Amortization of net transition obligation	—			—		1		—		—		—
Recognized actuarial losses	496			745		460		135		201		136
Curtailments and settlements	11			8		(17	)	—		—		—
Net periodic benefit cost	$	422		971		743		477		604		503

Amounts expected to be recognized in net periodic benefit cost in the coming year for the Company’s defined benefit retirement plans and other post-retirement plans:



(Dollars in Millions)
Amortization of net transition obligation	$	—
Amortization of net actuarial losses	715
Amortization of prior service credit	28

Unrecognized gains and losses for the U.S. pension plans are amortized over the average remaining future service for each plan. For plans with no active employees, they are amortized over the average life expectancy. The amortization of gains and losses for the other U.S. benefit plans is determined by using a 10% corridor of the greater of the market value of assets or the accumulated postretirement benefit obligation. Total unamortized gains and losses in excess of the corridor are amortized over the average remaining future service.

Prior service costs/benefits for the U.S. pension plans are amortized over the average remaining future service of plan participants at the time of the plan amendment. Prior service cost/benefit for the other U.S. benefit plans is amortized over the average remaining service to full eligibility age of plan participants at the time of the plan amendment.

The following table represents the weighted-average actuarial assumptions:



	Retirement Plans				Other Benefit Plans
Worldwide Benefit Plans	2016		2015	2014	2016	2015	2014
Net Periodic Benefit Cost
Service cost discount rate	3.98	%	3.78	4.78	4.77	4.31	5.25
Interest cost discount rate	4.24	%	3.78	4.78	4.10	4.31	5.25
Rate of increase in compensation levels	4.02	%	4.05	4.08	4.32	4.11	4.29
Expected long-term rate of return on plan assets	8.55	%	8.53	8.46

Benefit Obligation
Discount rate	3.78	%	4.11	3.78	4.42	4.63	4.31
Rate of increase in compensation levels	4.02	%	4.01	4.05	4.29	4.28	4.11

The Company’s discount rates are determined by considering current yield curves representing high quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities. For the fiscal year 2016, the Company changed its methodology in determining service and interest cost from the single weighted average discount rate approach to duration specific spot rates along that yield curve to the plans’ liability cash flows, which management has concluded is a more precise estimate. Prior to this change in methodology, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis. This change does not impact the benefit obligation and did not have a material impact to the 2016 full year results.

The expected rates of return on plan asset assumptions represent the Company's assessment of long-term returns on diversified investment portfolios globally. The assessment is determined using projections from external financial sources, long-term historical averages, actual returns by asset class and the various asset class allocations by market.

The following table displays the assumed health care cost trend rates, for all individuals:



Health Care Plans	2016		2015
Health care cost trend rate assumed for next year	6.32	%	6.60	%
Rate to which the cost trend rate is assumed to decline (ultimate trend)	4.50	%	4.50	%
Year the rate reaches the ultimate trend rate	2038		2038

A one-percentage-point change in assumed health care cost trend rates would have the following effect:



	One-Percentage-		One-Percentage-
(Dollars in Millions)	Point Increase		Point Decrease
Health Care Plans
Total interest and service cost	$	30	(23	)
Post-retirement benefit obligation	$	401	(325	)

The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2016 and 2015 for the Company’s defined benefit retirement plans and other post-retirement plans:



