REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 9
13/02/2018 07:15
- Part 9: For the preceding part double click ID:nRSM6559Eh
(4) (6) -
Actuarial (gain) loss 1,263 427 170 724 127 7
Benefit payments (936) (919) (276) (245) (105) (104)
Settlements, curtailments, special termination benefits and other (2) (1) - (7) - -
Benefit obligation at end of year $ 17,360 $ 16,202 $ 7,502 $ 6,625 $ 2,410 $ 2,259
Change in plan assets
Fair value of plan assets at beginning of year $ 14,081 $ 13,966 $ 5,617 $ 5,669 $ 1,356 $ 1,367
Acquisitions/Transfers - - 2 - - -
Actual return on plan assets 1,693 779 714 512 143 90
Company contributions 852 259 112 121 3 3
Participant contributions - - 8 8 - -
Foreign exchange rate changes - - 560 (444) - -
Benefit payments (936) (919) (276) (245) (105) (104)
Settlements, curtailments, special termination benefits and other (4) (4) - (4) - -
Fair value of plan assets at end of year $ 15,686 $ 14,081 $ 6,737 $ 5,617 $ 1,397 $ 1,356
Funded status at end of year $ (1,674) $ (2,121) $ (765) $ (1,008) $ (1,013) $ (903)
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2017 2016 2017 2016
Amounts recognized in the Consolidated Balance Sheet as of Dec. 31,
Non-current assets $ 4 $ 4 $ 233 $ 48 $ - $ -
Accrued benefit cost
Current liabilities (53) (52) (12) (10) (4) (4)
Non-current liabilities (1,625) (2,073) (986) (1,046) (1,009) (899)
Ending balance $ (1,674) $ (2,121) $ (765) $ (1,008) $ (1,013) $ (903)
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2017 2016 2017 2016
Amounts recognized in accumulated other comprehensive income as of Dec. 31,
Net transition obligation (asset) $ - $ - $ - $ - $ - $ -
Net actuarial loss (gain) 5,921 5,704 1,720 1,933 774 761
Prior service cost (credit) (175) (198) (40) (56) (163) (214)
Ending balance $ 5,746 $ 5,506 $ 1,680 $ 1,877 $ 611 $ 547
The balance of amounts recognized for international plans in accumulated other comprehensive income as of December 31 in
the preceding table are presented based on the foreign currency exchange rate on that date.
The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and
compensation as of the measurement date and does not include an assumption about future compensation levels. The
accumulated benefit obligation of the U.S. pension plans was $16.270 billion and $15.149 billion at December 31, 2017 and
2016, respectively. The accumulated benefit obligation of the international pension plans was $6.870 billion and $6.058
billion at December 31, 2017 and 2016, respectively.
The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of December
31:
Qualified and Non-qualified Pension Plans
United States International
(Millions) 2017 2016 2017 2016
Projected benefit obligation $ 17,350 $ 16,202 $ 2,687 $ 2,590
Accumulated benefit obligation 16,260 15,149 2,449 2,351
Fair value of plan assets 15,671 14,081 1,731 1,635
Components of net periodic cost and other amounts recognized in other comprehensive income
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research,
development and related expenses. Components of net periodic benefit cost and other changes in plan assets and benefit
obligations recognized in other comprehensive income for the years ended December 31 follow:
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2017 2016 2015 2017 2016 2015 2017 2016 2015
Net periodic benefit cost (benefit)
Service cost $ 268 $ 259 $ 293 $ 142 $ 133 $ 154 $ 52 $ 54 $ 75
Interest cost 565 575 655 157 171 206 80 79 98
Expected return on plan assets (1,035) (1,043) (1,069) (293) (308) (308) (86) (90) (91)
Amortization of transition asset - - - - (1) (1) - - -
Amortization of prior service benefit (23) (24) (24) (13) (13) (13) (53) (55) (42)
Amortization of net actuarial loss 388 354 409 126 91 144 56 61 73
Settlements, curtailments, special termination benefits and other 2 4 2 4 4 (6) (4) - 1
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other $ 165 $ 125 $ 266 $ 123 $ 77 $ 176 $ 45 $ 49 $ 114
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
Amortization of transition asset - - - - 1 1 - - -
Prior service cost (benefit) - 5 - 6 (5) 10 (1) - (212)
Amortization of prior service benefit 23 24 24 13 13 13 53 55 42
Net actuarial (gain) loss 605 692 312 (248) 512 (270) 69 8 (23)
Amortization of net actuarial loss (388) (354) (409) (126) (91) (144) (56) (61) (73)
Foreign currency - - - 167 (93) (174) - - (1)
Total recognized in other comprehensive (income) loss $ 240 $ 367 $ (73) $ (188) $ 337 $ (564) $ 65 $ 2 $ (267)
Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss $ 405 $ 492 $ 193 $ (65) $ 414 $ (388) $ 110 $ 51 $ (153)
Amounts expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next
fiscal year
Qualified and Non-qualified
Pension Benefits Postretirement
(Millions) United States International Benefits
Amortization of transition (asset) obligation $ - $ - $ -
Amortization of prior service cost (benefit) (23) (13) (40)
Amortization of net actuarial (gain) loss 503 116 62
Total amortization expected over the next fiscal year $ 480 $ 103 $ 22
The Company primarily amortizes amounts recognized as prior service cost (benefit) over the average future service period
of active employees at the date of the amendment.
