RETIREMENT BENEFITS

Defined benefit pension and OPEB plan obligations are remeasured at least annually as of December 31 based on the present value of projected future benefit payments for all participants for services rendered to date. The measurement of projected future benefits is dependent on the provisions of each specific plan, demographics of the group covered by the plan, and other key measurement assumptions. For plans that provide benefits dependent on salary assumptions, we include a projection of salary growth in our measurements. No assumption is made regarding any potential changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).

Net periodic benefit costs, including service cost, interest cost, and expected return on assets are determined using assumptions regarding the benefit obligation and the fair value of plan assets (where applicable) as of the beginning of each year. We have elected to use a fair value of plan assets to calculate the expected return on assets in net periodic benefit cost. The funded status of the benefit plans, which represents the difference between the benefit obligation and fair value of plan assets, is calculated on a plan-by-plan basis. The benefit obligation and related funded status are determined using assumptions as of the end of each year. Actuarial gains and losses resulting from plan remeasurement are recognized in net periodic benefit cost in the period of the remeasurement. The impact of plan amendments is recorded in Accumulated other comprehensive income/(loss), and is amortized as a component of net periodic cost generally over the remaining service period of the active employees. Net periodic benefit costs are recorded in Cost of sales and Selling, administrative, and other expenses.

Curtailment gains or losses are recorded when an event occurs that significantly reduces the expected years of future service or eliminates the accrual of defined benefits for the future services of a significant number of employees. We record a curtailment gain when the employees who are entitled to the benefits terminate their employment; we record a curtailment loss when it becomes probable a loss will occur. We recognize settlement expense, when applicable, if the cost of all settlements during the year exceeds the interest component of net periodic cost for the affected plan. Expense from curtailments and settlements is recorded in Cost of sales and Selling, administrative, and other expenses.

Defined Benefit Pension Plans. We have defined benefit pension plans covering hourly and salaried employees in the United States, Canada, United Kingdom, Germany and other locations. The largest portion of our worldwide obligation is associated with our U.S. plans. The vast majority of our worldwide defined benefit plans are closed to new participants.

In general, our defined benefit pension plans are funded (i.e., have restricted assets from which benefits are paid). Our unfunded defined benefit pension plans are treated on a “pay as you go” basis with benefit payments from general Company cash. These unfunded plans primarily include certain plans in Germany and the U.S. defined benefit plans for senior management.

OPEB. We have defined benefit OPEB plans, primarily certain health care and life insurance benefits, covering hourly and salaried employees in the United States, Canada, and other locations. The largest portion of our worldwide obligation is associated with our U.S. plans. Our OPEB plans are unfunded and the benefits are paid from general Company cash.

Defined Contribution and Savings Plans. We also have defined contribution and savings plans for hourly and salaried employees in the United States and other locations. Company contributions to these plans, if any, are made from general Company cash and are expensed as incurred. The expense for our worldwide defined contribution and savings plans was $275 million, $291 million, and $340 million for the years ended December 31, 2014, 2015, and 2016, respectively. This includes the expense for Company-matching contributions to our primary employee savings plan in the United States of $114 million, $124 million, and $132 million for the years ended December 31, 2014, 2015, and 2016, respectively.

NOTE 13. RETIREMENT BENEFITS (Continued)

Defined Benefit Plans – Expense and Status

The assumptions used to determine benefit obligation and net periodic benefit cost were as follows:



	Pension Benefits
	U.S. Plans				Non-U.S. Plans				Worldwide OPEB
	2015		2016		2015		2016		2015		2016
Weighted Average Assumptions at December 31
Discount rate	4.27	%	4.03	%	3.20	%	2.44	%	4.23	%	4.00	%
Average rate of increase in compensation	3.80		3.50		3.40		3.38		3.81		3.51
Weighted Average Assumptions Used to Determine Net Benefit Cost for the Year Ended December 31
Discount rate - Service Cost	3.94	%	4.60	%	3.06	%	3.36	%	3.93	%	4.53	%
Effective interest rate on benefit obligation	3.94		3.46		3.06		2.72		3.93		3.48
Expected long-term rate of return on assets	6.75		6.75		6.11		5.56		—		—
Average rate of increase in compensation	3.80		3.80		3.40		3.40		3.76		3.81

