Pension and Other Postretirement Plans

12 Months Ended

Dec. 31, 2016

Pension and Other Postretirement Plans

NOTE 8 - PENSION AND OTHER POSTRETIREMENT PLANS

The following summarizes the significant pension and other postretirement plans of United:

Pension Plans

United maintains two primary defined benefit pension plans, one covering certain pilot employees and another covering certain U.S. non-pilot employees. Each of these plans provide benefits based on a combination of years of benefit accruals service and an employee’s final average compensation. Additional benefit accruals are frozen under the plan covering certain pilot employees and management and administrative employees. Benefit accruals for certain non-pilot employees continue. United maintains additional defined benefit pension plans, which cover certain international employees.

Other Postretirement Plans

United maintains postretirement medical programs which provide medical benefits to certain retirees and eligible dependents, as well as life insurance benefits to certain retirees participating in the plan. Benefits provided are subject to applicable contributions, co-payments, deductibles and other limits as described in the specific plan documentation.

Actuarial assumption changes are reflected as a component of the net actuarial gains/(losses) during 2016 and 2015. These amounts will be amortized over the average remaining service life of the covered active employees or the average life expectancy of inactive participants and will impact 2016 and 2015 pension and retiree medical expense as described below.

The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in these financial statements for the defined benefit and other postretirement plans (in millions):

	Pension Benefits
	Year Ended December 31, 2016		Year Ended December 31, 2015
Accumulated benefit obligation:	$	4,158	$	3,795
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	4,473	$	4,803
Service cost		112		124
Interest cost		200		200
Actuarial (gain) loss		738		(298)
Gross benefits paid and settlements		(243)		(343)
Other		(27)		(13)
Projected benefit obligation at end of year	$	5,253	$	4,473
Change in plan assets:
Fair value of plan assets at beginning of year	$	2,975	$	2,562
Actual gain (loss) on plan assets		230		(59)
Employer contributions		421		824
Gross benefits paid and settlements		(243)		(343)
Other		(28)		(9)
Fair value of plan assets at end of year	$	3,355	$	2,975
Funded status—Net amount recognized	$	(1,898)	$	(1,498)

	Pension Benefits
	December 31, 2016		December 31, 2015
Amounts recognized in the consolidated balance sheets consist of:
Noncurrent asset	$	2	$	2
Current liability		(8)		(12)
Noncurrent liability		(1,892)		(1,488)
Total liability	$	(1,898)	$	(1,498)
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial loss	$	(1,482)	$	(844)
Prior service loss		(1)		(1)
Total accumulated other comprehensive loss	$	(1,483)	$	(845)

	Other Postretirement Benefits
	Year Ended December 31, 2016		Year Ended December 31, 2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	2,002	$	2,052
Service cost		19		21
Interest cost		86		82
Plan participants’ contributions		69		68
Benefits paid		(191)		(205)
Actuarial gain		(165)		(22)
Plan amendments		(138)		—
Other		5		6
Benefit obligation at end of year	$	1,687	$	2,002
Change in plan assets:
Fair value of plan assets at beginning of year	$	56	$	57
Actual return on plan assets		2		1
Employer contributions		119		135
Plan participants’ contributions		69		68
Benefits paid		(191)		(205)
Fair value of plan assets at end of year		55		56
Funded status—Net amount recognized	$	(1,632)	$	(1,946)

	Other Postretirement Benefits
	December 31, 2016		December 31, 2015
Amounts recognized in the consolidated balance sheets consist of:
Current liability	$	(51)	$	(64)
Noncurrent liability		(1,581)		(1,882)
Total liability	$	(1,632)	$	(1,946)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial gain	$	384	$	236
Prior service credit		245		246
Total accumulated other comprehensive income	$	629	$	482

The following information relates to all pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets at December 31 (in millions):

	2016		2015
Projected benefit obligation	$	5,025	$	4,292
Accumulated benefit obligation		3,985		3,655
Fair value of plan assets		3,164		2,794

Net periodic benefit cost for the years ended December 31 included the following components (in millions):

	2016				2015				2014
	Pension Benefits		Other Postretirement Benefits		Pension Benefits		Other Postretirement Benefits		Pension Benefits		Other Postretirement Benefits
Service cost	$	112	$	19	$	124	$	21	$	98	$	19
Interest cost		200		86		200		82		201		88
Expected return on plan assets		(216)		(2)		(194)		(2)		(180)		(2)
Curtailment gain		—		(107)		—		—		—		—
Amortization of unrecognized actuarial (gain) loss		76		(19)		85		(22)		12		(47)
Amortization of prior service credits		—		(31)		—		(32)		—		(31)
Other		5		—		4		—		1		—
Net periodic benefit cost	$	177	$	(54)	$	219	$	47	$	132	$	27

