The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.
Defined benefit pension plans (non-U.S. plans)
The Company has various defined benefit pension plans outside the United States. The principal defined benefit pension plan is the Boots Pension Plan (the “Boots Plan”), which covers certain employees in the United Kingdom. The Boots Plan is a funded final salary defined benefit plan providing pensions and death benefits to members. The Boots Plan was closed to future accrual effective July 1, 2010, with pensions calculated based on salaries up until that date. The Boots Plan is governed by a trustee board, which is independent of the Company.
The plan is subject to a full funding actuarial valuation on a triennial basis.
The investment strategy of the principal defined benefit pension plan is to hold approximately 85% of its assets in a diverse portfolio which aims to broadly match the characteristics of the plan’s liabilities by investing in bonds, derivatives and other fixed income assets, with the remainder invested in predominantly return-seeking assets. Interest rate and inflation rate swaps are also employed to complement the role of fixed and index-linked bond holdings in liability risk management.
The following tables present classes of defined benefit pension plan assets by fair value hierarchy (in millions):
August 31, 2018 Level 1 Level 2 Level 3
Equity securities:
Equity securities1 $1,030 $— $1,030 $ —
Debt securities:
Fixed interest government bonds2 901 — 901 —
Index linked government bonds2 2,880 — 2,880 —
Corporate bonds3 2,542 — 2,536 6
Real estate:
Real estate4 501 — — 501
Other:
Other investments5 822 64 531 227
Total $8,676 $64 $7,878 $734
August 31, 2017 Level 1 Level 2 Level 3
Equity securities:
Equity securities1 $ 956 $— $ 956 $ —
Debt securities:
Fixed interest government bonds2 217 — 217 —
Index linked government bonds2 3,354 — 3,354 —
Corporate bonds3 3,251 — 3,251 —
Real estate:
Real estate4 461 — — 461
Other:
Other investments5 741 58 583 100
Total $8,980 $58 $8,361 $561
1 Equity securities, which mainly comprise investments in commingled funds, are valued based on quoted prices and are primarily exchange-traded. Securities for which official close or last trade pricing on an active exchange is available are classified as Level 1 investments. If closing prices are not available, or the investments are in a commingled fund, securities are valued at the last quoted bid price and typically are categorized as Level 2 investments.
2 Debt securities: government bonds comprise fixed interest and index linked bonds issued by central governments and are valued based on quotes received from independent pricing services or from dealers who make markets in such securities. Pricing services utilize pricing which considers readily available inputs such as the yield or price of bonds of comparable quality, coupon, maturity and type, as well as dealer-supplied prices. Government bonds are classified as Level 2 investments.
3 Debt securities: corporate bonds comprise bonds issued by corporations in both segregated and commingled funds and are valued using recently executed transactions, or quoted market prices for similar assets and liabilities in active markets, or for identical assets and liabilities in markets that are not active. If there have been no market transactions in a particular fixed income security, its fair value is calculated by pricing models that benchmark the security against other securities with actual market prices. Corporate bonds are categorized as Level 2 investments.
4 Real estate comprises investments in certain property funds which are valued based on the underlying properties. These properties are valued using a number of standard industry techniques such as cost, discounted cash flows, independent appraisals and market based comparable data. Real estate investments are categorized as Level 3 investments. Changes in Level 3 investments during fiscal 2018 were driven by actual return on plan assets still held at August 31, 2018 and purchases during the year.
5 Other investments mainly comprise cash and cash equivalents, derivatives and direct private placements.
Cash is categorized as a Level 1 investment and cash in commingled funds is categorized as Level 2 investments. Cash equivalents are valued using observable yield curves, discounting and interest rates and are categorized as Level 2 investments. Derivatives which are exchange-traded and for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market, or exchange on which they are traded, and are categorized as Level 1 investments. Over-the-counter derivatives typically are valued by independent pricing services and are categorized as Level 2 investments. Direct private placements are typically bonds valued by reference to comparable bonds and are categorized as Level 3 investments. Changes in Level 3 investments during fiscal 2018 were primarily driven by purchases during the year.
