Retirement Plans | 6. Retirement Plans Pension and Other Postretirement Benefits Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. Non-union employees hired on or after January 1, 2018, are no longer eligible for pension benefits, but will be eligible for an enhanced 401(k) plan as described below in other retirement programs. Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums are paid. Funded Status We are required by GAAP to separately recognize the overfunded or underfunded status of our pension and OPEB plans as an asset or liability. The funded status represents the difference between the projected benefit obligation (PBO) and the fair value of the plan assets. Our non-qualified (supplemental) pension plan is unfunded by design. The PBO of the pension plans is the present value of benefits earned to date by plan participants, including the effect of assumed future compensation increases. The PBO of the OPEB plan is equal to the accumulated benefit obligation, as the present value of the OPEB liabilities is not affected by compensation increases. Plan assets are measured at fair value. We use a December 31 measurement date for plan assets and obligations for all our retirement plans. Changes in our PBO and plan assets were as follows for the years ended December 31: Funded Status Pension OPEB Millions 2017 2016 2017 2016 Projected Benefit Obligation Projected benefit obligation at beginning of year $ 4,110 $ 3,958 $ 334 $ 329 Service cost 90 84 2 1 Interest cost 142 143 10 11 Plan curtailment cost 20 - (1) - Special termination cost 49 - - - Actuarial loss 382 124 7 16 Gross benefits paid (264) (199) (22) (23) Projected benefit obligation at end of year $ 4,529 $ 4,110 $ 330 $ 334 Plan Assets Fair value of plan assets at beginning of year $ 3,748 $ 3,544 $ - $ - Actual return on plan assets 716 279 - - Voluntary funded pension plan contributions - 100 - - Non-qualified plan benefit contributions 24 24 22 23 Gross benefits paid (264) (199) (22) (23) Fair value of plan assets at end of year $ 4,224 $ 3,748 $ - $ - Funded status at end of year $ (305) $ (362) $ (330) $ (334) Amounts recognized in the statement of financial position as of December 31, 2017, and 2016 consist of: Pension OPEB Millions 2017 2016 2017 2016 Noncurrent assets $ 196 $ 67 $ - $ - Current liabilities (27) (24) (23) (24) Noncurrent liabilities (474) (405) (307) (310) Net amounts recognized at end of year $ (305) $ (362) $ (330) $ (334) Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 2017, and 2016 consist of: 2017 2016 Millions Pension OPEB Total Pension OPEB Total Prior service cost $ - $ (1) $ (1) $ - $ (2) $ (2) Net actuarial loss (1,533) (120) (1,653) (1,681) (123) (1,804) Total $ (1,533) $ (121) $ (1,654) $ (1,681) $ (125) $ (1,806) Pre-tax changes recognized in other comprehensive inco me/(loss) during 2017, 2016, and 2015 were as follows: Pension OPEB Millions 2017 2016 2015 2017 2016 2015 Net actuarial (loss)/gain $ 67 $ (112) $ (31) $ (6) $ (16) $ 18 Amortization of: Prior service cost/(credit) - - - 1 (9) (10) Actuarial loss 81 83 106 9 10 13 Total $ 148 $ (29) $ 75 $ 4 $ (15) $ 21 Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2018 : Millions Pension OPEB Total Prior service credit $ - $ (1) $ (1) Net actuarial loss (90) (9) (99) Total $ (90) $ (10) $ (100) Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated benefit obligation represents the difference between the ABO and the fair value of plan assets. At December 31, 2017, and 2016 , the non-qualified (supplemental) plan ABO was $481 million and $ 412 million, respectively. The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31 : Underfunded Accumulated Benefit Obligation Millions 2017 2016 Projected benefit obligation $ 501 $ 428 Accumulated benefit obligation $ 481 $ 412 Fair value of plan assets - - Underfunded accumulated benefit obligation $ (481) $ (412) The ABO for all defined benefit pension plans was $4.2 billion and $3.9 billion at December 31, 2017, and 2016 , respectively. Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31: Pension OPEB Percentages 2017 2016 2017 2016 Discount rate 3.62% 4.20% 3.53% 4.00% Compensation increase 4.20% 4.20% N/A N/A Health care cost trend rate (employees under 65) N/A N/A 6.09% 6.31% Ultimate health care cost trend rate N/A N/A 4.50% 4.50% Year ultimate trend rate reached N/A N/A 2038 2038 Expense Both pension and OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a five -year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense. The workforce reduction plan initiated in the third quarter of 2017 included a curtailment loss of $20 million and a special termination benefit of $49 million as a result of a remeasurement as of September 30, 2017, due to the eliminated future service for approximately 460 management employees. These amounts were recognized in 2017 within compensation and benefits expense in our Consolidated Statements of Income . In connection with this remeasurement, the Company also updated the pension effective discount rate assumption from 4.20% to 3.81 % . The components of our net periodic pension and OPEB cost were as follows for the years ended December 31: Pension OPEB Millions 2017 2016 2015 2017 2016 2015 Net Periodic Benefit Cost: Service cost $ 90 $ 84 $ 106 $ 2 $ 1 $ 3 Interest cost 142 143 163 10 11 13 Expected return on plan assets (267) (267) (255) - - - Plan curtailment cost 20 - - - - - Special termination cost 49 - - - - - Amortization of: Prior service cost/(credit) - - - 1 (9) (10) Actuarial loss 81 83 106 9 10 13 Net periodic benefit cost $ 115 $ 43 $ 120 $ 22 $ 13 $ 19 Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows: Pension OPEB Percentages 2017 2016 2015 2017 2016 2015 Discount rate for benefit obligations 4.09% 4.37% 3.94% 3.89% 4.13% 