Postretirement Benefit Plans

Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans

Many of our employees are covered by qualified defined benefit pension plans and we provide certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualified defined benefit pension plans to provide for benefits in excess of qualified plan limits. Non-union employees hired after December 2005 do not participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. Over the last few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension plans. In June 2014, we amended certain of our qualified and nonqualified defined benefit pension plans for non-union employees; comprising the majority of our benefit obligations; to freeze future retirement benefits. The calculation of retirement benefits under the affected defined benefit pension plans is determined by a formula that takes into account the participants’ years of credited service and average compensation. The freeze will take effect in two stages. On January 1, 2016, the pay-based component of the formula used to determine retirement benefits was frozen so that future pay increases, annual incentive bonuses or other amounts earned for or related to periods after December 31, 2015 are not used to calculate retirement benefits. On January 1, 2020, the service-based component of the formula used to determine retirement benefits will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019. When the freeze is complete, the majority of our salaried employees will have transitioned to an enhanced defined contribution retirement savings plan. As part of the November 6, 2015 acquisition of Sikorsky, we established a new defined benefit pension plan for Sikorsky’s union workforce that provides benefits for their prospective service with us. The Sikorsky salaried employees participate in a defined contribution plan. We did not assume any legacy pension liability from UTC.

We have made contributions to trusts established to pay future benefits to eligible retirees and dependents, including Voluntary Employees’ Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses of certain retiree medical plans. We use December 31 as the measurement date. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the respective preceding year.

The rules related to accounting for postretirement benefit plans under GAAP require us to recognize on a plan-by-plan basis the funded status of our postretirement benefit plans as either an asset or a liability on our consolidated balance sheets. The funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan.

The net periodic benefit cost recognized each year included the following (in millions):



	Qualified Defined Benefit Pension Plans ^(a)									Retiree Medical and Life Insurance Plans
	2017			2016			2015			2017			2016			2015
Service cost	$	820		$	827		$	836		$	20		$	24		$	21
Interest cost	1,809			1,861			1,791			102			119			110
Expected return on plan assets	(2,408		)	(2,666		)	(2,734		)	(128		)	(138		)	(147		)
Recognized net actuarial losses	1,506			1,359			1,599			19			34			43
Amortization of net prior service (credit) cost ^(b)	(355		)	(362		)	(365		)	15			22			4
Total net periodic benefit cost	$	1,372		$	1,019		$	1,127		$	28		$	61		$	31

^(a)

Total net periodic benefit cost associated with our qualified defined benefit plans represents pension expense calculated in accordance with GAAP (FAS pension expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules, each of which results in a different calculated amount of pension expense. The CAS pension cost is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and services. We include the difference between FAS pension expense and CAS pension cost, referred to as the FAS/CAS pension adjustment, as a component of other unallocated, net on our consolidated statements of earnings. The FAS/CAS pension adjustment, which was $876 million in 2017, $902 million in 2016, and $400 million in 2015, effectively adjusts the amount of CAS pension cost in the business segment operating profit so that pension expense recorded on our consolidated statements of earnings is equal to FAS pension expense. FAS pension expense and CAS pension costs reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees.


^(b)	Net of the reclassification for discontinued operations presentation of pension benefits related to former IS&GS salaried employees ($14 million in 2016 and $24 million in 2015).

The following table provides a reconciliation of benefit obligations, plan assets and unfunded status related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):



	Qualified Defined Benefit Pension Plans						Retiree Medical and Life Insurance Plans
	2017			2016			2017			2016
Change in benefit obligation
Beginning balance	$	45,064		$	43,702		$	2,649		$	2,883
Service cost	820			827			20			24
Interest cost	1,809			1,861			102			119
Benefits paid	(2,310		)	(2,172		)	(232		)	(222		)
Actuarial losses (gains)	3,377			1,402			23			(135		)
Changes in longevity assumptions ^(a)	(352		)	(687		)	(24		)	(53		)
Plan amendments and acquisitions ^(b)	278			110			—			(32		)
Service cost related to discontinued operations	—			21			—			—
Medicare Part D subsidy	—			—			—			4
Participants’ contributions	—			—			64			61
Ending balance	$	48,686		$	45,064		$	2,602		$	2,649
Change in plan assets
Beginning balance at fair value	$	31,417		$	32,096		$	1,787		$	1,813
Actual return on plan assets	3,942			1,470			224			95
Benefits paid	(2,310		)	(2,172		)	(232		)	(222		)
Company contributions	46			23			40			36
Medicare Part D subsidy	—			—			—			4
Participants’ contributions	—			—			64			61
Ending balance at fair value	$	33,095		$	31,417		$	1,883		$	1,787
Unfunded status of the plans	$	(15,591	)	$	(13,647	)	$	(719	)	$	(862	)


^(a)	As published by the Society of Actuaries.


