| Pension and Other Postretirement Benefits | Pension and Other Postretirement Benefits Howmet maintains pension plans covering most U.S. employees and certain employees in foreign locations. Pension benefits generally depend on length of service and job grade. Substantially all benefits are paid through pension trusts that are sufficiently funded to ensure that all plans can pay benefits to retirees as they become due. Most salaried and non-bargaining hourly U.S. employees hired after March 1, 2006, participate in a defined contribution plan instead of a defined benefit plan. Howmet also maintains health care and life insurance postretirement benefit plans covering eligible U.S. retired employees and certain retirees from foreign locations. Generally, the medical plans are unfunded and pay a percentage of medical expenses, reduced by deductibles and other coverage. Life benefits are generally provided by insurance contracts. Howmet retains the right, subject to existing agreements, to change or eliminate these benefits. All salaried and certain non-bargaining hourly U.S. employees hired after January 1, 2002 and certain bargaining hourly U.S. employees hired after July 1, 2010, are not eligible for postretirement health care benefits. All salaried and certain hourly U.S. employees that retire on or after April 1, 2008 are not eligible for postretirement life insurance benefits. Effective May 1, 2019, salaried employees and retirees are not eligible for postretirement life insurance benefits. Effective January 1, 2015, Howmet no longer offers postretirement health care benefits to Medicare-eligible, primarily non-bargaining, U.S. retirees through Company-sponsored plans. Qualifying retirees (hired prior to January 1, 2002), both current and future, may access these benefits in the marketplace by purchasing coverage directly from insurance carriers. On April 1, 2018, benefit accruals for future service and compensation under all of the Company's qualified and non-qualified defined benefit pension plans for U.S. salaried and non-bargaining hourly employees ceased. As a result of this change, in 2018, the Company recorded a decrease to the Accrued pension benefit liability of $136 related to the reduction of future benefits ($141 offset in Accumulated other comprehensive loss) and curtailment charges of $5 in Restructuring and other charges. On April 13, 2018, the United Auto Workers ratified a new five-year labor agreement, covering approximately 1,300 U.S. employees, which expires on March 31, 2023. A provision within the agreement includes a retirement benefit increase for future retirees that participate in a defined benefit pension plan, which impacts approximately 300 of those employees. In addition, effective January 1, 2019, benefit accruals for future service of this group ceased. As result of these changes, in 2018, a curtailment charge of $9 was recorded in Restructuring and other charges. In 2018, the Company announced that effective December 31, 2018, it would end all pre-Medicare medical, prescription drug and vision coverage for current and future salaried and non-bargained hourly employees and retirees of the Company and its subsidiaries. As a result of this change, in 2018, the Company recorded a decrease to the Accrued other postretirement benefits liability of $32 related to the reduction of future benefits, $4 offset in Accumulated other comprehensive loss, and a curtailment benefit of $28 in Restructuring and other charges. In 2018, the company communicated to plan participants that effective in the first quarter of 2019, benefit accruals for future service and compensation for employees in the United Kingdom defined benefit pension plans will cease. The plan curtailment resulted in a $13 decrease in the Accrued pension benefits liability which was offset in Accumulated other comprehensive loss. Additionally, on October 29, 2018, the United Kingdom High Court ruled that defined benefit pension plans offering Guaranteed Minimum Pensions must review benefits accrued between May 1990 to April 1997 to ensure gender pay equality. The review resulted in an increase to the Accrued pension benefits liability of $9 and a corresponding curtailment charge that was recorded in Restructuring and other charges. In 2019, the Company communicated to plan participants that for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries, it would eliminate the life insurance benefit effective May 1, 2019, and certain health care subsidies effective December 31, 2019. As a result of these changes, in 2019, the Company recorded a decrease to the Accrued other postretirement benefits liability of $75, which was offset by a curtailment benefit of $58 (of which $16 was recorded in Restructuring and other charges and $42 related to Arconic Corporation in