Note 17
Employee benefits

The Company operates defined benefit pension plans, defined contribution pension plans, and termination indemnity plans, in accordance with local regulations and practices. The Company’s most significant defined benefit pension plans are in Switzerland as well as in Germany, the United Kingdom, the U.S., Sweden and Finland. These plans cover a large portion of the Company’s employees and provide benefits to employees in the event of death, disability, retirement, or termination of employment. Certain of these plans are multi-employer plans. The Company also operates other postretirement benefit plans including postretirement health care benefits and other employee-related benefits for active employees including long-service award plans. The measurement date used for the Company’s employee benefit plans is December 31. The funding policies of the Company’s plans are consistent with the local government and tax requirements.

The Company recognizes in its Consolidated Balance Sheets the funded status of its defined benefit pension plans, postretirement plans, and other employee-related benefits measured as the difference between the fair value of the plan assets and the benefit obligation.

Unless otherwise indicated, the following tables include amounts relating to both continuing and discontinued operations.

Obligations and funded status of the plans

The change in benefit obligation, change in fair value of plan assets, and funded status recognized in the Consolidated Balance Sheets were as follows:

 

Defined pension benefits

 

Other postretirement benefits

 

Switzerland

International

 

International

($ in millions)

2018

2017

2018

2017

 

2018

2017

Benefit obligations at January 1,

4,055

3,708

7,892

7,188

 

132

147

Service cost

92

106

122

122

 

1

1

Interest cost

30

41

198

208

 

4

5

Contributions by plan participants

69

70

16

12

 

Benefit payments

(239)

(245)

(318)

(345)

 

(11)

(11)

Benefit obligations of businesses acquired (divested)

10

56

60

8

 

8

Actuarial (gain) loss

6

127

(92)

101

 

(12)

(11)

Plan amendments and other

(4)

23

(119)

(45)

 

(1)

Exchange rate differences

(26)

169

(330)

643

 

(2)

2

Benefit obligation at December 31,

3,993

4,055

7,429

7,892

 

120

132

Fair value of plan assets at January 1,

4,020

3,682

6,514

5,811

 

Actual return on plan assets

(41)

207

(184)

437

 

Contributions by employer

89

90

152

139

 

11

11

Contributions by plan participants

69

70

16

12

 

Benefit payments

(239)

(245)

(318)

(345)

 

(11)

(11)

Plan assets of businesses acquired (divested)

7

52

39

 

Plan amendments and other

(3)

(94)

(47)

 

Exchange rate differences

(26)

167

(259)

507

 

Fair value of plan assets at December 31,

3,879

4,020

5,866

6,514

 

Funded status – underfunded

(114)

(35)

(1,563)

(1,378)

 

(120)

(132)

The amounts recognized in “Accumulated other comprehensive loss” and “Noncontrolling interests” were:

 

2018

2017

2016

2018

2017

2016

December 31, ($ in millions)

Defined pension benefits

Other postretirement benefits

(1)

OCI represents “Accumulated other comprehensive loss”.

(2)

NCI represents “Noncontrolling interests”.

(3)

NCI, net of tax, amounted to $(1) million, $0 million, and $0 million at December 31, 2018, 2017 and 2016.

Net actuarial (loss) gain

(2,628)

(2,321)

(2,237)

30

20

10

Prior service credit

74

99

108

23

27

31

Amount recognized in OCI(1) and NCI(2)

(2,554)

(2,222)

(2,129)

53

47

41

Taxes associated with amount recognized in OCI and NCI

535

503

487

Amount recognized in OCI and NCI, net of tax(3)

(2,019)

(1,719)

(1,642)

53

47

41

In addition, the following amounts were recognized in the Company’s Consolidated Balance Sheets:

 

2018

2017

2018

2017

 

2018

2017

 

Defined pension benefits

 

Other postretirement benefits

December 31, ($ in millions)

Switzerland

International

 

International

Overfunded plans

24

60

59

62

 

Underfunded plans – current

(19)

(18)

 

(11)

(12)

Underfunded plans – non-current

(138)

(95)

(1,603)

(1,422)

 

(109)

(120)

Funded status – underfunded

(114)

(35)

