8. PENSION AND OTHER POSTRETIREMENT BENEFITS

The company has several funded and unfunded defined benefit pension plans and other postretirement benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries. The company uses an October 31 measurement date for these plans.

The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:

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The components of net periodic OPEB cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:

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The OPEB curtailments are a result of the employee-separation programs (see Note 5).

The spot yield curve approach is used to estimate the service and interest cost components of the net periodic pension and OPEB costs by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. The components of net periodic pension and OPEB cost excluding the service component are primarily included in the line item “Other operating expenses” in the statement of consolidated income.

The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

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The previous OPEB cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:

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The benefit plan obligations, funded status, and the assumptions related to the obligations at November 1, 2020 and November 3, 2019, respectively, in millions of dollars follow:

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The company made voluntary contributions of $700 million and $300 million to a U.S. OPEB plan in 2020 and 2019, respectively.

The actuarial loss for pension for 2020 was primarily due to a decrease in discount rates partially offset by a decrease in mortality assumptions. The actuarial gain for OPEB for 2020 was primarily due to the U.S. enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that repealed the health insurance provider fee effective in 2021, a decrease in mortality assumptions, and a decrease in health care trend rates, partially offset by a decrease in discount rates. The actuarial loss for pension for 2019 was primarily due to a decrease in discount rates. The actuarial loss for OPEB for 2019 was primarily due to a decrease in discount rates partially offset by a decrease in health care trend rates.

The mortality assumptions for the 2020 and 2019 benefit plan obligations reflect the most recent tables and scales issued by the Society of Actuaries at that time.

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The amounts recognized at November 1, 2020 and November 3, 2019, respectively, in millions of dollars consist of the following:

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The total accumulated benefit obligations for all pension plans at November 1, 2020 and November 3, 2019, were $14,257 million and $13,430 million, respectively.

The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $2,107 million and $1,100 million, respectively, at November 1, 2020 and $1,836 million and $924 million, respectively, at November 3, 2019. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $10,792 million and $9,482 million, respectively, at November 1, 2020 and $10,097 million and $9,031 million, respectively, at November 3, 2019.

Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the benefit obligation, the excess is amortized as a component of net periodic cost over the remaining service period of the active participants. For plans in which all or almost all of the plan’s participants are inactive, the amortization period is the remaining life expectancy of the inactive participants.

The company expects to contribute approximately $105 million to its pension plans and approximately $845 million to its OPEB plans in 2021. The anticipated OPEB contributions include a voluntary $700 million to a U.S. plan in the fourth quarter, which will increase plan assets. The pension and remaining OPEB contributions primarily include direct benefit payments from company funds.

The benefits expected to be paid from the benefit plans, which reflect expected future years of service, are as follows in millions of dollars:

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*       Net of prescription drug group benefit subsidy under Medicare Part D.

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The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. For the 2020 actuarial valuation, the weighted-average composite trend rates for these obligations were assumed to be a 4.0 percent increase from 2020 to 2021, followed by an increase of 7.6 percent from 2021 to 2022, gradually decreasing to 4.7 from 2027 to 2028 and all future years. The lower estimated increase from 2021 to 2022 resulted from the SECURE Act that repealed the health insurance provider fee effective in 2021. The 2019 obligations and the cost in 2020 assumed an 8.6 percent increase from 2019 to 2020, gradually decreasing to 4.7 percent from 2027 to 2028 and all future years.

The discount rate assumptions used to determine the pension and OPEB obligations for all periods presented were primarily based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company’s benefit obligations could effectively be settled at the October 31 measurement dates.

Fair value measurement levels in the following tables are defined in Note 26.

The fair values of the pension plan assets at November 1, 2020 follow in millions of dollars:

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*       Includes contracts for interest rates of $67 million, foreign currency of $25 million, and other of $2 million.

**     Includes contracts for equity of $30 million, foreign currency of $24 million, interest rates of $23 million, and other of $2 million.

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The fair values of the health care assets at November 1, 2020 follow in millions of dollars:

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The fair values of the pension plan assets at November 3, 2019 follow in millions of dollars:

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*       Includes contracts for interest rates of $171 million, foreign currency of $20 million, equity of $10 million, and other of $7 million.

**     Includes contracts for foreign currency of $26 million, interest rates of $20 million, and other of $1 million.

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The fair values of the health care assets at November 3, 2019 follow in millions of dollars:

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Investments at net asset value in the preceding tables are measured at fair value using the net asset value per share practical expedient, and therefore, are not classified in the fair value hierarchy.

Fair values are determined as follows:

Cash and Short-Term Investments – Include accounts that are valued based on the account value, which approximates fair value, and investment funds that are valued based on a constant fund net asset value (NAV) using the NAV per share practical expedient or on the fund’s NAV based on the fair value of the underlying securities. Also included are securities that are valued using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data.

Equity Securities, Equity Funds, and Other Funds – The values are determined by closing prices in the active market in which the equity investment trades, or the fund’s NAV, based on the fair value of the underlying securities.

Fixed Income Securities and Funds – The securities are valued using either a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds, or they are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the fund’s NAV, based on the fair value of the underlying securities.

Real Estate, Venture Capital, Private Equity, and Hedge Funds – The investments that are structured as limited partnerships are valued

at estimated fair value based on their proportionate share of the limited partnership’s fair value that is determined by the respective general partner. These investments are valued using a combination of NAV, an income approach (primarily estimated cash flows discounted over the expected holding period), or market approach (primarily the valuation of similar securities and properties). Real estate investment trusts are primarily valued at the closing prices in the active markets in which the investment trades.

Derivative Instruments – The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (closing prices in the active market in which the derivative instrument trades).

The primary investment objective for the pension and health care plans assets is to maximize the growth of these assets to support the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s risk tolerance. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the company’s long-term asset class risk/return expectations for each plan since the obligations are long-term in nature. The current target allocations for pension assets are approximately 32 percent for equities, 46 percent for debt, 4 percent for real estate, and 18 percent for other investments. The target allocations for health care assets are approximately 61 percent for equities, 34 percent for debt, and 5 percent for other investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company’s diversified investment policy, there were no significant concentrations of risk.

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. A market related value of plan assets is used to calculate the expected return on assets. The market related value recognizes changes in the fair value of pension plan assets systematically over a five-year period. The market related value of the health care plan assets equals fair value. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation, and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed significantly unless there are fundamental changes in capital markets that affect the company’s expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company’s U.S. pension fund was approximately 9.2 percent during the past ten years and approximately 7.2 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not

necessarily indicative of long-term future expected returns. The company’s systematic methodology for determining the long-term rate of return for the company’s investment strategies supports its long-term expected return assumptions.

The company has created certain Voluntary Employees’ Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company’s pension plan trust.

The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company’s contributions and costs under these plans were $160 million in 2020, $192 million in 2019, and $206 million in 2018. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.