PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Oct. 31, 2021

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

8. PENSION AND OTHER POSTRETIREMENT BENEFITS

The company has several funded and unfunded defined benefit pension plans and other postretirement benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries. The company uses an October 31 measurement date for these plans.

The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percentages:

	2021		2020		2019
Pensions
Service cost	$	332	$	321	$	261
Interest cost		276		347		447
Expected return on plan assets		(799)		(819)		(802)
Amortization of actuarial loss		259		256		148
Amortization of prior service cost		12		13		11
Settlements/curtailments		21		25		5
Net cost	$	101	$	143	$	70
Weighted-average assumptions
Discount rates - service cost		2.5%		2.9%		4.0%
Discount rates - interest cost		2.1%		2.7%		4.0%
Rate of compensation increase		3.7%		3.8%		3.8%
Expected long-term rates of return		6.0%		6.4%		6.5%
Interest crediting rate - U.S. cash balance plan		1.7%		2.1%		3.3%

The components of net periodic OPEB cost and the assumptions related to the cost consisted of the following in millions of dollars and in percentages:

	2021		2020		2019
OPEB
Service cost	$	48	$	49	$	41
Interest cost		102		140		216
Expected return on plan assets		(77)		(50)		(36)
Amortization of actuarial loss		27		29		16
Amortization of prior service credit		(4)		(4)		(72)
Curtailments				34
Net cost	$	96	$	198	$	165
Weighted-average assumptions
Discount rates - service cost		3.4%		3.7%		4.8%
Discount rates - interest cost		2.1%		2.7%		4.2%
Expected long-term rates of return		5.4%		5.7%		5.7%

The 2020 OPEB curtailments were a result of the employee-separation programs (see Note 5).

The spot yield curve approach is used to estimate the service and interest cost components of the net periodic pension and OPEB costs by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. The components of net periodic pension and OPEB cost excluding the service component are primarily included in the line item “Other operating expenses” in the statement of consolidated income.

The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

	2021		2020		2019
Pensions
Net cost	$	101	$	143	$	70
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss		(2,821)		438		887
Amortization of actuarial loss		(256)		(249)		(143)
Amortization of prior service cost		(12)		(11)		(11)
Settlements		(22)		(26)		(3)
Total (gain) loss recognized in other comprehensive (income) loss		(3,111)		152		730
Total recognized in comprehensive (income) loss	$	(3,010)	$	295	$	800

The previous OPEB cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

	2021		2020		2019
OPEB
Net cost	$	96	$	198	$	165
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial (gain) loss		(671)		(136)		141
Amortization of actuarial loss		(27)		(29)		(16)
Amortization of prior service credit		4		4		72
Total (gain) loss recognized in other comprehensive (income) loss		(694)		(161)		197
Total recognized in comprehensive (income) loss	$	(598)	$	37	$	362

The benefit plan obligations, funded status, and the assumptions related to the obligations at October 31, 2021 and November 1, 2020, respectively, in millions of dollars follow:

	Pensions				OPEB
	2021		2020		2021		2020
Change in benefit obligations
Beginning of year balance	$	(15,021)	$	(14,250)	$	(5,410)	$	(5,622)
Service cost		(332)		(321)		(48)		(49)
Interest cost		(276)		(347)		(102)		(140)
Actuarial gain (loss)		373		(771)		381		119
Benefits paid		755		749		290		297
Health care subsidies						(29)		(28)
Settlements/curtailments		1		15
Foreign exchange and other		(25)		(96)		(12)		13
End of year balance		(14,525)		(15,021)		(4,930)		(5,410)
Change in plan assets (fair value)
Beginning of year balance		14,574		14,024		1,518		936
Actual return on plan assets		3,249		1,144		367		33
Employer contribution		101		108		157		843
Benefits paid		(755)		(749)		(290)		(297)
Settlements				(12)
Foreign exchange and other		21		59		3		3
End of year balance		17,190		14,574		1,755		1,518
Funded status	$	2,665	$	(447)	$	(3,175)	$	(3,892)
Weighted-average assumptions
Discount rates		2.7%		2.5%		2.8%		2.7%
Rate of compensation increase		3.7%		3.7%
Interest crediting rate - U.S. cash balance plan		1.8%		1.7%

The company remeasured the U.S. hourly pension plan as of November 30, 2021 due to the new collective bargaining agreement, which decreased the plan’s funded status and increased pension expense in 2022. See Note 29 for more information.

The actuarial gain for pension for 2021 was primarily due to an increase in discount rates. The actuarial gain for OPEB for 2021 was primarily due to a decrease in health care trend rates, favorable mortality assumptions, and an increase in discount rates. The actuarial loss for pension for 2020 was primarily due to a decrease in discount rates partially offset by favorable mortality

assumptions. The actuarial gain for OPEB for 2020 was primarily due to the U.S. enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that repealed the health insurance provider fee effective in 2021, favorable mortality assumptions, and a decrease in health care trend rates, partially offset by a decrease in discount rates.