The pre-tax net periodic benefit cost for our defined benefit pension and OPEB plans for the years ended December 31 was as follows (in millions):



	Pension Benefits
	U.S. Plans									Non-U.S. Plans									Worldwide OPEB
	2014			2015			2016			2014			2015			2016			2014			2015			2016
Service cost	$	507		$	586		$	510		$	468		$	532		$	483		$	54		$	60		$	49
Interest cost	1,992			1,817			1,524			1,189			936			782			269			236			194
Expected return on assets	(2,735		)	(2,928		)	(2,693		)	(1,534		)	(1,480		)	(1,339		)	—			—			—
Amortization of prior service costs/(credits)	155			155			170			55			47			38			(229		)	(204		)	(142		)
Net remeasurement (gain)/loss	641			1,964			900			2,801			(974		)	1,876			681			(292		)	220
Separation programs/other	19			17			12			83			39			81			—			1			—
Settlements and curtailments	—			—			—			13			—			2			—			—			—
Net periodic benefit cost/(income)	$	579		$	1,611		$	423		$	3,075		$	(900	)	$	1,923		$	775		$	(199	)	$	321

Beginning in 2016, we changed the method used to estimate the service and interest costs for pension and OPEB plans that utilize a yield curve approach. We now apply the specific spot rates along the yield curve to the relevant cash flows instead of using a single effective discount rate. Service and interest costs in 2016 were about $580 million lower with the new method than they would have been under the prior method. This refinement had no effect on the measurement of our plan obligations or on full year net periodic benefit cost/(income) as lower service and interest costs recorded quarterly are offset in net remeasurement (gain)/loss.

NOTE 13. RETIREMENT BENEFITS (Continued)

The year-end status of these plans was as follows (in millions):



	Pension Benefits
	U.S. Plans						Non-U.S. Plans						Worldwide OPEB
	2015			2016			2015			2016			2015			2016
Change in Benefit Obligation
Benefit obligation at January 1	$	47,103		$	44,936		$	33,223		$	29,639		$	6,375		$	5,701
Service cost	586			510			532			483			60			49
Interest cost	1,817			1,524			936			782			236			194
Amendments	99			—			4			—			1			14
Separation programs and other	(27		)	(30		)	40			71			1			—
Curtailments	—			—			—			2			—			—
Settlements	—			—			(29		)	(131		)	—			—
Plan participant contributions	26			27			24			22			23			20
Benefits paid	(2,949		)	(2,966		)	(1,350		)	(1,252		)	(402		)	(382		)
Foreign exchange translation	—			—			(2,995		)	(2,576		)	(301		)	49
Actuarial (gain)/loss	(1,719		)	1,745			(746		)	3,584			(292		)	220
Benefit obligation at December 31	44,936			45,746			29,639			30,624			5,701			5,865
Change in Plan Assets
Fair value of plan assets at January 1	44,844			41,252			25,675			25,141			—			—
Actual return on plan assets	(755		)	3,538			1,722			3,041			—			—
Company contributions	130			130			1,345			1,346			—			—
Plan participant contributions	26			27			24			22			—			—
Benefits paid	(2,949		)	(2,966		)	(1,350		)	(1,252		)	—			—
Settlements	—			—			(29		)	(131		)	—			—
Foreign exchange translation	—			—			(2,238		)	(2,612		)	—			—
Other	(44		)	(42		)	(8		)	(6		)	—			—
Fair value of plan assets at December 31	41,252			41,939			25,141			25,549			—			—
Funded status at December 31	$	(3,684	)	$	(3,807	)	$	(4,498	)	$	(5,075	)	$	(5,701	)	$	(5,865	)

