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EMPLOYEE BENEFITS
 12 Months Ended
Dec. 31, 2017
EMPLOYEE BENEFITS  
EMPLOYEE BENEFITS

21. Employee Benefits

Pension Plans

We offer various defined benefit plans to eligible employees.

The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan that is subject to the provisions of ERISA. U.S. salaried employees who are employed by a participating company on or before December 1, 2014 and who have completed 12 months of continuous service are eligible to participate in the plan. Effective April 1, 2012, the qualified plan was converted to a cash balance formula comprised of pay credits based on six percent of a plan participant’s annual compensation (subject to IRS limitations) and annual interest credits. Employees can take their vested benefits when they leave AIG as a lump sum or an annuity option after completing at least three years of service. Employees satisfying certain age and service requirements (i.e., grandfathered employees) remain covered under the average pay formula that was in effect prior to the conversion to the cash balance formula. The final average pay formula is based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Grandfathered employees will receive the higher of the benefit under the cash balance formula or the final average pay formula at retirement. Non-U.S. defined benefit plans generally are either based on the employee’s years of credited service and compensation in the years preceding retirement or on points accumulated based on the employee’s job grade and other factors during each year of service.

In the U.S. we also sponsor non-qualified unfunded defined benefit plans, such as the AIG Non-Qualified Retirement Income Plan (AIG NQRIP) for certain employees, including key executives, designed to supplement pension benefits provided by the qualified plan.  The AIG NQRIP provides a benefit equal to the reduction in benefits under the qualified plan as a result of federal tax limitations on compensation and benefits payable.

Plan Freeze

Effective January 1, 2016, the U.S. defined benefit pension plans were frozen. Consequently, these plans are closed to new participants and current participants no longer earn benefits. However, interest credits continue to accrue on the existing cash balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and subsidies as they continue to be employed by AIG.

Postretirement Plans

We also provide postretirement medical care and life insurance benefits in the U.S. and in certain non-U.S. countries. Eligibility in the various plans generally is based upon completion of a specified period of eligible service and attaining a specified age. Overseas, benefits vary by geographic location.

U.S. postretirement medical and life insurance benefits are based upon the employee attaining the age of 55 and having a minimum of ten years of service. Eligible employees who have medical coverage can enroll in retiree medical upon termination of employment. Medical benefits are contributory, while the life insurance benefits generally are non-contributory. Retiree medical contributions vary from none for pre-1989 retirees to actual premium payments reduced by certain subsidies for post-1992 retirees. These contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination. Effective April 1, 2012, the retiree medical employer subsidy for the AIG postretirement plan was eliminated for employees who were not grandfathered. Additionally, new employees hired after December 31, 2012 are not eligible for retiree life insurance.

The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance Sheets. The measurement date for most of the non-U.S. defined benefit pension and postretirement plans is November 30, consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of December 31.

As of or for the Years EndedPension Postretirement
December 31,U.S. Plans*Non-U.S. Plans*U.S. Plans Non-U.S. Plans
(in millions)20172016201720162017201620172016
Change in projected benefit obligation:
Benefit obligation, beginning of year$4,948$5,324$1,246$1,146$196$208$80$75
Service cost111929312233
Interest cost16618116216733
Actuarial (gain) loss372118(29)98-(2)(2)-
Benefits paid:
AIG assets(19)(24)(10)(12)(13)(14)(1)(1)
Plan assets(161)(332)(26)(35)----
Plan amendment---1--(6)-
Curtailments--(7)(2)-(1)--
Settlements(226)(338)(12)(16)----
Foreign exchange effect--3719--1-
Other--(42)(5)(1)(4)(15)-
Projected benefit obligation, end of year$5,091$4,948$1,202$1,246$190$196$63$80
Change in plan assets:
Fair value of plan assets, beginning
of year$3,843$4,359$803$773$-$-$-$-
Actual return on plan assets, net of expenses5841546719----
AIG contributions329246071131411
Benefits paid:
AIG assets(19)(24)(10)(12)(13)(14)(1)(1)
Plan assets(161)(332)(26)(35)----
Settlements(226)(338)(12)(16)----
Foreign exchange effect--196----
Dispositions---(4)----
Other--(26)1----
Fair value of plan assets, end of year$4,350$3,843$875$803$-$-$-$-
Funded status, end of year$(741)$(1,105)$(327)$(443)$(190)$(196)$(63)$(80)
Amounts recognized in the balance
sheet:
Assets$-$-$68$53$-$-$-$-
Liabilities(741)(1,105)(395)(496)(190)(196)(63)(80)
Total amounts recognized$(741)$(1,105)$(327)$(443)$(190)$(196)$(63)$(80)
Pre-tax amounts recognized in Accumulated
other comprehensive income:
Net gain (loss)$(1,373)$(1,405)$(170)$(251)$17$17$(11)$(15)
Prior service (cost) credit--(22)(28)125-
Total amounts recognized$(1,373)$(1,405)$(192)$(279)$18$19$(6)$(15)

* Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $272 million and $278 million for the U.S. at December 31, 2017 and 2016, respectively, and $211 million and $199 million for the non-U.S at December 31, 2017 and 2016, respectively.

