PENSION BENEFITS

The Company sponsors a number of U.S. and foreign pension plans to provide retirement benefits for its employees. The majority of these plans are funded or unfunded defined benefit plans, although the Company does participate in a limited number of multiemployer or other defined contribution plans for certain employee groups. See Note 12 for more information regarding the Company’s participation in multiemployer plans. Defined benefits for salaried employees are generally based on salary and years of service, while union employee benefits are generally a negotiated amount for each year of service. The Company uses a December 31 measurement date for these plans and, when necessary, adjusts for plan contributions and significant events between December 31 and its fiscal year-end.

In September 2018, the Company recognized a curtailment gain of $30 million as certain European pension plans were frozen as of December 29, 2018 in conjunction with Project K restructuring.

In September 2017, the Company amended certain defined benefit pension plans in the U.S. and Canada for salaried employees. As of December 31, 2018, the amendment will freeze the compensation and service periods used to calculate pension benefits for active salaried employees who participate in the affected pension plans. During the third quarter of 2017, the Company recognized related pension curtailment gains totaling $136 million included within Project K restructuring activity.

Beginning January 1, 2019, impacted employees will not accrue additional benefits for future service and eligible compensation received under these plans. Concurrently, the Company also amended its 401(k) savings plans effective January 1, 2019, to make previously ineligible salaried U.S. and Canada employees eligible for Company retirement contributions, which range from 3% to 7% of eligible compensation based on the employee’s length of employment.

Obligations and funded status

The aggregate change in projected benefit obligation, plan assets, and funded status is presented in the following tables.



(millions)	2018			2017
Change in projected benefit obligation
Beginning of year	$	5,648		$	5,510
Service cost	87			96
Interest cost	165			164
Plan participants’ contributions	1			1
Amendments	6			6
Actuarial (gain)loss	(384		)	264
Benefits paid	(280		)	(395		)
Curtailment and special termination benefits	(36		)	(156		)
Other	1			1
Foreign currency adjustments	(91		)	157
End of year	$	5,117		$	5,648
Change in plan assets
Fair value beginning of year	$	5,043		$	4,544
Actual return on plan assets	(299		)	666
Employer contributions	270			31
Plan participants’ contributions	1			1
Benefits paid	(236		)	(364		)
Other	(1		)	1
Foreign currency adjustments	(101		)	164
Fair value end of year	$	4,677		$	5,043
Funded status	$	(440	)	$	(605	)
Amounts recognized in the Consolidated Balance Sheet consist of
Other assets	$	228		$	252
Other current liabilities	(17		)	(19		)
Other liabilities	(651		)	(838		)
Net amount recognized	$	(440	)	$	(605	)
Amounts recognized in accumulated other comprehensive income consist of
Prior service cost	$	41		$	48
Net amount recognized	$	41		$	48

The accumulated benefit obligation for all defined benefit pension plans was $5.0 billion and $5.4 billion at December 29, 2018 and December 30, 2017, respectively. Information for pension plans with accumulated benefit obligations in excess of plan assets were:



(millions)	2018		2017
Projected benefit obligation	$	3,725	$	4,119
Accumulated benefit obligation	$	3,689	$	4,051
Fair value of plan assets	$	3,081	$	3,279

Expense

The components of pension expense are presented in the following table. Service cost is recorded in COGS and SGA expense. All other components of net periodic benefit cost are included in OIE. Pension expense for defined contribution plans relates to certain foreign-based defined contribution plans and multiemployer plans in the United States in which the Company participates on behalf of certain unionized workforces.



(millions)	2018			2017			2016
Service cost	$	87		$	96		$	98
Interest cost	165			164			174
Expected return on plan assets	(361		)	(371		)	(352		)
Amortization of unrecognized prior service cost	8			9			13
Recognized net (gain) loss	269			(36		)	323
Net periodic benefit cost	168			(138		)	256
Curtailment and special termination benefits	(30		)	(151		)	1
Pension (income) expense:
Defined benefit plans	138			(289		)	257
Defined contribution plans	27			34			36
Total	$	165		$	(255	)	$	293

The estimated prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive income into pension expense over the next fiscal year is approximately $7 million.