Amounts Recognized on the Balance Sheet
Prepaid assets	$	—		$	—		$	1,611		$	1,515		$	—		$	—
Other liabilities	(3,684		)	(3,807		)	(6,109		)	(6,590		)	(5,701		)	(5,865		)
Total	$	(3,684	)	$	(3,807	)	$	(4,498	)	$	(5,075	)	$	(5,701	)	$	(5,865	)
Amounts Recognized in Accumulated Other Comprehensive Loss (pre-tax)
Unamortized prior service costs/(credits)	$	553		$	383		$	278		$	213		$	(475	)	$	(322	)

Pension Plans in which Accumulated Benefit Obligation Exceeds Plan Assets at December 31
Accumulated benefit obligation	$	26,021		$	26,170		$	9,634		$	10,039
Fair value of plan assets	22,967			23,204			4,636			4,700

Accumulated Benefit Obligation at December 31	$	43,698		$	44,513		$	26,835		$	27,166

Pension Plans in which Projected Benefit Obligation Exceeds Plan Assets at December 31
Projected benefit obligation	$	44,936		$	45,746		$	11,238		$	11,703
Fair value of plan assets	41,252			41,939			5,129			5,113

Projected Benefit Obligation at December 31	$	44,936		$	45,746		$	29,639		$	30,624

NOTE 13. RETIREMENT BENEFITS (Continued)

Pension Plan Contributions

Our policy for funded pension plans is to contribute annually, at a minimum, amounts required by applicable laws and regulations. We may make contributions beyond those legally required.

In 2016, we contributed $1.2 billion to our worldwide funded pension plans (most of which were mandatory contributions) and made about $300 million of benefit payments to participants in unfunded plans. During 2017, we expect to contribute about $1 billion from cash and cash equivalents to our worldwide funded pension plans (most of which are mandatory) and to make about $300 million of benefit payments to participants in unfunded plans, for a total of about $1.3 billion. Based on current assumptions and regulations, we do not expect to have a legal requirement to contribute to our major U.S. pension plans in 2017.

Expected Future Benefit Payments and Amortization

The expected future benefit payments were as follows (in millions):



	Benefit Payments
	Pension
	U.S. Plans		Non-U.S. Plans		Worldwide OPEB
2017	$	3,030	$	1,170	$	350
2018	3,020		1,080		350
2019	2,980		1,100		350
2020	2,970		1,120		340
2021	2,950		1,130		340
2022-2026	14,750		5,980		1,710

The prior service cost/(credit) amounts in Accumulated other comprehensive income/(loss) that are expected to be recognized as components of net periodic benefit cost/(income) during 2017 are $143 million for U.S. pension plans, $35 million for non-U.S. pension plans, and $(119) million for Worldwide OPEB plans.

Pension Plan Asset Information

Investment Objective and Strategies. Our investment objectives for the U.S. plans are to minimize the volatility of the value of our U.S. pension assets relative to U.S. pension obligations and to ensure assets are sufficient to pay plan benefits. Our U.S. target asset allocations are 80% fixed income and 20% growth assets (primarily alternative investments which include hedge funds, real estate, and private equity, and public equity). Our largest non-U.S. plans (United Kingdom and Canada) have similar investment objectives to the U.S. plans and have made progress towards these objectives.

Investment strategies and policies for the U.S. plans and the largest non-U.S. plans reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative to obligations is addressed primarily through asset-liability matching, asset diversification, and hedging. The fixed income target asset allocation matches the bond-like and long-dated nature of the pension obligations. Assets are broadly diversified within asset classes to achieve risk-adjusted returns that in total lower asset volatility relative to the obligations. Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes, and strategies within asset classes that provide adequate returns, diversification, and liquidity.