The mortality assumptions for the 2021 and 2020 benefit plan obligations used the most recent tables and scales issued by the Society of Actuaries at that time. The 2021 mortality assumption includes an adjustment to the scale related to COVID.

The amounts recognized at October 31, 2021 and November 1, 2020, respectively, in millions of dollars consisted of the following:

	Pensions				OPEB
	2021		2020		2021		2020
Amounts recognized in balance sheet
Noncurrent asset	$	3,601	$	863
Current liability		(51)		(72)	$	(36)	$	(36)
Noncurrent liability		(885)		(1,238)		(3,139)		(3,856)
Total	$	2,665	$	(447)	$	(3,175)	$	(3,892)
Amounts recognized in accumulated other comprehensive income – pretax
Net actuarial loss	$	1,376	$	4,475	$	49	$	747
Prior service cost (credit)		9		21		(20)		(24)
Total	$	1,385	$	4,496	$	29	$	723

The total accumulated benefit obligations for all pension plans at October 31, 2021 and November 1, 2020, were $13,787 million and $14,257 million, respectively.

The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $2,012 million and $1,207 million, respectively, at October 31, 2021 and $2,107 million and $1,100 million, respectively, at November 1, 2020. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $2,163 million and $1,227 million, respectively, at October 31, 2021 and $10,792 million and $9,482 million, respectively, at November 1, 2020.

Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). To the extent unamortized gains and losses exceed 10 percent of the higher of the market-related value of assets or the benefit obligation, the excess is amortized as a component of net periodic cost over the remaining service period of the active participants. For plans in which all or almost all of the plan’s participants are inactive, the amortization period is the remaining life expectancy of the inactive participants.

The company makes any required contributions to the plan assets under applicable regulations and voluntary contributions after evaluating the company’s liquidity position and ability to make tax-deductible contributions. Total company contributions to the plans were $258 million in 2021 and $951 million in 2020, which included both required and voluntary contributions and direct benefit payments. The voluntary contributions to plan assets were $700 million in 2020.

The company expects to contribute approximately $100 million to its pension plans and approximately $1,150 million to its OPEB plans in 2022. Fiscal year 2022 OPEB contributions include a voluntary contribution of $1,000 million to a U.S. plan made on November 30, 2021 (see Note 29), which will increase plan assets. The pension and OPEB contributions exceeding the voluntary amounts primarily include direct benefit payments from company funds. The company has no significant required contributions to U.S. pension plan assets in 2022 under applicable funding regulations.

The benefits expected to be paid from the benefit plans, which reflect expected future years of service, are as follows in millions of dollars:

	Pensions		OPEB*
2022	$	730	$	280
2023		710		279
2024		701		279
2025		693		278
2026		698		278
2027 to 2031		3,426		1,374

*       Net of prescription drug group benefit subsidy under Medicare Part D.

The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. For the 2021 obligation, the weighted-average composite trend rates were assumed to be a 2.1 percent increase from 2021 to 2022, followed by an increase of 8.4 percent from 2022 to 2023, gradually decreasing to 4.7 from 2028 to 2029 and all future years. The lower estimated increase from 2021 to 2022 resulted from a decrease in Medicare Advantage premiums. The 2020 obligations and the cost in 2021 assumed a 4.0 percent increase from 2020 to 2021, followed by an increase of 7.6 percent from 2021 to 2022, gradually decreasing to 4.7 percent from 2027 to 2028 and all future years. The lower estimated increase from 2020 to 2021 resulted from the SECURE Act that repealed the health insurance provider fee effective in 2021.

The discount rate assumptions used to determine the pension and OPEB obligations for all periods presented were primarily based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company’s benefit obligations could effectively be settled at the October 31 measurement dates.

Fair value measurement levels in the following tables are defined in Note 26.

The fair values of the pension plan assets at October 31, 2021 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	378	$	355	$	23
Equity:
U.S. equity securities		1,151		1,123		28
International equity securities and funds		951		931		20
Fixed Income:
Government and agency securities		1,475		1,159		316
Corporate debt securities		4,841				4,841
Mortgage-backed securities		144				144
Real estate investment trusts		62		55		7
Derivative contracts - assets		116		37		79
Derivative contracts - liabilities		(75)		(15)		(60)
Receivables, payables, and other		(155)		(177)		22
Securities lending collateral		982		107		875
Securities lending liability		(982)		(107)		(875)
Securities sold short		(139)		(128)		(11)
Total of Level 1 and Level 2 assets		8,749	$	3,340	$	5,409
Investments at net asset value:
Short-term investments		815
U.S. equity funds		796
International equity funds		528
Fixed income funds		1,701
Real estate funds		566
Hedge funds		751
Private equity		1,385
Venture capital		1,537
Other investments		362
Total net assets	$	17,190

