Retirement Plans | International Paper sponsors and maintains the Retirement Plan of International Paper Company (the Pension Plan), a tax-qualified defined benefit pension plan that provides retirement benefits to substantially all U.S. salaried employees and hourly employees (receiving salaried benefits) hired prior to July 1, 2004, and substantially all other U.S. hourly union and non-union employees who work at a participating business unit regardless of hire date. These employees generally are eligible to participate in the Pension Plan upon attaining 21 years of age and completing one year of eligibility service. U.S. salaried employees and hourly employees (receiving salaried benefits) hired after June 30, 2004 are not eligible to participate in the Pension Plan, but receive a company contribution to their individual savings plan accounts (see Other U.S. Plans); however, salaried employees hired by Temple Inland prior to March 1, 2007 or Weyerhaeuser Company's Cellulose Fibers division prior to December 1, 2011 also participate in the Pension Plan. The Pension Plan provides defined pension benefits based on years of credited service and either final average earnings (salaried employees and hourly employees receiving salaried benefits), hourly job rates or specified benefit rates (hourly and union employees). The Company also has two unfunded nonqualified defined benefit pension plans: a Pension Restoration Plan available to employees hired prior to July 1, 2004 that provides retirement benefits based on eligible compensation in excess of limits set by the Internal Revenue Service, and a supplemental retirement plan for senior managers (SERP), which is an alternative retirement plan for salaried employees who are senior vice presidents and above or who are designated by the chief executive officer as participants. These nonqualified plans are only funded to the extent of benefits paid, which totaled $26 million , $29 million and $40 million in 2019 , 2018 and 2017 , respectively, and which are expected to be $28 million in 2020 . Effective January 1, 2019, the Company froze participation, including credited service and compensation, for salaried employees under the Pension Plan, the Pension Restoration Plan and the SERP plan. This change does not affect benefits accrued through December 31, 2018. For service after December 31, 2018, employees affected by the freeze receive a company contribution to their individual Retirement Savings Account as described later in this Note 19 . Many non-U.S. employees are covered by various retirement benefit arrangements, some of which are considered to be defined benefit pension plans for accounting purposes. OBLIGATIONS AND FUNDED STATUS The following table shows the changes in the benefit obligation and plan assets for 2019 and 2018 , and the plans’ funded status. 2019 2018 In millions U.S. Non- U.S. Non- Change in projected benefit obligation: Benefit obligation, January 1 $ 10,467 $ 215 $ 13,264 $ 247 Service cost 68 5 153 5 Interest cost 440 8 467 8 Curtailment — (1 ) — — Settlements — (6 ) (1,653 ) (2 ) Actuarial loss (gain) 1,230 33 (1,089 ) (17 ) Acquisitions — 3 — — Divestitures — (1 ) — — Plan amendments 40 — 2 — Benefits paid (546 ) (8 ) (677 ) (9 ) Effect of foreign currency exchange rate movements — 5 — (17 ) Benefit obligation, December 31 $ 11,699 $ 253 $ 10,467 $ 215 Change in plan assets: Fair value of plan assets, January 1 $ 8,735 $ 161 $ 11,368 $ 176 Actual return on plan assets 1,950 23 (332 ) (2 ) Company contributions 26 10 29 10 Benefits paid (546 ) (8 ) (677 ) (9 ) Settlements — (6 ) (1,653 ) (2 ) Effect of foreign currency exchange rate movements — 3 — (12 ) Fair value of plan assets, December 31 $ 10,165 $ 183 $ 8,735 $ 161 Funded status, December 31 $ (1,534 ) $ (70 ) $ (1,732 ) $ (54 ) Amounts recognized in the consolidated balance sheet: Non-current asset $ — $ 6 $ — $ 5 Current liability (28 ) (3 ) (27 ) (2 ) Non-current liability (1,506 ) (73 ) (1,705 ) (57 ) $ (1,534 ) $ (70 ) $ (1,732 ) $ (54 ) Amounts recognized in accumulated other comprehensive income under ASC 715 (pre-tax): Prior service cost (credit) $ 98 $ (1 ) $ 74 $ (1 ) Net actuarial loss 2,851 75 3,140 57 $ 2,949 $ 74 $ 3,214 $ 56 The largest contributor to the actuarial loss affecting the benefit obligation was the decrease in the discount rate from 4.30% at December 31, 2018 to 3.40% at December 31, 2019. However positive asset returns offset the higher obligation for a slightly improved funded position. The components of the $(265) million and $18 million related to U.S. plans and non-U.S. plans, respectively, in the amounts recognized in OCI during 2019 consisted of: In millions U.S. Non- Current year actuarial (gain) loss $ (89 ) $ 19 Amortization of actuarial loss (200 ) (2 ) Current year prior service cost 40 — Amortization of prior service cost (16 ) — Settlements/curtailments — (1 ) Effect of foreign currency exchange rate movements — 2 $ (265 ) $ 18 The portion of the change in the funded status that was recognized in net periodic benefit cost and OCI for the U.S. plans was $(172) million , $(134) million and $(184) million in 2019 , 2018 and 2017 , respectively. The portion of the change in funded status for the non-U.S. plans was $24 million , $(6) million , and $10 million in 2019 , 2018 and 2017 , respectively. The accumulated benefit obligation at December 31, 2019 and 2018 was $11.7 billion and $10.4 billion , respectively, for our U.S. defined benefit plans and $236 million and $200 million , respectively, at December 31, 2019 and 2018 for our non-U.S. defined benefit plans. The following table summarizes information for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2019 and 2018 : 2019 2018 In millions U.S. Non-U.S. U.S. Non-U.S. Projected benefit obligation $ 11,699 $ 225 $ 10,467 $ 187 Accumulated benefit obligation 11,672 208 10,440 175 Fair value of plan assets 10,165 149 8,735 128 ASC 715, “Compensation – Retirement Benefits” provides for delayed recognition of actuarial gains and losses, including amounts arising from changes in the estimated projected plan benefit obligation due to changes in the assumed discount rate, differences between the actual and expected return on plan assets and other assumption changes. These net gains and losses are recognized prospectively over a period that approximates the average remaining service period of active employees expected to receive benefits under the plans to the extent that they are not offset by gains in subsequent years. NET PERIODIC PENSION EXPENSE Service cost is the actuarial present value of benefits attributed by the plans’ benefit formula to services rendered by employees during the year. Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current-year earnings from the investment of plan assets using an estimated long-term rate of return. Net periodic pension expense for qualified and nonqualified U.S. and non-U.S. defined benefit plans comprised the following: 2019 2018 2017 In millions U.S. Non- U.S. Non- U.S. Non- Service cost $ 68 $ 5 $ 153 $ 5 $ 160 $ 4 Interest cost 440 8 467 8 536 9 Expected return on plan assets (631 ) (10 ) (765 ) (11 ) (774 ) (11 ) Actuarial loss (gain) 200 2 337 2 339 2 Amortization of prior service cost 16 — 16 — 28 — Curtailment loss (gain) (a) — (1 ) — — 23 — Settlement loss — 2 424 — 383 1 Special termination benefits (a) — — — — 22 — Net periodic pension expense $ 93 $ 6 $ 632 $ 4 $ 717 $ 5 (a) 2017 amounts were recorded in Discontinued operations in the consolidated statement of operations. The components of net periodic pension expense other than the Service cost component are included in Non-operating pension expense in the Consolidated Statement of Operations. The decrease in 2019 pension expense primarily reflects lower service cost due to the salaried pension freeze, lower amortization and the current year absence of a settlement loss related to the October 2018 annuity purchase transaction slightly offset by lower asset returns due to the 2018 annuity purchase. On September 25, 2018, the Company entered into an agreement with The Prudential Insurance Company of America to purchase a group annuity contract and transfer approximately $1.6 billion of International Paper's U.S. qualified pension plan projected benefit obligations, subject to customary closing conditions. The transaction closed on October 2, 2018 and was funded with pension plan assets. Under the transaction, at the end of 2018, Prudential assumed responsibility for pension benefits and annuity administration for approximately 23,000 retirees or their beneficiaries receiving less than $1,000 in monthly benefit payments from the plan. Settlement accounting rules required a remeasurement of the qualified plan as of October 2, 2018 and the Company recognized a non-cash pension settlement charge of $424 million before tax in the fourth quarter of 2018. On September 26, 2017, the Company entered into an agreement with The Prudential Insurance Company of America to purchase a group annuity contract and transfer approximately $1.3 billion of International Paper's U.S. qualified pension plan projected benefit obligations, subject to customary closing conditions. The transaction closed on October 3, 2017 and was funded with pension plan assets. Under the transaction, at the end of 2017, Prudential assumed responsibility for pension benefits and annuity administration for approximately 