RETIREMENT PLANS

Defined Contribution Plans

We provide certain employees with defined contribution plans and other types of retirement plans. A portion of our retirement plan expense under the defined contribution plans is funded with Stryker common stock. The use of Stryker common stock represents a non-cash operating activity that is not reflected in our Consolidated Statements of Cash Flows.



	2016			2015			2014
Plan expense	$	166		$	148		$	132
Expense funded with Stryker common stock	22			20			18
Stryker common stock held by plan:
Dollar amount	272			203			198
Shares (in millions)	2.3			2.2			2.1
Value as a percentage of total plan assets	11		%	11		%	11		%

Defined Benefit Plans

Certain of our subsidiaries have both funded and unfunded defined benefit pension plans covering some or all of their employees. Substantially all of the defined benefit pension plans have projected benefit obligations in excess of plan assets.

Discount Rate

The discount rates were selected using a hypothetical portfolio of high quality bonds on December 31 that would provide the necessary cash flows to match our projected benefit payments. Effective January 1, 2017, in countries where it was possible, we elected to change the method to calculate the service cost and interest cost components of net periodic benefit costs for our defined benefit plans and will measure these costs by applying the specific spot rates along the yield curve of the projected cash flows for the respective plans. Our defined benefit plans previously utilized the yield curve approach to establish discount rates and we believe the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of our total benefit obligations for those plans and is accounted for as a change in accounting estimate inseparable from a change in accounting principle, which is applied prospectively. The reductions in service and interest costs for 2017 associated with this change in estimate are nominal.

Expected Return on Plan Assets

The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns.



Components of Net Periodic Pension Cost
Net periodic benefit cost:	2016			2015			2014
Service cost	$	(33	)	$	(36	)	$	(26	)
Interest cost	(11		)	(10		)	(13		)
Expected return on plan assets	10			11			10
Amortization of prior service cost and transition amount	1			1			1
Recognized actuarial loss	(9		)	(13		)	(7		)
Net periodic benefit cost	$	(42	)	$	(47	)	$	(35	)

Changes in assets and benefit obligations recognized in OCI:
Net actuarial (loss) gain	$	(26	)	$	26		$	(88	)
Recognized net actuarial loss	9			13			7
Prior service cost and transition amount	1			(1		)	4
Total recognized in OCI	$	(16	)	$	38		$	(77	)
Total recognized in net periodic benefit cost and OCI	$	(58	)	$	(9	)	$	(112	)

Weighted-average rates used to determine net periodic benefit cost:
Discount rate	2.1		%	2.0		%	3.2		%
Expected return on plan assets	3.6		%	4.0		%	3.7		%
Rate of compensation increase	2.3		%	2.9		%	2.9		%
Weighted-average discount rate used to determine projected benefit obligations	1.8		%	2.1		%	2.0		%

Investment Strategy

The investment strategy for our defined benefit pension plans is to meet the liabilities of the plans as they fall due and to maximize the return on invested assets within appropriate risk tolerances.



	2016			2015
Fair value of plan assets	$	308		$	289
Benefit obligations	(588		)	(529		)
Funded status	$	(280	)	$	(240	)
Reported as:
Current liabilities—accrued compensation	$	(1	)	$	(1	)
Noncurrent liabilities—other liabilities	(279		)	(239		)
Pre-tax amounts recognized in AOCI:
Unrecognized net actuarial loss	(171		)	(155		)
Unrecognized prior service cost	11			13
Total	$	(160	)	$	(142	)

The estimated net actuarial loss for the defined benefit pension plans to be reclassified from AOCI into net periodic benefit cost is $8 in 2017. We estimate that an immaterial amount of amortization of prior service cost and transition amount for the defined benefit pension plans will be reclassified from AOCI into net periodic benefit cost in 2017.



Change in Benefit Obligations
	2016			2015
Beginning projected benefit obligations	$	529		$	570
Service cost	33			36
Interest cost	11			10
Foreign exchange impact	(18		)	(43		)
Employee contributions	6			6
Actuarial losses (gains)	40			(21		)
Acquisition	7			—
Benefits paid	(20		)	(29		)
Ending projected benefit obligations	$	588		$	529
Ending accumulated benefit obligations	$	560		$	505



Change in Plan Assets
	2016			2015
Beginning fair value of plan assets	$	289		$	310
Actual return	20			2
Employer contributions	18			16
Employee contributions	6			6
Foreign exchange impact	(9		)	(18		)
Acquisition	2			—
Benefits paid	(18		)	(27		)
Ending fair value of plan assets	$	308		$	289



Allocation of Plan Assets
	2016 Target		2016 Actual		2015 Actual
Equity securities	28	%	28	%	31	%
Debt securities	50		50		48
Other	22		22		21
Total	100	%	100	%	100	%



Valuation of Plan Assets
2016	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	7	$	—	$	—	$	7
Equity securities	83		17		—		100
Corporate debt securities	127		—		—		127
Other	23		13		38		74
Total	$	240	$	30	$	38	$	308
2015
Cash and cash equivalents	$	6	$	—	$	—	$	6
Equity securities	67		22		—		89
Corporate debt securities	135		—		—		135
Other	19		9		31		59
Total	$	227	$	31	$	31	$	289

Our Level 3 pension plan assets (Refer to Note 2 for an explanation of our fair value hierarchy) consist primarily of guaranteed investment contracts with insurance companies. The insurance contracts guarantee us principal repayment and a fixed rate of return. The $7 increase in Level 3 pension plan assets is primarily related to actual returns and acquired assets. We expect to contribute $20 to our defined benefit pension plans in 2017.



Estimated Future Benefit Payments
2017		2018		2019		2020		2021		2022-2026
$	16	$	14	$	14	$	14	$	14	$	80