PENSION AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Oct. 29, 2023

PENSION AND OTHER POSTRETIREMENT BENEFITS

PENSION AND OTHER POSTRETIREMENT BENEFITS

7. PENSION AND OTHER POSTRETIREMENT BENEFITS

We have several funded and unfunded defined benefit pension plans and other postretirement benefit (OPEB) plans. These plans cover U.S. employees and certain foreign employees. The measurement date of our plans is October 31. The funded status as of October 31, 2023 of the significant plans follows:

	Funded		Enrollment
	Status		Status
Pensions
U.S. salaried qualified	$	1,511	Closed
U.S. hourly qualified		1,042	Open
Other		(477)	Varies
Total	$	2,076
OPEB
U.S. salaried	$	(1,086)	Closed
U.S. hourly		178	Closed
Other		(93)	Varies
Total	$	(1,001)

The components of net periodic pension and OPEB cost excluding the service component are included in the line item “Other operating expenses.”

The components of net periodic pension (benefit) cost and the related assumptions consisted of the following:

	2023		2022		2021
Pensions
Service cost	$	246	$	349	$	332
Interest cost		533		330		276
Expected return on plan assets		(878)		(726)		(799)
Amortization of actuarial (gain) loss		(13)		132		259
Amortization of prior service cost		38		34		12
Settlements/curtailment		37		45		21
Net (benefit) cost	$	(37)	$	164	$	101
Weighted-average assumptions
Discount rates - service cost		5.2%		3.0%		2.5%
Discount rates - interest cost		5.1%		2.6%		2.1%
Rate of compensation increase		3.8%		3.7%		3.7%
Expected long-term rates of return		6.3%		5.1%		6.0%
Interest crediting rate - U.S. cash balance plans		4.3%		2.1%		1.7%

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

The 2024 net periodic pension benefit is expected to increase by $130 due to an increase in the expected long-term rates of return on plan assets (estimated to be 7.0 percent) and the Canadian pension settlement charge recognized in 2023, described below.

The components of net periodic OPEB cost and the assumptions related to the cost consisted of the following:

	2023		2022		2021
OPEB
Service cost	$	27	$	45	$	48
Interest cost		176		99		102
Expected return on plan assets		(117)		(110)		(77)
Amortization of actuarial (gain) loss		(59)		(18)		27
Amortization of prior service credit		(3)		(4)		(4)
Net cost	$	24	$	12	$	96
Weighted-average assumptions
Discount rates - service cost		6.1%		3.6%		3.4%
Discount rates - interest cost		5.4%		2.3%		2.1%
Expected long-term rates of return		5.7%		4.4%		5.4%

The benefit plan obligations, funded status, and the assumptions related to the obligations at October 29, 2023 and October 30, 2022 follow:

	Pensions				OPEB
	2023		2022		2023		2022
Change in benefit obligations
Beginning of year balance	$	(10,529)	$	(14,525)	$	(3,341)	$	(4,930)
Service cost		(246)		(349)		(27)		(45)
Interest cost		(533)		(330)		(176)		(99)
Actuarial gain		504		4,122		285		1,492
Prior service cost				(505)				(12)
Benefits paid		838		757		260		282
Health care subsidies						(27)		(33)
Settlement		112
Foreign exchange and other		(74)		301		(3)		4
End of year balance		(9,928)		(10,529)		(3,029)		(3,341)
Change in plan assets (fair value)
Beginning of year balance		13,219		17,190		2,136		1,755
Actual loss on plan assets		(387)		(3,070)		(8)		(495)
Employer contribution		70		85		158		1,155
Benefits paid		(838)		(757)		(260)		(282)
Settlement		(112)
Foreign exchange and other		52		(229)		2		3
End of year balance		12,004		13,219		2,028		2,136
Funded status	$	2,076	$	2,690	$	(1,001)	$	(1,205)
Weighted-average assumptions
Discount rates		5.9%		5.4%		6.0%		5.6%
Rate of compensation increase		3.8%		3.8%
Interest crediting rate - U.S. cash balance plans		4.9%		4.4%

The actuarial gain for pension for 2023 was due to an increase in discount rates. The actuarial gain for OPEB for 2023 was due to changes to health care assumptions. The actuarial gains for pension and OPEB for 2022 were due to an increase in discount rates. The pension prior service cost for 2022 was due to the new UAW collective bargaining agreement.

During 2023, we irrevocably transferred to an insurance company $112 of a Canadian pension plan’s defined benefit obligations and related plan assets. The transaction resulted in no changes to the benefits to be received by the retired participants. We recognized a one-time, non-cash, pretax pension settlement charge of $36 related to the accelerated recognition of actuarial losses included within “Accumulated other comprehensive income (loss).”

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 our benefit obligations could effectively be settled at the October 31 measurement dates.

The mortality assumptions for the 2023 and 2022 U.S. benefit plan obligations used the most recent tables and scales issued by the Society of Actuaries at that time. The 2023 and 2022 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 29, 2023 and October 30, 2022 accumulated postretirement benefit obligations were as follows:

	2023	2022
Initial year	18.7% (2023 to 2024)	0.0% (2022 to 2023)
Second year	8.8% (2024 to 2025)	12.6% (2023 to 2024)
Ultimate	4.7% (2032 to 2033)	4.7% (2032 to 2033)

An increase in Medicare Advantage premiums and prescription drug trends impacted the weighted-average annual rates of increase for the initial year in 2023. A decrease in Medicare Advantage premiums impacted the weighted-average annual rates of increase for the initial year in 2022.

