U. 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. This change resulted in the adoption of a significant plan amendment by certain Arconic U.S. postretirement benefit plans in August 2014. Accordingly, these plans were required to be remeasured.

Effective August 1, 2016, in preparation for the Separation Transaction, certain U.S. pension and postretirement benefit plans were separated, requiring a remeasurement as of that date. Additionally, one pension plan was required to be remeasured as a result of settlement accounting. Together, these remeasurements resulted in an increase of $845 to Arconic’s pension liability and an increase of $551 (net of tax) to the plans’ unrecognized net actuarial loss (included in Accumulated other comprehensive loss).

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,	2016			2015			2016			2015
Change in benefit obligation⁽¹⁾
Benefit obligation at beginning of year	$	14,247		$	15,019		$	2,319		$	2,368
Service cost		165			187			13			14
Interest cost		435			583			63			92
Amendments		2			18			-			-
Actuarial (gains) losses		770			(222	)		112			26
Acquisitions (F)		-			188			-			48
Transfer to Alcoa Corporation		(7,577	)		-			(1,340	)		-
Settlements		(82	)		(72	)		-			-
Curtailments		-			(12	)		-			(6	)
Benefits paid, net of participants’ contributions		(794	)		(1,033	)		(197	)		(235	)
Medicare Part D subsidy receipts		-			-			9			15
Foreign currency translation impact		(140	)		(409	)		1			(3	)
Benefit obligation at end of year⁽²⁾	$	7,026		$	14,247		$	980		$	2,319
Change in plan assets⁽¹⁾
Fair value of plan assets at beginning of year	$	10,928		$	11,717		$	-		$	-
Actual return on plan assets		89			24			-			-
Employer contributions		296			479			-			-
Participants’ contributions		16			21			-			-
Benefits paid		(762	)		(1,015	)		-			-
Administrative expenses		(65	)		(55	)		-			-
Acquisitions (F)		-			164			-			-
Transfer to Alcoa Corporation		(5,610	)		-			-			-
Settlements		(82	)		(72	)		-			-
Foreign currency translation impact		(144	)		(335	)		-			-
Fair value of plan assets at end of year⁽²⁾	$	4,666		$	10,928		$	-		$	-
Funded status*	$	(2,360	)	$	(3,319	)	$	(980	)	$	(2,319	)
Less: Amounts attributed to joint venture partners		-			30			-			-
Net funded status	$	(2,360	)	$	(3,289	)	$	(980	)	$	(2,319	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Noncurrent assets	$	6		$	9		$	-		$	-
Noncurrent assets of discontinued operations		-			35			-			-
Current liabilities		(21	)		(23	)		(91	)		(93	)
Current liabilities of discontinued operations		-			(12	)		-			(120	)
Noncurrent liabilities		(2,345	)		(1,925	)		(889	)		(917	)
Noncurrent liabilities of discontinued operations		-			(1,373	)		-			(1,189	)
Net amount recognized	$	(2,360	)	$	(3,289	)	$	(980	)	$	(2,319	)
Amounts recognized in Accumulated Other Comprehensive Loss consist of:
Net actuarial loss	$	2,979		$	5,351		$	150		$	398
Prior service cost (benefit)		15			70			(45	)		(106	)
Total, before tax effect		2,994			5,421			105			292
Less: Amounts attributed to joint venture partners		-			38			-			-
Net amount recognized, before tax effect	$	2,994		$	5,383		$	105		$	292
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss consist of:
Net actuarial loss	$	(1,992	)	$	440		$	(224	)	$	23
Amortization of accumulated net actuarial loss		(380	)		(468	)		(24	)		(17	)
Prior service (benefit) cost		(42	)		(7	)		37			1
Amortization of prior service (cost) benefit		(13	)		(25	)		24			37
Total, before tax effect		(2,427	)		(60	)		(187	)		44
Less: Amounts attributed to joint venture partners		(38	)		(5	)		-			-
Net amount recognized, before tax effect	$	(2,389	)	$	(55	)	$	(187	)	$	44

⁽¹⁾	The roll forward of the benefit obligation and the roll forward of plan assets have not been restated for discontinued operations for 2015 as it is impractical to do so.

⁽²⁾

At December 31, 2016, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,707, $3,495, and $(2,212), respectively. 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.

Pension Plan Benefit Obligations


	Pension benefits
	2016		2015
The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans was as follows:
Projected benefit obligation	$	7,026	$	14,247
Accumulated benefit obligation		6,850		13,832

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		6,995		14,146
Fair value of plan assets		4,629		10,786

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		6,104		12,510
Fair value of plan assets		3,894		9,512

Components of Net Periodic Benefit Cost


	Pension benefits⁽¹⁾									Other postretirement benefits⁽²⁾
	2016			2015			2014			2016			2015			2014
Service cost	$	155		$	175		$	166		$	13		$	14		$	15
Interest cost		431			577			630			63			92			114
Expected return on plan assets		(677	)		(753	)		(782	)		-			-			-
Recognized net actuarial loss		380			468			391			24			17			13
Amortization of prior service cost (benefit)		13			16			18			(24	)		(37	)		(25	)
Settlements⁽³⁾		19			16			26			-			-			-
Curtailments⁽⁴⁾		-			9			-			-			(4	)		-
Special termination benefits⁽⁵⁾		2			16			-			-			-			-
Net periodic benefit cost⁽⁶⁾	$	323		$	524		$	449		$	76		$	82		$	117
Discontinued operations		122			248			215			41			43			68
Net amount recognized in Statement of Consolidated Operations	$	201		$	276		$	234		$	35		$	39		$	49

Note:

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

⁽¹⁾	In 2016, 2015, and 2014, net periodic benefit cost for U.S pension plans was $261, $423, and $335, respectively.