Discontinued Operations) and $17 in Accumulated other comprehensive loss. In June 2019, the Company and the United Steelworkers ("USW") reached a tentative three-year labor agreement that was ratified on July 11, 2019 covering approximately 3,400 employees at four U.S. locations of Arconic Corporation; the previous labor agreement expired on May 15, 2019. In 2019, the Company recognized $9 in Discontinued operations on the accompanying Statement of Consolidated Operations primarily for a one-time signing bonus for employees. Additionally, on July 25, 2019, the USW ratified a new four-year labor agreement covering approximately 560 employees at the Company’s Niles, Ohio facility. The prior labor agreement expired on June 30, 2018. In 2020 and 2019, the Company applied settlement accounting to U.S. pension plans due to lump sum payments to participants which resulted in settlement charges of $8 and $9, respectively, that were recorded in Restructuring and other charges. In 2020 the Company undertook a number of actions to reduce pension obligations in the U.K. by offering lump sum payments to certain plan participants and entering into group annuity contracts with a third-party carrier to pay and administer future annuity payments which resulted in settlement charges of $66 th at were recorded in Restructuring and other charges in the Statement of Consolidated Operations. These actions reduced the number of pension plan participants in the U.K. by approximately half. In 2020, the Company communicated to plan participants that for its U.S. salaried and non-bargained hourly retirees of the Company and its subsidiaries, it would eliminate certain health care subsidies effective December 31, 2021, and that for certain bargained retirees of the Company, it would eliminate certain health care subsidies effective December 31, 2021 and the life insurance benefit effective August 1, 2020. As a result of these amendments, the Company recorded a decrease to the Accrued other postretirement benefits liability of $6 in 2020, which was offset in Accumulated other comprehensive loss. The funded status of all of Howmet’s pension and other postretirement benefit plans are measured as of December 31 each calendar year. Obligations and Funded Status Pension benefits Other December 31, 2020 2019 2020 2019 Change in benefit obligation Benefit obligation at beginning of year $ 7,249 $ 6,476 $ 786 $ 806 Transfer to Arconic Corporation (4,355) — (569) — Service cost 6 25 2 7 Interest cost 71 235 7 28 Amendments 6 — (11) (78) Actuarial losses (1) 313 974 14 100 Settlements (398) (23) — — Benefits paid (153) (477) (17) (82) Medicare Part D subsidy receipts — — 3 5 Foreign currency translation impact (26) 39 — — Benefit obligation at end of year (2) $ 2,713 $ 7,249 $ 215 $ 786 Change in plan assets (2) Fair value of plan assets at beginning of year $ 4,868 $ 4,334 $ — $ — Transfer to Arconic Corporation (2,982) — — — Actual return on plan assets 203 731 — — Employer contributions 227 268 — — Benefits paid (136) (453) — — Administrative expenses (12) (34) — — Settlement payments (413) (22) — — Foreign currency translation impact (31) 44 — — Fair value of plan assets at end of year (2) $ 1,724 $ 4,868 $ — $ — Funded status $ (989) $ (2,381) $ (215) $ (786) Amounts recognized in the Consolidated Balance Sheet consist of: Noncurrent assets $ 12 $ 41 $ — $ — Noncurrent assets of discontinued operations — 63 — — Current liabilities (16) (19) (17) (17) Current liabilities of discontinued operations — (7) — (55) Noncurrent liabilities (985) (1,030) (198) (200) Noncurrent liabilities of discontinued operations — (1,429) — (514) Net amount recognized $ (989) $ (2,381) $ (215) $ (786) Amounts recognized in Accumulated Other Comprehensive Loss consist of: Net actuarial loss $ 1,274 $ 3,375 $ 22 $ 179 Prior service cost (benefit) 6 1 (28) (37) Net amount recognized, before tax effect $ 1,280 $ 3,376 $ (6) $ 142 Other changes in plan assets and benefit obligations recognized in Other Comprehensive Loss consist of: Net actuarial loss $ 166 $ 566 $ 14 $ 100 Amortization of accumulated net actuarial (loss) gain (123) (148) 1 (8) Loss transferred to Arconic Corporation (2,144) — (170) — Prior service cost (benefit) 5 — (11) (78) Amortization of prior service (cost) benefit — (2) 5 68 Prior service credit transferred to Arconic Corporation — — 13 — Net amount recognized, before tax effect $ (2,096) $ 416 $ (148) $ 82 (1) At December 31, 2020, the actuarial losses impacting the benefit obligation were due to changes in discount rate, alternative interest cost method and other changes including census data, partially offset by actual asset returns in excess of expected returns. (2) At December 31, 2020, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $2,327, $1,361, and $(966), respectively. At