The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:

At December 31,
(in millions)20172016
U.S. pension benefit plans$5,091$4,948
Non-U.S. pension benefit plans$1,188$1,215

Defined benefit plan obligations in which the projected benefit obligation was in excess of the related plan assets and the accumulated benefit obligation was in excess of the related plan assets were as follows:

At December 31,PBO Exceeds Fair Value of Plan Assets ABO Exceeds Fair Value of Plan Assets
U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans
(in millions)20172016201720162017201620172016
Projected benefit obligation$5,091$4,948$1,054$1,121$5,091$4,948$991$1,029
Accumulated benefit obligation5,0914,9489791,0165,0914,9489791,009
Fair value of plan assets4,3503,8435965454,3503,843596536

The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:

Years Ended December 31,Pension Postretirement
U.S. PlansNon-U.S. PlansU.S. PlansNon-U.S. Plans
(in millions)201720162015201720162015201720162015201720162015
Components of net periodic benefit
cost:
Service cost*$11$19$192$29$31$43$2$2$5$3$3$3
Interest cost166181220162125678333
Expected return on assets(266)(292)(295)(24)(26)(25)------
Amortization of prior service credit--(22)--(2)(1)(12)(11)(1)-(1)
Amortization of net (gain) loss2625921279(1)(1)-11-
Net periodic benefit cost (credit)(63)(67)1873333506(4)2675
Curtailment gain--(179)(6)(6)(1)-(1)-(2)--
Settlement loss60149-121------
Net benefit cost (credit)$(3)$82$8$28$29$50$6$(5)$2$4$7$5
Total recognized in Accumulated other
comprehensive income (loss)$32$(82)$143$87$(101)$38$(2)$(7)$12$9$1$(9)
Total recognized in net periodic benefit
cost and other comprehensive
income (loss)$35$(164)$135$59$(130)$(12)$(8)$(2)$10$5$(6)$(14)

* Reflects administrative fees for the U.S. pension plans.

The estimated net loss and prior service cost that will be amortized from Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $35 million and $2 million, respectively, for our combined defined benefit pension plans. For the defined benefit postretirement plans, the estimated amortization from Accumulated other comprehensive income for net loss and prior service credit that will be amortized into net periodic benefit cost over the next fiscal year is a $3 million credit in the aggregate.

As of 2016, interest cost for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans is measured by applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation (the Spot Rate Approach). This method provides a more precise measurement of interest cost by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve. Previously, interest cost was measured utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.

A 100 basis point increase in the discount rate or expected long-term rate of return would decrease the 2018 pension expense by approximately $4 million and $51 million, respectively, with all other items remaining the same. Conversely, a 100 basis point decrease in the discount rate or expected long-term rate of return would increase the 2018 pension expense by approximately $23 million and $51 million, respectively, with all other items remaining the same.

Assumptions

The following table summarizes the weighted average assumptions used to determine the benefit obligations:

Pension Postretirement
U.S. PlansNon-U.S. Plans(a)U.S. PlansNon-U.S. Plans(a)
December 31, 2017
Discount rate3.61%1.60%3.53%3.59%
Rate of compensation increaseN/A(b)2.27%N/A3.00%
December 31, 2016
Discount rate4.14%1.50%4.02%3.95%
Rate of compensation increaseN/A(b)2.50%N/A3.38%

(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.

(b) Compensation increases are no longer applicable due to the plan freeze that became effective January 1, 2016.

The following table summarizes assumed health care cost trend rates for the U.S. plans:

At December 31,20172016
Following year:
Medical (before age 65)6.12%6.31%
Medical (age 65 and older)5.00%5.00%
Ultimate rate to which cost increase is assumed to decline4.50%4.50%
Year in which the ultimate trend rate is reached:
Medical (before age 65)20382038
Medical (age 65 and older)20382038

A one percent point change in the assumed healthcare cost trend rate would have the following effect on our postretirement benefit obligations:

One PercentOne Percent
At December 31,Increase Decrease
(in millions)2017201620172016
U.S. plans$4$4$(4)$(3)
Non-U.S. plans$14$19$(10)$(14)

Our postretirement plans provide benefits primarily in the form of defined employer contributions rather than defined employer benefits. Changes in the assumed healthcare cost trend rate have a minimal impact for U.S. plans because for post-1992 retirees, benefits are fixed dollar amounts based on service at retirement. Our non-U.S. postretirement plans are not subject to caps.