As part of the ratified contract with the Association of Flight Attendants (“AFA”) in 2016, the Company amended two of its flight attendant postretirement medical plans. The amendments triggered curtailment accounting, resulting in the recognition of a one-time $47 million gain for accelerated recognition of a prior service credit in one of the plans. Also, as part of the ratified contract with the International Brotherhood of Teamsters (the “IBT”) in 2016, the Company amended some of its technicians and related employees’ postretirement medical plans. The amendments triggered curtailment accounting, resulting in the recognition of a one-time $60 million gain for accelerated recognition of a prior service credit in one of the plans.

The estimated amounts that will be amortized in 2017 out of accumulated other comprehensive income (loss) into net periodic benefit cost are as follows (in millions):

	Pension Benefits		Other Postretirement Benefits
Actuarial (gain) loss	$	127	$	(36)
Prior service credit		—		(37)

The assumptions used for the benefit plans were as follows:

	Pension Benefits
Assumptions used to determine benefit obligations	2016	2015
Discount rate	4.18%	4.58%
Rate of compensation increase	3.54%	3.66%
Assumptions used to determine net expense
Discount rate	4.58%	4.20%
Expected return on plan assets	7.04%	7.40%
Rate of compensation increase	3.53%	3.51%

	Other Postretirement Benefits
Assumptions used to determine benefit obligations	2016		2015
Discount rate		4.07%		4.49%
Assumptions used to determine net expense
Discount rate		4.49%		4.07%
Expected return on plan assets		3.00%		3.00%
Health care cost trend rate assumed for next year		6.50%		6.75%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate in 2023)		5.00%		5.00%

The Company used the Society of Actuaries’ 2014 mortality tables, modified to reflect the Social Security Administration Trustee’s Report on current projections regarding expected longevity improvements.

The Company selected the 2016 discount rate for substantially all of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2016, that would provide the necessary cash flows to match projected benefit payments.

We develop our expected long-term rate of return assumption for our defined benefit plans based on historical experience and by evaluating input from the trustee managing the plans’ assets. Our expected long-term rate of return on plan assets for these plans is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. Plan fiduciaries regularly review our actual asset allocation and the pension plans’ investments are periodically rebalanced to our targeted allocation when considered appropriate. United’s plan assets are allocated within the following guidelines:

	Percent of Total		Expected Long-Term Rate of Return
Equity securities		30-40    %		9.5    %
Fixed-income securities		34-44		5.0
Alternatives		14-27		7.3
Other		0-10		7.0

One-hundred percent of other postretirement plan assets are invested in a deposit administration fund.

Assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement plans. A 1% change in the assumed health care trend rate for the Company would have the following additional effects (in millions):

	1% Increase		1% Decrease
Effect on total service and interest cost for the year ended December 31, 2016	$	13	$	(11)
Effect on postretirement benefit obligation at December 31, 2016		169		(149)

A one percentage point decrease in the weighted average discount rate would increase the postretirement benefit liability by approximately $181 million and increase the estimated 2016 benefits expense by approximately $11 million.

Fair Value Information. Accounting standards require us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1	Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value
Level 2	Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3	Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities

Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:

(a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities; and

(b) Income approach. Techniques to convert future amounts to a single current value based on market expectations (including present value techniques, option-pricing and excess earnings models).

The following tables present information about United’s pension and other postretirement plan assets at December 31 (in millions):

	2016										2015
Pension Plan Assets:	Total		Level 1		Level 2		Level 3		Assets Measured at NAV(a)		Total		Level 1		Level 2		Level 3		Assets Measured at NAV(a)
Equity securities funds	$	1,173	$	230	$	111	$	—	$	832	$	1,135	$	254	$	135	$	—	$	746
Fixed-income securities		1,298		—		824		11		463		1,109		—		877		9		223
Alternatives		586		—		—		134		452		527		—		1		125		401
Other investments		298		47		68		87		96		204		37		56		18		93
Total	$	3,355	$	277	$	1,003	$	232	$	1,843	$	2,975	$	291	$	1,069	$	152	$	1,463
Other Postretirement Benefit Plan Assets:
Deposit administration fund	$	55	$	—	$	—	$	55	$	—	$	56	$	—	$	—	$	56	$	—

(a) In accordance with the relevant accounting standards, certain investments that are measured at fair value using the NAV per share (or its equivalent) have not been classified in the fair value hierarchy. These investments are commingled funds that invest in fixed-income instruments including bonds, debt securities, and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities. Redemption periods for these investments range from daily to annually.