Information related to pension plans benefit obligations at October 29, 2023 and October 30, 2022 follows:

	2023		2022
Total accumulated benefit obligations for all plans	$	9,453	$	10,068
Plans with accumulated benefit obligation exceeding fair value of plan assets:
Accumulated benefit obligations		1,147		1,116
Fair value of plan assets		704		672
Plans with projected benefit obligation exceeding fair value of plan assets:
Projected benefit obligations		1,261		1,225
Fair value of plan assets		729		692

The pension and OPEB amounts recognized in the balance sheet at October 29, 2023 and October 30, 2022 consisted of the following:

	Pensions				OPEB
	2023		2022		2023		2022
Noncurrent asset	$	2,608	$	3,223	$	399	$	507
Less: Current liability		59		42		40		39
Less: Noncurrent liability		473		491		1,360		1,673
Total	$	2,076	$	2,690	$	(1,001)	$	(1,205)

The retirement benefits and other liabilities recognized in the balance sheet at October 29, 2023 and October 30, 2022 consisted of the following:

	2023		2022
Deferred compensation - current	$	25	$	30
Deferred compensation and other - noncurrent		183		182
Pensions and OPEB - current		99		81
Pensions and OPEB - noncurrent		1,833		2,164
Total	$	2,140	$	2,457

The amounts recognized in accumulated other comprehensive income ‒ pretax at October 29, 2023 and October 30, 2022 consisted of the following:

	Pensions				OPEB
	2023		2022		2023		2022
Net actuarial (gain) loss	$	1,660	$	926	$	(921)	$	(820)
Prior service (credit) cost		406		446		(1)		(4)
Total	$	2,066	$	1,372	$	(922)	$	(824)

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 (benefit) 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

We make any required contributions to the plan assets under applicable regulations and voluntary contributions after evaluating our liquidity position and ability to make tax-deductible contributions. Total contributions to the plans were $228 in 2023 and $1,240 in 2022, which included both required and voluntary contributions and direct benefit payments. 2022 OPEB contributions included a voluntary contribution of $1,000 to a U.S. plan.

We expect to contribute approximately $85 to our pension plans and approximately $140 to our OPEB plans in 2024. The contributions include required and voluntary contributions and direct benefit payments from company funds. We have no significant required contributions to U.S. pension plan assets in 2024 under applicable funding regulations.

Expected Future Benefit Payments

The expected future benefit payments at October 29, 2023 were as follows:

	Pensions		OPEB*
2024	$	746	$	249
2025		726		252
2026		727		257
2027		720		257
2028		708		257
2029 to 2033		3,564		1,251

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

Plan Asset Information

The fair values of the pension plan assets at October 29, 2023 follow:

	Total		Level 1		Level 2		Level 3
Cash and short-term investments	$	513	$	470	$	43
Equity:
U.S. equity securities		342		330		12
International equity securities and funds		199		197		2
Fixed Income:
Government and agency securities		1,017		759		258
Corporate debt securities		4,389				4,389
Mortgage-backed securities		285				285
Private equity		18					$	18
Other investments		50		30		20
Derivative contracts - assets		53		17		36
Derivative interest rate contracts - liabilities		(309)		(215)		(94)
Receivables, prepaids, and payables		(137)		(137)
Securities lending collateral		615				615
Securities lending liability		(615)				(615)
Securities sold short		(73)		(69)		(4)
Total of Level 1, Level 2, and Level 3 assets		6,347	$	1,382	$	4,947	$	18
Investments at net asset value:
Short-term investments		362
U.S. equity funds		92
International equity funds		151
Fixed income funds		1,418
Real estate funds		462
Hedge funds		491
Private equity		1,306
Venture capital		1,341
Other investments		34
Total net assets	$	12,004

The fair values of the OPEB health care assets at October 29, 2023 follow:

	Total		Level 1		Level 2
Cash and short-term investments	$	76	$	76
Fixed Income:
Government and agency securities		637		596	$	41
Corporate debt securities		515				515
Mortgage-backed securities		89				89
Other		8		5		3
Securities lending collateral		122				122
Securities lending liability		(122)				(122)
Total of Level 1 and Level 2 assets		1,325	$	677	$	648
Investments at net asset value:
Fixed income funds		392
Real estate funds		104
Hedge funds		104
Private equity		43
Venture capital		43
Other investments		17
Total net assets	$	2,028

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

	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 OPEB health care assets at October 30, 2022 follow:

	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

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, which is based on quoted prices in the active market in which the investment fund trades, or the fund’s net asset value using the net asset value per share practical expedient (NAV), 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, excluding the private equity investments classified as Level 3, 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. The private equity investments classified as Level 3 are valued based on the current market pricing of the assets related to an expected secondary sale. The investments were transferred into Level 3 as of October 29, 2023.

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 our 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 our long-term asset class risk/return expectations for each plan since the obligations are long-term in nature. The target asset allocations as of October 29, 2023 are as follows:

	Pension	Health Care
	Assets	Assets
Equity	5%	9%
Debt	68%	83%
Real estate	4%	2%
Other investments	23%	6%

The assets are diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of our diversified investment policy, there were no significant concentrations of risk.

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 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. 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. Our 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 our expectations for returns over an

extended period of time (i.e., 10 to 20 years). The average annual return of our U.S. pension fund was approximately 6.8 percent during the past ten years and approximately 7.8 percent during the past 20 years.

We have created a Voluntary Employees’ Beneficiary Association trust (VEBA) for the funding of hourly postretirement health care benefits. The future expected asset returns for the VEBA is 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 John Deere Pension Trust.

Defined Contribution Plans

We have defined contribution plans related to employee investment and savings plans primarily in the U.S. Our contributions and costs under these plans were $288 in 2023, $263 in 2022, and $207 in 2021. The contribution rate varies based on employee participation in the plans.