45,000 retirees or their beneficiaries receiving less than $450 in monthly benefit payments from the plan. Settlement accounting rules required a remeasurement of the qualified plan as of October 3, 2017 and the Company recognized a non-cash pension settlement charge of $376 million before tax in the fourth quarter of 2017. In addition, large payments from the non-qualified pension plan also required a remeasurement as of October 2, 2017 and a non-cash settlement charge of $7 million was also recognized in the fourth quarter of 2017. ASSUMPTIONS International Paper evaluates its actuarial assumptions annually as of December 31 (the measurement date) and considers changes in these long-term factors based upon market conditions and the requirements for employers’ accounting for pensions. These assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded in the following year (i.e., the discount rate used to determine the benefit obligation as of December 31, 2019 is also the discount rate used to determine net pension expense for the 2020 year). Major actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined benefit plans are presented in the following table: 2019 2018 2017 U.S. Non- U.S. Non- U.S. Non- Actuarial assumptions used to determine benefit obligations as of December 31: Discount rate 3.40 % 2.70 % 4.30 % 3.97 % 3.60 % 3.59 % Rate of compensation increase 2.25 % 3.62 % 2.25 % 4.05 % 3.75 % 4.06 % Actuarial assumptions used to determine net periodic pension cost for years ended December 31: Discount rate (a) 4.30 % 3.97 % 3.80 % 3.59 % 4.03 % 3.88 % Expected long-term rate of return on plan assets 7.25 % 6.20 % 7.50 % 6.52 % 7.50 % 6.73 % Rate of compensation increase 2.25 % 4.05 % 3.38 % 4.06 % 3.75 % 4.20 % (a) Represents the weighted average rate for the U.S. qualified plans in 2018 and 2017 due to the remeasurements. The expected long-term rate of return on plan assets is based on projected rates of return for current asset classes in the plan’s investment portfolio. Projected rates of return are developed through an asset/liability study in which projected returns for each of the plan’s asset classes are determined after analyzing historical experience and future expectations of returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio is developed considering the effects of active portfolio management and expenses paid from plan assets. The discount rate assumption was determined from a universe of high quality corporate bonds. A settlement portfolio is selected and matched to the present value of the plan’s projected benefit payments. To calculate pension expense for 2020, the Company will use an expected long-term rate of return on plan assets of 7.00% for the Retirement Plan of International Paper, a discount rate of 3.40% and an assumed rate of compensation increase of 2.25% . The Company estimates that it will record net pension expense of approximately $46 million for its U.S. defined benefit plans in 2020 , compared to expense of $93 million in 2019 . The estimated decrease in net pension expense in 2020 is primarily due to higher return on assets and lower interest cost partially offset by higher amortization of actuarial losses and higher service cost. For non-U.S. pension plans, assumptions reflect economic assumptions applicable to each country. The following illustrates the effect on pension expense for 2020 of a 25 basis point decrease in the above assumptions: In millions 2020 Expense (Income): Discount rate $ 31 Expected long-term rate of return on plan assets 24 PLAN ASSETS International Paper’s Board of Directors has appointed a Fiduciary Review Committee that is responsible for fiduciary oversight of the U.S. Pension Plan, approving investment policy and reviewing the management and control of plan assets. Pension Plan assets are invested to maximize returns within prudent levels of risk. The Pension Plan maintains a strategic asset allocation policy that designates target allocations by asset class. Investments are diversified across classes and within each class to minimize the risk of large losses. Derivatives, including swaps, forward and futures contracts, may be used as asset class substitutes or for hedging or other risk management purposes. Periodic reviews are made of investment policy objectives and investment manager performance. For non-U.S. plans, assets consist principally of common stock and fixed income securities. International Paper’s U.S. pension allocations by type of fund at December 31, 2019 and 2018 and target allocations were as follows: Asset Class 2019 2018 Target Equity accounts 37 % 32 % 32% - 43% Fixed income accounts 50 % 51 % 44% - 56% Real estate accounts 8 % 11 % 5% - 11% Other 