Pension and Other Postretirement Benefits

Arconic maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension benefits generally depend on length of service, job grade, and remuneration. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and non-bargaining hourly U.S. employees hired after March 1, 2006 participate in a defined contribution plan instead of a defined benefit plan.

Arconic also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations. Generally, the medical plans are unfunded and pay a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Arconic retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010 are not eligible for postretirement health care benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits.

Effective January 1, 2015, Arconic no longer offers postretirement health care benefits to Medicare-eligible, primarily non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees (hired prior to January 1, 2002), both current and future, may access these benefits in the marketplace by purchasing coverage directly from insurance carriers.

In the first quarter of 2018, the Company announced that, effective April 1, 2018, benefit accruals for future service and compensation under all of the Company's qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargaining hourly employees ceased. As a result of this change, in the first quarter of 2018, the Company recorded a decrease to the Accrued pension benefits liability of $136 related to the reduction of future benefits, $141 offset in Accumulated other comprehensive loss, and curtailment charges of $5 in Restructuring and other charges.

On April 13, 2018, the United Auto Workers ratified a new five-year labor agreement, covering approximately 1,300 U.S. employees of Arconic, which expires on March 31, 2023. A provision within the agreement includes a retirement benefit increase for future retirees that participate in a defined benefit pension plan, which impacts approximately 300 of those employees. In addition, effective January 1, 2019, benefit accruals for future service will cease. As result of these changes, a curtailment charge of $9 was recorded in Restructuring and other charges in the second quarter of 2018.

In the third quarter of 2018, the Company announced that effective December 31, 2018, it will end all pre-Medicare medical, prescription drug and vision coverage for current and future salaried and non-bargained hourly employees and retirees of the Company and its subsidiaries. As a result of this change, in the third quarter of 2018, the Company recorded a decrease to the Accrued other postretirement benefits liability of $32 related to the reduction of future benefits, $4 offset in Accumulated other comprehensive loss, and a curtailment benefit of $28 in Restructuring and other charges.

In the fourth quarter, the company communicated to plan participants that effective in the first quarter of 2019, benefit accruals for future service and compensation for employees in the United Kingdom defined benefit pension plans will cease. The plan curtailment resulted in a $13 decrease in the Accrued pension benefits liability which was offset in Accumulated other comprehensive loss. Additionally, on October 29, 2018, the United Kingdom High Court ruled that defined benefit pension plans offering Guaranteed Minimum Pensions must review benefits accrued between May 1990 to April 1997 to ensure gender pay equality. The review resulted in an increase to the Accrued pension benefits liability of $9 and a corresponding curtailment charge that was recorded in Restructuring and other charges.

In the third and fourth quarters of 2018, settlement accounting applied to certain U.S. pension plans due to lump sum payments to participants, resulting in settlement charges of $96 that were recorded in Restructuring and other charges.

The funded status of all of Arconic’s pension and other postretirement benefit plans are measured as of December 31 each calendar year.

