20. Retirement Plans and Other Benefits

Pension and Other Postretirement Plans

The Company has defined benefit pension plans covering certain of its North American employees, which are funded in accordance with the provisions of the laws where the plans are in effect. In addition, the Company has a defined benefit plan for certain individuals of Runners Point Group.

The Company also sponsors postretirement medical and life insurance plans, which are available to most of its retired U.S. employees. These plans are contributory and are not funded. The measurement date of the assets and liabilities is the month-end date that is closest to our fiscal year end. The following tables set forth the plans’ changes in benefit obligations and plan assets, funded status, and amounts recognized in the Consolidated Balance Sheets:


	Pension Benefits				Postretirement Benefits
	2018		2017		2018		2017
	($ in millions)
Change in benefit obligation
Benefit obligation at beginning of year	$	683	$	666	$	15	$	15
Service cost		18		17		—		—
Interest cost		29		25		—		1
Plan participants’ contributions		—		—		1		1
Actuarial (gain) / loss		(16)		25		(2)		—
Foreign currency translation adjustments		(4)		3		—		—
Plan reformation (1)		194		—		—		—
Benefits paid		(165)		(53)		(2)		(2)
Benefit obligation at end of year	$	739	$	683	$	12	$	15

Change in plan assets
Fair value of plan assets at beginning of year	$	697	$	647
Actual return on plan assets		(15)		70
Employer contributions		131		29
Foreign currency translation adjustments		(4)		4
Benefits paid		(165)		(53)
Fair value of plan assets at end of year	$	644	$	697

Funded status	$	(95)		14	$	(12)	$	(15)

Amounts recognized on the balance sheet:
Other assets	$	7	$	36	$	—	$	—
Accrued and other liabilities		(3)		(3)		(1)		(1)
Other liabilities		(99)		(19)		(11)		(14)
	$	(95)	$	14	$	(12)	$	(15)

Amounts recognized in accumulated other
comprehensive loss, pre-tax:
Net loss (gain)	$	391	$	368	$	(6)	$	(5)
Prior service cost		1		1		—		—
	$	392	$	369	$	(6)	$	(5)

(1)

In connection with the pension litigation more fully disclosed in Note 22, Legal Proceedings, the Company reformed its U.S. qualified pension plan during the second quarter of 2018 in accordance with the court’s order.

As of February 2, 2019, the Canadian qualified pension plan’s assets exceeded its accumulated benefit obligation. As of February 3, 2018, the assets of both the Canadian and U.S. qualified pension plans exceeded their accumulated benefit obligations. The Company’s non-qualified pension plans have an accumulated benefit obligation in excess of plan assets, as these plans are unfunded. Accordingly, the table below reflects both the U.S. qualified plan and the non-qualified plans for 2018, whereas the amounts presented for 2017 reflects the non-qualified plans.

The following tables set forth the changes in accumulated other comprehensive loss (pre-tax) at February 2, 2019:


	Pension		Postretirement
	Benefits		Benefits
	($ in millions)
Net actuarial loss (gain) at beginning of year	$	368	$	(5)
Amortization of net (loss) gain		(12)		1
Loss / (gain) arising during the year		37		(2)
Foreign currency fluctuations		(2)		—
Net actuarial loss (gain) at end of year (1)	$	391	$	(6)
Net prior service cost at end of year (2)		1		—
Total amount recognized	$	392	$	(6)

(1)

The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost (income) during the next year are approximately $12 million and $(1) million related to the pension and postretirement plans, respectively.

(2)

The net prior service cost did not change during the year and is not expected to change significantly during the next year.

The following weighted-average assumptions were used to determine the benefit obligations under the plans:


	Pension Benefits				Postretirement Benefits
	2018		2017		2018		2017
Discount rate	4.0	%	3.7	%	4.1	%	3.7	%
Rate of compensation increase	3.6	%	3.6	%

Pension expense is actuarially calculated annually based on data available at the beginning of each year. The expected return on plan assets is determined by multiplying the expected long-term rate of return on assets by the market-related value of plan assets for the U.S. qualified pension plan and market value for the Canadian qualified pension plan. The market-related value of plan assets is a calculated value that recognizes investment gains and losses in fair value related to equities over three or five years, depending on which computation results in a market-related value closer to market value. Market-related value for the U.S. qualified plan was $615 million and $585 million for 2018 and 2017, respectively.

Assumptions used in the calculation of net benefit cost include the discount rate selected and disclosed at the end of the previous year, as well as other assumptions detailed in the table below:


	Pension Benefits						Postretirement Benefits
	2018		2017		2016		2018		2017		2016
Discount rate (1)	4.0	%	4.0	%	4.1	%	3.7	%	4.0	%	4.1	%
Rate of compensation increase	3.6	%	3.6	%	3.7	%
Expected long-term rate of return on assets	5.9	%	5.8	%	6.1	%

(1)

The U.S qualified pension plan was remeasured during the second quarter of 2018 in connection with the pension litigation more fully described in Note 22, Legal Proceedings. The discount rate used to determine the benefit obligation before the remeasurement was 3.7%.

