Postretirement Health Care and Life Insurance Benefits

In addition to pension and other supplemental benefits, certain retired employees currently are provided with specified health care and life insurance benefits. Eligibility requirements for such benefits vary by division and subsidiary, but generally state that benefits are available to eligible employees who were hired prior to a certain date and retire after a certain age with specified years of service. Certain employees are subject to having such benefits modified or terminated.

In 2016, the Company changed the method used to estimate the service and interest cost components of net periodic benefit costs for the postretirement obligations. The new method uses a full yield curve approach in the estimation of these components of net periodic benefit costs. Under this approach, the Company applies discounting using individual spot rates from the yield curve composed of the rates of return from a portfolio of high quality corporate debt securities available at the measurement date. These spot rates align to each of the accumulated postretirement obligation and service cost cash flows. Historically, the Company estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.

The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. The Company accounted for this change as a change in estimate prospectively starting in 2016.

The following provides a reconciliation of benefit obligations, plan assets, and funded status of the postretirement obligations as of February 3, 2018 and January 28, 2017:



	2017			2016
	(millions)
Change in accumulated postretirement benefit obligation
Accumulated postretirement benefit obligation, beginning of year	$	186		$	212
Service cost	—			—
Interest cost	5			6
Plan amendment	(10		)	—
Actuarial gain	(9		)	(13		)
Medicare Part D subsidy	1			1
Benefits paid	(17		)	(20		)
Accumulated postretirement benefit obligation, end of year	156			186
Change in plan assets
Fair value of plan assets, beginning of year	—			—
Company contributions	17			20
Benefits paid	(17		)	(20		)
Fair value of plan assets, end of year	—			—
Funded status at end of year	$	(156	)	$	(186	)
Amounts recognized in the Consolidated Balance Sheets at February 3, 2018 and January 28, 2017
Accounts payable and accrued liabilities	$	(17	)	$	(18	)
Other liabilities	(139		)	(168		)
	$	(156	)	$	(186	)
Amounts recognized in accumulated other comprehensive loss at February 3, 2018 and January 28, 2017
Net actuarial gain	$	(35	)	$	(31	)
Prior service credit	(10		)	—
	$	(45	)	$	(31	)

Net postretirement benefit costs and other amounts recognized in other comprehensive loss included the following actuarially determined components:



	2017			2016			2015
	(millions)
Net Periodic Postretirement Benefit Cost
Service cost	$	—		$	—		$	—
Interest cost	5			6			8
Amortization of net actuarial gain	(5		)	(4		)	—
Amortization of prior service cost	—			—			—
	—			2			8
Other Changes in Plan Assets and Projected Benefit Obligation Recognized in Other Comprehensive Loss
Net actuarial gain	(9		)	(13		)	(22		)
Amortization of net actuarial gain	5			4			—
Prior service credit	(10		)	—			—
	(14		)	(9		)	(22		)
Total recognized	$	(14	)	$	(7	)	$	(14	)

The estimated net actuarial gain and prior service credit that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit cost during 2018 is $6 million.

The following weighted average assumption was used to determine the accumulated postretirement benefit obligations at February 3, 2018 and January 28, 2017:



	2017		2016
Discount rate	3.71	%	3.99	%

The following weighted average assumption was used to determine the net postretirement benefit costs for the postretirement obligations:



	2017		2016		2015
Discount rate used to measure interest cost	3.17	%	3.14	%	3.55	%

The accumulated postretirement benefit obligation assumptions are evaluated annually, and at interim re-measurements if required, and updated as necessary.

The discount rate used to determine the present value of the Company’s accumulated postretirement benefit obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for the accumulated postretirement benefit obligations.

The future medical benefits provided by the Company for certain employees are based on a fixed amount per year of service, and the accumulated postretirement benefit obligation is not affected by increases in health care costs. However, the future medical benefits provided by the Company for certain other employees are affected by increases in health care costs.

The following provides the assumed health care cost trend rates related to the Company’s accumulated postretirement benefit obligations at February 3, 2018 and January 28, 2017:



	2017	2016
Health care cost trend rates assumed for next year	5.50% - 10.50%	6.15% - 9.75%
Rates to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.5%	5.0%
Year that the rate reaches the ultimate trend rate	2027	2027

The assumed health care cost trend rates have an impact on the amounts reported for the accumulated postretirement benefit obligations. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:



	1 – Percentage Point Increase		1 – Percentage Point Decrease
	(millions)
Effect on total of service and interest cost	$	—	$	—
Effect on accumulated postretirement benefit obligations	$	9	$	(8	)

The following table reflects the benefit payments estimated to be funded by the Company and paid from the accumulated postretirement benefit obligations and estimated federal subsidies expected to be received under the Medicare Prescription Drug Improvement and Modernization Act of 2003:



	Expected Benefit Payments		Expected Federal Subsidy
	(millions)
Fiscal Year
2018	$	16	$	1
2019	15		—
2020	14		—
2021	13		—
2022	13		—
2023-2027	52		1