The fair values of the health care assets at October 31, 2021 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	55	$	55
Equity securities and funds		30		29	$	1
Fixed Income:
Government and agency securities		243		215		28
Corporate debt securities		307				307
Mortgage-backed securities		10				10
Securities lending collateral		64		20		44
Securities lending liability		(64)		(20)		(44)
Securities sold short		(3)		(3)
Total of Level 1 and Level 2 assets		642	$	296	$	346
Investments at net asset value:
Short-term investments		20
U.S. equity funds		619
International equity funds		358
Fixed income funds		18
Real estate funds		42
Hedge funds		13
Private equity		18
Venture capital		20
Other investments		5
Total net assets	$	1,755

The fair values of the pension plan assets at November 1, 2020 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	309	$	276	$	33
Equity:
U.S. equity securities		1,184		1,135		49
International equity securities		947		937		10
Fixed Income:
Government and agency securities		1,133		824		309
Corporate debt securities		3,534				3,534
Mortgage-backed securities		136				136
Real estate investment trusts		49		48		1
Derivative contracts - assets		94		2		92
Derivative contracts - liabilities		(79)		(43)		(36)
Receivables, payables, and other		(163)		(184)		21
Securities lending collateral		449		90		359
Securities lending liability		(449)		(90)		(359)
Securities sold short		(149)		(144)		(5)
Total of Level 1 and Level 2 assets		6,995	$	2,851	$	4,144
Investments at net asset value:
Short-term investments		510
U.S. equity funds		1,246
International equity funds		674
Fixed income funds		1,321
Real estate funds		618
Hedge funds		750
Private equity		1,064
Venture capital		974
Other investments		422
Total net assets	$	14,574

The fair values of the health care assets at November 1, 2020 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	117	$	117
Equity securities and funds		44		43	$	1
Fixed Income:
Government and agency securities		180		168		12
Corporate debt securities		66				66
Mortgage-backed securities		13				13
Other		(1)		(1)
Securities lending collateral		49		8		41
Securities lending liability		(49)		(8)		(41)
Securities sold short		(3)		(3)
Total of Level 1 and Level 2 assets		416	$	324	$	92
Investments at net asset value:
Short-term investments		9
U.S. equity funds		539
International equity funds		320
Fixed income funds		185
Hedge funds		12
Private equity		13
Venture capital		12
Other investments		12
Total net assets	$	1,518

Investments at net asset value in the preceding tables are measured at fair value using the net asset value per share practical expedient and are not classified in the fair value hierarchy.

Fair values are determined as follows:

Cash and Short-Term Investments – The investments include (1) cash accounts that are valued based on the account value, which approximates fair value; (2) investments that are valued at quoted prices in the active markets in which the investment trades or using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data; and (3) investment funds that are valued based on a constant fund net asset value (NAV), which is based on quoted prices in the active market in which the investment fund trades, or the fund’s NAV using the NAV per share practical expedient, which is based on the fair value of the underlying securities.

Equity Securities and Funds – The values are determined by quoted prices in the active market in which the equity investment trades, or the fund’s NAV, based on the fair value of the underlying securities.

Fixed Income Securities and Funds and Other Funds – The securities are valued using either a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds, or they are valued using the quoted prices in the active market in which the fixed income investment trades. Fixed income and other funds are valued using the fund’s NAV, based on the fair value of the underlying securities.

Real Estate, Venture Capital, Private Equity, and Hedge Funds – The investments that are structured as limited partnerships are valued at estimated fair value based on their proportionate share of the limited partnership’s fair value that is determined by the respective general partner. These investments are valued using the fund’s NAV, which is based on the fair value of the underlying investments. Real estate investment trusts are primarily valued at the quoted prices in the active markets in which the investment trades.

Derivative Instruments – The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (quoted prices in the active market in which the derivative instrument trades).

The primary investment objective for the pension and health care plans assets is to fulfill the projected obligations to the beneficiaries over a long period of time, while meeting the company’s fiduciary responsibilities. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the company’s long-term asset class risk/return expectations for each plan since the obligations are long-term in nature. The current target allocations for pension assets are approximately 26 percent for equity, 55 percent for debt, 4 percent for real estate, and 15 percent for other investments. The target allocations for health care assets are approximately 58 percent for equity, 35 percent for debt, 2 percent for real estate, and 5 percent for other

investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company’s diversified investment policy, there were no significant concentrations of risk.

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. A market related value of plan assets is used to calculate the expected return on assets. The market related value recognizes changes in the fair value of pension plan assets systematically over a five-year period. The market related value of the health care plan assets equals fair value. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation, and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed significantly unless there are fundamental changes in capital markets that affect the company’s expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company’s U.S. pension fund was approximately 11.0 percent during the past ten years and approximately 9.3 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not necessarily indicative of long-term future expected returns. The company’s systematic methodology for determining the long-term rate of return for the company’s investment strategies supports its long-term expected return assumptions.

The company has created certain Voluntary Employees’ Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company’s pension plan trust.

The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company’s contributions and costs under these plans were $207 million in 2021, $160 million in 2020, and $192 million in 2019. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.