(1,563)

(1,378)

 

(120)

(132)

Amounts reported as assets and liabilities held for sale

(93)

(133)

(120)

(106)

 

December 31, ($ in millions)

2018

2017

Non-current assets

 

 

Overfunded pension plans

83

122

Other employee-related benefits

1

22

Pension and other employee benefits

84

144

Amounts reported as non-current assets held for sale

1

1

December 31, ($ in millions)

2018

2017

Current liabilities

 

 

Underfunded pension plans

(19)

(18)

Underfunded other postretirement benefit plans

(11)

(12)

Other employee-related benefits

(10)

(17)

Pension and other employee benefits

(40)

(47)

Amounts reported as Current liabilities held for sale

(4)

(7)

December 31, ($ in millions)

2018

2017

Non-current liabilities

 

 

Underfunded pension plans

(1,741)

(1,517)

Underfunded other postretirement benefit plans

(109)

(120)

Other employee-related benefits

(246)

(245)

Pension and other employee benefits

(2,096)

(1,882)

Amounts reported as Non-current liabilities held for sale

(266)

(291)

The accumulated benefit obligation (ABO) for all defined benefit pension plans was $11,249 million and $11,683 million at December 31, 2018 and 2017, respectively. The projected benefit obligation (PBO), ABO and fair value of plan assets, for pension plans with a PBO in excess of fair value of plan assets or ABO in excess of fair value of plan assets, was:

 

PBO exceeds fair value of plan assets

 

ABO exceeds fair value of plan assets

 

Switzerland

International

 

Switzerland

International

December 31, ($ in millions)

2018

2017

2018

2017

 

2018

2017

2018

2017

PBO

3,482

3,557

6,897

7,477

 

3,482

3,557

6,872

5,864

ABO

3,482

3,557

6,743

7,235

 

3,482

3,557

6,724

5,725

Fair value of plan assets

3,344

3,461

5,275

6,038

 

3,344

3,461

5,254

4,453

All of the Company’s other postretirement benefit plans are unfunded.

Components of net periodic benefit cost

Net periodic benefit cost consisted of the following:

 

Defined pension benefits

 

Other postretirement benefits

 

Switzerland

International

 

International

($ in millions)

2018

2017

2016

2018

2017

2016

 

2018

2017

2016

Operational pension cost:

 

 

 

 

 

 

 

 

 

 

Service cost

92

106

133

122

122

116

 

1

1

1

Operational pension cost

92

106

133

122

122

116

 

1

1

1

Non-operational pension cost (credit):

 

 

 

 

 

 

 

 

 

 

Interest cost

30

41

46

198

208

234

 

4

5

6

Expected return on plan assets

(117)

(112)

(130)

(305)

(295)

(272)

 

Amortization of prior service cost (credit)

(15)

10

36

1

1

4

 

(5)

(5)

(12)

Amortization of net actuarial loss

92

91

85

 

(1)

(1)

Curtailments, settlements and special termination benefits

23

16

41

 

(1)

Non-operational pension cost (credit)

(102)

(61)

(48)

9

21

92

 

(2)

(2)

(6)

Net periodic benefit cost

(10)

45

85

131

143

208

 

(1)

(1)

(5)

The components of net periodic benefit cost other than the service cost component are included in the line “Non-operational pension (cost) credit” in the income statement. Net periodic benefit cost includes $45 million, $55 million and $67 million in 2018, 2017 and 2016, respectively, related to discontinued operations.

Assumptions

The following weighted-average assumptions were used to determine benefit obligations:

 

2018

2017

2018

2017

 

2018

2017

 

Defined pension benefits

 

Other postretirement benefits

December 31, (in %)

Switzerland

International

 

International

Discount rate

0.8

0.8

2.8

2.6

 

3.9

3.2

Rate of compensation increase

2.4

2.5

 

0.2

Rate of pension increase

1.4

1.5

 

Cash balance interest credit rate

1.0

1.0

1.6

1.7

 

For the Company’s significant benefit plans, the discount rate used at each measurement date is set based on a high-quality corporate bond yield curve – derived based on bond universe information sourced from reputable third-party index and data providers and rating agencies – reflecting the timing, amount and currency of the future expected benefit payments for the respective plan. Consistent discount rates are used across all plans in each currency zone, based on the duration of the applicable plan(s) in that zone. For plans in the other countries, the discount rate is based on high quality corporate or government bond yields applicable in the respective currency, as appropriate at each measurement date with a duration broadly consistent with the respective plan’s obligations.