^(b)	Includes special termination benefits of $27 million for qualified pension, and $9 million for retiree medical, recognized in 2016 related to former IS&GS salaried employees.

The following table provides amounts recognized on our consolidated balance sheets related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):



	Qualified Defined Benefit Pension Plans						Retiree Medical and Life Insurance Plans
	2017			2016			2017			2016
Prepaid pension asset	$	112		$	208		$	—		$	—
Accrued postretirement benefit liabilities	(15,703		)	(13,855		)	(719		)	(862		)
Accumulated other comprehensive loss (pre-tax) related to:
Net actuarial losses	20,169			20,184			331			447
Prior service (credit) cost ^(a)	(2,263		)	(2,896		)	81			96
Total ^(b)	$	17,906		$	17,288		$	412		$	543


^(a)	During 2016 pre-tax amounts of $210 million for qualified pension prior service credits and $9 million for retiree medical prior service costs were recognized from the divestiture of our IS&GS business (combined $134 million, net of tax).

^(b)

Accumulated other comprehensive loss related to postretirement benefit plans, after tax, of $12.6 billion and $12.0 billion at December 31, 2017 and 2016 (see “Note 12 – Stockholders’ Equity”) includes $17.9 billion ($11.8 billion, net of tax) and $17.3 billion ($11.2 billion, net of tax) for qualified defined benefit pension plans, $412 million ($252 million, net of tax) and $543 million ($351 million, net of tax) for retiree medical and life insurance plans and $705 million ($479 million, net of tax) and $677 million ($448 million, net of tax) for other plans.

The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $48.5 billion and $44.9 billion at December 31, 2017 and 2016, of which $48.5 billion and $44.8 billion related to plans where the ABO was in excess of plan assets. The ABO represents benefits accrued without assuming future compensation increases to plan participants. Certain key information related to our qualified defined benefit pension plans as of December 31, 2017 and 2016 is as follows (in millions):



	2017			2016
Plans where ABO was in excess of plan assets
Projected benefit obligation	$	48,628		$	44,946
Less: fair value of plan assets	32,925			31,091
Unfunded status of plans ^(a)	(15,703		)	(13,855		)
Plans where ABO was less than plan assets
Projected benefit obligation	58			118
Less: fair value of plan assets	170			326
Funded status of plans ^(b)	$	112		$	208


^(a)	Represents accrued pension liabilities, which are included on our consolidated balance sheets.


^(b)	Represents prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets.

We also sponsor nonqualified defined benefit plans to provide benefits in excess of qualified plan limits. The aggregate liabilities for these plans at December 31, 2017 and 2016 were $1.3 billion and $1.2 billion, which also represent the plans’ unfunded status. We have set aside certain assets totaling $530 million and $460 million as of December 31, 2017 and 2016 in a separate trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance with GAAP, those assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit plans in the table above. The unrecognized net actuarial losses at December 31, 2017 and 2016 were $646 million and $642 million. The unrecognized prior service credit at December 31, 2017 and 2016 were $61 million and $74 million. The expense associated with these plans totaled $126 million in 2017, $125 million in 2016 and $117 million in 2015. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $60 million and $63 million as of December 31, 2017 and 2016. The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit plans, was not material to our results of operations, financial position or cash flows. The actuarial assumptions used to determine the benefit obligations and expense associated with our nonqualified defined benefit plans and postemployment plans are similar to those assumptions used to determine the benefit obligations and expense related to our qualified defined benefit pension plans and retiree medical and life insurance plans as described below.

