Retirement and Other Benefit Programs

As part of the acquisition of Baxalta, the Company assumed certain pension and other post-employment benefit (“OPEB”) plan obligations and plan assets. The following is a summary of the fair value of the pension and OPEB-related balances assumed as of June 3, 2016, the acquisition date.



(in millions)	U.S. pensions			International pensions			OPEB
Projected Benefit Obligation and Plan Assets Assumed
Projected benefit obligation	$	441.6		$	503.8		$	23.5
Plan assets	218.0			140.5			—
Funded status as of June 3, 2016	$	(223.6	)	$	(363.3	)	$	(23.5	)

Amounts Recognized in the Consolidated Balance Sheet
Other current liabilities	$	(0.2	)	$	(3.1	)	$	—
Other non-current liabilities	(223.4		)	(360.2		)	(23.5		)
Net liability recognized as of June 3, 2016	$	(223.6	)	$	(363.3	)	$	(23.5	)

The Company did not assume any gains or losses deferred in AOCI.

Accumulated Benefit Obligation Information

The pension obligation information in the table above represents the projected benefit obligation (“PBO”) assumed as of June 3, 2016. The PBO incorporates assumptions relating to future compensation levels. The accumulated benefit obligation (“ABO”) is the same as the PBO except that it includes no assumptions relating to future compensation levels. The ABO for all of the Company’s U.S. pension plans was $369.2 million as of June 3, 2016. The ABO for all of the Company’s International pension plans was $386.8 million as of June 3, 2016.

The information in the funded status table above represents the totals for all of the Company’s pension plans. The following is information relating to the individual plans as of June 3, 2016 in the funded status table above that have an ABO in excess of plan assets.



(in millions)	June 3, 2016
U.S.
ABO	$	369.2
Fair value of plan assets	218.0
International
ABO	364.9
Fair value of plan assets	118.2

Expected Net Pension and OPEB Plan Payments for the Next 10 Years



(in millions)	U.S. pensions		International pensions		OPEB
2016 (after June 3, 2016)	$	0.9	$	7.3	$	—
2017	3.6		14.7		0.2
2018	5.4		14.6		0.3
2019	7.3		16.2		0.4
2020	9.3		16.7		0.5
2021 through 2025	75.6		104.8		3.5
Total expected benefit payments for next 10 years	$	102.1	$	174.3	$	4.9

The expected net benefit payments above reflected the Company’s share of the total net benefits expected to be paid from the plans’ assets (for funded plans) or from the Company’s assets (for unfunded plans) as of June 3, 2016. The federal subsidies relating to the Medicare Prescription Drug, Improvement and Modernization Act are not expected to be significant.

Weighted-Average Assumptions Used in Determining Benefit Obligations at the Measurement Date and Net Periodic Benefit Cost



	U.S. pensions		International pensions		OPEB
Discount rate	4.1	%	1.0	%	4.2	%
Rate of compensation increase	3.8	%	3.2	%	n/a
Annual rate of increase in the per-capita cost	n/a		n/a		6.5	%
Rate decreased to	n/a		n/a		5.0	%
by the year ended	n/a		n/a		2022

The assumptions above, which were used in calculating the June 3, 2016 measurement date benefit obligations, are used in the calculation of net periodic benefit cost in 2016 along with the expected return on plan asset assumption. The Company establishes the expected return on plan assets assumption primarily based on a review of historical compound average asset returns, both Company-specific and relating to the broad market (based on the Company’s asset allocation), as well as an analysis of current market and economic information and future expectations. The Company is using weighted-average assumptions of 7.0% and 4.5% for its U.S. and International funded plans, respectively, in its calculation of net period benefit cost in 2016.

Pension Plan Assets

A committee of members of senior management is responsible for supervising, monitoring and evaluating the invested assets of the Company’s funded pension plans. The committee abides by policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, use of derivatives, the relationship between plan assets and benefit obligations, and other relevant factors and considerations. In the United States, Goldman Sachs Asset Management acts as an outsourced chief investment officer (“oCIO”) to perform the day-to-day management of pension assets.

The policies and procedures include the following:


•	Ability to pay all benefits when due;


•	Targeted long-term performance expectations relative to applicable market indices, such as Standard & Poor’s, Russell, MSCI EAFE, and other indices;


•	Targeted asset allocation percentage ranges (summarized below), and periodic reviews of these allocations;


•	Specified investment holding and transaction prohibitions (for example, private placements or other restricted securities, securities that are not traded in a sufficiently active market, short sales, certain derivatives, commodities and margin transactions);


•	Specified portfolio percentage limits on holdings in a single corporate or other entity (generally 5%, except for holdings in U.S. government or agency securities);


•	Specified average credit quality for the fixed-income securities portfolio (at least A- by Standard & Poor’s or A3 by Moody’s);


•	Specified portfolio percentage limits on foreign holdings; and


•	Periodic monitoring of oCIO performance and adherence to policies.

Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and exceed the planned benchmark investment return. Investment strategies and asset allocations are based on consideration of plan liabilities, the plans’ funded status and other factors, such as the plans’ demographics and liability durations. Investment performance is reviewed on a quarterly basis and asset allocations are reviewed at least annually.