December 31, 2019, the benefit obligation, fair value of plan assets, and funded status for U.S. pension plans were $5,884, $3,513, and $(2,371) respectively. Pension Plan Benefit Obligations Pension benefits 2020 2019 The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans were as follows: Projected benefit obligation $ 2,713 $ 7,249 Accumulated benefit obligation 2,707 7,219 The aggregate projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets was as follows: Projected benefit obligation 2,364 6,064 Fair value of plan assets 1,364 3,579 The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was as follows: Accumulated benefit obligation 2,359 6,045 Fair value of plan assets 1,364 3,579 Components of Net Periodic Benefit Cost Pension benefits (1) Other postretirement benefits (2) For the year ended December 31, 2020 2019 2018 2020 2019 2018 Service cost $ 12 $ 25 $ 46 $ 3 $ 7 $ 7 Interest cost 97 235 219 10 28 28 Expected return on plan assets (136) (286) (306) — — — Recognized net actuarial loss 78 139 168 3 4 7 Amortization of prior service cost (benefit) — 2 3 (6) (6) (7) Settlements (3) 76 9 96 — — — Curtailments (4) — — 23 (2) (58) (28) Net periodic benefit cost (5) $ 127 $ 124 $ 249 $ 8 $ (25) $ 7 Discontinued operations 20 95 100 6 (15) 12 Net amount recognized in Statement of Consolidated Operations $ 107 $ 29 $ 149 $ 2 $ (10) $ (5) (1) In 2020, 2019 and 2018, net periodic benefit cost for U.S. pension plans was $58, $127, and $239, respectively. (2) In 2020, 2019 and 2018, net periodic benefit cost for other postretirement benefits reflects a reduction of $1, $11, and $10, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D. (3) In 2020, settlements were related to U.K. actions including lump sum benefits and the purchase of group annuity contracts as well as U.S. lump sum benefit payments. In 2019 and 2018, settlements were due to workforce reductions and the payment of lump sum benefits. (See Note E ) (4) In 2020, the curtailment was due to workforce reductions. In 2019 and 2018, curtailments were due to a reduction of future benefits, resulting in the recognition of favorable and unfavorable plan amendments. (5) Service cost was included within Cost of goods sold, Selling, general administrative, and other expenses, and Research and development expenses; curtailments and settlements were included in Restructuring and other charges; and all other cost components were recorded in Other expense (income), net in the Statement of Consolidated Operations. Assumptions Weighted average assumptions used to determine benefit obligations for pension and other postretirement benefit plans were as follows: December 31, 2020 2019 Discount rate 2.40 % 3.00 % Cash balance plan interest crediting rate 3.00 % 3.00 % The U.S. discount rate is determined using a Company-specific yield curve model (above-median) developed with the assistance of an external actuary while both the U.K. and Canada utilize models developed internally by their respective actuary. The cash flows of the plans’ projected benefit obligations are discounted using a single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of issuers in various sectors, including finance and banking, industrials, transportation, and utilities, among others. The yield curve model parallels the plans’ projected cash flows, which have a global average duration o f 12 years. The underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. Benefit accruals for future compensation under the Company’s major salaried and non-bargained hourly defined benefit pension plans have ceased. The rate of compensation increase no longer impacts the determination of the benefit obligation. Weighted average assumptions used to determine net periodic benefit cost for pension and other postretirement benefit plans were as follows: 2020 2019 2018 Discount rate to calculate service cost (1) 3.30 % 4.30 % 3.60 % Discount rate to calculate interest cost (1) 2.70 % 3.90 % 3.30 % Expected long-term rate of return on plan assets 6.00 % 5.60 % 5.90 % Rate of compensation increase (2) — % 3.50 % 3.50 % Cash balance plan interest crediting rate 3.00 % 3.00 % 3.00 % (1) In all periods presented, the respective global discount rates were used to determine net periodic benefit cost for most pension plans for the full annual period. However, the discount rates for a limited number of plans were updated during 2020, 2019, and 2018 to reflect the remeasurement of these plans due to new union labor agreements, settlements, and/or curtailments. The updated discount rates used were not significantly different from the discount rates presented. (2) Benefit accruals for future compensation under the Company’s major salaried and non-bargained hourly defined benefit pension plans have ceased. The rate of compensation increase no longer