The following table provides the amounts recognized in other comprehensive income (loss) related to postretirement benefit plans, net of tax, for the years ended December 31, 2017, 2016 and 2015 (in millions):



	Incurred but Not Yet Recognized in Net Periodic Benefit Cost									Recognition of Previously Deferred Amounts
	2017			2016			2015			2017			2016			2015
	Gains (losses)									(Gains) losses
Actuarial gains and losses
Qualified defined benefit pension plans	$	(1,172	)	$	(1,236	)	$	(291	)	$	974		$	879		$	1,034
Retiree medical and life insurance plans	77			94			46			12			22			28
Other plans	(66		)	(62		)	21			44			37			47
	(1,161		)	(1,204		)	(224		)	1,030			938			1,109
	Credit (cost)									(Credit) cost ^(a)
Net prior service credit and cost
Qualified defined benefit pension plans	(219		)	(54		)	(18		)	(229		)	(235		)	(235		)
Retiree medical and life insurance plans	—			27			(102		)	10			14			2
Other plans	—			(1		)	(7		)	(9		)	(9		)	(10		)
	(219		)	(28		)	(127		)	(228		)	(230		)	(243		)
	$	(1,380	)	$	(1,232	)	$	(351	)	$	802		$	708		$	866


^(a)	Reflects the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees ($9 million in 2016 and $16 million in 2015). In addition, we recognized $134 million in 2016 of prior service credits from the divestiture of our IS&GS business, which were reclassified as discontinued operations.

We expect that approximately $1.5 billion, or about $1.2 billion net of tax, of actuarial losses and net prior service credit related to postretirement benefit plans included in accumulated other comprehensive loss at the end of 2017 to be recognized in net periodic benefit cost during 2018. Of this amount, $1.4 billion, or $1.1 billion net of tax, relates to our qualified defined benefit plans and is included in our expected 2018 pension expense of $1.4 billion.

Actuarial Assumptions

The actuarial assumptions used to determine the benefit obligations at December 31 of each year and to determine the net periodic benefit cost for each subsequent year, were as follows:



	Qualified Defined Benefit Pension Plans						Retiree Medical and Life Insurance Plans
	2017		2016		2015		2017		2016		2015
Weighted average discount rate	3.625	%	4.125	%	4.375	%	3.625	%	4.000	%	4.250	%
Expected long-term rate of return on assets	7.50	%	7.50	%	8.00	%	7.50	%	7.50	%	8.00	%
Rate of increase in future compensation levels (for applicable bargained pension plans)	4.50	%	4.50	%	4.50	%
Health care trend rate assumed for next year							8.50	%	8.75	%	9.00	%
Ultimate health care trend rate							5.00	%	5.00	%	5.00	%
Year that the ultimate health care trend rate is reached							2032		2032		2032

The decrease in the discount rate from December 31, 2016 to December 31, 2017 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $2.9 billion at December 31, 2017. The decrease in the discount rate from December 31, 2015 to December 31, 2016 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $1.4 billion at December 31, 2016.

The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the benefit obligations. That assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the trust funds, plan expenses and the potential to outperform market index returns.

Plan Assets

Investment policies and strategies – Lockheed Martin Investment Management Company (LMIMCo), our wholly-owned subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCo’s investment objectives for the assets of these plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.

LMIMCo’s investment policies require that asset allocations of postretirement benefit plans be maintained within the following approximate ranges:



Asset Class	Asset Allocation Ranges
Cash and cash equivalents	0-20%
Equity	15-65%
Fixed income	10-60%
Alternative investments:
Private equity funds	0-15%
Real estate funds	0-10%
Hedge funds	0-20%
Commodities	0-15%

Fair value measurements – The rules related to accounting for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not separately presented on our consolidated balance sheets. The following table presents the fair value of the assets (in millions) of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy, which has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. Certain other investments are measured at their Net Asset Value (NAV) per share and do not have readily determined values and are thus not subject to leveling in the fair value hierarchy. The NAV is the total value of the fund divided by the number of the fund’s shares outstanding. We recognize transfers between levels of the fair value hierarchy as of the date of the change in circumstances that causes the transfer. We did not have any transfers of assets between Level 1 and Level 2 of the fair value hierarchy during 2017.



