United Parcel Service, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

12 Months Ended

Dec. 31, 2017

COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS

We sponsor various retirement and pension plans, including defined benefit and defined contribution plans which cover our employees worldwide.

U.S. Pension Benefits

In the U.S. we maintain the following single-employer defined benefit pension plans: the UPS Retirement Plan, the UPS Pension Plan, the UPS/IBT Full-Time Employee Pension Plan and the UPS Excess Coordinating Benefit Plan, a non-qualified plan.

The UPS Retirement Plan is noncontributory and includes substantially all eligible employees of participating domestic subsidiaries who are not members of a collective bargaining unit, as well as certain employees covered by a collective bargaining agreement. This plan generally provides for retirement benefits based on average compensation levels earned by employees prior to retirement. Benefits payable under this plan are subject to maximum compensation limits and the annual benefit limits for a tax-qualified defined benefit plan as prescribed by the Internal Revenue Service (“IRS”).

The UPS Pension Plan is noncontributory and includes certain eligible employees of participating domestic subsidiaries and members of collective bargaining units that elect to participate in the plan. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

The UPS/IBT Full-Time Employee Pension Plan is noncontributory and includes employees that were previously members of the Central States Pension Fund, a multiemployer pension plan, in addition to other eligible employees who are covered under certain collective bargaining agreements. This plan generally provides for retirement benefits based on service credits earned by employees prior to retirement.

The UPS Excess Coordinating Benefit Plan is a non-qualified plan that provides benefits to certain participants in the UPS Retirement Plan for amounts that exceed the benefit limits described above.

In the year ended December 31, 2017, we amended the UPS Retirement Plan and the UPS Excess Coordinating Benefit Plan to cease accruals of additional benefits for future service and compensation for non-union participants effective January 1, 2023. We remeasured plan assets and pension benefit obligations for the affected pension plans as of June 30, 2017, resulting in a net actuarial gain of $569 million. This reflected a curtailment gain of $1.525 billion resulting from the benefit plan changes that was partially offset by net actuarial losses of $956 million, driven by a reduction of approximately 32 basis points in the discount rate compared to December 31, 2016, offset by actual asset returns approximately 275 basis points above our expected return as of the remeasurement date. The net curtailment gain reduced the actuarial loss recorded in "Accumulated other comprehensive loss" in the equity section of the consolidated balance sheet. As actuarial losses were within the corridor (defined as 10% of the greater of the fair value of plan assets and the plan's projected benefit obligation), there was no impact to the statement of consolidated income as a result of this remeasurement.

The UPS Retirement Plan was closed to new non-union participants effective July 1, 2016. The Company amended the UPS 401(k) Savings Plan so that employees who previously would have been eligible for participation in the UPS Retirement Plan receive, in addition to current benefits under the UPS 401(k) Savings Plan, a UPS Retirement Contribution. For employees eligible to receive the Retirement Contribution, UPS will contribute 3% to 8% of eligible pay to the UPS 401(k) Savings Plan based on years of vesting service and business unit. Contributions will be made annually in cash to the accounts of participants who are employed on December 31st of each calendar year.

During the fourth quarter of 2016, certain former U.S. employees were offered the option to receive a one-time payment of their vested pension benefit. Approximately 22,000 participants accepted this option, accelerating $685 million in benefit payments during 2016 while reducing the number of participants who are due future payments from U.S. pension plans. As the cost of these settlements did not exceed the plans' service cost and interest cost for the year, the impact of the settlement was not recognized in earnings.

International Pension Benefits

We also sponsor various defined benefit plans covering certain of our international employees. The majority of our international obligations are for defined benefit plans in Canada and the United Kingdom. In addition, many of our international employees are covered by government-sponsored retirement and pension plans. We are not directly responsible for providing benefits to participants of government-sponsored plans.

U.S. Postretirement Medical Benefits

We also sponsor postretirement medical plans in the U.S. that provide healthcare benefits to our retirees who meet certain eligibility requirements and who are not otherwise covered by multiemployer plans. Generally, this includes employees with at least 10 years of service who have reached age 55 and employees who are eligible for postretirement medical benefits from a Company-sponsored plan pursuant to collective bargaining agreements. We have the right to modify or terminate certain of these plans. These benefits have been provided to certain retirees on a noncontributory basis; however, in many cases, retirees are required to contribute all or a portion of the total cost of the coverage.

