Note 11. Retirement Plans

Our defined benefit and defined contribution plans cover substantially all of our employees. A significant number of our U.S.-based employees participate in the Textron Retirement Plan, which is designed to be a “floor-offset” arrangement with both a defined benefit component and a defined contribution component. The defined benefit component of the arrangement includes the Textron Master Retirement Plan (TMRP) and the Bell Helicopter Textron Master Retirement Plan (BHTMRP), and the defined contribution component is the Retirement Account Plan (RAP). The defined benefit component provides a minimum guaranteed benefit (or “floor” benefit). Under the RAP, participants are eligible to receive contributions from Textron of 2% of their eligible compensation but may not make contributions to the plan. Upon retirement, participants receive the greater of the floor benefit or the value of the RAP. Both the TMRP and the BHTMRP are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective on January 1, 2010, the Textron Retirement Plan was closed to new participants, and employees hired after that date receive an additional 4% annual cash contribution to their Textron Savings Plan account based on their eligible compensation.

We also have other funded and unfunded defined benefit pension plans that cover certain of our U.S. and Non-U.S. employees. In addition, several defined contribution plans are sponsored by our various businesses, of which the largest plan is the Textron Savings Plan, which is a qualified 401(k) plan subject to ERISA. Our defined contribution plans cost approximately $110 million, $103 million and $99 million in 2016, 2015 and 2014, respectively; these amounts include $10 million, $12 million and $16 million, respectively, in contributions to the RAP. We also provide postretirement benefits other than pensions for certain retired employees in the U.S., which include healthcare, dental care, Medicare Part B reimbursement and life insurance benefits.

Periodic Benefit Cost

The components of net periodic benefit cost and other amounts recognized in OCI are as follows:

	Pension Benefits						Postretirement Benefits Other than Pensions
(In millions)		2016		2015		2014		2016		2015		2014
Net periodic benefit cost
Service cost	$	98	$	113	$	109	$	3	$	4	$	4
Interest cost		338		327		334		16		15		19
Expected return on plan assets		(490)		(483)		(462)		—		—		—
Amortization of prior service cost (credit)		15		16		15		(22)		(25)		(23)
Amortization of net actuarial loss		104		148		112		—		2		2
Curtailment and other charges		—		6		—		—		—		—

Net periodic benefit cost (credit)	$	65	$	127	$	108	$	(3)	$	(4)	$	2

Other changes in plan assets and benefit obligations recognized in OCI
Current year actuarial loss (gain)	$	399	$	(107)	$	729	$	(17)	$	(29)	$	5
Current year prior service cost (credit)		—		—		12		(12)		—		(30)
Amortization of net actuarial loss		(104)		(148)		(112)		—		(2)		(2)
Amortization of prior service credit (cost)		(15)		(18)		(15)		22		25		23

Total recognized in OCI, before taxes	$	280	$	(273)	$	614	$	(7)	$	(6)	$	(4)

Total recognized in net periodic benefit cost and OCI	$	345	$	(146)	$	722	$	(10)	$	(10)	$	(2)

The estimated amount that will be amortized from Accumulated other comprehensive loss into net periodic pension costs in 2017 is as follows:

(In millions)		Pension Benefits		Postretirement Benefits Other than Pensions
Net actuarial loss (gain)	$	137	$	(1)
Prior service cost (credit)		15		(8)

Total	$	152	$	(9)

Obligations and Funded Status

All of our plans are measured as of our fiscal year-end. The changes in the projected benefit obligation and in the fair value of plan assets, along with our funded status, are as follows:

	Pension Benefits				Postretirement Benefits Other than Pensions
(In millions)		2016		2015		2016		2015
Change in benefit obligation
Benefit obligation at beginning of year	$	7,476	$	8,006	$	364	$	413
Service cost		98		113		3		4
Interest cost		338		327		16		15
Plan participants’ contributions		—		—		5		5
Actuarial losses (gains)		571		(470)		(17)		(29)
Benefits paid		(410)		(423)		(42)		(44)
Plan amendment		—		—		(12)		—
Curtailments and special termination benefits		(7)		(4)		—		—
Foreign exchange rate changes and other		(75)		(73)		—		—