The Company and certain of its subsidiaries sponsor 401(k) or similar savings plans for active employees. Expense related to these plans was (in millions): 2018 – $38 million; 2017 – $41 million; 2016 – $39 million. These amounts are not included in the preceding expense table. Company contributions to these savings plans approximate annual expense. Company contributions to multiemployer and other defined contribution pension plans approximate the amount of annual expense presented in the preceding table.

Assumptions

The worldwide weighted-average actuarial assumptions used to determine benefit obligations were:



	2018		2017		2016
Discount rate	3.9	%	3.3	%	3.6	%
Long-term rate of compensation increase	3.8	%	3.9	%	3.9	%

The worldwide weighted-average actuarial assumptions used to determine annual net periodic benefit cost were:



	2018		2017		2016
Discount rate	3.3	%	3.6	%	4.1	%
Long-term rate of compensation increase	3.9	%	3.9	%	3.9	%
Long-term rate of return on plan assets	7.4	%	8.1	%	8.1	%

To determine the overall expected long-term rate of return on plan assets, the Company models expected returns over a 20-year investment horizon with respect to the specific investment mix of its major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. The U.S. model, which corresponds to approximately 72% of consolidated pension and other postretirement benefit plan assets, incorporates a long-term inflation assumption of 2.5% and an active management premium of 1% (net of fees) validated by historical analysis. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. The expected rate of return for 2018 of 7.5% for the U.S. plans equated to approximately the 39th percentile expectation. Refer to Note 1.

At the end of 2014, the Company revised its mortality assumption after considering the Society of Actuaries’ (SOA) updated mortality tables and improvement scale, as well as other mortality information available from the Social Security Administration to develop assumptions aligned with the Company’s expectation of future improvement rates. In determining the appropriate mortality assumptions as of December 29, 2018, the Company considered the SOA's 2018 updated improvement scale. The SOA's 2018 scale incorporates changes consistent with the Company's view of future mortality improvements established in 2014. Therefore, the Company adopted the 2018 SOA improvement scales. The change to the mortality assumption decreased the year-end pension liability by $10 million.

To conduct the annual review of discount rates, the Company selected the discount rate based on a cash-flow matching analysis using Towers Watson’s proprietary RATE:Link tool and projections of the future benefit payments that constitute the projected benefit obligation for the plans. RATE:Link establishes the uniform discount rate that produces the same present value of the estimated future benefit payments, as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. The measurement dates for the defined benefit plans are consistent with the Company’s fiscal year end. Accordingly, the Company selects yield curves to measure benefit obligations consistent with market indices during December of each year.

Plan assets

The Company categorized Plan assets within a three level fair value hierarchy described as follows:

Investments stated at fair value as determined by quoted market prices (Level 1) include:

Cash and cash equivalents: Value based on cost, which approximates fair value.

Corporate stock, common: Value based on the last sales price on the primary exchange.

Investments stated at estimated fair value using significant observable inputs (Level 2) include:

Cash and cash equivalents: Institutional short-term investment vehicles valued daily.

Mutual funds: Valued at exit prices quoted in active or non-active markets or based on observable inputs.

Collective trusts: Valued at exit prices quoted in active or non-active markets or based on observable inputs.

Bonds: Value based on matrices or models from pricing vendors.

Limited partnerships: Value based on the ending net capital account balance at year end.

Investments stated at estimated fair value using significant unobservable inputs (Level 3) include:

Real estate: Value based on the net asset value of units held at year end. The fair value of real estate holdings is based on market data including earnings capitalization, discounted cash flow analysis, comparable sales transactions or a combination of these methods.

Buy-in annuity contracts: Value based on the calculated pension benefit obligation covered by the non-participating annuity contracts at year-end.