Derivatives are permitted for fixed income investment and public equity managers to use as efficient substitutes for traditional securities and to manage exposure to interest rate and foreign exchange risks. Interest rate and foreign currency derivative instruments are used for the purpose of hedging changes in the fair value of assets that result from interest rate changes and currency fluctuations. Interest rate derivatives also are used to adjust portfolio duration. Derivatives may not be used to leverage or to alter the economic exposure to an asset class outside the scope of the mandate an investment manager has been given. Alternative investment managers are permitted to employ leverage (including through the use of derivatives or other tools) that may alter economic exposure.

NOTE 13. RETIREMENT BENEFITS (Continued)

Alternative investments execute diverse strategies that provide exposure to a broad range of hedge fund strategies, equity investments in private companies, and investments in private property funds.

Significant Concentrations of Risk. Significant concentrations of risk in our plan assets relate to interest rate, equity, and operating risk. In order to minimize asset volatility relative to the obligations, the majority of plan assets are allocated to fixed income investments which are exposed to interest rate risk. Rate increases generally will result in a decline in the value of fixed income assets, while reducing the present value of the obligations. Conversely, rate decreases generally will increase the value of fixed income assets, offsetting the related increase in the obligations.

In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to growth assets that are expected over time to earn higher returns with more volatility than fixed income investments which more closely match pension obligations. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style, and process. Within alternative investments, risk is similarly mitigated by constructing a portfolio that is broadly diversified by asset class, investment strategy, manager, style, and process.

Operating risks include the risks of inadequate diversification and weak controls. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight (e.g., style adherence, team strength, firm health, and internal risk controls), plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence.

At year-end 2016, Ford securities comprised less than 1% of our plan assets.

Expected Long-Term Rate of Return on Assets. The long-term return assumption at year-end 2016 is 6.75% for the U.S. plans, 5.75% for the U.K. plans, and 5.50% for the Canadian plans, and averages 5.19% for all non-U.S. plans. A generally consistent approach is used worldwide to develop this assumption. This approach considers various sources, primarily inputs from a range of advisors for long-term capital market returns, inflation, bond yields, and other variables, adjusted for specific aspects of our investment strategy by plan. Historical returns also are considered where appropriate. The assumption is based on consideration of all inputs, with a focus on long-term trends to avoid short-term market influences.

Fair Value of Plan Assets. Pension assets are recorded at fair value, and include primarily fixed income and public equity securities, derivatives, and alternative investments, which include hedge funds, private equity, and real estate. Fixed income and public equity securities may each be combined into commingled fund investments. Most commingled funds are valued to reflect the pension fund’s interest in the fund based on the reported year-end net asset value (“NAV”). Alternative investments are valued based on year-end reported NAV, with adjustments as appropriate for lagged reporting of up to 6 months.

Fixed Income. Fixed income securities are valued based on quotes received from independent pricing services or from dealers who make markets in such securities. Pricing services utilize matrix pricing, which considers prepayment speed assumptions, attributes of the collateral, yield or price of bonds of comparable quality, coupon, maturity, and type, as well as dealer-supplied prices, and generally are categorized as Level 2 inputs in the fair value hierarchy. Securities categorized as Level 3 typically are priced by dealers and pricing services that use proprietary pricing models which incorporate unobservable inputs. These inputs primarily consist of prepayment curves, discount rates, default assumptions, recovery rates, yield assumptions, and credit spread assumptions.

Public Equities. Public equity securities are valued based on quoted prices and are primarily exchange-traded. Securities for which official close or last trade pricing on an active exchange is available are classified as Level 1 in the fair value hierarchy. If closing prices are not available, securities are valued at the last quoted bid price or may be valued using the last available price and typically are categorized as Level 2. Level 3 securities often are thinly traded or delisted, with unobservable pricing data.

NOTE 13. RETIREMENT BENEFITS (Continued)

Derivatives. Exchange-traded derivatives for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market or exchange on which they are traded and are categorized as Level 1. Over-the-counter derivatives typically are valued by independent pricing services and categorized as Level 2. Level 3 derivatives typically are priced by dealers and pricing services that use proprietary pricing models which incorporate unobservable inputs, including extrapolated or model‑derived assumptions such as volatilities and yield and credit spread assumptions.