Equity and Fixed-Income. Equities include investments in both developed market and emerging market equity securities. Fixed-income includes primarily U.S. and non-U.S. government fixed-income securities and U.S. and non-U.S corporate fixed-income securities.

Deposit Administration Fund. This investment is a stable value investment product structured to provide investment income.

Alternatives. Alternative investments consist primarily of investments in hedge funds, real estate and private equity interests.

Other investments. Other investments consist of cash, insurance contracts and other funds.

The reconciliation of United’s defined benefit plan assets measured at fair value using unobservable inputs (Level 3) for the years ended December 31, 2016 and 2015 is as follows (in millions):

	2016		2015
Balance at beginning of year	$	208	$	188
Actual return on plan assets:
Sold during the year		4		8
Held at year end		3		(1)
Purchases, sales, issuances and settlements (net)		72		13
Balance at end of year	$	287	$	208

Funding requirements for tax-qualified defined benefit pension plans are determined by government regulations. United’s contributions reflected above have satisfied its required contributions through the 2016 calendar year. In 2017, employer anticipated contributions to all of United’s pension and postretirement plans are at least $400 million and approximately $108 million, respectively.

The estimated future benefit payments, net of expected participant contributions, in United’s pension plans and other postretirement benefit plans as of December 31, 2016 are as follows (in millions):

	Pension		Other    Postretirement		Other Postretirement—  subsidy receipts
2017	$	303	$	112	$	6
2018		300		117		6
2019		310		122		7
2020		319		126		7
2021		337		130		8
Years 2022 – 2026		1,782		682		44

Defined Contribution Plans

Depending upon the employee group, employer contributions consist of matching contributions and/or non-elective employer contributions. United’s employer contribution percentages vary from 1% to 16% of eligible earnings depending on the terms of each plan. United recorded contributions to its defined contribution plans of $592 million, $522 million and $503 million in the years ended December 31, 2016, 2015 and 2014, respectively.

Multi-Employer Plans

United’s participation in the IAM National Pension Plan (“IAM Plan”) for the annual period ended December 31, 2016 is outlined in the table below. There have been no significant changes that affect the comparability 2016 and 2015 contributions. The risks of participating in these multi-employer plans are different from single-employer plans, as United may be subject to additional risks that others do not meet their obligations, which in certain circumstances could revert to United. The IAM Plan reported $395 million in employers’ contributions for the year ended December 31, 2015. For 2015, the Company’s contributions to the IAM Plan represented more than 5% of total contributions to the IAM Plan.

Pension Fund	IAM National Pension Fund
EIN/ Pension Plan Number	51-6031295 - 002
Pension Protection Act Zone Status (2016 and 2015)	Green Zone. Plans in the green zone are at least 80 percent funded.
FIP/RP Status Pending/Implemented	No
United’s Contributions	$41 million, $40 million and $39 million in the years ended December 31, 2016, 2015 and 2014, respectively
Surcharge Imposed	No
Expiration Date of Collective Bargaining Agreement	N/A

At the date the financial statements were issued, Forms 5500 were not available for the plan year ending in 2016.

Profit Sharing

Substantially all employees participate in profit sharing based on a percentage of pre-tax earnings, excluding special items, profit sharing expense and share-based compensation. Profit sharing percentages range from 5% to 20% depending on the work group, and in some cases profit sharing percentages vary above and below certain pre-tax margin thresholds. Eligible U.S. co-workers in each participating work group receive a profit sharing payout using a formula based on the ratio of each qualified co-worker’s annual eligible earnings to the eligible earnings of all qualified co-workers in all domestic work groups. Eligible non-U.S. co-workers receive profit sharing based on the calculation under the U.S. profit sharing plan for management and administrative employees. The Company recorded profit sharing and related payroll tax expense of $628 million, $698 million and $235 million in 2016, 2015 and 2014, respectively. Profit sharing expense is recorded as a component of Salaries and related costs in the Company’s statements of consolidated operations.