At the end of 2018, the Company changed the approach used to calculate the service and interest components of net periodic benefit cost for its significant benefit plans to provide a more precise measurement of service and interest costs. This change compared to the previous approach is expected to result in a net decrease in the service and interest components for benefit cost in 2019. The Company calculates the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, the Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. This change does not affect the measurement of our total benefit obligations. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it prospectively.

The following weighted-average assumptions were used to determine the “Net periodic benefit cost”:

 

Defined pension benefits

 

Other postretirement benefits

 

Switzerland

International

 

International

($ in millions)

2018

2017

2016

2018

2017

2016

 

2018

2017

2016

Discount rate

0.8

1.1

1.2

2.6

2.9

3.4

 

3.2

3.3

3.6

Expected long-term rate of return on plan assets

3.0

3.0

3.5

4.9

5.0

4.8

 

Rate of compensation increase

2.5

2.5

2.4

 

Cash balance interest credit rate

1.0

1.0

1.3

1.7

1.7

1.6

 

The “Expected long-term rate of return on plan assets” is derived for each benefit plan by considering the expected future long-term return assumption for each individual asset class. A single long-term return assumption is then derived for each plan based upon the plan’s target asset allocation.

The Company maintains other postretirement benefit plans, which are generally contributory with participants’ contributions adjusted annually. The assumptions used were:

December 31,

2018

2017

Health care cost trend rate assumed for next year

6.7%

7.1%

Rate to which the trend rate is assumed to decline (the ultimate trend rate)

5.0%

5.0%

Year that the rate reaches the ultimate trend rate

2028

2028

Plan assets

The Company has pension plans in various countries with the majority of the Company’s pension liabilities deriving from a limited number of these countries.

The pension plans are typically funded by regular contributions from employees and the Company. These plans are typically administered by boards of trustees (which include Company representatives) whose primary responsibilities include ensuring that the plans meet their liabilities through contributions and investment returns. The boards of trustees have the responsibility for making key investment strategy decisions within a risk-controlled framework.

The pension plan assets are invested in diversified portfolios that are managed by third-party asset managers, in accordance with local statutory regulations, pension plan rules and the respective plans’ investment guidelines, as approved by the boards of trustees.

Plan assets are generally segregated from those of the Company and invested with the aim of meeting the respective plans’ projected future pension liabilities. Plan assets are measured at fair value at the balance sheet date.

The boards of trustees manage the assets of the pension plans in a risk-controlled manner and assess the risks embedded in the pension plans through asset/liability management studies. Asset/liability management studies typically take place every three years. However, the risks of the plans are monitored on an ongoing basis.

The board of trustees’ investment goal is to maximize the long-term returns of plan assets within specified risk parameters, while considering the future liabilities and liquidity needs of the individual plans. Risk measures taken into account include the funding ratio of the plan, the likelihood of extraordinary cash contributions being required, the risk embedded in each individual asset class, and the plan asset portfolio as a whole.

The Company’s global pension asset allocation is the result of the asset allocations of the individual plans, which are set by the respective boards of trustees. The target asset allocation of the Company’s plans on a weighted-average basis is as follows:

 

Target

(in %)

Switzerland

International

Asset class

 

 

Equity

19

22

Fixed income

54

61

Real estate

22

7

Other

5

10

 

100

100

The actual asset allocations of the plans are in line with the target asset allocations.

Equity securities primarily includes investments in large-cap and mid-cap publicly traded companies. Fixed income assets primarily include corporate bonds of companies from diverse industries and government bonds. Both fixed income and equity assets are invested either via funds or directly in segregated investment mandates, and include an allocation to emerging markets. Real estate consists primarily of investments in real estate in Switzerland held in the Swiss plans. The “Other” asset class includes investments in private equity, hedge funds, commodities, and cash and reflects a variety of investment strategies.

