PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Oct. 30, 2022

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

7. 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.

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 included in the line item “Other operating expenses” in the statements of consolidated income.

The company’s U.S. salaried pension plan will be closed to new entrants effective January 1, 2023. Certain participants will have the opportunity to make a one-time election in 2023 to freeze their defined benefit pension plan benefit for an enhanced defined contribution benefit.

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:

	2022		2021		2020
Pensions
Service cost	$	349	$	332	$	321
Interest cost		330		276		347
Expected return on plan assets		(726)		(799)		(819)
Amortization of actuarial loss		132		259		256
Amortization of prior service cost		34		12		13
Settlements/curtailments		45		21		25
Net cost	$	164	$	101	$	143
Weighted-average assumptions
Discount rates - service cost		3.0%		2.5%		2.9%
Discount rates - interest cost		2.6%		2.1%		2.7%
Rate of compensation increase		3.7%		3.7%		3.8%
Expected long-term rates of return		5.1%		6.0%		6.4%
Interest crediting rate - U.S. cash balance plans		2.1%		1.7%		2.1%

In November 2021, employees represented by the UAW approved a new collective bargaining agreement. The company remeasured the U.S. hourly pension plan, which increased the 2022 pension expense by nearly $80 million with $35 million negatively impacting operating profit.

A curtailment loss of $34 million was recognized during 2022 when 10 percent of active, eligible U.S. hourly employees elected

to freeze their defined benefit pension plan benefit for an enhanced defined contribution benefit.

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:

	2022		2021		2020
OPEB
Service cost	$	45	$	48	$	49
Interest cost		99		102		140
Expected return on plan assets		(110)		(77)		(50)
Amortization of actuarial (gain) loss		(18)		27		29
Amortization of prior service credit		(4)		(4)		(4)
Curtailments						34
Net cost	$	12	$	96	$	198
Weighted-average assumptions
Discount rates - service cost		3.6%		3.4%		3.7%
Discount rates - interest cost		2.3%		2.1%		2.7%
Expected long-term rates of return		4.4%		5.4%		5.7%

The 2020 OPEB curtailments were a result of the employee-separation programs (see Note 4).

The benefit plan obligations, funded status, and the assumptions related to the obligations at October 30, 2022 and October 31, 2021 in millions of dollars follow:

	Pensions				OPEB
	2022		2021		2022		2021
Change in benefit obligations
Beginning of year balance	$	(14,525)	$	(15,021)	$	(4,930)	$	(5,410)
Service cost		(349)		(332)		(45)		(48)
Interest cost		(330)		(276)		(99)		(102)
Actuarial gain		4,122		373		1,492		381
Prior service cost		(505)				(12)
Benefits paid		757		755		282		290
Health care subsidies						(33)		(29)
Settlements/curtailments				1
Foreign exchange and other		301		(25)		4		(12)
End of year balance		(10,529)		(14,525)		(3,341)		(4,930)
Change in plan assets (fair value)
Beginning of year balance		17,190		14,574		1,755		1,518
Actual return on plan assets		(3,070)		3,249		(495)		367
Employer contribution		85		101		1,155		157
Benefits paid		(757)		(755)		(282)		(290)
Foreign exchange and other		(229)		21		3		3
End of year balance		13,219		17,190		2,136		1,755
Funded status	$	2,690	$	2,665	$	(1,205)	$	(3,175)
Weighted-average assumptions
Discount rates		5.4%		2.7%		5.6%		2.8%
Rate of compensation increase		3.8%		3.7%
Interest crediting rate - U.S. cash balance plans		4.4%		1.8%

The actuarial gains for pension and OPEB for 2022 were due to an increase in discount rates. The actuarial gain for pension for 2021 was due to an increase in discount rates. The actuarial gain for OPEB for 2021 was due to a decrease in health care trend rates, favorable mortality assumptions, and an increase in discount rates. The pension prior service cost for 2022 was due to the new UAW collective bargaining agreement.

The discount rate assumptions used to determine the pension and OPEB obligations for all periods presented were 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.

The mortality assumptions for the 2022 and 2021 U.S. benefit plan obligations used the most recent tables and scales issued by the Society of Actuaries at that time. The 2022 and 2021 mortality assumptions included an adjustment to the scale related to COVID for some plans.

The weighted-average annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) for medical and prescription drug claims for pre- and post-65 age groups used to determine the October 30, 2022 and October 31, 2021 accumulated postretirement benefit obligations were as follows:

	2022	2021
Initial year	0.0% (2022 to 2023)	2.1% (2021 to 2022)
Second year	12.6% (2023 to 2024)	8.4% (2022 to 2023)
Ultimate	4.7% (2032 to 2033)	4.7% (2028 to 2029)

A decrease in Medicare Advantage premiums impacted the weighted-average annual rates of increase for the initial years in 2022 and 2021.

The amounts recognized at October 30, 2022 and October 31, 2021 in millions of dollars consisted of the following:

	Pensions				OPEB
	2022		2021		2022		2021
Amounts recognized in balance sheet
Noncurrent asset	$	3,223	$	3,601	$	507
Current liability		(42)		(51)		(39)	$	(36)
Noncurrent liability		(491)		(885)		(1,673)		(3,139)
Total	$	2,690	$	2,665	$	(1,205)	$	(3,175)
Amounts recognized in accumulated other comprehensive income – pretax
Net actuarial (gain) loss	$	926	$	1,376	$	(820)	$	49
Prior service cost (credit)		446		9		(4)		(20)
Total	$	1,372	$	1,385	$	(824)	$	29

Information related to pension plans benefit obligations at October 30, 2022 and October 31, 2021 in millions of dollars follows:

	2022		2021
Total accumulated benefit obligations for all plans	$	10,068	$	13,787
Plans with accumulated benefit obligation exceeding fair value of plan assets:
Accumulated benefit obligations		1,116		2,012
Fair value of plan assets		672		1,207
Plans with projected benefit obligation exceeding fair value of plan assets:
Projected benefit obligations		1,225		2,163
Fair value of plan assets		692		1,227

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.

Contributions

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 $1,240 million in 2022 and $258 million in 2021, which included both required and voluntary contributions and direct benefit payments. 2022 OPEB contributions included a voluntary contribution of $1,000 million to a U.S. plan.

The company expects to contribute approximately $70 million to its pension plans and approximately $130 million to its OPEB plans in 2023. The contributions are direct benefit payments from company funds. The company has no significant required contributions to U.S. pension plan assets in 2023 under applicable funding regulations.

Expected Future Benefit Payments

The expected future benefit payments at October 30, 2022 were as follows in millions of dollars:

	Pensions		OPEB*
2023	$	739	$	246
2024		730		248
2025		729		250
2026		728		252
2027		721		253
2028 to 2032		3,589		1,274

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

Plan Asset Information

The fair values of the pension plan assets at October 30, 2022 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	338	$	283	$	55
Equity:
U.S. equity securities		311		290		21
International equity securities and funds		196		195		1
Fixed Income:
Government and agency securities		1,296		1,053		243
Corporate debt securities		4,587				4,587
Mortgage-backed securities		213				213
Other investments		49		31		18
Derivative contracts - assets		92		54		38
Derivative contracts - liabilities		(209)		(106)		(103)
Receivables, prepaids, and payables		(207)		(207)
Securities lending collateral		684				684
Securities lending liability		(684)				(684)
Securities sold short		(64)		(58)		(6)
Total of Level 1 and Level 2 assets		6,602	$	1,535	$	5,067
Investments at net asset value:
Short-term investments		633
U.S. equity funds		54
International equity funds		125
Fixed income funds		1,736
Real estate funds		592
Hedge funds		569
Private equity		1,322
Venture capital		1,553
Other investments		33
Total net assets	$	13,219

The fair values of the health care assets at October 30, 2022 follow in millions of dollars:

	Total		Level 1		Level 2
Cash and short-term investments	$	79	$	79
Fixed Income:
Government and agency securities		629		597	$	32
Corporate debt securities		516				516
Mortgage-backed securities		83				83
Other		(4)		(7)		3
Securities lending collateral		98				98
Securities lending liability		(98)				(98)
Total of Level 1 and Level 2 assets		1,303	$	669	$	634
Investments at net asset value:
U.S. equity funds		40
International equity funds		22
Fixed income funds		347
Real estate funds		140
Hedge funds		188
Private equity		41
Venture capital		48
Other investments		7
Total net assets	$	2,136

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

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 value measurement levels in the preceding tables are defined in Note 25.

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. Valuations may be lagged up to six months. The NAV is adjusted for cash flows (additional investments or contributions, and distributions) and any known substantive valuation changes through year end. Real estate investment trusts were 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 investment objective for the pension and health care plan 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 20 percent for equity, 66 percent for debt, 3 percent for real estate, and 11 percent for other investments. The target allocations for health care assets are approximately 15 percent for equity, 72 percent for debt, 4 percent for real estate, and 9 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 8.6 percent during the past ten years and approximately 8.9 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.

Defined Contribution Plans

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 $263 million in 2022, $207 million in 2021, and $160 million in 2020. The contribution rate varies based on the company’s performance in the prior year and employee participation in the plans.