W. Pension and Other Postretirement Benefits

Alcoa 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.

On June 6, 2014, the United Steelworkers ratified a new five-year labor agreement covering approximately 6,100 employees at 10 U.S. locations; the previous labor agreement expired on May 15, 2014. In 2014, as a result of the preparation for and ratification of the new agreement, Alcoa recognized $18 ($12 after-tax) in Cost of goods sold on the accompanying Statement of Consolidated Operations for, among other items, business contingency costs and a one-time signing bonus for employees. Additionally, as a result of the provisions of the new labor agreement, a significant plan amendment was adopted by one of Alcoa’s U.S. pension plans. Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated from 4.80% at December 31, 2013 to 4.25% at May 31, 2014. The plan remeasurement resulted in an increase to both Alcoa’s pension liability of $100 and a combination of the plan’s unrecognized net actuarial loss and prior service cost (included in Accumulated other comprehensive loss) of $65 (after-tax). The plan remeasurement also resulted in a $13 decrease to 2014 net periodic benefit cost.

Alcoa 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. Alcoa 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, Alcoa 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. This change resulted in the adoption of a significant plan amendment by certain Alcoa U.S. postretirement benefit plans in August 2014. Accordingly, these plans were required to be remeasured, and through this process, the discount rate was updated from 4.80% at December 31, 2013 to 4.15% at August 31, 2014. The remeasurement of the plans resulted in a decrease to both Alcoa’s other postretirement benefits liability of $90 and a combination of the plans’ unrecognized net actuarial loss and prior service benefit (included in Accumulated other comprehensive loss) of $59 (after-tax). The remeasurement of the plans also resulted in a $7 decrease to 2014 net periodic benefit cost.

The funded status of all of Alcoa’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,	2015			2014			2015			2014
Change in benefit obligation
Benefit obligation at beginning of year	$	15,019		$	13,730		$	2,368		$	2,592
Service cost		187			182			14			15
Interest cost		583			640			92			114
Amendments		18			33			-			(111	)
Actuarial (gains) losses		(222	)		1,552			26			16
Acquisitions (F)		188			455			48			-
Divestitures (F)		-			(142	)		-			(10	)
Settlements		(72	)		(134	)		-			-
Curtailments		(12	)		-			(6	)		-
Benefits paid, net of participants’ contributions		(1,033	)		(1,051	)		(235	)		(264	)
Medicare Part D subsidy receipts		-			-			15			19
Foreign currency translation impact		(409	)		(246	)		(3	)		(3	)
Benefit obligation at end of year*	$	14,247		$	15,019		$	2,319		$	2,368
Change in plan assets
Fair value of plan assets at beginning of year	$	11,717		$	10,580		$	-		$	-
Actual return on plan assets		24			1,764			-			-
Employer contributions		479			507			-			-
Participants’ contributions		21			25			-			-
Benefits paid		(1,015	)		(1,038	)		-			-
Administrative expenses		(55	)		(54	)		-			-
Acquisitions (F)		164			431			-			-
Divestitures (F)		-			(164	)		-			-
Settlements		(72	)		(134	)		-			-
Foreign currency translation impact		(335	)		(200	)		-			-
Fair value of plan assets at end of year*	$	10,928		$	11,717		$	-		$	-
Funded status*	$	(3,319	)	$	(3,302	)	$	(2,319	)	$	(2,368	)
Less: Amounts attributed to joint venture partners		(30	)		(33	)		-			-
Net funded status	$	(3,289	)	$	(3,269	)	$	(2,319	)	$	(2,368	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets	$	44		$	53		$	-		$	-
Current liabilities		(35	)		(31	)		(213	)		(213	)
Noncurrent liabilities		(3,298	)		(3,291	)		(2,106	)		(2,155	)
Net amount recognized	$	(3,289	)	$	(3,269	)	$	(2,319	)	$	(2,368	)
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss	$	5,351		$	5,379		$	398		$	392
Prior service cost (benefit)		70			102			(106	)		(144	)
Total, before tax effect		5,421			5,481			292			248
Less: Amounts attributed to joint venture partners		38			43			-			-
Net amount recognized, before tax effect	$	5,383		$	5,438		$	292		$	248
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss consist of:
Net actuarial loss	$	440		$	572		$	23		$	15
Amortization of accumulated net actuarial loss		(468	)		(391	)		(17	)		(13	)
Prior service (benefit) cost		(7	)		26			1			(112	)
Amortization of prior service (cost) benefit		(25	)		(18	)		37			25
Total, before tax effect		(60	)		189			44			(85	)
Less: Amounts attributed to joint venture partners		(5	)		5			-			-
Net amount recognized, before tax effect	$	(55	)	$	184		$	44		$	(85	)

At December 31, 2015, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $10,983, $8,077, and $(2,906), respectively. At December 31, 2014, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $11,404, $8,576, and $(2,828), respectively.