Obligations and Funded Status



	Pension benefits						Other postretirement benefits
December 31,	2018			2017			2018			2017
Change in benefit obligation
Benefit obligation at beginning of year	$	7,359		$	7,026		$	927		$	980
Service cost	46			90			7			7
Interest cost	219			234			28			30
Amendments	18			1			(25		)	—
Actuarial (gains) losses	(372		)	311			(51		)	1
Settlements	(146		)	—			—			—
Curtailments	(154		)	—			—			—
Benefits paid	(422		)	(425		)	(86		)	(98		)
Medicare Part D subsidy receipts	—			—			6			7
Foreign currency translation impact	(72		)	122			—			—
Benefit obligation at end of year⁽¹⁾	$	6,476		$	7,359		$	806		$	927
Change in plan assets⁽¹⁾
Fair value of plan assets at beginning of year	$	4,862		$	4,666		$	—		$	—
Actual return on plan assets	(144		)	212			—			—
Employer contributions	298			310			—			—
Benefits paid	(397		)	(404		)	—			—
Administrative expenses	(33		)	(33		)	—			—
Settlements	(178		)	—			—			—
Foreign currency translation impact	(74		)	111			—			—
Fair value of plan assets at end of year⁽¹⁾	$	4,334		$	4,862		$	—		$	—
Net funded status	$	(2,142	)	$	(2,497	)	$	(806	)	$	(927	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets	$	111		$	89		$	—		$	—
Current liabilities	(23		)	(22		)	(83		)	(86		)
Noncurrent liabilities	(2,230		)	(2,564		)	(723		)	(841		)
Net amount recognized	$	(2,142	)	$	(2,497	)	$	(806	)	$	(927	)
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss	$	2,957		$	3,240		$	87		$	146
Prior service cost (benefit)	3			10			(27		)	(37		)
Net amount recognized, before tax effect	$	2,960		$	3,250		$	60		$	109
Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of:
Net actuarial (gain) loss	$	(19	)	$	481		$	(52	)	$	1
Amortization of accumulated net actuarial loss	(264		)	(220		)	(7		)	(5		)
Prior service cost (benefit)	19			—			(25		)	—
Amortization of prior service (cost) benefit	(26		)	(5		)	35			8
Net amount recognized, before tax effect	$	(290	)	$	256		$	(49	)	$	4


⁽¹⁾	At December 31, 2018, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,282, $3,123, and $(2,159), respectively. At December 31, 2017, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $6,018, $3,544, and $(2,474) respectively.

Pension Plan Benefit Obligations



	Pension benefits
	2018		2017
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as follows:
Projected benefit obligation	$	6,476	$	7,359
Accumulated benefit obligation	6,444		7,169
The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows:
Projected benefit obligation	5,435		6,600
Fair value of plan assets	3,182		4,016
The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows:
Accumulated benefit obligation	5,415		6,422
Fair value of plan assets	3,179		3,998

Components of Net Periodic Benefit Cost



	Pension benefits⁽¹⁾									Other postretirement benefits⁽²⁾
For the year ended December 31,	2018			2017			2016			2018			2017			2016
Service cost	$	46		$	90		$	155		$	7		$	7		$	13
Interest cost	219			234			431			28			30			63
Expected return on plan assets	(306		)	(332		)	(677		)	—			—			—
Recognized net actuarial loss	168			220			380			7			5			24
Amortization of prior service cost (benefit)	3			5			13			(7		)	(8		)	(24		)
Settlements⁽³⁾	96			—			19			—			—			—
Curtailments⁽⁴⁾	23			—			—			(28		)	—			—
Special termination benefits⁽⁵⁾	—			—			2			—			—			—
Net periodic benefit cost⁽⁶⁾	$	249		$	217		$	323		$	7		$	34		$	76
Discontinued operations	—			—			122			—			—			41
Net amount recognized in Statement of Consolidated Operations	$	249		$	217		$	201		$	7		$	34		$	35


Note:	the footnotes below include components of Net Periodic Benefit Cost related to Alcoa Corporation through the completion of the Separation Transaction in 2016.


⁽¹⁾	In 2018, 2017 and 2016, net periodic benefit cost for U.S. pension plans was $239, $206, and $261, respectively.


⁽²⁾	In 2018, 2017 and 2016, net periodic benefit cost for other postretirement benefits reflects a reduction of $10, $11, and $22, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.


⁽³⁾	In 2018 and 2016, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or purchases of annuity contracts.


⁽⁴⁾	In 2018, curtailments were due to a reduction of future benefits, resulting in the recognition of favorable and unfavorable plan amendments.


⁽⁵⁾	In 2016, special termination benefits were due to workforce reductions (see Note D).

⁽⁶⁾

Amounts attributed to joint venture partners are not included. Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments and settlements were included in Restructuring and other charges; and all other cost components were recorded in Other expense (income), net in the Statement of Consolidated Operations.