5 % 6 % 3% - 8% Total 100 % 100 % The fair values of International Paper’s pension plan assets at December 31, 2019 and 2018 by asset class are shown below. Hedge funds disclosed in the following table are allocated to fixed income accounts for target allocation purposes. Following our adoption of ASU 2018-09 "Codification Improvements", we have evaluated certain investments and classified them as Level 2 (previously Level 0). Prior year leveling disclosures have been updated for comparability as a result of our retrospective adoption of this disclosure guidance. Fair Value Measurement at December 31, 2019 Asset Class Total Quoted Significant Significant In millions Equities – domestic $ 1,613 $ 965 $ 648 $ — Equities – international 2,181 1,599 582 — Corporate bonds 1,845 — 1,845 — Government securities 2,659 — 2,659 — Mortgage backed securities 1 — 1 — Other fixed income (647 ) — (661 ) 14 Derivatives (19 ) — — (19 ) Cash and cash equivalents 336 336 — — Other investments: Hedge funds 902 Private equity 522 Real estate funds 772 Total Investments $ 10,165 $ 2,900 $ 5,074 $ (5 ) Fair Value Measurement at December 31, 2018 Asset Class Total Quoted Significant Significant In millions Equities – domestic $ 1,200 $ 685 $ 515 $ — Equities – international 1,583 1,141 442 — Corporate bonds 1,493 — 1,493 — Government securities 2,262 — 2,262 — Other fixed income (543 ) — (556 ) 13 Derivatives 98 — — 98 Cash and cash equivalents 294 294 — — Other investments: Hedge funds 886 Private equity 518 Real estate funds 944 Total Investments $ 8,735 $ 2,120 $ 4,156 $ 111 In accordance with accounting standards, certain investments that are measured at NAV and are not classified in the fair value hierarchy. Other Investments at December 31, 2019 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period In millions Hedge funds 902 — Daily to annually 1 - 100 days Private equity 522 198 (a) None Real estate funds 772 147 Quarterly 45 - 60 days Total $ 2,196 $ 345 (a) A private equity fund investment ("partnership interest") is contractually locked up for the life of the private equity fund by the partnership agreement. Limited partners do not have the option to redeem partnership interests. Other Investments at December 31, 2018 Investment Fair Value Unfunded Commitments Redemption Frequency Remediation Notice Period In millions Hedge funds 886 — Daily to annually 1 - 100 days Private equity 518 310 (a) None Real estate funds 944 109 Quarterly 45 - 60 days Total $ 2,348 $ 419 (a) A private equity fund investment ("partnership interest") is contractually locked up for the life of the private equity fund by the partnership agreement. Limited partners do not have the option to redeem partnership interests. Equity securities consist primarily of publicly traded U.S. companies and international companies. Publicly traded equities are valued at the closing prices reported in the active market in which the individual securities are traded. Fixed income consists of government securities, mortgage-backed securities, corporate bonds, common collective funds and other fixed income investments. Government securities are valued by third-party pricing sources. Mortgage-backed security holdings consist primarily of agency-rated holdings. The fair value estimates for mortgage securities are calculated by third-party pricing sources chosen by the custodian’s price matrix. Corporate bonds are valued using either the yields currently available on comparable securities of issuers with similar credit ratings or using a discounted cash flows approach that utilizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. Common collective funds are valued at the net asset value per share multiplied by the number of shares held as of the measurement date. Other fixed income investments of $(647) million and $(543) million at December 31, 2019 and 2018, respectively, primarily include reverse repurchase agreement obligations in which we have sold a security and have an agreement to repurchase the same or substantially the same security at a later date for a price specified in the agreement. Derivative investments such as futures, forward contracts, options and swaps are used to help manage risks. Derivatives are generally employed as asset class substitutes (such as when employed in a portable alpha strategy), for managing asset/liability mismatches, or bona fide hedging or other appropriate risk management purposes. Derivative instruments are generally valued by the investment managers or in certain instances by third-party pricing sources. Hedge funds are investment structures for managing private, loosely-regulated investment pools that can pursue a diverse array of investment strategies