	December 31, 2017								December 31, 2016
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3
Investments measured at fair value
Cash and cash equivalents ^(a)	$	1,419	$	1,419	$	—	$	—	$	2,301	$	2,301	$	—		$	—
Equity ^(a):
U.S. equity securities	4,922		4,905		14		3		4,166		4,139		23			4
International equity securities	5,370		5,355		13		2		3,971		3,927		40			4
Commingled equity funds	4,453		1,493		2,960		—		2,332		788		1,544			—
Fixed income ^(a):
Corporate debt securities	4,910		—		4,905		5		4,333		—		4,316			17
U.S. Government securities	3,775		—		3,775		—		6,811		—		6,811			—
U.S. Government-sponsored enterprise securities	817		—		817		—		919		—		919			—
Other fixed income investments	2,412		—		2,401		11		2,215		—		2,214			1
Alternative investments:
Hedge funds	7		—		7		—		33		—		33			—
Commodities ^(a)	2		1		1		—		523		525		(2		)	—
Total	$	28,087	$	13,173	$	14,893	$	21	$	27,604	$	11,680	$	15,898		$	26
Investments measured at NAV ^(b)
Commingled equity funds	99								60
Other fixed income investments	68								—
Private equity funds	4,334								3,614
Real estate funds	1,611								1,411
Hedge funds	711								462
Total investments measured at NAV	6,823								5,547
Receivables, net	68								53
Total	$	34,978							$	33,204

^(a)

Cash and cash equivalents, equity securities, fixed income securities and commodities included derivative assets and liabilities whose fair values were not material as of December 31, 2017 and 2016. LMIMCo’s investment policies restrict the use of derivatives to either establish long exposures for purposes of expediency or capital efficiency or to hedge risks to the extent of a plan’s current exposure to such risks. Most derivative transactions are settled on a daily basis.


^(b)	Certain investments that are valued using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets.

As of December 31, 2017 and 2016, the assets associated with our foreign defined benefit pension plans were not material and have not been included in the table above. The changes during 2017 and 2016 in the fair value of plan assets categorized as Level 3 were insignificant.

Valuation techniques – Cash equivalents are mostly comprised of short-term money-market instruments and are valued at cost, which approximates fair value.

U.S. equity securities and international equity securities categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.

Commingled equity funds categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For commingled equity funds not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor.

Fixed income investments categorized as Level 2 are valued by the trustee using pricing models that use verifiable observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are categorized at Level 3 when valuations using observable inputs are unavailable. The trustee obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager.

Commodities are traded on an active commodity exchange and are valued at their closing prices on the last trading day of the year.

Certain commingled equity funds, consisting of equity mutual funds, are valued using the NAV. The NAV valuations are based on the underlying investments and typically redeemable within 90 days.

Private equity funds consist of partnership and co-investment funds. The NAV is based on valuation models of the underlying securities, which includes unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods between eight and 12 years.

Real estate funds consist of partnerships, most of which are closed-end funds, for which the NAV is based on valuation models and periodic appraisals. These funds typically have redemption periods between eight and 10 years.

Hedge funds consist of direct hedge funds for which the NAV is generally based on the valuation of the underlying investments. Redemptions in hedge funds are based on the specific terms of each fund, and generally range from a minimum of one month to several months.

Contributions and Expected Benefit Payments

The funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended by the PPA, and in a manner consistent with CAS and Internal Revenue Code rules. There were no material contributions to our qualified defined benefit pension plans during 2017. We will make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required until 2021. We plan to fund these contributions using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change.

The following table presents estimated future benefit payments, which reflect expected future employee service, as of December 31, 2017 (in millions):



	2018		2019		2020		2021		2022		2023 – 2027
Qualified defined benefit pension plans	$	2,450	$	2,480	$	2,560	$	2,630	$	2,700	$	14,200
Retiree medical and life insurance plans	180		180		180		180		180		820

Defined Contribution Plans

We maintain a number of defined contribution plans, most with 401(k) features, that cover substantially all of our employees. Under the provisions of our 401(k) plans, we match most employees’ eligible contributions at rates specified in the plan documents. Our contributions were $613 million in 2017, $617 million in 2016 and $393 million in 2015, the majority of which were funded using our common stock. Our defined contribution plans held approximately 35.5 million and 36.9 million shares of our common stock as of December 31, 2017 and 2016.