Alternative Assets. Hedge funds generally hold liquid and readily-priced securities, such as public equities, exchange-traded derivatives, and corporate bonds. Private equity and real estate investments are less liquid. External investment managers typically report valuations reflecting initial cost or updated appraisals, which are adjusted for cash flows, and realized and unrealized gains/losses. All alternative assets are valued using the NAV provided by the investment sponsor or third party administrator, as they do not have readily-available market quotations. Valuations may be lagged up to 6 months. The NAV will be adjusted for cash flows (additional investments or contributions, and distributions) through year-end. We may make further adjustments for any known substantive valuation changes not reflected in the NAV.

The Ford-Werke GmbH (“Ford-Werke”) defined benefit plan is primarily funded through a group insurance contract. Beginning with year-end 2015, we measure the fair value of the insurance asset by projecting expected future cash flows from the contract and discounting them to present value based on current market rates including an assessment for non‑performance risk of the insurance company. The assumptions used to project expected future cash flows are based on actuarial estimates and are unobservable; therefore the contract is Level 3.

NOTE 13. RETIREMENT BENEFITS (Continued)

The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $363 million and $94 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions):



	2015
	U.S. Plans												Non-U.S. Plans
	Level 1		Level 2			Level 3		Assets measured at NAV (a)		Total			Level 1		Level 2			Level 3		Assets measured at NAV (a)		Total
Asset Category
Equity
U.S. companies	$	1,935	$	4		$	—	$	—	$	1,939		$	1,647	$	1		$	—	$	86	$	1,734
International companies	1,082		10			1		7		1,100			1,290		292			1		29		1,612
Total equity	3,017		14			1		7		3,039			2,937		293			1		115		3,346
Fixed Income
U.S. government	5,209		—			—		—		5,209			138		—			—		—		138
U.S. government-sponsored enterprises	—		3,106			—		—		3,106			—		10			—		—		10
Non-U.S. government	—		1,588			—		—		1,588			—		10,650			—		—		10,650
Corporate bonds (b)
Investment grade	—		18,687			—		—		18,687			—		2,027			—		—		2,027
High yield	—		1,576			9		—		1,585			—		539			—		—		539
Other credit	—		412			—		—		412			—		65			—		—		65
Mortgage/other asset-backed	—		1,101			12		—		1,113			—		292			—		—		292
Commingled funds	—		—			—		174		174			—		—			—		379		379
Derivative financial instruments, net	22		(231		)	—		—		(209		)	1		(130		)	—		—		(129		)
Total fixed income	5,231		26,239			21		174		31,665			139		13,453			—		379		13,971
Alternatives
Hedge funds	—		175			—		2,548		2,723			—		108			—		1,762		1,870
Private equity	—		—			—		2,745		2,745			—		—			—		633		633
Real estate	—		20			—		963		983			—		1			—		681		682
Total alternatives	—		195			—		6,256		6,451			—		109			—		3,076		3,185
Cash and cash equivalents (c)	221		1,103			—		—		1,324			—		556			—		—		556
Other (d)	—		(1,227		)	—		—		(1,227		)	—		(1,173		)	5,256		—		4,083
Total assets at fair value	$	8,469	$	26,324		$	22	$	6,437	$	41,252		$	3,076	$	13,238		$	5,257	$	3,570	$	25,141

_______


(a)	Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.


(b)	“Investment grade” bonds are those rated Baa3/BBB- or higher by at least two rating agencies; “High yield” bonds are those rated below investment grade; “Other credit” refers to non-rated bonds.


(c)	Primarily short-term investment funds to provide liquidity to plan investment managers and cash held to pay benefits.


(d)	For U.S. plans, primarily cash related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales). For non-U.S plans, primarily Ford-Werke, plan assets (insurance contract valued at $4.4 billion at year-end 2015) and cash related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).