The expected long-term rate of return on invested plan assets is based on the plans’ weighted-average target asset allocation, as well as historical and future expected performance of those assets. The target asset allocation is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to reduce the variability of future contributions by the Company.

The following are the components of net periodic pension benefit cost and net periodic postretirement benefit income. In conjunction with the first quarter 2018 adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, service cost continues to be recognized as part of SG&A expense, while the remaining pension and postretirement expense components are now recognized as part of other income. Prior periods were not reclassified as required by this ASU as the amounts were not considered significant.

The components of net benefit expense (income) are:



	Pension Benefits						Postretirement Benefits
	2018		2017		2016		2018		2017		2016

Service cost	$	18	$	17	$	16	$	—	$	—	$	—
Interest cost		29		25		26		—		1		1
Expected return on plan assets		(38)		(37)		(37)		—		—		—
Amortization of net loss (gain)		12		13		14		(1)		(2)		(2)
Net benefit expense (income)	$	21	$	18	$	19	$	(1)	$	(1)	$	(1)

Beginning in 2001, new retirees were charged the expected full cost of the medical plan, and then-existing retirees will incur 100 percent of the expected future increases in medical plan costs. Any changes in the health care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since retirees will incur 100 percent of such expected future increases.

The Company maintains a Supplemental Executive Retirement Plan (“SERP”), which is an unfunded plan that includes provisions for the continuation of medical and dental insurance benefits to certain executive officers and other key employees of the Company (“SERP Medical Plan”). The SERP Medical Plan’s accumulated projected benefit obligation at February 2, 2019 was $10 million. The following initial and ultimate cost trend rate assumptions were used to determine the benefit obligations under the SERP Medical Plan:


	Medical Trend Rate						Dental Trend Rate
	2018		2017		2016		2018		2017		2016
Initial cost trend rate	6.5	%	7.0	%	7.0	%	5.0	%	5.0	%	5.0	%
Ultimate cost trend rate	5.0	%	5.0	%	5.0	%	5.0	%	5.0	%	5.0	%
Year that the ultimate cost trend rate is reached	2025		2025		2021		2019		2018		2017

The following initial and ultimate cost trend rate assumptions were used to determine the net periodic cost under the SERP Medical Plan:


	Medical Trend Rate						Dental Trend Rate
	2018		2017		2016		2018		2017		2016
Initial cost trend rate	7.0	%	7.0	%	7.0	%	5.0	%	5.0	%	5.0	%
Ultimate cost trend rate	5.0	%	5.0	%	5.0	%	5.0	%	5.0	%	5.0	%
Year that the ultimate cost trend rate is reached	2025		2021		2021		2018		2017		2016

A one percentage-point change in the assumed health care cost trend rates would have the following effects on the SERP Medical Plan:

The mortality assumption used to value the Company’s 2018 and 2017 U.S. pension obligations was the RP‑2017 mortality table with generational projection using modified MP‑2017 for both males and females. The Company used the RP‑2000 mortality table with generational projection using scale AA for both males and females to value its Canadian pension obligations for both 2018 and 2017. For the SERP Medical Plan, the mortality assumption used to value the 2018 obligation was updated to the RPH‑2018 table with generational projection using MP‑2018, while in the prior year the obligation was valued using the RPH‑2017 table with generational projection using MP‑2017.

Plan Assets

The target composition of the Company’s Canadian qualified pension plan assets is 95 percent fixed-income securities and 5 percent equities. The Company believes plan assets are invested in a prudent manner with the same overall objective and investment strategy as noted below for the U.S. pension plan. The bond portfolio is comprised of government and corporate bonds chosen to match the duration of the pension plan’s benefit payment obligations. This current asset allocation will limit future volatility with regard to the funded status of the plan.

The target composition of the Company’s U.S. qualified pension plan assets is 60 percent fixed-income securities, 36.5 percent equities, and 3.5 percent real estate. The Company may alter the asset allocation targets from time to time depending on market conditions and the funding requirements of the pension plan. This current asset allocation has and is expected to limit volatility with regard to the funded status of the plan, but may result in higher pension expense due to the lower long-term rate of return associated with fixed-income securities. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above.

The Company believes plan assets are invested in a prudent manner with an objective of providing a total return that, over the long term, provides sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the level of funding risk deemed appropriate. The Company’s investment strategy seeks to diversify assets among classes of investments with differing rates of return, volatility, and correlation in order to reduce funding risk. Diversification within asset classes is also utilized to ensure that there are no significant concentrations of risk in plan assets and to reduce the effect that the return on any single investment may have on the entire portfolio.

