Retirement Plans

12 Months Ended

Jan. 04, 2020

Retirement Plans

Retirement Plans

Note 16. Retirement Plans

Our defined benefit and 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 $130 million, $125 million and $123 million in 2019, 2018 and 2017, respectively, which included $13 million in contributions to the RAP for each year. We also provide postretirement benefits other than pensions for certain retired employees in the U.S. that include healthcare, dental care, Medicare Part B reimbursement and life insurance.

Periodic Benefit Cost (Credit)

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

							Postretirement Benefits
	Pension Benefits						Other than Pensions
(In millions)	2019		2018		2017		2019		2018		2017
Net periodic benefit cost
Service cost	$	91	$	104	$	100	$	3	$	3	$	3
Interest cost		326		306		323		10		10		12
Expected return on plan assets		(556)		(553)		(507)		—		—		—
Amortization of prior service cost (credit)		14		15		15		(6)		(6)		(8)
Amortization of net actuarial loss (gain)		101		153		137		(2)		(1)		(1)
Net periodic benefit cost (credit)	$	(24)	$	25	$	68	$	5	$	6	$	6
Other changes in plan assets and benefit obligations recognized in OCI
Current year actuarial loss (gain)	$	207	$	270	$	(11)	$	11	$	(22)	$	(7)
Current year prior service cost		—		20		1		—		—		—
Amortization of net actuarial gain (loss)		(101)		(153)		(137)		2		1		1
Amortization of prior service credit (cost)		(14)		(15)		(15)		6		6		8
Business disposition		—		(7)		—		—		—		—
Total recognized in OCI, before taxes	$	92	$	115	$	(162)	$	19	$	(15)	$	2
Total recognized in net periodic benefit cost (credit) and OCI	$	68	$	140	$	(94)	$	24	$	(9)	$	8

In 2018, we adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This standard requires companies to present only the service cost component of net periodic benefit cost in operating income in the same line as other compensation costs arising from services rendered by the pertinent employees during the period.  The other non-service components of net periodic benefit cost must be presented separately from service cost and excluded from operating income.  In addition, only the service cost component is eligible for capitalization into inventory.  The change in the amount capitalized into inventory was applied prospectively. Using a practical expedient, the other non-service components of net periodic benefit cost (credit) previously disclosed of $(29) million for 2017 was reclassified from Cost of sales and Selling and administrative expense to Non-service components of pension and postretirement income, net in the Consolidated Statements of Operations.

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:

					Postretirement Benefits
	Pension Benefits				Other than Pensions
(In millions)	2019		2018		2019		2018
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	7,901	$	8,563	$	250	$	289
Service cost		91		104		3		3
Interest cost		326		306		10		10
Plan participants’ contributions		—		—		5		5
Actuarial losses (gains)		1,001		(615)		11		(22)
Benefits paid		(421)		(422)		(33)		(35)
Plan amendment		—		20		—		—
Business disposition		—		(15)		—		—
Foreign exchange rate changes and other		40		(40)		—		—
Projected benefit obligation at end of year	$	8,938	$	7,901	$	246	$	250
Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	7,122	$	7,877
Actual return on plan assets		1,350		(335)
Employer contributions		38		39
Benefits paid		(421)		(422)
Foreign exchange rate changes and other		40		(37)
Fair value of plan assets at end of year	$	8,129	$	7,122
Funded status at end of year	$	(809)	$	(779)	$	(246)	$	(250)

Actuarial losses (gains) reflected in the table above for both 2019 and 2018 were largely the result of changes in the discount rate utilized.

Amounts recognized in our balance sheets are as follows:

					Postretirement Benefits
	Pension Benefits				Other than Pensions
(In millions)	2019		2018		2019		2018
Non-current assets	$	152	$	112	$	—	$	—
Current liabilities		(27)		(27)		(26)		(28)
Non-current liabilities		(934)		(864)		(220)		(222)
Recognized in Accumulated other comprehensive loss, pre-tax:
Net loss (gain)		2,271		2,157		(21)		(34)
Prior service cost (credit)		55		69		(20)		(27)

The accumulated benefit obligation for all defined benefit pension plans was $8.5 billion and $7.5 billion at January 4, 2020 and December 29, 2018, respectively, which included $404 million and $369 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 obligation exceeding the fair value of plan assets are as follows:

(In millions)	2019		2018
Accumulated benefit obligation	$	8,050	$	7,137
Fair value of plan assets		7,500		6,589

Pension plans with projected benefit obligation exceeding the fair value of plan assets are as follows:

(In millions)	2019		2018
Projected benefit obligation	$	8,462	$	7,481
Fair value of plan assets		7,500		6,589

Assumptions

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

							Postretirement Benefits
	Pension Benefits						Other than Pensions
	2019		2018		2017		2019		2018		2017
Net periodic benefit cost
Discount rate	4.24	%	3.67	%	4.13	%	4.25	%	3.50	%	4.00	%
Expected long-term rate of return on assets	7.55	%	7.58	%	7.57	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%
Benefit obligations at year-end
Discount rate	3.36	%	4.24	%	3.66	%	3.20	%	4.25	%	3.50	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%
Interest crediting rate for cash balance plans	5.25	%	5.25	%	5.25	%

Our assumed healthcare cost trend rate for both the medical and prescription drug cost was 7.00% in both 2019 and 2018. We expect this rate to gradually decline to 5% by 2024 where we assume it will remain.

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 that will be 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	17	%	to	33	%
International equity securities	8	%	to	19	%
Global equities	5	%	to	17	%
Debt securities	27	%	to	38	%
Real estate	7	%	to	13	%
Private investment partnerships	5	%	to	11	%
Non-U.S. Plan Assets
Equity securities	51	%	to	75	%
Debt securities	25	%	to	45	%
Real estate	0	%	to	13	%

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

	January 4, 2020								December 29, 2018
(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	$	18	$	12	$	—	$	174	$	19	$	19	$	—	$	113
Equity securities:
Domestic		1,257		—		—		1,160		1,256		—		—		828
International		929		—		—		780		835		—		—		450
Mutual funds		176		—		—		—		266		—		—		—
Debt securities:
National, state and local governments		414		308		—		56		366		290		—		53
Corporate debt		14		1,062		—		240		—		908		—		220
Asset-backed securities		—		—		—		18		—		—		—		104
Private investment partnerships		—		—		—		745		—		—		—		650
Real estate		—		—		473		293		—		—		460		285
Total	$	2,808	$	1,382	$	473	$	3,466	$	2,742	$	1,217	$	460	$	2,703

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 represents 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 private investment nor real estate partnerships are 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)	2019		2018
Balance at beginning of year	$	460	$	460
Unrealized gains, net		7		13
Realized gains, net		5		12
Purchases, sales and settlements, net		1		(25)
Balance at end of year	$	473	$	460

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 2020, we expect to contribute approximately $50 million to 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 2019. 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)	2020		2021		2022		2023		2024		2025-2029
Pension benefits	$	426	$	433	$	441	$	450	$	460	$	2,426
Postretirement benefits other than pensions		26		25		24		23		22		88