Weighted-average assumptions used to determine benefit obligations as of December 31
Qualified and Non-qualified Pension Benefits Postretirement
United States International Benefits
2017 2016 2015 2017 2016 2015 2017 2016 2015
Discount rate 3.68 % 4.21 % 4.47 % 2.41 % 2.54 % 3.12 % 3.79 % 4.26 % 4.48 %
Compensation rate increase 4.10 % 4.10 % 4.10 % 2.89 % 2.90 % 2.90 % N/A N/A N/A
Weighted-average assumptions used to determine net cost for years ended December 31
Qualified and Non-qualified Pension Benefits Postretirement
United States International Benefits
2017 2016 2015 2017 2016 2015 2017 2016 2015
Discount rate - service cost 4.42 % 4.70 % 4.10 % 2.32 % 2.84 % 3.11 % 4.50 % 4.70 % 4.07 %
Discount rate - interest cost 3.61 % 3.73 % 4.10 % 2.25 % 2.72 % 3.11 % 3.80 % 3.80 % 4.07 %
Expected return on assets 7.25 % 7.50 % 7.75 % 5.16 % 5.77 % 5.90 % 6.48 % 6.91 % 6.91 %
Compensation rate increase 4.10 % 4.10 % 4.10 % 2.90 % 2.90 % 3.33 % N/A N/A N/A
The Company provides eligible retirees in the U.S. postretirement health care benefit plans to a savings account
benefits-based plan. The contributions provided by the Company to the health savings accounts increase 3 percent per year
for employees who retired prior to January 1, 2016 and increase 1.5 percent for employees who retire on or after January 1,
2016. Therefore, the Company no longer has material exposure to health care cost inflation.
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the
pension and postretirement benefit plans, which is also the date used for the related annual measurement assumptions. The
discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the
year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that
would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the
Company determined a discount rate of 3.68% for pension and 3.79% for postretirement benefits to be appropriate for its
U.S. plans as of December 31, 2017, which is a decrease of 0.53 percentage points and 0.47 percentage points, respectively,
from the rates used as of December 31, 2016. For the international pension and postretirement plans the discount rates also
reflect the current rate at which the associated liabilities could be effectively settled at the end of the year. If the
country has a deep market in corporate bonds the Company matches the expected cash flows from the plan either to a
portfolio of bonds that generate sufficient cash flow or a notional yield curve generated from available bond information.
In countries that do not have a deep market in corporate bonds, government bonds are considered with a risk premium to
approximate corporate bond yields.
Beginning in 2016, 3M changed the method used to estimate the service and interest cost components of the net periodic
pension and other postretirement benefit costs. The new method measures service cost and interest cost separately using the
spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific
spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying
duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect
the measurement of the total benefit obligations as the change in service and interest costs offset in the actuarial gains
and losses recorded in other comprehensive income. The Company changed to the new method to provide a more precise measure
of service and interest costs by improving the correlation between the projected benefit cash flows and the discrete spot
yield curve rates. The Company accounted for this change as a change in estimate prospectively beginning in the first
quarter of 2016. As a result of the change to the spot yield curve approach, 2016 annual defined benefit pension and
postretirement net periodic benefit cost decreased approximately $180 million.