Defined Contribution Plans

We also sponsor several defined contribution plans for all employees not covered under collective bargaining agreements, and for certain employees covered under collective bargaining agreements. The Company matches, in shares of UPS common stock or cash, a portion of the participating employees’ contributions. Matching contributions charged to expense were $119, $111 and $104 million for 2017, 2016 and 2015, respectively.

Effective June 23, 2017, the Company amended the UPS 401(k) Savings Plan so that non-union employees who currently participate in the UPS Retirement Plan will, in addition to current benefits under the UPS 401(k) Savings Plan, earn a UPS Retirement Contribution beginning January 1, 2023. UPS will contribute 5% to 8% of eligible compensation to the UPS 401(k) Savings Plan based on years of vesting service. The amendment also provides for transition contributions for certain participants. There was no impact to the statement of consolidated income for the year ended December 31, 2017 as a result of this change.

As noted above, effective July 1, 2016, the UPS 401(k) Savings Plan was amended so that newly hired employees who previously would have been eligible for participation in the UPS Retirement Plan began receiving a UPS Retirement Contribution. Contributions associated with this amendment charged to expense were $23 and $4 million for 2017 and 2016 respectively.

Contributions are also made to defined contribution money purchase plans under certain collective bargaining agreements. Amounts charged to expense were $91, $82 and $83 million for 2017, 2016 and 2015, respectively.

Net Periodic Benefit Cost

Information about net periodic benefit cost for the company-sponsored pension and postretirement defined benefit plans is as follows (in millions):



	U.S. Pension Benefits									U.S. Postretirement Medical Benefits									International Pension Benefits
	2017			2016			2015			2017			2016			2015			2017			2016			2015
Net Periodic Benefit Cost:
Service cost	$	1,543		$	1,412		$	1,527		$	29		$	28		$	34		$	60		$	49		$	48
Interest cost	1,813			1,828			1,694			112			124			117			40			41			44
Expected return on assets	(2,883		)	(2,516		)	(2,489		)	(7		)	(6		)	(17		)	(66		)	(58		)	(61		)
Amortization of prior service cost	192			166			168			7			5			5			1			1			1
Actuarial (gain) loss	729			2,520			70			53			17			17			18			114			31
Curtailment and settlement loss	—			—			—			—			—			—			2			—			—
Net periodic benefit cost	$	1,394		$	3,410		$	970		$	194		$	168		$	156		$	55		$	147		$	63

Actuarial Assumptions

The table below provides the weighted-average actuarial assumptions used to determine the net periodic benefit cost.



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017		2016		2015		2017		2016		2015		2017		2016		2015
Discount rate	4.41	%	4.86	%	4.40	%	4.23	%	4.79	%	4.18	%	2.75	%	3.51	%	3.56	%
Rate of compensation increase	4.27	%	4.29	%	4.29	%	N/A		N/A		N/A		3.17	%	3.04	%	3.08	%
Expected return on assets	8.75	%	8.75	%	8.75	%	8.75	%	8.75	%	8.75	%	5.65	%	5.73	%	6.03	%

The table below provides the weighted-average actuarial assumptions used to determine the benefit obligations of our plans.



	U.S. Pension Benefits				U.S. Postretirement Medical Benefits				International Pension Benefits
	2017		2016		2017		2016		2017		2016
Discount rate	3.84	%	4.41	%	3.82	%	4.23	%	2.78	%	2.75	%
Rate of compensation increase	4.25	%	4.27	%	N/A		N/A		3.23	%	3.17	%

A discount rate is used to determine the present value of our future benefit obligations. To determine the discount rate for our U.S. pension and postretirement benefit plans, we use a bond matching approach to select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach reflects the process we would employ to settle our pension and postretirement benefit obligations. For our international plans, the discount rate is determined by matching the expected cash flows of a sample plan of similar duration to a yield curve based on long-term, high quality fixed income debt instruments available as of the measurement date. These assumptions are updated each measurement date, which is typically annually.

As of December 31, 2017, the impact of each basis point change in the discount rate on the projected benefit obligation of the pension and postretirement medical benefit plans is as follows (in millions):



	Increase (Decrease) in the Projected Benefit Obligation
	Pension Benefits			Postretirement Medical Benefits
One basis point increase in discount rate	$	(75	)	$	(2	)
One basis point decrease in discount rate	$	80		$	3

The Society of Actuaries ("SOA") published mortality tables and improvement scales are used in developing the best estimate of mortality for U.S. plans. In October 2016, the SOA published an updated improvement scale which reduced expected mortality improvements from previously published scales. Based on our perspective of future longevity, we updated the mortality assumptions to incorporate this updated scale for purposes of measuring pension and other postretirement benefit obligations.

Assumptions for the expected return on plan assets are used to determine a component of net periodic benefit cost for the fiscal year. The assumption for our U.S. plans is developed using a long-term projection of returns for each asset class. Our asset allocation targets are reviewed and, if necessary, updated taking into consideration plan changes, funded status and actual performance. The expected return for each asset class is a function of passive, long-term capital market assumptions and excess returns generated from active management. The capital market assumptions used are provided by independent investment advisors, while excess return assumptions are supported by historical performance, fund mandates and investment expectations.

For plans outside the U.S., consideration is given to local market expectations of long-term returns. Strategic asset allocations are determined by plan based on the nature of liabilities and considering the demographic composition of the plan participants.

Actuarial Assumptions - Central States Pension Fund

UPS was a contributing employer to the Central States Pension Fund (“CSPF”) until 2007 when we withdrew from the plan and fully funded our allocable share of unfunded vested benefits by paying a $6.1 billion withdrawal liability. Under a collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”), UPS agreed to provide coordinating benefits in the UPS/IBT Full-Time Employee Pension Plan (“UPS/IBT Plan”) for UPS participants whose last employer was UPS and who had not retired as of January 1, 2008 (“the UPS Transfer Group”) in the event that benefits are lawfully reduced by the CSPF in the future consistent with the terms of our withdrawal agreement with the CSPF.

In December 2014, Congress passed the Multiemployer Pension Reform Act (“MPRA”), which for the first time ever allowed multiemployer pension plans to reduce benefit payments to retirees, subject to specific guidelines in the statute and government approval. In September 2015, the CSPF submitted a proposed pension benefit reduction plan to the U.S. Department of the Treasury under the MPRA. The CSPF plan proposed to reduce retirement benefits to the CSPF participants, including the UPS Transfer Group. We vigorously challenged the proposed benefit reduction plan because we believed that it did not comply with the law and that the CSPF failed to comply with its contractual obligation to obtain our consent to reduce benefits to the UPS Transfer Group under the terms of the withdrawal agreement with the CSPF. On May 6, 2016, the U.S. Department of the Treasury rejected the proposed plan submitted by the CSPF, stating that it failed to satisfy a number of requirements set forth in the MPRA.

The CSPF has asserted that it will become insolvent in 2025, which could lead to the reduction of retirement benefits. Although there are numerous factors that could affect the CSPF’s funding status, if the CSPF were to become insolvent as they have projected, UPS may be required to provide coordinating benefits, thereby increasing the current projected benefit obligation for the UPS/IBT Plan by approximately $4 billion. The CSPF has said that it believes a legislative solution to its funding status is necessary, and we expect that the CSPF will continue to explore options to avoid insolvency.

The potential obligation to pay coordinating benefits from the UPS/IBT Plan is subject to a number of significant uncertainties, including actions that may be taken by the CSPF, the federal government or others. These actions include whether the CSPF will submit a revised pension benefit reduction plan or otherwise seek federal government assistance, the extent to which benefits are paid by the Pension Benefit Guaranty Corporation, our ability to successfully defend our legal positions as well as the effect of discount rates, CSPF asset returns and various other actuarial assumptions.

We account for this potential obligation under Accounting Standards Codification Topic 715- Compensation- Retirement Benefits (“ASC 715”). Under ASC 715 we are required to provide a best estimate of various actuarial assumptions, including the eventual outcome of this matter, in measuring our pension benefit obligation at the December 31st measurement date. While we currently believe the most likely solution to this matter and the broader systemic problems facing multiemployer pension plans is intervention by the federal government, ASC 715 does not permit anticipation of changes in law in making a best estimate of pension liabilities. Our best estimate as of the measurement date of December 31, 2017, does not incorporate this solution. However, if a future change in law resulted in an obligation to provide coordinating benefits under the UPS/IBT Plan, it may be a significant event, and may require us to remeasure the plan assets and projected benefit obligation of the UPS/IBT Plan at the date the law is enacted.

Our best estimate of the next most likely outcome to resolve the CSPF’s solvency concerns is that the CSPF will submit another benefit suspension application under the MPRA to forestall insolvency without reducing benefits to the UPS Transfer Group. If the CSPF attempts to reduce benefits for the UPS Transfer Group under a MPRA filing, we would be in a strong legal position to prevent that from occurring given that these benefits cannot be reduced without our consent and such a reduction, without first exhausting reductions to other groups in the CSPF, would be contrary to the statute. Accordingly, our best estimate as of the measurement date of December 31, 2017, is that there is no liability to be recognized for additional coordinating benefits of the UPS/IBT Plan. However, the projected benefit obligation could materially increase as the uncertainties are resolved. We will continue to assess the impact of these uncertainties on the projected benefit obligation of the UPS/IBT Plan in accordance with ASC 715.

Other Actuarial Assumptions

Healthcare cost trends are used to project future postretirement medical benefits payable from our plans. For year-end 2017 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual rate of increase of 6.5%, decreasing to 4.5% by the year 2022 and with consistent annual increases at that ultimate level thereafter.

Assumed healthcare cost trends can have a significant effect on the amounts reported for our postretirement medical plans. A one percent change in assumed healthcare cost trend rates would have had the following effects on 2017 results (in millions):



	1% Increase		1% Decrease
Effect on total of service cost and interest cost	$	3	$	(3	)
Effect on postretirement benefit obligation	$	65	$	(71	)

Funded Status

The following table discloses the funded status of our plans and the amounts recognized in our consolidated balance sheets as of December 31st (in millions):



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017			2016			2017			2016			2017			2016
Funded Status:
Fair value of plan assets	$	41,932		$	31,215		$	183		$	15		$	1,333		$	1,092
Benefit obligation	(45,847		)	(41,069		)	(2,792		)	(2,730		)	(1,651		)	(1,425		)
Funded status recognized at December 31	$	(3,915	)	$	(9,854	)	$	(2,609	)	$	(2,715	)	$	(318	)	$	(333	)
Funded Status Recognized in our Balance Sheet:
Other non-current assets	$	284		$	—		$	—		$	—		$	35		$	28
Other current liabilities	(18		)	(17		)	(77		)	(216		)	(5		)	(3		)
Pension and postretirement benefit obligations	(4,181		)	(9,837		)	(2,532		)	(2,499		)	(348		)	(358		)
Net liability at December 31	$	(3,915	)	$	(9,854	)	$	(2,609	)	$	(2,715	)	$	(318	)	$	(333	)
Amounts Recognized in AOCI:
Unrecognized net prior service cost	$	(880	)	$	(1,074	)	$	(29	)	$	(36	)	$	(2	)	$	(3	)
Unrecognized net actuarial gain (loss)	(4,277		)	(4,107		)	(195		)	(80		)	(126		)	(150		)
Gross unrecognized cost at December 31	(5,157		)	(5,181		)	(224		)	(116		)	(128		)	(153		)
Deferred tax assets (liabilities) at December 31	1,840			1,948			69			44			31			37
Net unrecognized cost at December 31	$	(3,317	)	$	(3,233	)	$	(155	)	$	(72	)	$	(97	)	$	(116	)

The accumulated benefit obligation for our pension plans as of the measurement dates in 2017 and 2016 was $45.776 and $39.488 billion, respectively.

Benefit payments under the pension plans include $22 million paid from employer assets in 2017 and in 2016. Benefit payments (net of participant contributions) under the postretirement medical benefit plans include $93 and $98 million paid from employer assets in 2017 and 2016, respectively. Such benefit payments from employer assets are also categorized as employer contributions.

At December 31, 2017 and 2016, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets for pension plans with benefit obligations in excess of plan assets were as follows (in millions):



	Projected Benefit Obligation Exceeds the Fair Value of Plan Assets				Accumulated Benefit Obligation Exceeds the Fair Value of Plan Assets
	2017		2016		2017		2016
U.S. Pension Benefits:
Projected benefit obligation	$	37,113	$	41,069	$	37,113	$	41,069
Accumulated benefit obligation	35,538		38,194		35,538		38,194
Fair value of plan assets	32,914		31,215		32,914		31,215
International Pension Benefits:
Projected benefit obligation	$	1,138	$	1,370	$	647	$	1,365
Accumulated benefit obligation	992		1,238		549		1,234
Fair value of plan assets	798		1,020		342		1,016

The accumulated postretirement benefit obligation exceeds plan assets for all of our U.S. postretirement medical benefit plans.

Benefit Obligations and Fair Value of Plan Assets

The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value of plan assets as of the respective measurement dates in each year (in millions).



	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017			2016			2017			2016			2017			2016
Benefit Obligations:
Projected benefit obligation at beginning of year	$	41,069		$	36,846		$	2,730		$	2,673		$	1,425		$	1,219
Service cost	1,543			1,412			29			28			60			49
Interest cost	1,813			1,828			112			124			40			41
Gross benefits paid	(1,309		)	(1,885		)	(264		)	(264		)	(32		)	(28		)
Plan participants’ contributions	—			—			26			27			3			3
Plan amendments⁽¹⁾	—			285			—			15			—			—
Actuarial (gain)/loss	4,256			2,583			159			126			26			208
Foreign currency exchange rate changes	—			—			—			—			129			(67		)
Curtailments and settlements	(1,525		)	—			—			—			(3		)	(3		)
Other	—			—			—			1			3			3
Projected benefit obligation at end of year	$	45,847		$	41,069		$	2,792		$	2,730		$	1,651		$	1,425

⁽¹⁾ Resulting from a new labor contract with the Independent Pilots Association.

	U.S. Pension Benefits						U.S. Postretirement Medical Benefits						International Pension Benefits
	2017			2016			2017			2016			2017			2016
Fair Value of Plan Assets:
Fair value of plan assets at beginning of year	$	31,215		$	28,887		$	15		$	130		$	1,092		$	1,014
Actual return on plan assets	4,717			1,735			(2		)	3			96			108
Employer contributions	7,309			2,478			408			119			77			71
Plan participants’ contributions	—			—			26			27			3			3
Gross benefits paid	(1,309		)	(1,885		)	(264		)	(264		)	(32		)	(28		)
Foreign currency exchange rate changes	—			—			—			—			100			(73		)
Curtailments and settlements	—			—			—			—			(3		)	(3		)
Fair value of plan assets at end of year	$	41,932		$	31,215		$	183		$	15		$	1,333		$	1,092

Pension and Postretirement Plan Assets

Under the governance of plan trustees, the investment committee establishes investment guidelines and strategies and regularly monitors the performance of investments and investment managers. The investment guidelines address items such as establishing appropriate governance provisions; defining investment objectives; determining strategic asset allocation; monitoring and reporting the investments on a regular basis; appointing/dismissing investment managers, custodians, consultants and advisors; risk management; determining/defining the mandates for investment managers; rebalancing of assets and determining investment restrictions/prohibited investments.

Pension assets are invested in accordance with applicable laws and regulations. The primary long-term investment objectives for pension assets are to: (1) provide for a reasonable amount of long-term growth of capital given prudent levels of risk exposure while minimizing permanent loss of capital; (2) generate investment results that meet or exceed the long-term rate of return assumption for the plans and (3) match the duration of the liabilities and assets of the plans to reduce the need for large employer contributions in the future. In furtherance of these objectives, investment managers are engaged to actively manage assets within the guidelines and strategies set forth by the Investment Committee. Active managers are monitored regularly and their performance is compared to applicable benchmarks.

Fair Value Measurements

Pension assets utilizing Level 1 inputs include equity investments, corporate debt instruments and U.S. government securities. Fair values were determined by closing prices for those securities traded on national stock exchanges, while securities traded in the over-the-counter market and listed securities for which no sale was reported on the valuation date are valued at the mean between the last reported bid and asked prices.

Level 2 assets include certain bonds that are valued based on yields currently available on comparable securities of other issues with similar credit ratings; mortgage-backed securities that are valued based on cash flow and yield models using acceptable modeling and pricing conventions; and certain investments that are pooled with other investments in a commingled fund. We value our investments in commingled funds by taking the percentage ownership of the underlying assets, each of which has a readily determinable fair value.

Fair value estimates for certain investments are based on unobservable inputs that are not corroborated by observable market data and are thus classified as Level 3.

Investments that do not have a readily determinable fair value, and which provide a net asset value ("NAV" or its equivalent) developed consistent with FASB measurement principles, are valued using NAV as a practical expedient. These investments are not classified in Levels 1, 2, or 3 of the fair value hierarchy, but are included in the totals in the tables shown below. These investments include hedge funds, risk parity funds, real estate investments, private debt and private equity funds. Investments in hedge funds are valued using reported NAVs as of December 31st. These assets are primarily invested in a portfolio of diversified, direct investments and funds of hedge funds. Real estate investments, private debt and private equity funds are valued using fair values per the most recent partnership audited financial reports, adjusted, as appropriate, for any lag between the date of the financial reports and December 31st. The fair values may, due to the inherent uncertainty of valuation for those alternative investments, differ significantly from the values that would have been used had a ready market for the alternative investments existed, and any differences could be material. These investments are described further below:

•

Hedge Funds: Plan assets are invested in hedge funds that pursue multiple strategies to diversify risk and reduce volatility. Most of these hedge funds allow redemptions either quarterly or semi-annually after a two to three month notice period, while others allow for redemption after only a brief notification period with no restriction on redemption frequency. No unfunded commitments existed with respect to hedge funds as of December 31, 2017.

•

Risk Parity Funds: Plan assets are invested in risk parity strategies in order to provide diversification and balance risk/return objectives. These strategies reflect a multi-asset class balanced risk approach generally consisting of equity, interest rates, credit and commodities. These funds allow for monthly redemptions with only a brief notification period. No unfunded commitments existed with respect to risk parity funds as of December 31, 2017.

•

Real Estate, Private Debt and Private Equity Funds: Plan assets are invested in limited partnership interests in various private equity, private debt and real estate funds. Limited provision exists for the redemption of these interests by the limited partners that invest in these funds until the end of the term of the partnerships, typically ranging between 10 and 15 years from the date of inception. An active secondary market exists for similar partnership interests, although no particular value (discount or premium) can be guaranteed. At December 31, 2017, unfunded commitments to such limited partnerships totaling approximately $2.546 billion are expected to be contributed over the remaining investment period, typically ranging between three and six years.

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2017 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.



	Total Assets⁽¹⁾		Level 1		Level 2		Level 3		Percentage of Plan Assets		Target Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents⁽²⁾	$	5,725	$	5,292	$	433	$	—	13.6	%	0-5
Equity Securities:
U.S. Large Cap	5,924		3,121		2,803		—
U.S. Small Cap	591		421		170		—
Emerging Markets	2,101		1,669		432		—
Global Equity	2,817		2,400		417		—
International Equity	4,791		2,950		1,841		—
Total Equity Securities	16,224		10,561		5,663		—		38.5		35-55
Fixed Income Securities:
U.S. Government Securities	7,695		7,323		372		—
Corporate Bonds	3,865		—		3,857		8
Global Bonds	53		—		53		—
Municipal Bonds	21		—		21		—
Total Fixed Income Securities	11,634		7,323		4,303		8		27.6		25-35
Other Investments:
Hedge Funds	2,910		—		1,031		—		6.9		5-15
Private Equity	2,107		—		—		—		5.0		1-10
Private Debt	953		—		237		—		2.3		1-10
Real Estate	2,031		157		139		—		4.8		1-10
Structured Products⁽³⁾	172		—		172		—		0.4		0-5
Risk Parity Funds	359		—		—				0.9		1-10
Total U.S. Plan Assets	$	42,115	$	23,333	$	11,978	$	8	100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	78	$	43	$	35			5.8		0-10
Equity Securities:
Local Markets Equity	213		—		213
U.S. Equity	30		—		30
Emerging Markets	38		38		—
International / Global Equity	356		166		190
Total Equity Securities	637		204		433		—		47.7		30-60
Fixed Income Securities:
Local Government Bonds	103		25		78
Corporate Bonds	198		59		139
Total Fixed Income Securities	301		84		217		—		22.6		25-50
Other Investments:
Real Estate	124		—		79				9.3		5-10
Other	193		—		184				14.6		0-20
Total International Plan Assets	$	1,333	$	331	$	948	$	—	100.0	%
Total Plan Assets	$	43,448	$	23,664	$	12,926	$	8

⁽¹⁾ Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy but are included in the category totals.

⁽²⁾ Includes $5 billion in contributions made in December 2017 that had not yet been invested according to the targeted allocation.

⁽³⁾ Represents mortgage and asset-backed securities.

The fair values of U.S. and international pension and postretirement benefit plan assets by asset category as of December 31, 2016 are presented below (in millions), as well as the percentage that each category comprises of our total plan assets and the respective target allocations.



	Total Assets⁽¹⁾		Level 1		Level 2		Level 3		Percentage of Plan Assets		Target Allocation
Asset Category (U.S. Plans):
Cash and cash equivalents	$	304	$	102	$	202	$	—	1.0	%	0-5
Equity Securities:
U.S. Large Cap	4,883		2,327		2,556		—
U.S. Small Cap	542		393		149		—
Emerging Markets	1,396		1,236		160		—
Global Equity	2,603		2,555		48		—
International Equity	3,026		2,197		829		—
Total Equity Securities	12,450		8,708		3,742		—		39.9		35-55
Fixed Income Securities:
U.S. Government Securities	6,173		5,821		352		—
Corporate Bonds	4,492		—		4,492		—
Global Bonds	161		—		59		—
Municipal Bonds	24		—		24		—
Total Fixed Income Securities	10,850		5,821		4,927		—		34.6		25-35
Other Investments:
Hedge Funds	2,867		—		763		—		9.2		5-15
Private Equity	1,716		—		—		—		5.5		1-10
Private Debt	496		—		—		—		1.6		1-10
Real Estate	1,734		122		144		—		5.6		1-10
Structured Products⁽²⁾	492		—		492		—		1.6		0-5
Risk Parity Funds	321		—		—		—		1.0		1-10
Total U.S. Plan Assets	$	31,230	$	14,753	$	10,270	$	—	100.0	%
Asset Category (International Plans):
Cash and cash equivalents	$	54	$	37	$	17	—		4.9		0-15
Equity Securities:
Local Markets Equity	188		—		188		—
U.S. Equity	20		—		20		—
Emerging Markets	26		26		—		—
International / Global Equity	288		141		147		—
Total Equity Securities	522		167		355		—		47.7		50-65
Fixed Income Securities:
Local Government Bonds	84		22		62		—
Corporate Bonds	158		51		107		—
Total Fixed Income Securities	242		73		169		—		22.2		15-35
Other Investments:
Real Estate	93		—		57		—		8.5		0-17
Other	181		—		175		—		16.7		0-20
Total International Plan Assets	$	1,092	$	277	$	773	$	—	100.0	%
Total Plan Assets	$	32,322	$	15,030	$	11,043	$	—

⁽²⁾ Represents mortgage and asset-backed securities.

The following table presents the changes in the Level 3 instruments measured on a recurring basis for the years ended December 31, 2017 and 2016 (in millions).



	Corporate Bonds			Other			Total
Balance on January 1, 2016	$	6		$	49		$	55
Actual Return on Assets:
Assets Held at End of Year	—			—			—
Assets Sold During the Year	—			(49		)	(49		)
Purchases	—			—			—
Sales	(6		)	—			(6		)
Transfers Into (Out of) Level 3	—			—			—
Balance on December 31, 2016	$	—		$	—		$	—
Actual Return on Assets:
Assets Held at End of Year	—			—			—
Assets Sold During the Year	—			—			—
Purchases	9			—			9
Sales	(1		)	—			(1		)
Transfers Into (Out of) Level 3	—			—			—
Balance on December 31, 2017	$	8		$	—		$	8

There were no UPS class A or B shares of common stock directly held in plan assets as of December 31, 2017 or December 31, 2016.

Accumulated Other Comprehensive Income

The estimated amounts of prior service cost in AOCI expected to be amortized and recognized as a component of net periodic benefit cost in 2018 are as follows (in millions):



	U.S. Pension Benefits		U.S. Postretirement Medical Benefits		International Pension Benefits
Prior service cost	$	193	$	7	$	1

Expected Cash Flows

Information about expected cash flows for the pension and postretirement benefit plans is as follows (in millions):



	U.S. Pension Benefits		U.S. Postretirement Medical Benefits		International Pension Benefits
Expected Employer Contributions:
2018 to plan trusts	$	—	$	—	$	75
2018 to plan participants	19		78		5
Expected Benefit Payments:
2018	$	1,294	$	237	$	24
2019	1,418		239		27
2020	1,551		237		30
2021	1,691		231		36
2022	1,836		222		41
2023 - 2027	11,358		967		286

Our funding policy for U.S. plans is to contribute amounts annually that are at least equal to the amounts required by applicable laws and regulations, or to directly fund payments to plan participants, as applicable. International plans will be funded in accordance with local regulations. Additional discretionary contributions may be made when deemed appropriate to meet the long-term obligations of the plans. Expected benefit payments for pensions will be primarily paid from plan trusts. Expected benefit payments for postretirement medical benefits will be paid from plan trusts and corporate assets.