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 future 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 a retroactive plan amendment 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. The service cost component is included in Cost of sales and Selling, administrative and other expenses. Other components of net periodic benefit cost/(income) are included in Other income/(loss), net on our consolidated income statement.

A curtailment results from an event 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. A curtailment gain is recorded when the employees who are entitled to a benefit terminate their employment, or when a plan suspension or amendment that results in a curtailment gain is adopted. A curtailment loss is recorded when it becomes probable a curtailment loss will occur. We recognize settlement expense when the costs associated with all settlements during the year exceed the interest component of net periodic cost for the affected plan. Expense from curtailments and settlements is recorded in Other income/(loss), net.

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.

NOTE 17. RETIREMENT BENEFITS (Continued)

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 $340 million, $377 million, and $393 million for the years ended December 31, 2016, 2017, and 2018, respectively. This includes the expense for Company-matching contributions to our primary employee savings plan in the United States of $132 million, $142 million, and $143 million for the years ended December 31, 2016, 2017, and 2018, respectively.

Defined Benefit Plans – Expense and Status

The assumptions used to determine benefit obligation and net periodic benefit cost/(income) were as follows:



	Pension Benefits
	U.S. Plans				Non-U.S. Plans				Worldwide OPEB
	2017		2018		2017		2018		2017		2018
Weighted Average Assumptions at December 31
Discount rate	3.60	%	4.29	%	2.33	%	2.48	%	3.61	%	4.17	%
Average rate of increase in compensation	3.50		3.50		3.37		3.37		3.44		3.44
Weighted Average Assumptions Used to Determine Net Benefit Cost for the Year Ended December 31
Discount rate - Service cost	4.18	%	3.67	%	2.51	%	2.39	%	4.15	%	3.70	%
Effective interest rate on benefit obligation	3.40		3.22		2.07		2.02		3.41		3.27
Expected long-term rate of return on assets	6.75		6.75		5.19		4.51		—		—
Average rate of increase in compensation	3.50		3.50		3.38		3.37		3.44		3.44

The pre-tax net periodic benefit cost/(income) 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
	2016			2017			2018			2016			2017			2018			2016			2017			2018
Service cost	$	510		$	534		$	544		$	483		$	566		$	588		$	49		$	49		$	54
Interest cost	1,524			1,525			1,466			782			671			684			194			197			195
Expected return on assets	(2,693		)	(2,734		)	(2,887		)	(1,339		)	(1,375		)	(1,295		)	—			—			—
Amortization of prior service costs/(credits)	170			143			143			38			37			25			(142		)	(120		)	(109		)
Net remeasurement (gain)/loss	900			(538		)	1,294			1,876			407			(76		)	220			293			(366		)
Separation programs/other	12			74			53			81			18			103			—			2			1
Settlements and curtailments	—			(354		)	(15		)	2			(3		)	(2		)	—			—			—
Net periodic benefit cost/(income)	$	423		$	(1,350	)	$	598		$	1,923		$	321		$	27		$	321		$	421		$	(225	)

In the first quarter of 2018, we amended the U.S. defined benefit plans for senior management. Effective December 31, 2019, the plans will have a 35-year limit for service and pay for purposes of determining the pension benefits. As a result, we recognized both a remeasurement gain and a curtailment gain related to this amendment.