Pension Plan Benefit Obligations


	Pension benefits
	2015		2014
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as follows:
Projected benefit obligation	$	14,247	$	15,019
Accumulated benefit obligation		13,832		14,553

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		14,146		14,151
Fair value of plan assets		10,786		10,777

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		12,510		13,112
Fair value of plan assets		9,512		10,144

Components of Net Periodic Benefit Cost


	Pension benefits⁽¹⁾									Other postretirement benefits⁽²⁾
	2015			2014			2013			2015			2014			2013
Service cost	$	175		$	166		$	194		$	14		$	15		$	17
Interest cost		577			630			602			92			114			114
Expected return on plan assets		(753	)		(782	)		(788	)		-			-			-
Recognized net actuarial loss		468			391			489			17			13			35
Amortization of prior service cost (benefit)		16			18			19			(37	)		(25	)		(18	)
Settlements⁽³⁾		16			26			9			-			-			-
Curtailments⁽⁴⁾		9			-			6			(4	)		-			-
Special termination benefits⁽⁵⁾		16			-			77			-			-			-
Net periodic benefit cost⁽⁶⁾	$	524		$	449		$	608		$	82		$	117		$	148

⁽¹⁾	In 2015, 2014, and 2013, net periodic benefit cost for U.S pension plans was $423, $335, and $391, respectively.

⁽²⁾	In 2015, 2014, and 2013, net periodic benefit cost for other postretirement benefits reflects a reduction of $34, $38, and $55, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.

⁽³⁾

In 2015, settlements were due to workforce reductions (see Note D) and the payment of lump sum benefits and/or purchases of annuity contracts. In 2014, settlements were due to workforce reductions (see Note D). In 2013, settlements were due to the payment of lump sum benefits and/or purchases of annuity contracts.

⁽⁴⁾	In 2015 and 2013, curtailments were due to elimination of benefits or workforce reductions (see Note D).

⁽⁵⁾	In 2015 and 2013, special termination benefits were due to workforce reductions (see Note D).

⁽⁶⁾	Amounts attributed to joint venture partners are not included.

Amounts Expected to be Recognized in Net Periodic Benefit Cost


	Pension benefits		Other postretirement benefits
	2016		2016
Net actuarial loss recognition		413		21
Prior service cost (benefit) recognition		15		(26	)

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,	2015			2014
Discount rate		4.29	%		4.00	%
Rate of compensation increase		3.5			3.5

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, consumer products, transportation, insurance, and pharmaceutical, among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 10 years, and 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 2016, 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):


	2015			2014			2013
Discount rate*		4.00	%		4.80	%		4.15	%
Expected long-term rate of return on plan assets		7.75			8.00			8.50
Rate of compensation increase		3.50			3.50			3.50

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 2015, 2014, and 2013 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 Alcoa’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 cost will be determined in 2016 and beyond. Previously, the interest cost component was determined by multiplying the single equivalent rate described above and the aggregate discounted cash flows of the plans’ projected benefit obligations. Under the new methodology, the interest cost component will be 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 will result in a lower interest cost component of net periodic benefit cost under the new methodology compared to the previous methodology of approximately $100 ($65 after-tax) in 2016. 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 four-year average or the 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 the annual, 10-year moving, and 20-year moving averages when developing this assumption. 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 2015, 2014, and 2013, 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 2015, the decrease of 25 basis points in the expected long-term rate of return was due to a decrease in the 20-year moving average of actual performance. For 2016, management anticipates that 7.75% 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):


	2015			2014			2013
Health care cost trend rate assumed for next year		5.5	%		5.5	%		5.5	%
Rate to which the cost trend rate gradually declines		4.5	%		4.5	%		4.5	%
Year that the rate reaches the rate at which it is assumed to remain		2019			2018			2017

The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Alcoa’s other postretirement benefit plans. For 2016, 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 4.0%. to 9.6% 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	$	126	$	(113	)
Effect on total of service and interest cost components		5		(5	)

Plan Assets

Alcoa’s pension plans’ investment policy and weighted average asset allocations at December 31, 2015 and 2014, by asset class, were as follows:


				Plan assets at December 31,
Asset class	Policy range			2015			2014
Equities		20–55	%		30	%		33	%
Fixed income		25–55	%		43			45
Other investments		15–35	%		27			22
Total					100	%		100	%

The principal objectives underlying the investment of the pension plans’ assets are to ensure that Alcoa 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 risk factor diversification across the balance of the asset portfolio. A portion of the assets are matched to the interest rate profile of the benefit obligation through long duration fixed income investments and exposure to broad equity risk has been decreased and diversified through investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, 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 use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not significant when compared to the overall investment portfolio.

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 X 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 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 if quoted in an active market, otherwise these investments are included in Level 2); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued by investment managers based on the most recent financial information available, which typically represents significant unobservable data (generally classified as Level 3).