Based on the above global asset allocation and the fair values of the plan assets, the expected long-term return on assets at December 31, 2018, is 4.1 percent. The Company and the local boards of trustees regularly review the investment performance of the asset classes and individual asset managers. Due to the diversified nature of the investments, the Company is of the opinion that no significant concentration of risks exists in its pension fund assets.

At December 31, 2018 and 2017, plan assets include ABB Ltd’s shares (as well as an insignificant amount of the Company’s debt instruments) with a total value of $8 million and $11 million, respectively.

The fair values of the Company’s pension plan assets by asset class are presented below. For further information on the fair value hierarchy and an overview of the Company’s valuation techniques applied, see the “Fair value measures” section of Note 2.

($ in millions)

Level 1

Level 2

Not subject to leveling(1)

Total fair value

(1)

Amounts relate to assets measured using the NAV practical expedient which are not subject to leveling.

Asset class

 

 

 

 

Equity

 

 

 

 

Equity securities

209

209

Mutual funds/commingled funds

1,433

39

1,472

Emerging market mutual funds/commingled funds

363

363

Fixed income

 

 

 

 

Government and corporate securities

524

997

1,521

Government and corporate – mutual funds/commingled funds

3,496

3,496

Emerging market bonds – mutual funds/commingled funds

729

729

Real estate

1,381

1,381

Insurance contracts

121

121

Cash and short-term investments

202

86

288

Private equity

139

139

Hedge funds

2

2

Commodities

24

24

Total

935

7,249

1,561

9,745

($ in millions)

Level 1

Level 2

Not subject to leveling(1)

Total fair value

(1)

Amounts relate to assets measured using the NAV practical expedient which are not subject to leveling.

Asset class

 

 

 

 

Equity

 

 

 

 

Equity securities

274

274

Mutual funds/commingled funds

1,726

46

1,772

Emerging market mutual funds/commingled funds

507

507

Fixed income

 

 

 

 

Government and corporate securities

564

1,092

1,656

Government and corporate – mutual funds/commingled funds

3,622

3,622

Emerging market bonds – mutual funds/commingled funds

708

708

Real estate

9

1,355

1,364

Insurance contracts

113

113

Cash and short-term investments

162

140

302

Private equity

128

128

Hedge funds

15

15

Commodities

73

73

Total

1,000

7,990

1,544

10,534

The Company applies accounting guidance related to the presentation of certain investments using the net asset value (NAV) practical expedient. This accounting guidance exempts investments using this practical expedient from categorization within the fair value hierarchy.

Contributions

Employer contributions were as follows:

 

Defined pension benefits

 

Other postretirement benefits

 

Switzerland

International

 

International

($ in millions)

2018

2017

2018

2017

 

2018

2017

Total contributions to defined benefit pension and other postretirement benefit plans

89

90

152

139

 

11

11

Of which, discretionary contributions to defined benefit pension plans

25

15

 

In 2018, 2017 and 2016, total contributions included non-cash contributions totaling $31 million, $31 million and $52 million, respectively, of available-for-sale debt securities to certain of the Company’s pension plans.

The Company expects to contribute approximately $202 million, including $8 million in discretionary contributions, to its defined benefit pension plans in 2019. Of these discretionary contributions $6 million are expected to be non-cash contributions. The Company expects to contribute approximately $11 million to its other postretirement benefit plans in 2019.

The Company also contributes to a number of defined contribution plans. The aggregate expense for these plans was $245 million, $233 million and $210 million in 2018, 2017 and 2016, respectively. Contributions to multi-employer plans were not significant in 2018, 2017 and 2016. Defined contribution expense includes $59 million, $61 million and $58 million in 2018, 2017 and 2016, respectively, related to discontinued operations.

Estimated future benefit payments

The expected future cash flows to be paid by the Company’s plans in respect of pension and other postretirement benefit plans at December 31, 2018, are as follows:

 

Defined pension benefits

 

Other postretirement benefits

($ in millions)

Switzerland

International

 

International

2019

357

338

 

11

2020

271

348

 

11

2021

233

345

 

11

2022

228

350

 

10

2023

213

350

 

10

Years 2024–2028

941

1,840

 

42