⁽²⁾	In 2016, 2015, and 2014, net periodic benefit cost for other postretirement benefits reflects a reduction of $22, $34, and $38, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D.

⁽³⁾

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

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

⁽⁵⁾	In 2016 and 2015, 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
	2017		2017
Net actuarial loss recognition		216		8
Prior service cost (benefit) recognition		5		(8	)

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,	2016			2015
Discount rate		4.20	%		4.29	%
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 11 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 2017, 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):


	2016			2015			2014
Discount rate*		4.29	%		4.00	%		4.80	%
Expected long-term rate of return on plan assets		7.75			7.75			8.00
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 2016, 2015, and 2014 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 of $84 for pension plans and $14 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 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 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 2016, 2015, and 2014, 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 2017, 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):


	2016			2015			2014
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		2020			2019			2018

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 2017, 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 3.6%. 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	$	44	$	(40	)
Effect on total of service and interest cost components		4		(3	)

Plan Assets

Arconic’s pension plans’ investment policy and weighted average asset allocations at December 31, 2016 and 2015, by asset class, were as follows:


				Plan assets at December 31,
Asset class	Policy range			2016			2015
Equities		20–55	%		30	%		30	%
Fixed income		25–55	%		42			43
Other investments		15–35	%		28			27
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 risk factor 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, 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 V 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); 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.

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; and (iv) interest rate swaps and are generally valued using industry standard models with market-based observable inputs.

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 by investment managers based on the most recent financial information available, which typically represents significant unobservable data.

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:


December 31, 2016	Level 1		Level 2		Total
Equities:
Equity securities	$	393	$	-	$	393
Fixed income:
Intermediate and long duration government/credit	$	23	$	95	$	118
Other		1,060		51		1,111
	$	1,083	$	146	$	1,229
Other investments:
Real estate	$	81	$	-	$	81
Other		65		-		65
	$	146	$	-	$	146
Net plan assets subject to leveling	$	1,622	$	146	$	1,768
Plan assets measured at net asset value:
Equity securities					$	431
Long/short equity hedge funds						406
Private equity						165
Fixed income						729
Real estate						185
Discretionary and systematic macro hedge funds						784
Other investments						178
Total plan assets measured at net asset value					$	2,878
Net plan assets*					$	4,646


December 31, 2015	Level 1		Level 2		Total
Equities
Equity securities	$	826	$	-	$	826
Fixed income:
Intermediate and long duration government/credit	$	2,496	$	487	$	2,983
Other		-		307		307
	$	2,496	$	794	$	3,290
Other investments:
Real estate	$	158	$	-	$	158
Other		126		-		126
	$	284	$	-	$	284
Net plan assets subject to leveling	$	3,606	$	794	$	4,400
Plan assets measured at net asset value:
Equity securities					$	1,099
Long/short equity hedge funds						932
Private equity						466
Fixed income						1,413
Real estate						578
Discretionary and systematic macro hedge funds						1,671
Other investments						367
Total plan assets measured at net asset value					$	6,526
Net plan assets**					$	10,926

*	As of December 31, 2016, the total fair value of pension plans’ assets excludes a net receivable of $20, which represents assets due from the Alcoa Corporation as a result of plan separations and securities sold not yet settled plus interest and dividends earned on various investments.

**	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.

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, 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, Arconic contributes additional amounts as deemed appropriate. In 2016 and 2015, cash contributions to Arconic’s pension plans were $290 and $470. The minimum required contribution to pension plans in 2017 is estimated to be $310, of which $290 is for U.S. plans.

During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between Arconic and Alcoa Corporation in connection with the Separation Transaction. The plan stipulates that Arconic will make cash contributions totaling $150 over a period of 30 months to its two largest pension plans. The payments are expected to be made in increments no less than $50 each over the 30-month period, with the first payment due no later than six months after the separation date of November 1, 2016.

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:


Year ended December 31,	Pension benefits		Gross Other post- retirement benefits		Medicare Part D subsidy receipts		Net Other post- retirement benefits
2017	$	420	$	95	$	5	$	90
2018		425		95		5		90
2019		425		95		5		90
2020		430		95		5		90
2021		435		95		5		90
2022 through 2026		2,195		415		35		380
	$	4,330	$	890	$	60	$	830

Defined Contribution Plans

Arconic sponsors savings and investment plans in various countries, primarily in the United States. Expenses related to these plans were $71 in 2016, $83 in 2015, and $83 in 2014. 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.