Components of net periodic pension costs for the defined benefit pension plans (in millions):
Boots and other pension plans
2018 2017 2016
Service costs $ 5 $ 5 $ 4
Interest costs 193 174 308
Expected returns on plan assets/other (209) (146) (249)
Total net periodic pension (income) cost $ (11) $ 33 $ 63
Change in benefit obligations for the defined benefit pension plans (in millions):
2018 2017
Benefit obligation at beginning of year $8,880 $9,463
Service costs 5 5
Interest costs 193 174
Amendments/other (4) (11)
Net actuarial gain (466) (295)
Benefits paid (398) (298)
Currency translation adjustments 83 (158)
Benefit obligation at end of year $8,293 $8,880
Change in plan assets for the defined benefit pension plans (in millions):
2018 2017
Plan assets at fair value at beginning of year $8,980 $9,428
Employer contributions 65 70
Benefits paid (398) (298)
Return on assets/other (55) (52)
Currency translation adjustments 84 (168)
Plan assets at fair value at end of year $8,676 $8,980
Amounts recognized in the Consolidated Balance Sheets (in millions):
2018 2017
Other non-current assets $ 554 $ 278
Accrued expenses and other liabilities (7) (7)
Other non-current liabilities (164) (171)
Net asset (liability) recognized at end of year $ 383 $ 100
Cumulative pre-tax amounts recognized in accumulated other comprehensive (income) loss (in millions):
2018 2017
Net actuarial (gain) loss $(27) $171
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans, including accumulated benefit obligations in excess of plan assets, at August 31 were as follows (in millions):
2018 2017
Projected benefit obligation $8,293 $8,880
Accumulated benefit obligation 8,285 8,861
Fair value of plan assets 8,676 8,980
Estimated future benefit payments for the next 10 years from defined benefit pension plans to participants are as follows (in millions):
Estimated future benefit payments
2019 $ 396
2020 259
2021 271
2022 287
2023 302
2024-2028 1,699
The assumptions used in accounting for the defined benefit pension plans were as follows:
2018 2017
Weighted-average assumptions used to determine benefit obligations
Discount rate 2.67% 2.41%
Rate of compensation increase 2.68% 2.83%
Weighted-average assumptions used to determine net periodic benefit cost
Discount rate 2.12% 2.16%
Expected long-term return on plan assets 2.27% 1.69%
Rate of compensation increase 2.64% 2.44%
Based on current actuarial estimates, the Company plans to make contributions of $29 million to its defined benefit pension plans in fiscal 2019 and expects to make contributions beyond 2019, which will vary based upon many factors, including the performance of the defined benefit pension plan assets.
Defined contribution plans
The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing Retirement Trust, to which both the Company and participating employees contribute. The Company’s contribution is in the form of a guaranteed match which is approved annually by the Walgreen Co. Board of Directors and reviewed by the Compensation Committee and Finance Committee of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of $217 million, $221 million and $226 million in fiscal 2018, 2017 and 2016, respectively. The Company’s contributions were $366 million, $220 million and $225 million in fiscal 2018, 2017 and 2016, respectively.
The Company also has certain contract based defined contribution arrangements. The principal one is the Alliance Healthcare & Boots Retirement Savings Plan, which is United Kingdom based and to which both the Company and participating employees contribute. The cost recognized in the Consolidated Statement of Earnings was $142 million in fiscal 2018, $112 million in fiscal 2017 and $130 million in fiscal 2016.
Postretirement healthcare plan
The Company provides certain health insurance benefits to retired U.S. employees who meet eligibility requirements, including age, years of service and date of hire. The costs of these benefits are accrued over the service life of the employee. An amendment to this plan during the fourth quarter of fiscal 2018 resulted in a reduction in the benefit plan obligation of $201 million and the recognition of a curtailment gain of $112 million.
An amendment during the third quarter of fiscal 2017 resulted in the recognition of a curtailment gain of
$109 million. The Company’s postretirement health benefit plan obligation was $146 million and $361 million in fiscal 2018 and 2017 respectively and is not funded. The expected benefit to be paid net of the estimated federal subsidy during fiscal year 2019 is $11 million.