with a wide range of different securities and derivative instruments. These investments are made through funds-of-funds (commingled, multi-manager fund structures) and through direct investments in individual hedge funds. Hedge funds are primarily valued by each fund’s third-party administrator based upon the valuation of the underlying securities and instruments and primarily by applying a market or income valuation methodology as appropriate depending on the specific type of security or instrument held. Funds-of-funds are valued based upon the net asset values of the underlying investments in hedge funds. Private equity consists of interests in partnerships that invest in U.S. and non-U.S. debt and equity securities. Partnership interests are valued using the most recent general partner statement of fair value, updated for any subsequent partnership interest cash flows. Real estate funds include commercial properties, land and timberland, and generally include, but are not limited to, retail, office, industrial, multifamily and hotel properties. Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments which include inputs such as cost, discounted cash flows, independent appraisals and market based comparable data. The following is a reconciliation of the assets that are classified using significant unobservable inputs (Level 3) at December 31, 2019 . Fair Value Measurements Using Significant Unobservable Inputs (Level 3) In millions Mortgage backed securities Other Derivatives Total Beginning balance at December 31, 2017 $ 1 $ 12 $ 16 $ 29 Actual return on plan assets: Relating to assets still held at the reporting date — 1 75 76 Relating to assets sold during the period — — (19 ) (19 ) Purchases, sales and settlements (1 ) — 26 25 Transfers in and/or out of Level 3 — — — — Ending balance at December 31, 2018 $ — $ 13 $ 98 $ 111 Actual return on plan assets: Relating to assets still held at the reporting date — 1 (127 ) (126 ) Relating to assets sold during the period — — 314 314 Purchases, sales and settlements — — (304 ) (304 ) Transfers in and/or out of Level 3 — — — — Ending balance at December 31, 2019 $ — $ 14 $ (19 ) $ (5 ) FUNDING AND CASH FLOWS The Company’s funding policy for the Pension Plan 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, cash flow generated by the Company, and other factors. The Company continually reassesses the amount and timing of any discretionary contributions. Contributions to the qualified plan totaling $1.25 billion were made by the Company in 2017 . No voluntary contributions were made in 2018 or 2019. Generally, International Paper’s non-U.S. pension plans are funded using the projected benefit as a target, except in certain countries where funding of benefit plans is not required. At December 31, 2019 , projected future pension benefit payments, excluding any termination benefits, were as follows: In millions 2020 $ 569 2021 579 2022 593 2023 607 2024 619 2025-2029 3,217 OTHER U.S. PLANS International Paper sponsors the International Paper Company Salaried Savings Plan and the International Paper Company Hourly Savings Plan, both of which are tax-qualified defined contribution 401(k) savings plans. Substantially all U.S. salaried and certain hourly employees are eligible to participate and may make elective deferrals to such plans to save for retirement. International Paper makes matching contributions to participant accounts on a specified percentage of employee deferrals as determined by the provisions of each plan. The Company makes Retirement Savings Account contributions equal to a percentage of an eligible employee’s pay. Beginning in 2019, as a result of the freeze for salaried employees under the Pension Plan, all salaried employees are eligible for the contribution to the Retirement Savings Account. The Company also sponsors the International Paper Company Deferred Compensation Savings Plan, which is an unfunded nonqualified defined contribution plan. This plan permits eligible employees to continue to make deferrals and receive company matching contributions (and Retirement Savings Account contributions) when their contributions to the International Paper Salaried Savings Plan are stopped due to limitations under U.S. tax law. Participant deferrals and company contributions are not invested in a separate trust, but are paid directly from International Paper’s general assets at the time benefits become due and payable. Company contributions to the plans totaled approximately $172 million , $125 million and $117 million for the plan years ending in 2019 , 2018 and 2017 , respectively. The increase in 2019 reflects increased contributions in connection with the salaried pension plan freeze. |