For the primary U.S. qualified pension plan, the Company's assumption for the expected return on plan assets was 7.25% in
2017. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking
estimates of active portfolio and investment management. As of December 31, 2017, the Company's 2018 expected long-term
rate of return on U.S. plan assets is 7.25%, consistent with 2017. The expected return assumption is based on the strategic
asset allocation of the plan, long term capital market return expectations and expected performance from active investment
management. The 2017 expected long-term rate of return is based on an asset allocation assumption of 25% global equities,
16% private equities, 41% fixed-income securities, and 18% absolute return investments independent of traditional
performance benchmarks, along with positive returns from active investment management. The actual net rate of return on
plan assets in 2017 was 12.4%. In 2016 the plan earned a rate of return of 5.8% and in 2015 earned a return of 0.7%. The
average annual actual return on the plan assets over the past 10 and 25 years has been 7.0% and 9.4%, respectively. Return
on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan
basis using plan asset allocations and expected long-term rate of return assumptions.
As of December 31, 2014, the Company converted to the "RP 2014 Mortality Tables" and updated the mortality improvement
scale it used for calculating the year-end 2014 U.S. defined benefit pension annuitant and postretirement obligations and
2015 expense. The impact of this change increased the year-end 2014 U.S. pension projected benefit obligation (PBO) by
approximately $820 million and the U.S. accumulated postretirement benefit obligation by approximately $100 million. As of
December 31, 2016, the Company updated the mortality improvement scale to Scale MP-2016, which was released by the Society
of Actuaries in October 2016. The impact of this change decreased the year-end 2016 U.S. pension PBO by approximately $440
million and the U.S. accumulated postretirement benefit obligation by approximately $60 million. As of December 31, 2017,
the Company updated the mortality improvement scale to Scale MP-2017. The update resulted in a small decrease to the U.S.
pension PBO and U.S. accumulated postretirement benefit obligations.
During 2017, the Company contributed $964 million to its U.S. and international pension plans and $3 million to its
postretirement plans. During 2016, the Company contributed $380 million to its U.S. and international pension plans and $3
million to its postretirement plans. In 2018, the Company expects to contribute an amount in the range of $300 million to
$500 million of cash to its U.S. and international retirement plans. The Company does not have a required minimum cash
pension contribution obligation for its U.S. plans in 2018. Future contributions will depend on market conditions, interest
rates and other factors.
Future Pension and Postretirement Benefit Payments
The following table provides the estimated pension and postretirement benefit payments that are payable from the plans to
participants.
Qualified and Non-qualified
Pension Benefits Postretirement
(Millions) United States International Benefits
2018 Benefit Payments $ 1,074 $ 237 $ 139
2019 Benefit Payments 1,090 251 148
2020 Benefit Payments 1,102 260 157
2021 Benefit Payments 1,110 278 166
2022 Benefit Payments 1,126 285 174
Next five years 5,724 1,640 843
Plan Asset Management
3M's investment strategy for its pension and postretirement plans is to manage the funds on a going-concern basis. The
primary goal of the trust funds is to meet the obligations as required. The secondary goal is to earn the highest rate of
return possible, without jeopardizing its primary goal, and without subjecting the Company to an undue amount of
contribution risk. Fund returns are used to help finance present and future obligations to the extent possible within
actuarially determined funding limits and tax-determined asset limits, thus reducing the potential need for additional
contributions from 3M. The investment strategy has used long duration cash bonds and derivative instruments to offset a
significant portion of the interest rate sensitivity of U.S. pension liabilities.
Normally, 3M does not buy or sell any of its own securities as a direct investment for its pension and other postretirement
benefit funds. However, due to external investment management of the funds, the plans may indirectly buy, sell or hold 3M
securities. The aggregate amount of 3M securities are not considered to be material relative to the aggregate fund
percentages.
The discussion that follows references the fair value measurements of certain assets in terms of levels 1, 2 and 3. See
Note 14 for descriptions of these levels. While the company believes the valuation methods 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 estimate of fair value at the reporting date.
This information is provided by RNS
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