NOTE 17. 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
	2017			2018			2017			2018			2017			2018
Change in Benefit Obligation
Benefit obligation at January 1	$	45,746		$	46,340		$	30,624		$	34,098		$	5,865		$	6,169
Service cost	534			544			566			588			49			54
Interest cost	1,525			1,466			671			684			197			195
Amendments	—			—			—			135			—			—
Separation programs/other	35			9			17			97			1			1
Curtailments	(356		)	(15		)	(3		)	(2		)	—			—
Settlements	—			—			(52		)	(16		)	—			—
Plan participant contributions	24			25			20			19			24			17
Benefits paid	(3,267		)	(2,880		)	(1,316		)	(1,316		)	(368		)	(372		)
Foreign exchange translation	—			—			3,323			(1,858		)	108			(139		)
Actuarial (gain)/loss	2,099			(3,220		)	248			(1,350		)	293			(366		)
Benefit obligation at December 31	46,340			42,269			34,098			31,079			6,169			5,559
Change in Plan Assets
Fair value of plan assets at January 1	41,939			44,160			25,549			29,657			—			—
Actual return on plan assets	5,371			(1,627		)	1,216			21			—			—
Company contributions	133			140			1,624			629			—			—
Plan participant contributions	24			25			20			19			—			—
Benefits paid	(3,267		)	(2,880		)	(1,316		)	(1,316		)	—			—
Settlements	—			—			(52		)	(16		)	—			—
Foreign exchange translation	—			—			2,623			(1,708		)	—			—
Other	(40		)	(44		)	(7		)	(13		)	—			—
Fair value of plan assets at December 31	44,160			39,774			29,657			27,273			—			—
Funded status at December 31	$	(2,180	)	$	(2,495	)	$	(4,441	)	$	(3,806	)	$	(6,169	)	$	(5,559	)

Amounts Recognized on the Balance Sheet
Prepaid assets	$	386		$	165		$	3,154		$	3,161		$	—		$	—
Other liabilities	(2,566		)	(2,660		)	(7,595		)	(6,967		)	(6,169		)	(5,559		)
Total	$	(2,180	)	$	(2,495	)	$	(4,441	)	$	(3,806	)	$	(6,169	)	$	(5,559	)
Amounts Recognized in Accumulated Other Comprehensive Loss (pre-tax)
Unamortized prior service costs/(credits)	$	238		$	95		$	191		$	285		$	(209	)	$	97

Pension Plans in which Accumulated Benefit Obligation Exceeds Plan Assets at December 31
Accumulated benefit obligation	$	2,092		$	1,965		$	11,506		$	10,904
Fair value of plan assets	155			137			5,287			5,232

Accumulated Benefit Obligation at December 31	$	45,081		$	41,312		$	30,449		$	27,787

Pension Plans in which Projected Benefit Obligation Exceeds Plan Assets at December 31
Projected benefit obligation	$	22,378		$	20,529		$	13,385		$	12,321
Fair value of plan assets	19,812			17,872			5,790			5,357

Projected Benefit Obligation at December 31	$	46,340		$	42,269		$	34,098		$	31,079

NOTE 17. 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 2018, we contributed about $400 million (most of which were mandatory contributions) to our global funded pension plans and made about $350 million of benefit payments to participants in unfunded plans. During 2019, we expect to contribute about $650 million (including $140 million in discretionary contributions in the United States) from cash and cash equivalents to our worldwide funded pension plans and to make about $350 million of benefit payments to participants in unfunded plans, for a total of about $1 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 2019.

Expected Future Benefit Payments and Amortization

The expected future benefit payments at December 31, 2018 were as follows (in millions):



	Benefit Payments
	Pension
	U.S. Plans		Non-U.S. Plans		Worldwide OPEB
2019	$	3,050	$	1,290	$	350
2020	2,820		1,180		340
2021	2,790		1,190		340
2022	2,760		1,200		330
2023	2,760		1,220		330
2024-2028	13,640		6,460		1,640

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 2019 are $87 million for U.S. pension plans, $33 million for non-U.S. pension plans, and $(70) 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, 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 toward 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 17. 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 2018, 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 2018 is 6.75% for the U.S. plans, 4.25% for the U.K. plans, and 5.00% for the Canadian plans, and averages 4.18% 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.

NOTE 17. RETIREMENT BENEFITS (Continued)

The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $344 million and $106 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions):