NOTE 13. RETIREMENT BENEFITS (Continued)

The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $345 million and $93 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions):



	2016
	U.S. Plans												Non-U.S.Plans
	Level 1		Level 2			Level 3		Assets measured at NAV (a)		Total			Level 1		Level 2			Level 3		Assets measured at NAV (a)		Total
Asset Category
Equity
U.S. companies	$	2,353	$	6		$	—	$	—	$	2,359		$	1,614	$	93		$	—	$	—	$	1,707
International companies	1,457		19			1		7		1,484			1,278		360			—		—		1,638
Total equity	3,810		25			1		7		3,843			2,892		453			—		—		3,345
Fixed Income
U.S. government	5,157		—			—		—		5,157			433		—			—		—		433
U.S. government-sponsored enterprises	—		3,030			—		—		3,030			—		57			—		—		57
Non-U.S. government	—		1,343			—		—		1,343			—		11,171			—		—		11,171
Corporate bonds (b)
Investment grade	—		8,922			—		—		8,922			—		1,014			—		—		1,014
High yield	—		11,512			13		—		11,525			—		1,338			—		—		1,338
Other credit	—		203			—		—		203			—		—			—		—		—
Mortgage/other asset-backed	—		855			—		—		855			—		242			—		—		242
Commingled funds	—		—			—		153		153			—		379			—		—		379
Derivative financial instruments, net	27		(213		)	—		—		(186		)	5		28			—		—		33
Total fixed income	5,184		25,652			13		153		31,002			438		14,229			—		—		14,667
Alternatives
Hedge funds	—		158			—		2,802		2,960			—		215			—		1,383		1,598
Private equity	—		—			—		2,548		2,548			—		—			—		679		679
Real estate	—		—			—		1,135		1,135			—		(2		)	—		485		483
Total alternatives	—		158			—		6,485		6,643			—		213			—		2,547		2,760
Cash and cash equivalents (c)	218		1,385			—		—		1,603			—		97			—		—		97
Other (d)	—		(1,152		)	—		—		(1,152		)	—		(572		)	5,252		—		4,680
Total assets at fair value	$	9,212	$	26,068		$	14	$	6,645	$	41,939		$	3,330	$	14,420		$	5,252	$	2,547	$	25,549

_______


(a)	Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.


(b)	“Investment grade” bonds are those rated Baa3/BBB- or higher by at least two rating agencies; “High yield” bonds are those rated below investment grade; “Other credit” refers to non-rated bonds.


(c)	Primarily short-term investment funds to provide liquidity to plan investment managers and cash held to pay benefits.


(d)	For U.S. plans, primarily cash related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales). For non-U.S plans, primarily Ford-Werke, plan assets (insurance contract valued at $4.5 billion at year-end 2016) and cash related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).

NOTE 13. RETIREMENT BENEFITS (Continued)

The following table summarizes the changes in Level 3 defined benefit pension plan assets measured at fair value on a recurring basis for the years ended December 31 (in millions):



	2015
			Return on plan assets
	Fair Value at January 1		Attributable to Assets Held at December 31			Attributable to Assets Sold		Net Purchases/ (Settlements)			Transfers Into/ (Out of) Level 3			Fair Value at December 31
U.S. Plans	$	48	$	(9	)	$	—	$	(4	)	$	(13	)	$	22
Non-U.S. Plans (a)	4,725		531			—		—			1			5,257

	2016
			Return on plan assets
	Fair Value at January 1		Attributable to Assets Held at December 31			Attributable to Assets Sold		Net Purchases/ (Settlements)			Transfers Into/ (Out of) Level 3			Fair Value at December 31
U.S. Plans	$	22	$	5		$	—	$	(13	)	$	—		$	14
Non-U.S. Plans (a)	5,257		(5		)	—		—			—			5,252

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(a)	Primarily Ford-Werke plan assets (insurance contract valued at $4.4 billion and $4.5 billion at year-end 2015 and 2016, respectively). Return on plan assets attributable to assets held at December 31, 2015 reflects a change in valuation technique (totaling $725 million) noted in the alternative assets section of the pension plan asset information.