	Retirement Plans					Other Benefit Plans
(Dollars in Millions)	2016			2015		2016		2015
Change in Benefit Obligation
Projected benefit obligation — beginning of year	$	25,855		26,889		4,669		5,081
Service cost	949			1,037		224		257
Interest cost	927			988		158		186
Plan participant contributions	54			48		—		—
Amendments	(48		)	60		—		—
Actuarial (gains) losses	2,302			(1,578	)	(73	)	(400	)
Divestitures & acquisitions	(24		)	(5	)	—		—
Curtailments, settlements & restructuring	(25		)	(20	)	—		(3	)
Benefits paid from plan*	(1,210		)	(773	)	(378	)	(420	)
Effect of exchange rates	(664		)	(791	)	5		(32	)
Projected benefit obligation — end of year	$	28,116		25,855		4,605		4,669
Change in Plan Assets
Plan assets at fair value — beginning of year	$	22,254		22,575		74		79
Actual return on plan assets	2,286			298		7		1
Company contributions	838			752		372		414
Plan participant contributions	54			48		—		—
Settlements	(25		)	(20	)	—		—
Divestitures & acquisitions	(24		)	(5	)	—		—
Benefits paid from plan assets*	(1,210		)	(773	)	(378	)	(420	)
Effect of exchange rates	(540		)	(621	)	—		—
Plan assets at fair value — end of year	$	23,633		22,254		75		74
Funded status — end of year	$	(4,483	)	(3,601	)	(4,530	)	(4,595	)
Amounts Recognized in the Company’s Balance Sheet consist of the following:
Non-current assets	$	227		256		—		—
Current liabilities	(86		)	(77	)	(315	)	(324	)
Non-current liabilities	(4,624		)	(3,780	)	(4,215	)	(4,271	)
Total recognized in the consolidated balance sheet — end of year	$	(4,483	)	(3,601	)	(4,530	)	(4,595	)
Amounts Recognized in Accumulated Other Comprehensive Income consist of the following:
Net actuarial loss	$	7,749		6,501		1,804		2,013
Prior service cost (credit)	(12		)	34		(150	)	(185	)
Unrecognized net transition obligation	—			—		—		—
Total before tax effects	$	7,737		6,535		1,654		1,828

Accumulated Benefit Obligations — end of year	$	25,319		23,262

*In 2016, the Company offered a voluntary lump-sum payment option below a pre-determined threshold for certain eligible former employees who are vested participants of the U.S. Qualified Defined Benefit Pension Plan. The distribution of the lump-sums was substantially completed by the end of fiscal 2016. The amount distributed in 2016 was approximately $420 million. These distributions from the plan did not have a material impact on the Company’s financial position.



	Retirement Plans					Other Benefit Plans
(Dollars in Millions)	2016			2015		2016		2015
Amounts Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
Net periodic benefit cost	$	422		971		477		604
Net actuarial (gain) loss	1,965			(75	)	(72	)	(389	)
Amortization of net actuarial loss	(496		)	(745	)	(135	)	(201	)
Prior service cost (credit)	(48		)	60		—		—
Amortization of prior service (cost) credit	(1		)	(2	)	34		33
Effect of exchange rates	(218		)	(218	)	(1	)	(1	)
Total recognized in other comprehensive income, before tax	$	1,202		(980	)	(174	)	(558	)
Total recognized in net periodic benefit cost and other comprehensive income	$	1,624		(9	)	303		46

The Company plans to continue to fund its U.S. Qualified Plans to comply with the Pension Protection Act of 2006. International Plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently, the Company has several pension plans that are not funded.

In 2016, the Company contributed $501 million and $337 million to its U.S. and international pension plans, respectively.

The following table displays the funded status of the Company's U.S. Qualified & Non-Qualified pension plans and international funded and unfunded pension plans at December 31, 2016 and December 31, 2015, respectively:



	U.S. Plans									International Plans
	Qualified Plans					Non-Qualified Plans				Funded Plans				Unfunded Plans
(Dollars in Millions)	2016			2015		2016		2015		2016		2015		2016		2015
Plan Assets	$	16,057		15,113		—		—		7,576		7,141		—		—
Projected Benefit Obligation	16,336			15,280		1,905		1,675		9,502		8,542		373		358
Accumulated Benefit Obligation	14,759			13,876		1,568		1,411		8,663		7,661		329		314
Over (Under) Funded Status
Projected Benefit Obligation	$	(279	)	(167	)	(1,905	)	(1,675	)	(1,926	)	(1,401	)	(373	)	(358	)
Accumulated Benefit Obligation	1,298			1,237		(1,568	)	(1,411	)	(1,087	)	(520	)	(329	)	(314	)

Plans with accumulated benefit obligations in excess of plan assets have an accumulated benefit obligation, projected benefit obligation and plan assets of $8.8 billion, $9.9 billion and $5.6 billion, respectively, at the end of 2016, and $4.5 billion, $5.3 billion and $1.9 billion, respectively, at the end of 2015.

The following table displays the projected future benefit payments from the Company’s retirement and other benefit plans:



(Dollars in Millions)	2017		2018	2019	2020	2021	2022-2026
Projected future benefit payments
Retirement plans	$	897	908	958	1,010	1,081	6,416
Other benefit plans	$	325	315	311	307	304	1,465

The following table displays the projected future minimum contributions to the unfunded retirement plans. These amounts do not include any discretionary contributions that the Company may elect to make in the future.