	2017
	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	$	2,135		$	25		$	—	$	—	$	2,160		$	1,593		$	143	$	—	$	—	$	1,736
International companies	1,669			38			1		—		1,708			1,333			428		—		—		1,761
Total equity	3,804			63			1		—		3,868			2,926			571		—		—		3,497
Fixed Income
U.S. government and agencies	6,603			2,842			—		—		9,445			495			98		—		—		593
Non-U.S. government	—			1,575			—		—		1,575			—			14,088		—		—		14,088
Corporate bonds	—			21,617			4		—		21,621			—			3,217		—		—		3,217
Mortgage/other asset-backed	—			590			—		—		590			—			301		—		—		301
Commingled funds	—			49			—		—		49			—			251		—		—		251
Derivative financial instruments, net	11			(24		)	—		—		(13		)	(2		)	44		—		—		42
Total fixed income	6,614			26,649			4		—		33,267			493			17,999		—		—		18,492
Alternatives
Hedge funds	—			—			—		3,060		3,060			—			—		—		1,179		1,179
Private equity	—			—			—		2,322		2,322			—			—		—		722		722
Real estate	—			—			—		1,216		1,216			—			—		—		461		461
Total alternatives	—			—			—		6,598		6,598			—			—		—		2,362		2,362
Cash, cash equivalents, and repurchase agreements (b)	1,380			—			—		—		1,380			388			—		—		—		388
Other (c)	(953		)	—			—		—		(953		)	(715		)	—		5,633		—		4,918
Total assets at fair value	$	10,845		$	26,712		$	5	$	6,598	$	44,160		$	3,092		$	18,570	$	5,633	$	2,362	$	29,657

_______


(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)	Primarily short-term investment funds to provide liquidity to plan investment managers, cash held to pay benefits, and repurchase agreements valued at $(360) million in U.S. plans and $(181) million in non-U.S. plans.


(c)	For U.S. plans, amounts 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 $4.8 billion at year-end 2017) and amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).

NOTE 17. RETIREMENT BENEFITS (Continued)

The fair value of our defined benefit pension plan assets (including dividends and interest receivables of $340 million and $115 million for U.S. and non-U.S. plans, respectively) by asset category at December 31 was as follows (in millions):



	2018
	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	$	1,246		$	17	$	—	$	—	$	1,263		$	1,146		$	103		$	—	$	—	$	1,249
International companies	787			10		1		—		798			894			134			1		—		1,029
Total equity	2,033			27		1		—		2,061			2,040			237			1		—		2,278
Fixed Income
U.S. government and agencies	7,915			2,317		—		—		10,232			415			148			—		—		563
Non-U.S. government	—			1,073		—		—		1,073			—			14,871			—		—		14,871
Corporate bonds	—			19,905		—		—		19,905			—			2,875			—		—		2,875
Mortgage/other asset-backed	—			474		—		—		474			—			286			—		—		286
Commingled funds	—			94		—		—		94			—			268			—		—		268
Derivative financial instruments, net	9			43		—		—		52			13			(46		)	—		—		(33		)
Total fixed income	7,924			23,906		—		—		31,830			428			18,402			—		—		18,830
Alternatives
Hedge funds	—			—		—		3,217		3,217			—			—			—		1,143		1,143
Private equity	—			—		—		2,046		2,046			—			—			—		687		687
Real estate	—			—		—		1,242		1,242			—			—			—		413		413
Total alternatives	—			—		—		6,505		6,505			—			—			—		2,243		2,243
Cash, cash equivalents, and repurchase agreements (b)	354			—		—		—		354			(641		)	—			—		—		(641		)
Other (c)	(976		)	—		—		—		(976		)	(685		)	—			5,248		—		4,563
Total assets at fair value	$	9,335		$	23,933	$	1	$	6,505	$	39,774		$	1,142		$	18,639		$	5,249	$	2,243	$	27,273

_______


(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)	Primarily short-term investment funds to provide liquidity to plan investment managers, cash held to pay benefits, and repurchase agreements valued at $(1.7) billion in U.S. plans and $(1.4) billion in non-U.S. plans.


(c)	For U.S. plans, amounts 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 $4.3 billion at year-end 2018) and amounts related to net pending security (purchases)/sales and net pending foreign currency purchases/(sales).

NOTE 17. 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):



	2017
			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	$	14	$	(2	)	$	2		$	(9	)	$	—		$	5
Non-U.S. Plans (a)	5,252		381			—			—			—			5,633

	2018
			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	$	5	$	—		$	(5	)	$	4		$	(3	)	$	1
Non-U.S. Plans (a)	5,633		(384		)	1			(1		)	—			5,249

_______


(a)	Primarily Ford-Werke plan assets (insurance contract valued at $4.8 billion and $4.3 billion at year-end 2017 and 2018, respectively).