Amounts Expected to be Recognized in Net Periodic Benefit Cost



	Pension benefits		Other postretirement benefits
December 31,	2019		2019
Net actuarial loss recognition	$	139	$	3
Prior service cost (benefit) recognition	2		(4		)

Assumptions

Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):



December 31,	2018		2017
Discount rate	4.35	%	3.75	%
Rate of compensation increase	3.50		3.50
Cash balance plan interest crediting rate	3.00		3.00

The discount rate is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, industrials, transportation, and utilities, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 10 years. The underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times.

The rate of compensation increase is based upon actual experience. For 2019, the rate of compensation increase will be 3.5%, which approximates the five-year average.

Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):



	2018		2017		2016
Discount rate to calculate service cost⁽¹⁾	3.75	%	4.20	%	4.29	%
Discount rate to calculate interest cost⁽¹⁾	3.30		3.60		3.15
Expected long-term rate of return on plan assets	7.00		7.75		7.75
Rate of compensation increase	3.50		3.50		3.50
Cash balance plan interest crediting rate	3.00		3.00		3.00

⁽¹⁾

In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S. pension plans for the full annual period. However, the discount rates for a limited number of plans were updated during 2018, 2017, and 2016 to reflect the remeasurement of these plans due to new union labor agreements, settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount rates presented.

In conjunction with the annual measurement of the funded status of Arconic’s pension and other postretirement benefit plans at December 31, 2015, management elected to change the manner in which the interest cost component of net periodic benefit costs is determined in 2016 and beyond. Previously, the interest component was determined by multiplying the single equivalent rate and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component is determined by aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an individual spot rate (referred to as the “spot rate” approach). This change resulted in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology in 2018, 2017, and 2016 of $24, $34, and $84, respectively, for pension plans and $4, $6, and $14, respectively, for other postretirement benefit plans. Management believes this new methodology, which represents a change in an accounting estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of bond payments in the same respective year.

The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan assets (a fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on a combination of historical asset return information and forward-looking returns by asset class. As it relates to historical asset return information, management focuses on various historical moving averages when developing this assumption. While consideration is given to recent performance and historical returns, the assumption represents a long-term, prospective return. Management also incorporates expected future returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment.

For 2018, 2017, and 2016, the expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2018, management reduced the expected long-term rate of return by 75 basis points due to a decrease in the expected return by asset class and the 20-year moving average. For 2019, management anticipates that 7.00% will be the expected long-term rate of return.

Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-U.S. plans did not differ materially):



	2018		2017		2016
Health care cost trend rate assumed for next year	5.50	%	5.50	%	5.50	%
Rate to which the cost trend rate gradually declines	4.50		4.50		4.50
Year that the rate reaches the rate at which it is assumed to remain	2022		2021		2020

The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Arconic’s other postretirement benefit plans. For 2019, a 5.5% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend experience over the past three years has ranged from (3.3)% to (0.5)%. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term.

Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage point change in these assumed rates would have the following effects:



	1% increase		1% decrease
Effect on other postretirement benefit obligations	$	22	$	(22	)
Effect on total of service and interest cost components	1		(1		)

Plan Assets

Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31, 2018 and 2017, by asset class, were as follows:



		Plan assets at December 31,
Asset class	Policy range	2018		2017
Equities	20–55%	29	%	28	%
Fixed income	25–55%	48		47
Other investments	15–35%	23		25
Total		100	%	100	%

The principal objectives underlying the investment of the pension plans’ assets are to ensure that Arconic can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities and achieving diversification across the balance of the asset portfolio. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The investment strategy has used long duration cash bonds and derivative instruments to offset a portion of the interest rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk has been decreased and diversified through investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, high yield bonds, emerging market debt and global and emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the financial markets and to mitigate manager-concentration risk.

Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and other applicable laws and regulations.

The following section describes the valuation methodologies used by the trustees to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note R for the definition of fair value and a description of the fair value hierarchy).

Equities. These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies, and equity derivatives, that are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) that are valued at net asset value.

Fixed income. These securities consist of: (i) U.S. government debt that are generally valued using quoted prices (included in Level 1); (ii) cash and cash equivalents invested in publicly-traded funds and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (iii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2); (iv) fixed income derivatives that are generally valued using industry standard models with market-based observable inputs (included in Level 2); and (v) cash and cash equivalents invested in institutional funds and are valued at net asset value.

Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate investment trusts and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value.

The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Arconic believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset cost:



December 31, 2018	Level 1		Level 2		Net asset value		Total
Equities:
Equity securities	$	318	$	—	$	578	$	896
Long/short equity hedge funds	—		—		232		232
Private equity	—		—		147		147
	$	318	$	—	$	957	$	1,275
Fixed income:
Intermediate and long duration government/credit	$	200	$	934	$	770	$	1,904
Other	9		9		152		170
	$	209	$	943	$	922	$	2,074
Other investments:
Real estate	$	81	$	—	$	164	$	245
Discretionary and systematic macro hedge funds	—		—		471		471
Other	56		—		212		268
	$	137	$	—	$	847	$	984
Net plan assets⁽¹⁾	$	664	$	943	$	2,726	$	4,333



December 31, 2017	Level 1		Level 2		Net Asset Value		Total
Equities
Equity securities	$	379	$	—	$	593	$	972
Long/short equity hedge funds	—		—		230		230
Private equity	—		—		155		155
	$	379	$	—	$	978	$	1,357
Fixed income:
Intermediate and long duration government/credit	$	201	$	981	$	779	$	1,961
Other	164		8		145		317
	$	365	$	989	$	924	$	2,278
Other investments:
Real estate	$	85	$	—	$	172	$	257
Discretionary and systematic macro hedge funds	—		—		583		583
Other	77		7		275		359
	$	162	$	7	$	1,030	$	1,199
Net plan assets⁽²⁾	$	906	$	996	$	2,932	$	4,834


⁽¹⁾	As of December 31, 2018, the total fair value of pension plans’ assets excludes a net receivable of $1, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments.


⁽²⁾	As of December 31, 2017, the total fair value of pension plans’ assets excludes a net receivable of $28, which represents assets due from Alcoa Corporation as a result of plan separations and securities sold not yet settled plus interest and dividends earned on various investments.

Funding and Cash Flows

It is Arconic’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws. Periodically, Arconic contributes additional amounts as deemed appropriate. In 2018 and 2017, cash contributions to Arconic’s pension plans were $298 and $310, respectively. The $298 includes $72 contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA.

The minimum required contribution to pension plans in 2019 is estimated to be $255 (of which $230 is for U.S. plans) and includes $34 related to an agreement reached with the Pension Benefit Guaranty Corporation (PBGC), as discussed in the following paragraph.

During the third quarter of 2016, the PBGC approved management’s plan to separate the Alcoa Inc. pension plans between Arconic Inc. and Alcoa Corporation. The plan stipulates that Arconic will make cash contributions over a period of 30 months (from November 1, 2016) to its two largest pension plans. Payments are expected to be made in three increments of no less than $50 each ($150 total) over this 30-month period. The Company made payments of $50 in March 2018 and $50 in April 2017. In the third quarter of 2018, the 2018 U.S. pension plan valuations were completed and additional pension contributions of $16 that were made in the first quarter of 2018 were able to be used to partially satisfy the third $50 requirement. The remaining $34 payment is expected to be made in 2019. Through the end of 2018, $116 of pension contributions have been made toward the $150 requirement.

Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above:



For the year ended December 31,	Pension benefits paid		Gross Other post- retirement benefits		Medicare Part D subsidy receipts		Net Other post- retirement benefits
2019	$	460	$	90	$	5	$	85
2020	460		85		5		80
2021	455		85		5		80
2022	455		85		5		80
2023	450		85		5		80
Thereafter	2,170		300		25		275
	$	4,450	$	730	$	50	$	680

Defined Contribution Plans

Arconic sponsors savings and investment plans in various countries, primarily in the United States. Arconic’s contributions and expenses related to these plans were $123 in 2018, $89 in 2017, and $71 in 2016. In the United States, employees may contribute a portion of their compensation to the plans, and Arconic matches a portion of these contributions in equivalent form of the investments elected by the employee.