Bonds: Value based on matrices or models from brokerage firms. A limited number of the investments are in default.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods 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 Company’s practice regarding the timing of transfers between levels is to measure transfers in at the beginning of the month and transfers out at the end of the month. For the year ended December 29, 2018, the Company had no transfers between Levels 1 and 2.

The fair value of Plan assets as of December 29, 2018 summarized by level within the fair value hierarchy are as follows:



(millions)	Total Level 1		Total Level 2		Total Level 3		Total NAV (practical expedient)(a)		Total
Cash and cash equivalents	$	75	$	—	$	—	$	—	$	75
Corporate stock, common:
Domestic	412		—		—		—		412
International	10		1		—		—		11
Mutual funds:
International equity	—		7		—		34		41
Domestic debt	—		53		—		—		53
Collective trusts:
Domestic equity	—		—		—		437		437
International equity	—		92		—		1,330		1,422
Other international debt	—		—		—		331		331
Limited partnerships	—		—		—		283		283
Bonds, corporate	—		498		—		—		498
Bonds, government	—		562		—		—		562
Bonds, other	—		62		—		—		62
Real estate	—		—		—		378		378
Other	—		55		—		57		112
Total	$	497	$	1,330	$	—	$	2,850	$	4,677

(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The fair value of Plan assets at December 30, 2017 are summarized as follows:



(millions)	Total Level 1		Total Level 2		Total Level 3		Total NAV (practical expedient)(a)		Total
Cash and cash equivalents	$	66	$	21	$	—	$	—	$	87
Corporate stock, common:
Domestic	500		—		—		—		500
International	17		1		—		—		18
Mutual funds:
International equity	—		120		—		38		158
Domestic debt	—		—		—		36		36
Collective trusts:
Domestic equity	—		—		—		525		525
International equity	—		176		—		1,390		1,566
Other international debt	—		—		—		365		365
Limited partnerships	—		—		—		591		591
Bonds, corporate	—		482		—		—		482
Bonds, government	—		177		—		—		177
Bonds, other	—		63		—		—		63
Real estate	—		—		—		284		284
Other	—		128		—		63		191
Total	$	583	$	1,168	$	—	$	3,292	$	5,043

(a) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

There were no unfunded commitments to purchase investments at December 29, 2018 or December 30, 2017.

The Company’s investment strategy for its major defined benefit plans is to maintain a diversified portfolio of asset classes with the primary goal of meeting long-term cash requirements as they become due. Assets are invested in a prudent manner to maintain the security of funds while maximizing returns within the Plan’s investment policy. The investment policy specifies the type of investment vehicles appropriate for the Plan, asset allocation guidelines, criteria for the selection of investment managers, procedures to monitor overall investment performance as well as investment manager performance. It also provides guidelines enabling Plan fiduciaries to fulfill their responsibilities.

The current weighted-average target asset allocation reflected by this strategy is: equity securities–45%; debt securities–28%; real estate and other–27%. Investment in Company common stock represented 1.0% and 1.2% of consolidated plan assets at December 29, 2018 and December 30, 2017, respectively. Plan funding strategies are influenced by tax regulations and funding requirements. The Company currently expects to contribute, before consideration of incremental discretionary contributions, approximately $7 million to its defined benefit pension plans during 2019.

Level 3 gains and losses

Changes in the fair value of the Plan’s Level 3 assets are summarized as follows:



(millions)	Buy-in Annuity Contract			Other		Total
December 31, 2016	$	131		$	—	$	131
Sales	(131		)	—		(131		)
Purchases	—			—		—
Transfers	—			—		—
Realized and unrealized gain	—			—		—
Currency translation	—			—		—
December 30, 2017	$	—		$	—	$	—

The net change in Level 3 assets includes a gain attributable to the change in unrealized holding gains or losses related to Level 3 assets held at December 29, 2018 and December 30, 2017 was zero.

Benefit payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions): 2019–$261; 2020–$261; 2021–$269; 2022–$275; 2023–$281; 2024 to 2028–$1,482.