The following table presents the weighted average assumptions used to determine the net periodic benefit costs:

Pension Postretirement
U.S. Plans Non-U.S. Plans*U.S. Plans Non-U.S. Plans*
For the Year Ended December 31, 2017
Discount rate4.15%1.50%4.01%3.95%
Rate of compensation increaseN/A2.50%N/A3.38%
Expected return on assets7.00%2.92%N/AN/A
For the Year Ended December 31, 2016
Discount rate4.33%2.17%4.21%4.09%
Rate of compensation increaseN/A2.64%N/A3.43%
Expected return on assets7.00%3.28%N/AN/A
For the Year Ended December 31, 2015
Discount rate3.94%2.33%3.77%4.04%
Rate of compensation increase3.40%2.89%N/A3.29%
Expected return on assets7.25%3.33%N/AN/A

* The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of the subsidiaries providing such benefits.

Discount Rate Methodology

The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates derived from the Mercer U.S. Pension Discount Yield Curve at December 31, 2017 and 2016, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 3.61 percent at December 31, 2017 and 4.15 percent at December 31, 2016. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. pension plans.

In general, the discount rates for the non-U.S. plans were developed using a similar methodology to the U.S. AIG Retirement plan, by using country-specific Mercer Yield Curves.

The projected benefit obligation for AIG’s Japan pension plans represents approximately 50 percent and 54 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 2017 and 2016, respectively. The weighted average discount rate of 0.66 percent and 0.47 percent at December 31, 2017 and 2016, respectively, was selected by reference to the Mercer Yield Curve for Japan.

Plan Assets

The investment strategy with respect to assets relating to our U.S. and non-U.S. pension plans is designed to achieve investment returns that will provide for the benefit obligations of the plans over the long term, limit the risk of short-term funding shortfalls and maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the investment rate of return while managing various risk factors, including, but not limited to, volatility relative to the benefit obligations, liquidity, diversification and concentration, and incorporates the risk/return profile applicable to each asset class.

There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2017 or 2016.

U.S. Pension Plan

The assets of the qualified plan are monitored by the AIG U.S. Investment Committee and actively managed by the investment managers, which involves allocating the plan’s assets among approved asset classes within ranges as permitted by the strategic allocation. The long-term strategic asset allocation historically has been reviewed and revised approximately every three years. Beginning in 2016, the investment strategy focus is on de-risking the Plan via regular monitoring.  This was implemented through liability driven investing and the adoption of the glide path approach, where the glide path defines the target allocation for the “Return-Seeking” portion of the portfolio (i.e., growth assets) based on the funded ratio. Under this approach, the allocation to growth assets is reduced and the allocation to liability-hedging assets is increased as the Plan’s funded ratio increases in accordance with the defined glide path.

The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation for 2017 based on the plan’s funded status at December 31, 2017:

TargetActualActual
At December 31,201820172016
Asset class:
Equity securities46%45%43%
Fixed maturity securities44%36%36%
Other investments10%19%21%
Total100%100%100%

The expected long-term rate of return for the plan was 7.0 percent for both 2017 and 2016. The expected rate of return is an aggregation of expected returns within each asset class category, weighted for the investment mix of the assets. The combination of the expected asset return and any contributions made by us are expected to maintain the plan’s ability to meet all required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the expectations for future market returns.

Non-U.S. Pension Plans

The assets of the non-U.S. pension plans are held in various trusts in multiple countries and are invested primarily in equities and fixed maturity securities to maximize the long-term return on assets for a given level of risk.

The following table presents the asset allocation percentage by major asset class for non-U.S. pension plans and the target allocation:

TargetActualActual
At December 31,201820172016
Asset class:
Equity securities30%49%44%
Fixed maturity securities52%32%36%
Other investments17%13%14%
Cash and cash equivalents1%6%6%
Total100%100%100%

The assets of AIG’s Japan pension plans represent approximately 56 percent of total non-U.S. assets at December 31 for both 2017 and 2016. The expected long term rate of return was 2.43 percent and 2.61 percent, for 2017 and 2016, respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annual basis along with various investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the funding policy is revised in accordance with local regulation every five years.

The expected weighted average long-term rate of return for all our non-U.S. pension plans was 2.92 percent and 3.28 percent for the years ended December 31, 2017 and 2016, respectively. It is an aggregation of expected returns within each asset class that was generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns.

Assets Measured at Fair Value

The following table presents information about our plan assets and indicates the level of the fair value measurement based on the observability of the inputs used. The inputs and methodology used in determining the fair value of these assets are consistent with those used to measure our assets as discussed in Note 5 herein.