Valuation of Investments

Significant portions of plan assets are invested in commingled trust funds. These funds are valued at the net asset value of units held by the plan at year end. Stocks traded on U.S. and Canadian security exchanges are valued at closing market prices on the measurement date.

The fair values of the Company’s Canadian pension plan assets at February 2, 2019 and February 3, 2018 were as follows:


	Level 1		Level 2		Level 3		2018 Total		2017 Total*
	($ in millions)
Cash and cash equivalents	$	—	$	1	$	—	$	1	$	1
Equity securities:
Canadian and international (1)		3		—		—		3		4
Fixed-income securities:
Cash matched bonds (2)		—		47		—		47		53
Total assets at fair value	$	3	$	48	$	—	$	51	$	58

*Each category of plan assets is classified within the same level of the fair value hierarchy for 2018 and 2017.

(1)

This category comprises one mutual fund that invests primarily in a diverse portfolio of Canadian securities.

(2)

This category consists of fixed-income securities, including strips and coupons, issued or guaranteed by the Government of Canada, provinces or municipalities of Canada including their agencies and crown corporations, as well as other governmental bonds and corporate bonds.

No Level 3 assets were held by the Canadian pension plan during 2018 and 2017.

The fair values of the Company’s U.S. pension plan assets at February 2, 2019 and February 3, 2018 were as follows:


	Level 1		Level 2		Level 3		2018 Total		2017 Total*
	($ in millions)
Cash and cash equivalents	$	—	$	3	$	—	$	3	$	4
Equity securities:
U.S. large-cap (1)		—		106		—		106		115
U.S. mid-cap (1)		—		32		—		32		34
International (2)		—		72		—		72		78
Corporate stock (3)		22		—		—		22		19
Fixed-income securities:
Long duration corporate and government bonds (4)		—		234		—		234		254
Intermediate duration corporate and government bonds (5)		—		104		—		104		113
Other types of investments:
Real estate securities (6)		—		20		—		20		21
Insurance contracts		—		—		—		—		1
Total assets at fair value	$	22	$	571	$	—	$	593	$	639

*Each category of plan assets is classified within the same level of the fair value hierarchy for 2018 and 2017.

(1)

These categories consist of various managed funds that invest primarily in common stocks, as well as other equity securities and a combination of other funds.

(2)

This category comprises three managed funds that invest primarily in international common stocks, as well as other equity securities and a combination of other funds.

(3)

This category consists of the Company’s common stock.

(4)

This category consists of various fixed-income funds that invest primarily in long-term bonds, as well as a combination of other funds, that together are designed to exceed the performance of related long-term market indices.

(5)

This category consists of two fixed-income funds that invest primarily in intermediate duration bonds, as well as a combination of other funds, that together are designed to exceed the performance of related indices.

(6)

This category consists of one fund that invests in global real estate securities.

No Level 3 assets were held by the U.S. pension plan during 2018 and 2017.

Contributions and Expected Payments

The Company made a contribution of $128 million to its U.S. qualified pension plan during 2018. Also during 2018, the Company also paid $3 million in pension benefits related to its non-qualified pension plans. The Company continually evaluates the amount and timing of any potential contributions. The Company anticipates making a $55 million contribution to the U.S. qualified pension plan in early 2019 representing the remaining balance of the qualified settlement fund established in 2017.

Estimated future benefit payments for each of the next five years and the five years thereafter are as follows:


	Pension		Postretirement
	Benefits		Benefits
	($ in millions)
2019	$	140	$	1
2020		54		1
2021		53		1
2022		53		1
2023		51		—
2024-2028		238		2

Savings Plans

The Company has two qualified savings plans, a 401(k) plan that is available to employees whose primary place of employment is the U.S., and another plan that is available to employees whose primary place of employment is in Puerto Rico. Prior to January 1, 2018, both plans limited participation to employees who had attained at least the age of twenty-one and have completed one year of service consisting of at least 1,000 hours. Effective January 1, 2018, eligible associates may contribute to the plans following 28 days of employment and are eligible for Company matching contributions upon completion of one year of service consisting of at least 1,000 hours. As of January 1, 2019, the savings plans allow eligible employees to contribute up to 40 percent of their compensation on a pre-tax basis, subject to a maximum of $19,000 for the U.S. plan and $15,000 for the Puerto Rico plan. The Company matches 25 percent of employees’ pre-tax contributions on up to the first 4 percent of the employees’ compensation (subject to certain limitations). Matching contributions made before January 1, 2016 were made with Company stock, subsequent to this date matching contributions were made in cash. Such matching contributions are vested incrementally over the first 5 years of participation for both plans. The charge to operations for the Company’s matching contribution was $4 million and $3 million for 2018 and 2017, respectively.

($ in millions)

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets