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The Coca-Cola Company NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Our Company sponsors and/or contributes to pension and postretirement health care and life insurance benefit plans covering substantially all U.S. employees. We also sponsor nonqualified, unfunded defined benefit pension plans for certain associates. In addition, our Company and its subsidiaries have various pension plans and other forms of postretirement arrangements outside the United States. We refer to the funded defined benefit pension plan in the United States that is not associated with collective bargaining organizations as the "primary U.S. plan." As of December 31, 2014, the primary U.S. plan represented 58 percent and 61 percent of the Company's consolidated projected benefit obligation and pension assets, respectively. In December 2013, the Company modified The Coca-Cola Company Retiree Health Plan. Effective January 1, 2015, the current prescription drug plan will be replaced by a Company-sponsored Medicare Part D Plan. The change reduced the accumulated postretirement benefit obligation of the plan by approximately $71 million. The Coca-Cola Refreshments Welfare Plan for Retirees will not be impacted by this change because of variations in the design of the plan. Obligations and Funded Status The following table sets forth the changes in benefit obligations and the fair value of plan assets for our benefit plans (in millions): Pension Benefits 2014 Benefit obligation at beginning of year Service cost Interest cost Foreign currency exchange rate changes Amendments Actuarial loss (gain) Benefits paid Business combinations Settlements Special termination benefits Other $ Benefit obligation at end of year $ 1 2 1 2014 2013 8,845 $ 261 406 (183) 1,519 (522) 4 (7) 5 18 10,346 Other Benefits $ Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Foreign currency exchange rate changes Benefits paid Settlements Other $ 8,746 $ 574 214 (203) (435) (1) 7 Fair value of plan assets at end of year $ 8,902 Net liability recognized $ $ (1,444) $ 9,693 $ 280 378 (69) (1) (899) (538) (9) 2 8 8,845 $ 2013 946 $ 26 43 (4) (31) 88 (62) (1) 1 1,006 $ 7,584 $ 1,043 639 (43) (474) (5) 2 243 $ 2 (3) 4 8,746 246 $ (99) $ $ (760) $ 1,104 36 42 (2) (73) (91) (77) 7 946 202 40 (2) 3 243 (703) 1 2 For pension benefit plans, the benefit obligation is the projected benefit obligation. For other benefit plans, the benefit obligation is the accumulated postretirement benefit obligation. The accumulated benefit obligation for our pension plans was $10,028 million and $8,523 million as of December 31, 2014 and 2013, respectively. Benefits paid to pension plan participants during 2014 and 2013 included $87 million and $64 million, respectively, in payments related to unfunded pension plans that were paid from Company assets. Benefits paid to participants of other benefit plans during 2014 and 2013 included $59 million and $75 million, respectively, that were paid from Company assets. Pension and other benefit amounts recognized in our consolidated balance sheets are as follows (in millions): Pension Benefits 2014 December 31, Noncurrent asset Current liability Long-term liability $ Other Benefits 2014 2013 479 $ (78) (1,845) 1,067 $ (76) (1,090) 2013 $ (20) (740) (21) (682) Net liability recognized (99) $ (703) $ (1,444) $ (760) $ Certain of our pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations and the fair value of plan assets were as follows (in millions): 2014 December 31, Projected benefit obligation Fair value of plan assets $ 8,753 6,854 2013 $ 1,521 374 Certain of our pension plans have accumulated benefit obligations in excess of the fair value of plan assets. For these plans, the accumulated benefit obligations and the fair value of plan assets were as follows (in millions): 2014 December 31, Accumulated benefit obligation $ 8,501 Fair value of plan assets 6,820 Pension Plan Assets The following table presents total assets for our U.S. and non-U.S. pension plans (in millions): U.S. Plans 2014 December 31, Cash and cash equivalents Equity securities: U.S.-based companies International-based companies Fixed-income securities: Government bonds Corporate bonds and debt securities Mutual, pooled and commingled funds 1 $ 186 $ 1,446 351 Non-U.S. Plans 2014 2013 $ 2013 240 $ 75 2013 $ 274 1,274 558 1,422 698 542 505 280 586 455 1,379 863 464 1,369 1,134 411 187 400 304 137 453 Hedge funds/limited partnerships Real estate Other Total pension plan assets 2 1 2 526 245 245 756 391 481 $ 6,343 $ 6,343 17 6 346 43 17 379 $ 2,559 $ 2,403 Mutual, pooled and commingled funds include investments in equity securities, fixed-income securities and combinations of both. There are a significant number of mutual, pooled and commingled funds from which investors can choose. The selection of the type of fund is dictated by the specific investment objectives and needs of a given plan. These objectives and needs vary greatly between plans. Fair value disclosures related to our pension assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall; a reconciliation of the beginning and ending balances of Level 3 assets; and information about the valuation techniques and inputs used to measure the fair value of our pension assets. Investment Strategy for U.S. Pension Plans The Company utilizes the services of investment managers to actively manage the assets of our U.S. pension plans. We have established asset allocation targets and investment guidelines with each investment manager. Our asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the plan. Selection of the targeted asset allocation for U.S. plan assets was based upon a review of the expected return and risk characteristics of each asset class, as well as the correlation of returns among asset classes. During 2012, the Company revised the asset allocation targets and restructured the investment manager composition to further diversify investment risk and reduce volatility while maintaining our long-term return objectives. Our revised target allocation is a mix of 42 percent equity investments, 30 percent fixed-income investments and 28 percent alternative investments. We believe this target allocation will enable us to achieve the following long-term investment objectives: (1) optimize the long-term return on plan assets at an acceptable level of risk; (2) maintain a broad diversification across asset classes and among investment managers; and (3) maintain careful control of the risk level within each asset class. The guidelines that have been established with each investment manager provide parameters within which the investment managers agree to operate, including criteria that determine eligible and ineligible securities, diversification requirements and credit quality standards, where applicable. Unless exceptions have been approved, investment managers are prohibited from buying or selling commodities, futures or option contracts, as well as from short selling of securities. Additionally, investment managers agree to obtain written approval for deviations from stated investment style or guidelines. As of December 31, 2014, no investment manager was responsible for more than 10 percent of total U.S. plan assets. Our target allocation of 42 percent equity investments is composed of 60 percent global equities, 16 percent emerging market equities and 24 percent domestic small- and mid-cap equities. Optimal returns through our investments in global equities are achieved through security selection as well as country and sector diversification. Investments in the common stock of our Company accounted for approximately 5 percent of our global equities allocation and approximately 2 percent of total U.S. plan assets. Our investments in global equities are intended to provide diversified exposure to both U.S. and non-U.S. equity markets. Our investments in both emerging market equities and domestic small- and mid-cap equities are expected to experience larger swings in their market value on a periodic basis. Our investments in these asset classes are selected based on capital appreciation potential. Our target allocation of 30 percent fixed-income investments is composed of 33 percent long-duration bonds and 67 percent with multi-strategy alternative credit managers. Long-duration bonds provide a stable rate of return through investments in high-quality publicly traded debt securities. Our investments in long-duration bonds are diversified in order to mitigate duration and credit exposure. Multi-strategy alternative credit managers invest in a combination of high-yield bonds, bank loans, structured credit and emerging market debt. These investments are in lower-rated and non-rated debt securities, which generally produce higher returns compared to long-duration bonds and also help to diversify our overall fixed-income portfolio. In addition to equity investments and fixed-income investments, we have a target allocation of 28 percent in alternative investments. These alternative investments include hedge funds, reinsurance, private equity limited partnerships, leveraged buyout funds, international venture capital partnerships and real estate. The objective of investing in alternative investments is to provide a higher rate of return than that available from publicly traded equity securities. These investments are inherently illiquid and require a long-term perspective in evaluating investment performance. Investment Strategy for Non-U.S. Pension Plans As of December 31, 2014, the long-term target allocation for 59 percent of our international subsidiaries' plan assets, primarily certain of our European and Canadian plans, is 66 percent equity securities; 23 percent fixed-income securities; and 11 percent other investments. The actual allocation for the remaining 41 percent of the Company's international subsidiaries' plan assets consisted of 34 percent mutual, pooled and commingled funds; 10 percent equity securities; 13 percent fixed-income securities; and 43 percent other investments. The investment strategies of our international subsidiaries differ greatly, and in some instances are influenced by local law. None of our pension plans outside the United States is individually significant for separate disclosure. Other Postretirement Benefit Plan Assets Plan assets associated with other postretirement benefits primarily represent funding of one of the U.S. postretirement benefit plans through a U.S. Voluntary Employee Beneficiary Association ("VEBA"), a tax-qualified trust. The VEBA assets remain segregated from the U.S. pension master trust and are primarily invested in liquid assets due to the level and timing of expected future benefit payments. The following table presents total assets for our other postretirement benefit plans (in millions): 2014 December 31, Cash and cash equivalents Equity securities: U.S.-based companies $ 10 114 2013 $ 10 112 International-based companies Fixed-income securities: Government bonds Corporate bonds and debt securities Mutual, pooled and commingled funds Hedge funds/limited partnerships Real estate Other 7 79 9 16 5 3 3 Total other postretirement benefit plan assets $ 1 8 79 9 18 3 2 2 246 $ 243 Fair value disclosures related to our other postretirement benefit plan assets are included in Note 16. Fair value disclosures include, but are not limited to, the levels within the fair value hierarchy in which the fair value measurements in their entirety fall; a reconciliation of the beginning and ending balances of Level 3 assets; and information about the valuation techniques and inputs used to measure the fair value of our other postretirement benefit plan assets. 1 Components of Net Periodic Benefit Cost Net periodic benefit cost for our pension and other postretirement benefit plans consisted of the following (in millions): Pension Benefits 2014 Year Ended December 31, Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Amortization of actuarial loss $ 1 Net periodic benefit cost Settlement charge Curtailment charge Special termination benefits Total cost recognized in statements of income 2 2013 2012 261 $ 406 (713) 280 $ 378 (659) 291 $ 388 (573) (2) 197 (2) 73 2014 (2) 137 2013 26 $ 43 (11) 2012 36 $ 42 (9) (10) 13 (17) 2 34 43 (8) (52) 6 $ 25 4 5 $ 194 1 2 $ 241 3 6 1 $ 43 $ 72 $ 23 $ 34 $ 197 $ 251 $ 43 $ 72 $ 23 2 1 Other Benefits The Company has elected to use the actual fair value of plan assets as the market-related value of assets in the determination of the expected return on plan assets. The special termination benefits were primarily related to the Company's productivity, restructuring and integration initiatives. Refer to Note 18 for additional information related to our productivity, restructuring and integration initiatives. The following table sets forth the changes in AOCI for our benefit plans (in millions, pretax): Pension Benefits 2014 Other Benefits 2014 2013 2013 Beginning balance in AOCI Recognized prior service cost (credit) Recognized net actuarial loss (gain) Prior service credit (cost) arising in current year Net actuarial (loss) gain arising in current year Foreign currency translation gain (loss) $ (1,537) $ (2) 77 (1,658) 51 (3,032) $ (2) 198 1 1,283 15 13 $ (17) 2 31 (97) 1 (186) (10) 13 73 122 1 Ending balance in AOCI $ (3,069) $ (1,537) $ (67) $ 13 The following table sets forth amounts in AOCI for our benefit plans (in millions, pretax): Pension Benefits 2014 December 31, Prior service credit (cost) Net actuarial loss 10 $ (3,079) $ Other Benefits 2014 2013 12 $ (1,549) 2013 100 $ (167) 86 (73) Ending balance in AOCI (1,537) $ 13 $ (3,069) $ (67) $ Amounts in AOCI expected to be recognized as components of net periodic pension cost in 2015 are as follows (in millions, pretax): Other Benefits Pension Benefits Amortization of prior service cost (credit) Amortization of actuarial loss $ (2) $ 203 $ 201 $ (19) 10 (9) Assumptions Certain weighted-average assumptions used in computing the benefit obligations are as follows: Other Benefits Pension Benefits 2014 December 31, 2014 2013 2013 Discount rate 4.75% 3.75% 3.75% Rate of increase in compensation levels 3.50% 3.50% N/A Certain weighted-average assumptions used in computing net periodic benefit cost are as follows: Pension Benefits Year Ended December 31, Discount rate Rate of increase in compensation levels Expected long-term rate of return on plan assets 4.75% N/A Other Benefits 2014 2013 2012 2014 2013 2012 4.75% 3.50% 4.00% 3.50% 4.75% 3.25% 4.75% N/A 4.00% N/A 4.75% N/A 8.25% 8.25% 8.25% 4.75% 4.75% 4.75% The expected long-term rate of return assumption for U.S. pension plan assets is based upon the target asset allocation and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class, as well as correlations among asset classes. We evaluate the rate of return assumption on an annual basis. The expected long-term rate of return assumption used in computing 2014 net periodic pension cost for the U.S. plans was 8.5 percent. As of December 31, 2014, the 5-year, 10-year, and 15-year annualized return on plan assets for the primary U.S. plan was 10.4 percent, 6.3 percent and 5.5 percent, respectively. The annualized return since inception was 10.9 percent. The assumed health care cost trend rates are as follows: 2014 December 31, Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 2013 8.00% 5.00% 2020 7.50% 5.00% 2020 The Company's U.S. postretirement benefit plans are primarily defined dollar benefit plans that limit the effects of medical inflation because the plans have established dollar limits for determining our contributions. As a result, the effect of a 1 percentage point change in the assumed health care cost trend rate would not be significant to the Company. The discount rate assumptions used to account for pension and other postretirement benefit plans reflect the rates at which the benefit obligations could be effectively settled. Rates for each of our U.S. plans at December 31, 2014, were determined using a cash flow matching technique whereby the rates of a yield curve, developed from highquality debt securities, were applied to the benefit obligations to determine the appropriate discount rate. For our non-U.S. plans, we base the discount rate on comparable indices within each of the countries. The rate of compensation increase assumption is determined by the Company based upon annual reviews. We review external data and our own historical trends for health care costs to determine the health care cost trend rate assumptions. Cash Flows Our estimated future benefit payments for funded and unfunded plans are as follows (in millions): Year Ended December 31, 2015 Pension benefit payments $ Other benefit payments Total estimated benefit payments $ 1 1 The expected benefit payments for our other postretirement benefit plans are net of estimated federal subsidies expected to be received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Federal subsidies are estimated to be approximately $5 million for the 494 61 555 2016 $ $ 518 65 583 2017 $ $ 551 67 618 2018 $ $ 560 67 627 2019 $ $ 584 68 652 2020-2024 $ $ 3,137 343 3,480 period 2015-2019, and $4 million for the period 2020-2024. The Company anticipates making pension contributions in 2015 of approximately $90 million, all of which will be allocated to our international plans. The majority of these contributions are discretionary. Defined Contribution Plans Our Company sponsors qualified defined contribution plans covering substantially all U.S. employees. Under the largest U.S. defined contribution plan, we match participants' contributions up to a maximum of 3.5 percent of compensation, subject to certain limitations. Company costs related to the U.S. plans were $92 million, $97 million and $93 million in 2014, 2013 and 2012, respectively. We also sponsor defined contribution plans in certain locations outside the United States. Company costs associated with those plans were $36 million, $32 million and $29 million in 2014, 2013 and 2012, respectively. Multi-Employer Plans As a result of our acquisition of CCE's former North America business during the fourth quarter of 2010, the Company now participates in various multi-employer pension plans in the United States. Multi-employer pension plans are designed to cover employees from multiple employers and are typically established under collective bargaining agreements. These plans allow multiple employers to pool their pension resources and realize efficiencies associated with the daily administration of the plan. Multi-employer plans are generally governed by a board of trustees composed of management and labor representatives and are funded through employer contributions. The Company's expense for U.S. multi-employer pension plans totaled $38 million, $37 million and $31 million in 2014, 2013 and 2012, respectively. The plans we currently participate in have contractual arrangements that extend into 2019. If, in the future, we choose to withdraw from any of the multi-employer pension plans in which we currently participate, we would need to record the appropriate withdrawal liabilities at that time. PepsiCo, Inc. Note 7 Pension, Retiree Medical and Savings Plans In the fourth quarter of 2014 and 2012, the Company offered certain former employees who had vested benefits in our U.S. defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present value of the participant's pension benefit (payable in cash or rolled over into a qualified retirement plan or IRA). In December 2014 and 2012, we made a discretionary contribution of $388 million and $405 million, respectively, to fund substantially all of these payments. The Company recorded a pre-tax non-cash settlement charge of $141 million ($88 million after-tax or $0.06 per share) in 2014 and $195 million ($131 million after-tax or $0.08 per share) in 2012 as a result of these transactions. See additional unaudited information in \"Items Affecting Comparability\" in Management's Discussion and Analysis of Financial Condition and Results of Operations. The provisions of both the PPACA and the Health Care and Education Reconciliation Act are reflected in our retiree medical expenses and liabilities and were not material to our financial statements. During 2014, we revised our mortality assumptions to incorporate the new set of mortality tables issued by the Society of Actuaries, adjusted to reflect our experience and future expectations. This resulted in an increase in the projected benefit obligation of our U.S. pension and retiree medical programs. We also reviewed and revised other demographic assumptions to reflect recent experience. The net effect of these changes and certain plan design changes resulted in an increase of approximately $150 million in the projected benefit obligation at December 27, 2014. Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual return on plan assets and the expected return on plan assets, and from changes in our assumptions are determined at each measurement date. If this net accumulated gain or loss exceeds 10% of the greater of the market-related value of plan assets or plan liabilities, a portion of the net gain or loss is included in expense for the following year based upon the average remaining service period of active plan participants, which is approximately 11 years for pension expense and approximately 8 years for retiree medical expense. The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost/(credit)) is included in earnings on a straight-line basis over the average remaining service period of active plan participants. Selected financial information for our pension and retiree medical plans is as follows: Pension U.S. Retiree Medical International 2014 2013 2013 2014 2013 2014 Change in projected benefit liability Liability at beginning of year $ 11,825 $ 12,886 Service cost 393 467 98 111 36 45 Interest cost 580 527 131 118 58 54 (122) 22 (125) Plan amendments Participant contributions Experience loss/(gain) $ $ 2,788 $ (1) 1,384 $ 1,511 3 512 (65) 190 (128) 3 (1,522) 1,635 2,859 Benefit payments (349) (533) (86) (91) (101) (97) Settlement/curtailment (577) (44) (25) (3) Special termination benefits 24 22 3 2 Foreign currency adjustment (245) (2) (6) (3) Other 1 $ 13,409 $ 11,825 $ 3,247 $ 2,859 $ 1,439 $ 1,384 $ 11,462 $ 10,817 $ 2,777 $ 2,463 $ 406 $ 365 1,254 1,159 401 265 46 76 434 63 157 137 64 62 Liability at end of year Change in fair value of plan assets Fair value at beginning of year Actual return on plan assets Employer contributions/funding Participant contributions 3 3 Benefit payments (349) (533) (86) (91) (101) (97) Settlement (577) (44) (24) (8) Foreign currency adjustment Fair value at end of year $ 12,224 $ 11,462 Funded status $ (1,185) $ 8 (226) $ (363) $ 3,002 $ 2,777 (245) $ $ 406 (978) Retiree Medical International 2013 2014 415 (82) $ (1,024) $ Pension U.S. $ 2013 2014 2013 2014 Amounts recognized Other assets $ Other current liabilities $ 603 $ 37 $ 74 $ (42) (41) (1) (1) (925) (281) (155) (967) (363) $ (245) $ $ (57) (1,240) Other liabilities Net amount recognized 97 $ (1,185) $ (72) (906) (82) $ (1,024) $ (978) 849 (222) Amounts included in accumulated other comprehensive loss (pre-tax) Net loss/(gain) $ 2,918 $ 2,069 $ 1,003 $ $ (49) $ Prior service (credit)/cost 125 (18) Total $ 2,900 $ (6) (7) 2,194 $ $ 996 843 Components of the increase/(decrease) in net loss/(gain) included in accumulated other comprehensive loss Change in discount rate $ 1,424 $ (1,532) $ 636 $ Employee-related assumption changes 24 345 (112) (215) $ $ (291) $ (117) (166) $ 98 91 58 2 10 34 (13) (108) (19) (49) 4 (1) Liability-related experience different from assumptions Actual asset return different from expected return (104) (14) (12) (470) (336) (225) Amortization and settlement of losses (316) (285) (61) (68) Other, including foreign currency adjustments (30) Total $ Liability at end of year for service to date $ 12,206 849 $ 10,803 (6) (72) $ (2,143) $ 154 $ 2,721 $ (69) (166) $ (2) (247) $ 173 $ (178) 2,369 The components of benefit expense are as follows: Pension U.S. Retiree Medical International 2014 2013 2012 2014 2013 2012 2014 2013 2012 Service cost $ 393 $ 467 $ 407 $ 98 $ 111 $ 100 $ 36 $ 45 $ 50 Interest cost 580 527 534 131 118 115 58 54 65 (784) (823) (796) (176) (157) (146) (27) (27) (22) 21 18 17 (28) (23) (26) 175 289 259 53 66 53 (4) 1 385 478 421 106 139 123 35 50 67 185 7 7 4 Components of benefit expense Expected return on plan assets Amortization of prior service cost/(credit) Amortization of net loss/(gain) Settlement/curtailment loss/(gain) Special termination benefits (a) 141 (4) 1 1 24 22 8 1 3 2 5 Total $ 550 $ 496 $ 614 $ 113 $ 146 $ 128 $ 38 $ 52 $ 72 (a) U.S. includes pension lump sum settlement charge of $141 million in 2014 and $195 million in 2012. These charges are reflected in items affecting comparability (see additional unaudited information in \"Items Affecting Comparability\" in Management's Discussion and Analysis of Financial Condition and Results of Operations). The estimated amounts to be amortized from accumulated other comprehensive loss into expense in 2015 for our pension and retiree medical plans are as follows: Pension U.S. Net loss $ Retiree Medical International 205 Prior service credit $ 74 (3) Total $ 202 $ $ 74 (38) $ (38) The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for our pension and retiree medical plans: Pension Retiree Medical U.S. 2014 2013 International 2012 2013 2014 2012 2014 2013 2012 Weighted-average assumptions Liability discount rate 4.2% 5.0% 4.2% 3.8% 4.7% 4.4% 3.8% 4.6% 3.7% Expense discount rate 5.0% 4.2% 4.6% 4.7% 4.4% 4.8% 4.3% 3.7% 4.4% 7.5% 7.8% 7.8% 6.6% 6.6% 6.7% 7.5% 7.8% 7.8% 3.5% 3.7% 3.7% 3.6% 3.9% 3.9% 3.7% 3.7% 3.7% 3.9% 3.9% 4.1% Expected return on plan assets Liability rate of salary increases Expense rate of salary increases The following table provides selected information about plans with liability for service to date and total projected benefit liability in excess of plan assets: Retiree Medical Pension International U.S. 2013 2014 2013 2014 2013 2014 Selected information for plans with liability for service to date in excess of plan assets Liability for service to date $ (661) $ (577) $ (333) $ Fair value of plan assets 2 $ $ 2 $ 288 Selected information for plans with projected benefit liability in excess of plan assets Benefit liability $ Fair value of plan assets $ (7,385) $ 6,103 $ (6,555) $ 5,589 $ $ (2,865) $ 2,583 $ (310) 259 (2,291) $ 2,135 $ (1,439) $ 415 $ (1,384) 406 Of the total projected pension benefit liability at year-end 2014, $808 million relates to plans that we do not fund because the funding of such plans does not receive favorable tax treatment. Future Benefit Payments and Funding Our estimated future benefit payments are as follows: Pension Retiree medical(a) $ $ 2015 700 120 $ $ 2016 730 125 $ $ 2017 775 125 $ $ 2018 830 125 $ $ 2019 880 125 2020-24 $ 5,160 $ 560 (a) Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the 2003 Medicare Act. Subsidies are expected to be approximately $3 million for each of the years from 2015 through 2019 and approximately $13 million in total for 2020 through 2024. These future benefit payments to beneficiaries include payments from both funded and unfunded plans. In 2015, we expect to make pension and retiree medical contributions of approximately $225 million, with approximately $55 million for retiree medical benefits. Plan Assets Our pension plan investment strategy includes the use of actively managed securities and is reviewed periodically in conjunction with plan liabilities, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. This strategy is also applicable to funds held for the retiree medical plans. Our investment objective is to ensure that funds are available to meet the plans' benefit obligations when they become due. Our overall investment strategy is to prudently invest plan assets in a well-diversified portfolio of equity and high-quality debt securities and real estate to achieve our long-term return expectations. Our investment policy also permits the use of derivative instruments which are primarily used to reduce risk. Our expected long-term rate of return on U.S. plan assets is 7.5% for 2015 and 2014. Our target investment allocations for U.S. plan assets are as follows: 2015 Fixed income U.S. equity International equity Real estate 40% 33% 22% 5% 2014 40% 33% 22% 5% Actual investment allocations may vary from our target investment allocations due to prevailing market conditions. We regularly review our actual investment allocations and periodically rebalance our investments to our target allocations. The expected return on plan assets is based on our plan investment strategy and our expectations for long-term rates of return by asset class, taking into account volatility and correlation among asset classes and our historical experience. We also review current levels of interest rates and inflation to assess the reasonableness of the long-term rates. We evaluate our expected return assumptions annually to ensure that they are reasonable. To calculate the expected return on plan assets, our market-related value of assets for fixed income is the actual fair value. For all other asset categories, we use a method that recognizes investment gains or losses (the difference between the expected and actual return based on the market-related value of assets) over a fiveyear period. This has the effect of reducing year-to-year volatility. Contributions to our pension and retiree medical plans were as follows: Pension 2013 2014 Discretionary (a) Non-discretionary 2012 2014 Retiree Medical 2013 2012 $ (a) $ 23 177 $ 1,375 239 $ 64 $ 62 $ 140 111 $ Total 407 184 591 $ 200 $ 1,614 $ 64 $ 62 $ 251 Includes $388 million and $405 million in 2014 and 2012, respectively, pertaining to pension lump sum payments. Plan assets measured at fair value as of fiscal year-end 2014 and 2013 are categorized consistently by level in both years, and are as follows: 2013 2014 Significant Other Observable Inputs (Level 2) Quoted Prices in Active Markets for Identical Assets (Level 1) Total Significant Unobservable Inputs (Level 3) Total U.S. plan assets(a) Equity securities: U.S. common stock(b) $ U.S. commingled funds 966 $ 966 3,437 $ 732 1,488 1,669 876 902 22 22 18 Government securities(f) 1,279 1,279 1,264 Corporate bonds 3,338 3,338 2,958 274 274 220 6 6 6 629 629 552 International commingled fund(e) Preferred stock Fixed income securities: (f) (f) (g) Mortgage-backed securities(f) Other: Contracts with insurance companies(h) Real estate commingled funds(i) 876 $ 3,334 International common stock 1,488 (b) $ 3,437 (c) (d) Cash and cash equivalents 267 267 Sub-total U.S. plan assets 12,582 Dividends and interest receivable Total U.S. plan assets $ 2,721 $ 9,226 $ 154 635 11,809 59 57 $ $ 12,639 11,868 International plan assets Equity securities: U.S. common stock(b) $ 5 $ 5 U.S. commingled funds(c) 373 International common stock(b) 171 International commingled funds(e) 918 $ $ $ 4 373 334 171 176 918 914 1 1 1 454 454 207 320 320 261 517 517 650 Contracts with insurance companies(h) 36 36 34 Currency commingled fund(k) 87 87 91 Real estate commingled fund(i) Cash and cash equivalents 92 92 83 21 Sub-total international plan assets 2,995 Preferred stock(f) Fixed income securities: Government securities(f) Corporate bonds (f) Fixed income commingled funds Other: (j) Dividends and interest receivable 21 $ 197 $ 2,670 $ 15 128 2,770 7 7 Total international plan assets $ (a) 2014 and 2013 amounts include $415 million and $406 million, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries. 3,002 $ 2,777 (b) Based on quoted market prices in active markets. (c) Based on the fair value of the investments owned by these funds that track various U.S. large, mid-cap and small company indices. (d) Includes one large-cap fund that represents 25% of total U.S. plan assets for both 2014 and 2013. (e) Based on the fair value of the investments owned by these funds that track various non-U.S. equity indices. (f) Based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes in active markets. (g) Corporate bonds of U.S.-based companies represent 23% and 21%, respectively, of total U.S. plan assets for 2014 and 2013. (h) Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable. (i) Based on the appraised value of the investments owned by these funds as determined by independent third parties using inputs that are not observable. (j) Based on the fair value of the investments owned by these funds that track various government and corporate bond indices. (k) Based on the fair value of the investments owned by this fund that invests primarily in derivatives to hedge currency exposure. The changes in Level 3 plan assets are as follows: Real estate commingled funds Contracts with insurance companies Total Return on Assets Balance, Held at Beginning Year2013 End $ 391 $ 56 62 $ 453 Return on Assets Purchases Balance, Held at and Sales, End of YearNet 2013 End $ 188 $ 635 $ 68 (1) $ 55 (21) $ 167 40 $ 675 Purchases Balance, and Sales, End of Net 2014 $ 18 $ 721 2 $ 70 $ 18 42 $ 763 Retiree Medical Cost Trend Rates An average increase of 6% in the cost of covered retiree medical benefits is assumed for 2015. This average increase is then projected to decline gradually to 5% in 2025 and thereafter. These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability, however the cap on our share of retiree medical costs limits the impact. A 1-percentagepoint change in the assumed health care trend rate would have the following effects: 2014 service and interest cost components 2014 benefit liability 1% 1% Increase Decrease $ 4 $ (3) $ 46 $ (40) Savings Plan Certain U.S. employees are eligible to participate in 401(k) savings plans, which are voluntary defined contribution plans. The plans are designed to help employees accumulate additional savings for retirement, and we make Company matching contributions for certain employees on a portion of eligible pay based on years of service. As of February 2012, certain U.S. employees earning a benefit under one of our defined benefit pension plans were no longer eligible for Company matching contributions on their 401(k) contributions. Certain U.S. salaried employees, who are not eligible to participate in a defined benefit pension plan, are also eligible to receive an employer contribution to the 401(k) savings plan based on age and years of service regardless of employee contribution. In 2014, 2013 and 2012, our total Company contributions were $130 million, $122 million and $109 million, respectively. For additional unaudited information on our pension and retiree medical plans and related accounting policies and assumptions, see \"Our Critical Accounting Policies\" in Management's Discussion and Analysis of Financial Condition and Results of Operations.