(Dollars in Millions)	2017		2018	2019	2020	2021	2022-2026
Projected future contributions	$	83	84	89	94	100	610

Each pension plan is overseen by a local committee or board that is responsible for the overall administration and investment of the pension plans. In determining investment policies, strategies and goals, each committee or board considers factors including, local pension rules and regulations; local tax regulations; availability of investment vehicles (separate accounts, commingled accounts, insurance funds, etc.); funded status of the plans; ratio of actives to retirees; duration of liabilities; and other relevant factors including: diversification, liquidity of local markets and liquidity of base currency. A majority of the Company’s pension funds are open to new entrants and are expected to be on-going plans. Permitted investments are primarily liquid and/or listed, with little reliance on illiquid and non-traditional investments such as hedge funds.

The Company’s retirement plan asset allocation at the end of 2016 and 2015 and target allocations for 2017 are as follows:



	Percent of Plan Assets				Target Allocation
	2016		2015		2017
Worldwide Retirement Plans
Equity securities	75	%	79	%	73	%
Debt securities	25		21		27
Total plan assets	100	%	100	%	100	%

Determination of Fair Value of Plan Assets

The Plan has an established and well-documented process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves.

While the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Valuation Hierarchy

The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described in the table below with Level 1 having the highest priority and Level 3 having the lowest.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for the investments measured at fair value.

•

Short-term investments — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. Other investments are through investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in a market that is not active and classified as Level 2.

•

Government and agency securities — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. When quoted market prices for a security are not available in an active market, they are classified as Level 2.

•

Debt instruments — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. Where quoted prices are available in an active market, the investments are classified as Level 1. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. Level 3 debt instruments are priced based on unobservable inputs.


•	Equity securities — Common stocks are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all common stock is classified within Level 1 of the valuation hierarchy.


•	Commingled funds — These investment vehicles are valued using the NAV provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Assets in the Level 2 category have a quoted market price.

•

Insurance contracts — The instruments are issued by insurance companies. The fair value is based on negotiated value and the underlying investments held in separate account portfolios as well as considering the credit worthiness of the issuer. The underlying investments are government, asset-backed and fixed income securities. In general, insurance contracts are classified as Level 3 as there are no quoted prices nor other observable inputs for pricing.


•	Other assets — Other assets are represented primarily by limited partnerships and real estate investments, as well as commercial loans and commercial mortgages that are not classified as corporate debt. Other assets that are exchange listed and actively traded are classified as Level 1, while inactively traded assets are classified as Level 2.

The following table sets forth the Retirement Plans' investments measured at fair value as of December 31, 2016 and December 31, 2015:



	Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs		Significant Unobservable Inputs^(a)		Investments Measured at Net Asset Value^(b)
	(Level 1)			(Level 2)		(Level 3)				Total Assets
(Dollars in Millions)	2016		2015	2016	2015	2016	2015	2016	2015	2016	2015
Short-term investment funds	$	145	184	652	312	—	—	—	—	797	496
Government and agency securities	—		—	2,655	1,767	—	—	—	—	2,655	1,767
Debt instruments	—		—	1,237	1,050	—	1	—	—	1,237	1,051
Equity securities	11,433		11,317	12	11	—	—	—	—	11,445	11,328
Commingled funds	—		—	1,316	1,100	—	—	5,767	6,122	7,083	7,222
Insurance contracts	—		—	—	—	24	23	—	—	24	23
Other assets	—		—	—	107	—	—	392	260	392	367
Investments at fair value	$	11,578	11,501	5,872	4,347	24	24	6,159	6,382	23,633	22,254

^(a) The activity for the Level 3 assets is not significant for all years presented.

^(b) Per adoption of ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. As per ASU 2015-7 prior year amounts have been reclassified to conform to the current year presentation. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total retirement plan assets.

The Company's Other Benefit Plans are unfunded except for U.S. commingled funds (Level 2) of $75 million and $74 million at December 31, 2016 and December 31, 2015, respectively.

The fair value of Johnson & Johnson Common Stock directly held in plan assets was $847 million (3.6% of total plan assets) at December 31, 2016 and $751 million (3.4% of total plan assets) at December 31, 2015.