impacts the determination of the benefit obligation. The expected long-term rate of return on plan assets (“EROA”) is generally applied to a five-year market-related value of plan assets (a fair value at the plan measurement date is used for certain non-U.S. plans). The process used by management to develop this assumption is one that relies on a combination of historical asset return information and forward-looking returns by asset class. As it relates to historical asset return information, management focuses on various historical moving averages when developing this assumption. While consideration is given to recent performance and historical returns, the assumption represents a long-term, prospective return. Management also incorporates expected future returns on current and planned asset allocations using information from various external investment managers and consultants, as well as management’s own judgment. For 2020, 2019, and 2018, the U.S. expected long-term rate of return used by management was based on the prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. These rates fell within the respective range of the 20-year moving average of actual performance and the expected future return developed by asset class. In 2018, management reduced the expected long-term rate of return by 75 basis points to 7.00% for the U.S. Pension plans due to a decrease in the expected return by asset class and the 20-year moving average. For 2021, management anticipates that 7.00% will continue to be the expected long-term rate of return for the U.S. Pension plans. EROA assumptions are developed by country. Annual changes in the weighted average EROA are impacted by the relative size of the assets by country. Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows: 2020 2019 2018 Health care cost trend rate assumed for next year 5.50 % 5.50 % 5.50 % Rate to which the cost trend rate gradually declines 4.50 4.50 4.50 Year that the rate reaches the rate at which it is assumed to remain 2023 2023 2022 The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by Howmet’s other postretirement benefit plans. For 2021, a 5.5% trend rate will be used, reflecting management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend experience over the past three years has ranged from (3.8)% to 4.0%. Management does not believe this three-year range is indicative of expected increases for future health care costs over the long-term. Plan Assets Howmet’s pension plans’ investment policy at December 31, 2020 by asset class, were as follows: Asset class Policy range (1) Equities 20–55% Fixed income 25–55% Other investments 15–35% Total (1) Policy range is for U.S. plan assets only, as both the U.K. and Canadian asset investment allocations are controlled by a third-party trustee with input from Howmet. The principal objectives underlying the investment of the pension plans’ assets are to ensure that Howmet can properly fund benefit obligations as they become due under a broad range of potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly diversify investments across and within various asset classes to protect asset values against adverse movements. Specific objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension liabilities and achieving diversification across the balance of the asset portfolio. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. The investment strategy uses long duration cash bonds and derivative instruments to offset a portion of the interest rate sensitivity of U.S. pension liabilities. Exposure to broad equity risk is decreased and diversified through investments in discretionary and systematic macro hedge funds, long/short equity hedge funds, high yield bonds, emerging market debt and global and emerging market equities. Investments are further diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the financial markets and to mitigate manager-concentration risk. Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and other applicable laws and regulations. The following section describes the valuation methodologies used to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note S for the definition of fair value and a description of the fair value hierarchy). Equities. These securities consist of: (i) direct investments in the stock of publicly traded U.S. and non-U.S. companies, and equity derivatives, that are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (ii) the plans’ share of commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of shares held at December 31 (included in Level 1 and Level 2); and (iii) direct investments in long/short equity hedge funds and private equity (limited partnerships and venture capital partnerships) that are valued at net asset value. Fixed income. These securities consist of: (i) U.S. government debt that are generally valued using quoted prices (included in Level 1); (ii) cash and cash equivalents invested in publicly-traded funds and are valued based on the closing price reported in an active market on which the individual securities are traded (generally classified in Level 1); (iii) publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data (included in Level 2); (iv) fixed income derivatives that are generally valued using industry standard models with market-based observable inputs (included in Level 2); and (v) cash and cash equivalents invested in institutional funds and are valued at net asset value. Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate investment trusts and are valued based on the closing price reported in an active market on which the investments are traded (included in Level 1) and (ii) direct investments of discretionary and systematic macro hedge funds and private real estate (includes limited partnerships) and are valued at net asset value. The fair value methods described above may not be indicative of net realizable value or reflective of future fair values. Additionally, while Howmet believes the valuation methods used by the plans’ trustees are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table presents the fair value of pension plan assets classified under the appropriate level of the fair value hierarchy or net asset value: December 31, 2020 Level 1 Level 2 Net Asset Value Total Equities: Equity securities $ 274 $ 89 $ 68 $ 431 Long/short equity hedge funds — — 77 77 Private equity — — 87 87 $ 274 $ 89 $ 232 $ 595 Fixed income: Intermediate and long duration government/credit $ 78 $ 579 $ 31 $ 688 Other 63 254 — 317 $ 141 $ 833 $ 31 $ 1,005 Other investments: Real estate $ 31 $ — $ 52 $ 83 Discretionary and systematic macro hedge funds — — 94 94 Other — — 23 23 $ 31 $ — $ 169 $ 200 Net plan assets (1) $ 446 $ 922 $ 432 $ 1,800 December 31, 2019 Level 1 Level 2 Net Asset Value Total Equities Equity securities $ 590 $ — $ 508 $ 1,098 Long/short equity hedge funds — — 260 260 Private equity — — 155 155 $ 590 $ — $ 923 $ 1,513 Fixed income: Intermediate and long duration government/credit $ 121 $ 1,047 $ 1,003 $ 2,171 Other 126 7 144 277 $ 247 $ 1,054 $ 1,147 $ 2,448 Other investments: Real estate $ 104 $ — $ 165 $ 269 Discretionary and systematic macro hedge funds — — 405 405 Other — — 240 240 $ 104 $ — $ 810 $ 914 Net plan assets (2) $ 941 $ 1,054 $ 2,880 $ 4,875 (1) As of December 31, 2020, the total fair value of pension plans’ assets excludes a net payable of $76, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments. (2) As of December 31, 2019, the total fair value of pension plans’ assets excludes a net receivable of $7, which represents securities purchased and sold but not yet settled plus interest and dividends earned on various investments. Funding and Cash Flows It is Howmet’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable country benefits laws and tax laws. Periodically, Howmet contributes additional amounts as deemed appropriate. In 2020 and 2019, cash contributions to Howmet’s pension plans were $227 and $268, respectively, which includes $25 and $53, respectively, contributed to the Company’s U.S. plans that was in excess of the minimum required under ERISA. The contributions to the Company’s pension plans in 2021 are estimated to be $140 (of w hich $130 is for U.S. plans), all of which are minimum required contributions. During the third quarter of 2016, the Pension Benefit Guaranty Corporation approved management’s plan to separate the Alcoa Inc. pension plans between the Company and Alcoa Corporation. The plan stipulated that the Company make cash contributions of $150 over a period of 30 months (from November 1, 2016) to its two largest pension plans. The Company satisfied the requirements of the plan by making payments of $34, $66, and $50 in April 2019, March 2018, and April 2017, respectively. Benefit payments expected to be paid to pension and other postretirement benefit plans’ participants and expected Medicare Part D subsidy receipts are as follows utilizing the current assumptions outlined above: For the year ended December 31, Pension Gross Other post- Less Medicare Part D Net Other post- 2021 $ 168 $ 17 $ 1 $ 16 2022 169 16 1 15 2023 164 16 1 15 2024 160 15 1 14 2025 158 15 1 14 2026 - 2030 728 67 6 61 $ 1,547 $ 146 $ 11 $ 135 Defined Contribution Plans Howmet sponsors savings and investment plans in various countries, primarily in the U.S. Howmet’s contributions and expenses related to these plans were $73, $87 , and $85 in 2020, 2019, and 2018, respectively. U.S. employees may contribute a portion of their compensation to the plans, and Howmet matches a portion of these contributions in equivalent form of the investments elected by the employee. |