3.74% Discount rate for interest on benefit obligations 3.47% 3.65% 3.94% 3.25% 3.34% 3.74% Discount rate for service cost 4.41% 4.69% 3.94% 4.25% 4.59% 3.74% Discount rate for interest on service cost 4.27% 4.55% 3.94% 4.11% 4.44% 3.74% Expected return on plan assets 7.00% 7.50% 7.50% N/A N/A N/A Compensation increase 4.13% 4.20% 4.00% N/A N/A N/A Health care cost trend rate (employees under 65) N/A N/A N/A 6.31% 6.52% 6.34% Ultimate health care cost trend rate N/A N/A N/A 4.50% 4.50% 4.50% Year ultimate trend reached N/A N/A N/A 2038 2038 2028 Beginning in 2016, we measure the service cost and interest cost components of our net periodic benefit cost by using individual spot discount rates matched with separate cash flows for each future year. The discount rates were based on a yield curve of high quality corporate bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual return/(loss) on pension plan assets, net of fees, was approximately 19% in 2017, 8% in 2016 , and (1)% i n 2015. Assumed health care cost trend rates have an effect on the expense and liabilities reported for health care plans. The assumed health care cost trend rate is based on historical rates and expected market conditions. The 2018 assumed health care cost trend rate for employees under 65 is 6.09% . It is assumed the rate will decrease gradually to an ultimate rate of 4.5% in 2038 and will remain at that level. A one-percentage point change in the assumed health care cost trend rates would have the following effects on OPEB: Millions One % pt. Increase One % pt. Decrease Effect on total service and interest cost components $ 1 $ (1) Effect on accumulated benefit obligation 19 (16) Cash Contributions The following table details our cash contributions for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans: Pension Millions Qualified Non-qualified OPEB 2017 $ - $ 24 $ 22 2016 100 24 23 Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. All contributions made to the qualified pension plans were voluntary and were made with cash generated from operations. The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments and claims paid for medical and life insurance. We anticipate our 2018 supplemental pension and OPEB payments will be made from cash generated from operations. Benefit Payments The following table details expected benefit payments for the years 2018 through 2027 : Millions Pension OPEB 2018 $ 212 $ 23 2019 212 22 2020 211 22 2021 212 21 2022 213 20 Years 2023 - 2027 1,101 90 Asset Allocation Strategy Our pension plan asset allocation at December 31, 2017, and 2016 , and target allocation for 2018 , are as follows: Percentage of Plan Assets Target December 31, Allocation 2018 2017 2016 Equity securities 60% to 70% 69% 68% Debt securities 20% to 30% 22 21 Real estate 2% to 8% 5 6 Commodities 4% to 6% 4 5 Total 100% 100% The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target average long-term rate of return of 7.0% . While we believe we can achieve a long-term average rate of return of 7.0%, we cannot be certain that the portfolio will perform to our expectations. Assets are strategically allocated among equity, debt, and other investments in order to achieve a diversification level that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other portfolios are evaluated at least every three years with the assistance of an independent consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at least quarterly, as needed. The pension plan investments are held in a Master Trust. The majority of pension plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons and are expected to do so in the future. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high quality debt securities. The average credit rating of the debt portfolio exceeded A at both December 31, 2017 and December 31, 2016 . The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury, mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 13 years and 14 years at December 31, 2017, and 2016, respectively. The investment of pension plan assets in securities issued by UPC is explicitly prohibited by the plan for both the equity and debt portfolios, other than through index fund holdings. Fair Value Measurements The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy. Temporary Cash Investments – These investments consist of U.S. dollars and foreign currencies held in master trust accounts at The Northern Trust Company (the Trustee). Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. These temporary cash investments are classified as Level 1 investments. Registered Investment Companies – Registered Investment Companies are entities primarily engaged in the business of investing in securities and are registered with the Securities and Exchange Commission. The Plan’s holdings of Registered Investment Companies include both public and private fund vehicles. The public vehicles are mutual funds (real estate) and exchange-traded funds (stocks), which are classified as Level 1 investments. The private vehicles (bonds) do not have published pricing and are valued using Net Asset Value (NAV). Federal Government Securities – Federal Government Securities consist of bills, notes, bonds, and other fixed income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Federal Government Securities are classified as Level 2 investments. Bonds and Debentures – Bonds and de bentures consist of debt securities issued by U.S. and non-U.S. corporations as well as state and local governments. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Corporate, state, and municipal bonds and debentures are classified as Level 2 investments. Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and non-U.S. corporations. Most common shares are traded actively on exchanges and price quotes for these shares are readily available. Common stock is classified as a Level 1 investment. Preferred shares included in this category are valued using a bid evaluation process with bid data provided by independent pricing sources. Preferred stock is classified as a Level 2 investment. Venture Capital and Buyout Partnerships – This investment category is comprised of interests in limited partnerships that invest primarily in privately-held companies. Due to the private nature of the partnership investments, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on the application of public market multiples to private company cash flows, market transactions that provide valuation information for comparable companies, and other methods. The fair value recorded by the Plan is calculated using each partnership’s NAV. Real Estate Partnerships – Mo st of t he Plan’s real estate investments are primarily interests in private real estate investment trusts , partnerships, limited liability companies , and similar structures . Valuations for the holdings in this category are not based on readily observable inputs and are primarily derived from property appraisals. The fair value recorded by the Plan is calculated using the NAV for each investment. Collective Trust and Other Fund s – Collective trust and other funds are comprised of shares or units in commingled funds and limited liability companies that are not publicly traded. The underlying assets in these entities (U.S. stock funds, non-U.S. stock funds, commodity funds, hedge funds, and short term investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. The fair value recorded by the Plan is calculated using NAV for each investment. As of December 31, 2017 , the pension plan assets measured at fair value on a recurring basis were as follows: Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Inputs Inputs Inputs Millions (Level 1) (Level 2) (Level 3) Total Plan assets at fair value: Temporary cash investments $ 27 $ $ - $ 27 Registered investment companies [a] 4 - 4 Federal government securities 182 - 182 Bonds and debentures 389 - 389 Corporate stock 1,171 8 - 1,179 Total plan assets at fair value $ 1,202 $ 579 $ - $ 1,781 Plan assets at NAV: Registered investment companies [b] 329 Venture capital and buyout partnerships 358 Real estate partnerships 226 Collective trust and other funds 1,552 Total plan assets at NAV $ 2,465 Other assets [c] (22) Total plan assets $ 4,224 [a] Registered investment companies measured at fair val ue include stock investments. [b] Registered investment companies measured at NAV include bond investments. [c] Other assets include accrued receivables , net payables, and pending broker settlements. As of December 31, 2016 , the pension plan assets measured at fair value on a recurring basis were as follows: Quoted Prices Significant in Active Other Significant Markets for Observable Unobservable Identical Inputs Inputs Inputs Millions (Level 1) (Level 2) (Level 3) Total Plan assets at fair value: Temporary cash investments $ 27 $ - $ - $ 27 Registered investment companies [a] 17 - - 17 Federal government securities - 142 - 142 Bonds and debentures - 357 - 357 Corporate stock 1,059 8 - 1,067 Total plan assets at fair value $ 1,103 $ 507 $ - $ 1,610 Plan assets at NAV: Registered investment companies [b] 280 Venture capital and buyout partnerships 283 Real estate partnerships 212 Collective trust and other funds 1,346 Total plan assets at NAV $ 2,121 Other assets [c] 17 Total plan assets $ 3,748 [a] Registered investment companies measured at fair value include stock and real estate investments. [b] Registered investment companies measured at NAV include bond investments. [c] Other assets include accrued receivables and pending broker settlements. For the years ended December 31, 2017 and 2016 , there were no significant transfers in or out of Levels 1, 2, or 3. The Master Trust’s investments in limited partnerships and similar structures (used to invest in private equity and real estate) are valued at fair value based on their proportionate share of the partnerships’ fair value as recorded in the limited partnerships’ audited financial statements. The limited partnerships allocate gains, losses and expenses to the partners based on the ownership percentage as described in the partnership agreements. At Dece mber 31, 2017 and 2016 , the Master Trust had future commitments for additional contributions to private equity pa rtnerships totaling $359 million and $392 million , respectively, and to real estate partnership s and funds totaling $67 million and $32 million, respectively. Other Retirement Programs 401(k)/Thrift Plan – For non-union employees hired prior to January 1, 2018, and eligible union employees for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan). We match 50 cents for each dollar contributed by employees up to the first 6% of compensation contributed. Our plan contributions were $19 million in 2017, $19 m illion in 2016, and $20 million in 2015. For non-union employees hired on or after January 1, 2018 , we will match dollar -for-dollar, up to the first 6% of compensation contributed, in addition to contributing an annual amount of 3% of the employee’s annual base salary. Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System (the System). Contributions made to the System are expensed as incurred and amounted to approximately $672 million in 2017, $671 m illion in 2016, and $749 million in 2015. Collective Bargaining Agreements – Under collective bargaining agreements, we participate in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees. Premiums paid under these plans are expensed as incurred and amounted to $60 million in 2017, $50 million in 2016 , and $46 million in 2015. |