U.S. PlansNon-U.S. Plans
(in millions)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
At December 31, 2017
Assets:
Cash and cash equivalents$397$-$-$397$51$-$-$51
Equity securities:
U.S.(a)1,300--1,300----
International(b)265--26536264-426
Fixed maturity securities:
U.S. investment grade(c)-1,006121,018----
International investment grade(c)-204-204-97-97
U.S. and international high yield(d)-212-212-171-171
Mortgage and other asset-backed
securities(e)-142-142----
Other fixed maturity securities-----16-16
Other investment types(g):
Direct private equity(f)--1515----
Insurance contracts-20-20--113113
Total$1,962$1,584$27$3,573$413$348$113$874
At December 31, 2016
Assets:
Cash and cash equivalents$228$-$-$228$50$-$-$50
Equity securities:
U.S.(a)8381-839----
International(b)377--37729858-356
Fixed maturity securities:
U.S. investment grade(c)-1,17421,176----
International investment grade(c)-----90-90
U.S. and international high yield(d)-218-218-186-186
Mortgage and other asset-backed
securities(e)--------
Other fixed maturity securities-----13-13
Other investment types(g):
Direct private equity(f)--2424----
Insurance contracts-21-21--108108
Total$1,443$1,414$26$2,883$348$347$108$803

(a) Includes passive and active U.S. Large Cap and Small Cap strategies, as well as mutual funds, and exchange traded funds.

(b) Includes investments in companies in emerging and developed markets.

(c) Represents investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.

(d) Consists primarily of investments in securities or debt obligations that have a rating below investment grade.

(e) Comprised primarily of investments in U.S. asset backed securities and collateralized loan obligations.

(f) Comprised of private capital financing including private debt and private equity securities.

(g) Excludes investments that are measured at fair value using the NAV per share (or its equivalent), which totaled $777 million and $960 million at December 31, 2017 and 2016, respectively.

The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2017.

The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $20 million and $21 million at December 31, 2017 and 2016, respectively.

Changes in Level 3 Fair Value Measurements

The following table presents changes in our U.S. and non-U.S. Level 3 plan assets measured at fair value:

Changes in
NetUnrealized Gains
BalanceRealized and Balance(Losses) on
At December 31, 2017BeginningUnrealizedTransfersTransfersat EndInstruments Held
(in millions)of yearGains (Losses)PurchasesSalesIssuancesSettlementsInOutof yearat End of year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$2$-$17$(7)$-$-$-$-$12$2
Direct private equity24(3)1(7)----15(1)
Total$26$(3)$18$(14)$-$-$-$-$27$1
Non-U.S. Plan Assets:
Other fixed maturity securities$-$-$-$-$-$-$-$-$-$-
Insurance contracts10841-----113-
Total$108$4$1$-$-$-$-$-$113$-

Changes in
NetUnrealized Gains
BalanceRealized and Balance(Losses) on
At December 31, 2016BeginningUnrealizedTransfersTransfersat EndInstruments Held
(in millions)of yearGains (Losses)PurchasesSalesIssuancesSettlementsInOutof yearat End of year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$9$1$2$(10)$-$-$-$-$2$-
Direct private equity28(4)4(4)----24(4)
Total$37$(3)$6$(14)$-$-$-$-$26$(4)
Non-U.S. Plan Assets:
Other fixed maturity securities$-$-$-$-$-$-$-$-$-$-
Insurance contracts95121---2(2)108-
Total$95$12$1$-$-$-$2$(2)$108$-

Transfers of Level 1 and Level 2 Assets

Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. We had no material transfers between Level 1 and Level 2 during the years ended December 31, 2017 and 2016.

Transfers of Level 3 Assets

We record transfers of assets into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the year ended December 31, 2017, we had no transfers in or out of Level 3.

Expected Cash Flows

Funding for the qualified plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no minimum required cash contributions in 2018 for the AIG Retirement Plan. The non-qualified and postretirement plans’ benefit payments are deductible when paid to participants.

Our annual pension contribution in 2018 is expected to be approximately $64 million for our U.S. and non-U.S. pension plans. This estimate is subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management’s discretion.

The expected future benefit payments, net of participants’ contributions, with respect to the defined benefit pension plans and other postretirement benefit plans, are as follows:

Pension Postretirement
U.S.Non-U.S.U.S.Non-U.S.
(in millions)PlansPlansPlansPlans
2018$291$36$13$1
201928740131
202029742131
202129443132
202229141132
2023-20271,4072356011

Defined Contribution Plans

We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by employees. The most significant plan is the AIG Incentive Savings Plan, for which the matching contribution is 100 percent of the first six percent of a participant’s contributions, subject to the IRS-imposed limitations. Effective January 1, 2016, participants in the AIG Incentive Savings Plan receive an additional fully vested, non-elective, non-discretionary contribution equal to three percent of the participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the IRS-imposed limitations.

Our pre-tax expenses associated with these plans were $209 million, $236 million and $166 million in 2017, 2016 and 2015, respectively.