Plan assets are managed in a balanced equity and fixed income portfolio. The target allocations for plan assets are 75 percent in an equity portfolio and 25 percent in a fixed income portfolio. The documented policy includes an allocation range based on each individual investment type within the major portfolios that allows for a variance from the target allocations of approximately 5%. The equity portfolio may include common stock of U.S. and international companies, common/collective trust funds, mutual funds, hedge funds and real asset investments. The fixed income portfolio may include cash, money market funds with an original maturity of three months or less, U.S. and foreign government and governmental agency issues, common/collective trust funds, corporate bonds, municipal securities, derivative contracts and asset-backed securities.

While the committee provides oversight over plan assets for U.S. and international plans, the summary above is specific to the plans in the U.S. The plan assets for international plans are managed and allocated by the entities in each country, with input and oversight provided by the committee.

The following pension assets are recorded at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).



U.S. pension plan assets
(in millions)	Balance at June 3, 2016		Level 1		Level 2		Level 3
Assets
Fixed income
Cash equivalents*	$	4.4	$	—	$	—	$	—
Collective trust funds*	42.7		—		—		—
Mutual fund*	10.7		—		—		—
Equity
Collective trust funds*	96.5		—		—		—
Mutual fund*	53.0		17.0		—		—
Hedge funds*	10.7		—		—		—
Fair value of pension plan assets	$	218.0	$	17.0	$	—	$	—

*Investments that are measured at fair value using the net asset value per share or its equivalent as a practical expedient are not required to be classified in the fair value hierarchy.

The following tables summarize the bases used to measure the pension plan assets and liabilities that are carried at fair value on a recurring basis for the international funded plans.



International pension plan assets
(in millions)	Balance at June 3, 2016		Level 1		Level 2		Level 3
Assets
Fixed income
Cash and cash equivalents	$	9.7	$	9.7	$	—	$	—
Government agency issues	1.5		1.5		—		—
Corporate bonds	30.1		30.1		—		—
Mutual funds	40.5		40.5		—		—
Equity
Common stock:
Large cap	15.7		15.7		—		—
Mid cap	1.6		1.6		—		—
Total common stock	17.3		17.3		—		—
Mutual funds	21.5		21.5		—		—
Real estate funds*	10.2		8.4		—		—
Other holdings	9.7		0.1		9.6		—
Fair value of pension plan assets	$	140.5	$	129.1	$	9.6	$	—

*Investments that are measured at fair value using the net asset value per share or its equivalent as a practical expedient are not required to be classified in the fair value hierarchy.

The assets and liabilities of the Company’s pension plans are valued using the following valuation methods:



Investment category	Valuation methodology
Cash and cash equivalents	These largely consist of a short-term investment fund, U.S. dollars and foreign currency. The fair value of the short-term investment fund is based on the net asset value
Government agency issues	Values are based on quoted prices in an active market
Corporate bonds	Values are based on the valuation date in an active market
Common stock	Values are based on the closing prices on the valuation date in an active market on national and international stock exchanges
Mutual funds	Values are based on the net asset value of the units held in the respective fund which are obtained from national and international exchanges or as reported by the fund managers
Collective trust funds and hedge funds	Values are based on the net asset value of the units held at year end
Real estate funds	The value of these assets are either determined by the net asset value of the units held in the respective fund which are obtained from national and international exchanges or based on the net asset value of the underlying assets of the fund provided by the fund manager
Other holdings	The value of these assets vary by investment type and are primarily based on reputable pricing vendors that typically use pricing matrices or models

Net Periodic Benefit Cost

The net periodic benefit cost presented below is from the June 3, 2016 through September 30, 2016.



	June 3, 2016 through September 30, 2016
(in millions)	U.S. pensions			International pensions			OPEB
Net periodic benefit cost
Service cost	$	7.4		$	10.5		$	0.5
Interest cost	6.4			1.8			0.3
Expected return on plan assets	(5.1		)	(2.2		)	—
Net periodic benefit cost	$	8.7		$	10.1		$	0.8

The net periodic benefit cost presented below is for the three months ended September 30, 2016.



	Three months ended September 30, 2016
(in millions)	U.S. pensions			International pensions			OPEB
Net periodic benefit cost
Service cost	$	5.5		$	7.9		$	0.4
Interest cost	4.8			1.4			0.2
Expected return on plan assets	(3.8		)	(1.7		)	—
Net periodic benefit cost	$	6.5		$	7.6		$	0.6

Expected Pension and OPEB Plan Funding

The Company’s funding policy for its pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flows generated by the Company, and other factors. Volatility in the global financial markets could have an unfavorable impact on future funding requirements. The Company has no obligation to fund its principal plans in the U.S. in 2016. The Company made cash contributions to its international plans of approximately $4 million from the June 3, 2016 acquisition date through September 30, 2016. The Company did not make any significant voluntary contributions to its U.S. Qualified plan from the June 3, 2016 acquisition date through September 30, 2016. During the three months ended December 31, 2016, the Company expects to make cash contributions to its pension plans of at least $1 million, primarily related to its international plans, and expects to have net cash outflows relating to its OPEB plan of less than $1 million. The Company continually reassesses the amount and timing of any discretionary contributions, which could be significant in any period.

The table below details the funded status percentage of the Company’s assumed pension plans from Baxalta as of the acquisition date, including certain plans that are unfunded in accordance with the guidelines of the Company’s funding policy outlined above.



	United States				International
(in millions, except percentages)	Qualified plans			Nonqualified plans	Funded plans			Unfunded plans	Total
Fair value of plan assets	$	218.0		n/a	$	140.5		n/a	$	358.5
PBO	410.9			30.7	324.0			179.8	945.4
Funded status percentage	53		%	n/a	43		%	n/a	38		%