Benefit obligation at end of year	$	7,991	$	7,476	$	317	$	364

Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	6,668	$	6,979
Actual return on plan assets		655		113
Employer contributions		40		55
Benefits paid		(410)		(423)
Foreign exchange rate changes and other		(79)		(56)

Fair value of plan assets at end of year	$	6,874	$	6,668

Funded status at end of year	$	(1,117)	$	(808)	$	(317)	$	(364)

Amounts recognized in our balance sheets are as follows:

	Pension Benefits				Postretirement Benefits Other than Pensions
(In millions)		2016		2015		2016		2015
Non-current assets	$	63	$	73	$	—	$	—
Current liabilities		(26)		(26)		(35)		(40)
Non-current liabilities		(1,154)		(855)		(282)		(324)
Recognized in Accumulated other comprehensive loss, pre-tax:
Net loss		2,187		1,915		(8)		9
Prior service cost (credit)		78		92		(40)		(50)

The accumulated benefit obligation for all defined benefit pension plans was $7.6 billion and $7.1 billion at December 31, 2016 and January 2, 2016, respectively, which included $387 million and $371 million, respectively, in accumulated benefit obligations for unfunded plans where funding is not permitted or in foreign environments where funding is not feasible.

Pension plans with accumulated benefit obligations exceeding the fair value of plan assets are as follows:

(In millions)		2016		2015
Projected benefit obligation	$	7,799	$	2,881
Accumulated benefit obligation		7,422		2,708
Fair value of plan assets		6,627		2,091

Assumptions

The weighted-average assumptions we use for our pension and postretirement plans are as follows:

	Pension Benefits				Postretirement Benefits Other than Pensions
		2016	2015	2014		2016	2015	2014
Net periodic benefit cost
Discount rate		4.66%	4.25%	4.92%		4.50%	4.00%	4.50%
Expected long-term rate of return on assets		7.58%	7.57%	7.60%
Rate of compensation increase		3.49%	3.49%	3.50%
Benefit obligations at year-end
Discount rate		4.13%	4.66%	4.18%		4.00%	4.50%	4.00%
Rate of compensation increase		3.50%	3.49%	3.49%

Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 7.25% in 2016 and 7.50% in 2015. We expect this rate to gradually decline to 5.0% by 2024 where we assume it will remain. These assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefits other than pensions. A one-percentage-point change in these assumed healthcare cost trend rates would have the following effects:

(In millions)		One- Percentage- Point Increase		One- Percentage- Point Decrease
Effect on total of service and interest cost components	$	1	$	(1)
Effect on postretirement benefit obligations other than pensions		14		(12)

Pension Assets

The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We invest our pension assets with the objective of achieving a total rate of return, over the long term, sufficient to fund future pension obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. Where possible, investment managers are prohibited from owning our securities in the portfolios that they manage on our behalf.

For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our investment objectives, and the assets are rebalanced periodically. For Non-U.S. plan assets, allocations are based on expected cash flow needs and assessments of the local practices and markets. Our target allocation ranges are as follows:

U.S. Plan Assets
Domestic equity securities		20% to 35%
International equity securities		8% to 19%
Global equities		0% to 12%
Debt securities		27% to 38%
Real estate		7% to 13%
Private investment partnerships		5% to 11%
Hedge funds		0% to 5%
Non-U.S. Plan Assets
Equity securities		51% to 74%
Debt securities		26% to 46%
Real estate		3% to 15%

The fair value of our pension plan assets by major category and valuation method is as follows:

		December 31, 2016								January 2, 2016
(In millions)		Level 1		Level 2		Level 3		Not Subject to Leveling		Level 1		Level 2		Level 3		Not Subject to Leveling
Cash and equivalents	$	26	$	8	$	—	$	156	$	27	$	11	$	—	$	173
Equity securities:
Domestic		1,262		—		—		618		1,252		—		—		595
International		773		—		—		510		812		—		—		360
Mutual funds		309		—		—		—		251		—		—		—
Debt securities:
National, state and local governments		341		246		—		44		410		314		—		43
Corporate debt		—		769		—		121		—		752		—		126
Asset-backed securities		—		45		—		100		—		92		—		—
Real estate		—		—		494		292		—		—		436		322
Private investment partnerships		—		—		—		506		—		—		—		441
Hedge funds		—		—		—		254		—		—		—		251

Total	$	2,711	$	1,068	$	494	$	2,601	$	2,752	$	1,169	$	436	$	2,311

In 2016, we adopted ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which removed the requirement to categorize within the fair value hierarchy, as defined in Note 8, investments for which fair value is measured using the net asset value per share practical expedient. As a result, to conform with the current year presentation, pension assets totaling $2.3 billion at January 2, 2016 have been reclassified from the Level 2 and 3 categories as they are no longer subject to leveling within the fair value hierarchy.

Cash and equivalents, equity securities and debt securities include comingled funds, which represent investments in funds offered to institutional investors that are similar to mutual funds in that they provide diversification by holding various equity and debt securities. Since these comingled funds are not quoted on any active market, they are priced based on the relative value of the underlying equity and debt investments and their individual prices at any given time; these funds are not subject to leveling within the fair value hierarchy. Debt securities are valued based on same day actual trading prices, if available. If such prices are not available, we use a matrix pricing model with historical prices, trends and other factors.

Private investment partnerships represent interests in funds which invest in equity, debt and other financial assets. These funds are generally not publicly traded so the interests therein are valued using income and market methods that include cash flow projections and market multiples for various comparable investments. Real estate includes owned properties and limited partnership interests in real estate partnerships. Owned properties are valued using certified appraisals at least every three years that are updated at least annually by the real estate investment manager based on current market trends and other available information. These appraisals generally use the standard methods for valuing real estate, including forecasting income and identifying current transactions for comparable real estate to arrive at a fair value. Limited partnership interests in real estate partnerships are valued similarly to private investment partnerships, with the general partner using standard real estate valuation methods to value the real estate properties and securities held within their portfolios. Neither real estate partnerships nor private investment partnerships are subject to leveling within the fair value hierarchy.

Hedge funds represent an investment in a diversified fund of hedge funds of which we are the sole investor. The fund invests in portfolio funds that are not publicly traded and are managed by various portfolio managers. Investments in portfolio funds are typically valued on the basis of the most recent price or valuation provided by the fund’s administrator. The administrator for the fund aggregates these valuations with the other assets and liabilities to calculate the value of the fund, which is not subject to leveling within the fair value hierarchy.

The table below presents a reconciliation of the fair value measurements for owned real estate properties, which use significant unobservable inputs (Level 3):

(In millions)		2016		2015
Balance at beginning of year	$	436	$	436
Unrealized gains, net		6		46
Realized gains (losses), net		10		(17)
Purchases, sales and settlements, net		42		(29)

Balance at end of year	$	494	$	436

Estimated Future Cash Flow Impact

Defined benefits under salaried plans are based on salary and years of service. Hourly plans generally provide benefits based on stated amounts for each year of service. Our funding policy is consistent with applicable laws and regulations. In 2017, we expect to contribute approximately $55 million to fund our pension plans and the RAP. Benefit payments provided below reflect expected future employee service, as appropriate, and are expected to be paid, net of estimated participant contributions. These payments are based on the same assumptions used to measure our benefit obligation at the end of 2016. While pension benefit payments primarily will be paid out of qualified pension trusts, we will pay postretirement benefits other than pensions out of our general corporate assets. Benefit payments that we expect to pay on an undiscounted basis are as follows:

(In millions)		2017		2018		2019		2020		2021		2022-2026
Pension benefits	$	407	$	411	$	417	$	425	$	434	$	2,290
Post-retirement benefits other than pensions		36		34		32		31		29		120