Fixed income. These securities consist of: (i) U.S. government debt and are generally valued using quoted prices (included in Level 1); (ii) 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); (iii) cash and cash equivalents, which consist of government securities in commingled funds, and are generally valued using observable market data (included in Level 2); and (iv) commercial and residential mortgage-backed securities and are valued by investment managers based on the most recent financial information available, which typically represents significant unobservable data (generally classified as Level 3).

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); (ii) the plans’ share of commingled funds that are invested in real estate investment trusts and are valued at the net asset value of shares held at December 31 (generally included in Level 3, however, if fair value is able to be determined through the use of quoted market prices of similar assets or other observable market data, then the investments are classified in Level 2); and (iii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued by investment managers based on the most recent financial information available, which typically represents significant unobservable data (generally classified as Level 3, however, if fair value is able to be determined through the use of quoted market prices of similar assets or other observable market data, then the investments are classified in Level 2).

The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Alcoa 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:


December 31, 2015	Level 1		Level 2		Level 3		Total
Equities:
Equity securities	$	826	$	929	$	170	$	1,925
Long/short equity hedge funds		-		-		932		932
Private equity		-		-		466		466
	$	826	$	929	$	1,568	$	3,323
Fixed income:
Intermediate and long duration government/credit	$	2,496	$	1,255	$	-	$	3,751
Other		-		952		-		952
	$	2,496	$	2,207	$	-	$	4,703
Other investments:
Real estate	$	158	$	16	$	562	$	736
Discretionary and systematic macro hedge funds		-		-		1,671		1,671
Other		126		-		367		493
	$	284	$	16	$	2,600	$	2,900
Total*	$	3,606	$	3,152	$	4,168	$	10,926

December 31, 2014	Level 1		Level 2		Level 3		Total
Equities
Equity securities	$	1,156	$	1,131	$	176	$	2,463
Long/short equity hedge funds		-		-		963		963
Private equity		-		-		543		543
	$	1,156	$	1,131	$	1,682	$	3,969
Fixed income:
Intermediate and long duration government/credit	$	2,998	$	1,900	$	-	$	4,898
Other		-		413		-		413
	$	2,998	$	2,313	$	-	$	5,311
Other investments:
Real estate	$	152	$	18	$	459	$	629
Discretionary and systematic macro hedge funds		-		-		1,408		1,408
Other		140		-		376		516
	$	292	$	18	$	2,243	$	2,553
Total**	$	4,446	$	3,462	$	3,925	$	11,833

*	As of December 31, 2015, the total fair value of pension plans’ assets excludes a net receivable of $2 which represents securities sold not yet settled plus interest and dividends earned on various investments.

As of December 31, 2014, the total fair value of pension plans’ assets excludes a net payable of $116, which represents assets related to divested businesses (see Note F) to be transferred to the buyers’ pension plans less securities sold not yet settled plus interest and dividends earned on various investments.

Pension plan assets classified as Level 3 in the fair value hierarchy represent investments in which the trustees have used significant unobservable inputs in the valuation model. The following table presents a reconciliation of activity for such investments:


	2015			2014
Balance at beginning of year	$	3,925		$	3,421
Realized gains		118			180
Unrealized gains		94			146
Purchases		640			868
Sales		(481	)		(768	)
Issuances		-			-
Settlements		-			-
Acquisitions (F)		12			117
Foreign currency translation impact		(140	)		(39	)
Transfers in and/or out of Level 3*		-			-
Balance at end of year	$	4,168		$	3,925

*	In 2015 and 2014, there were no transfers of financial instruments into or out of Level 3.

Funding and Cash Flows

It is Alcoa’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws, including the Pension Protection Act of 2006; the Worker, Retiree, and Employer Recovery Act of 2008; the Moving Ahead for Progress in the 21^st Century Act of 2012; the Highway and Transportation Funding Act of 2014; and the Bipartisan Budget Act of 2015 for U.S. plans. From time to time, Alcoa contributes additional amounts as deemed appropriate. In 2015 and 2014, cash contributions to Alcoa’s pension plans were $470 and $501. The minimum required contribution to pension plans in 2016 is estimated to be $300, of which $218 is for U.S. plans.

Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected Medicare Part D subsidy receipts are as follows:


Year ended December 31,	Pension benefits		Gross Other postretirement benefits		Medicare Part D subsidy receipts		Net Other postretirement benefits
2016	$	910	$	230	$	15	$	215
2017		900		225		15		210
2018		910		225		15		210
2019		910		220		15		205
2020		920		220		20		200
2021 through 2025		4,650		975		80		895
	$	9,200	$	2,095	$	160	$	1,935

Defined Contribution Plans

Alcoa sponsors savings and investment plans in several countries, including the United States and Australia. Expenses related to these plans were $142 in 2015, $151 in 2014, and $149 in 2013. In the United States, employees may contribute a portion of their compensation to the plans, and Alcoa matches a portion of these contributions in equivalent form of the investments elected by the employee. Prior to January 1, 2014, Alcoa’s match was mostly in company stock.