Management has considered the U.K. referendum vote on June 23, 2016 to depart from the E.U., the triggering of Article 50 of the Treaty of Lisbon (providing the right to and procedures for a member to leave the E.U.) on March 29, 2017, the early general election held on June 8, 2017, and the uncertainties about the near-term and longer-term effects of Brexit on the Company. The terms of Brexit, and its impact, remain uncertain, and the Company is currently in the process of establishing appropriate arrangements for the continued servicing of client business. For a further discussion of the risks of Brexit to the Company, see Part I, Item 1A Risk Factors within this Annual Report on Form 10-K.
Revenue for the year ended December 31, 2018 was $8.5 billion, compared to $8.2 billion for the year ended December 31, 2017, an increase of $311 million or 4%. This growth in revenue was driven by strong performances in all segments.
Retirement - The Retirement business provides actuarial support, plan design, and administrative services for traditional pension and retirement savings plans. Our colleagues help our clients assess the costs and risks of retirement plans on cash flow, earnings and the balance sheet, the effects of changing workforce demographics on their retirement plans and retiree benefit adequacy and security.
The following table sets forth HCB segment revenue for the years ended December 31, 2018 and 2017, and the components of the change in revenue for the year ended December 31, 2018 from the year ended December 31, 2017.
The following table sets forth IRR segment revenue for the years ended December 31, 2018 and 2017, and the components of the change in revenue for the year ended December 31, 2018 from the year ended December 31, 2017.
As a result of the adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which was retrospectively applied to our 2017 and 2016 presentations as well, we now classify all components of net periodic benefit cost, except service cost, resulting from our defined benefit plans, in this line item. Other income, net, additionally includes other gains and losses, including gains and losses on foreign currency transactions.
As such, the Company has revised and finalized the provisional adjustments for the following items:
Management believes that the adjusted income tax rate presents a rate that is more closely aligned to the rate that we would incur if not for the reduction of pre-tax income for the adjusted items, the tax effects of our internal reorganizations, and the tax effect of U.S. Tax Reform, which are not core to our current and future operations.
The decrease in free cash flows in 2017 as compared to 2016 primarily resulted from higher capital expenditures and higher discretionary compensation payments made in 2017 for the 2016 compensation cycle. These discretionary compensation payments were lower in 2016 because they included only a partial payment to Legacy Towers Watson colleagues due to the timing of the Merger.
Descriptions of our U.S. and U.K. plans, which comprise 90% of our projected benefit obligations and 94% of our plan assets, are below:
Consolidated Statements of Changes in Equity for each of the three years in the period ended December 31, 2018
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Pensions - The Company has multiple defined benefit pension and defined contribution plans. The net periodic cost of the Company’s defined benefit plans is measured on an actuarial basis using various methods and actuarial assumptions. The most significant assumptions are the discount rates (calculated using the granular approach to calculating service and interest cost) and the expected long-term rates of return on plan assets. Other material assumptions include rates of participant mortality, the expected long-term rates of compensation and pension increases and rates of employee termination. Gains and losses occur when actual experience differs from actuarial assumptions. If such gains or losses exceed ten percent of the greater of the market-related value of plan assets or the projected benefit obligation, the Company amortizes those gains or losses over the average remaining service period or average remaining life expectancy, as appropriate, of the plan participants. In accordance with U.S. GAAP, the Company records on its consolidated balance sheets the funded status of its pension plans based on the projected benefit obligation.
Revenue recognition for fixed-fee engagements was affected by a number of factors that changed the estimated amount of work required to complete the project such as changes in scope, the staffing on the engagement and/or the level of client participation. The periodic engagement evaluations required us to make judgments and estimates regarding the overall profitability and stage of project completion that, in turn, affected how we recognized revenue. We recognized a loss on an engagement when estimated revenue to be received for that engagement was less than the total estimated costs associated with the engagement. Losses were recognized in the period in which the loss became probable and the amount of the loss was reasonably estimable.
Cost to obtain or fulfill contracts (effective from January 1, 2018) - Costs to obtain customers include commissions for brokers under specific agreements that would not be incurred without a contract being signed and executed. The Company has elected to apply the ASC 606 ‘practical expedient’ which allows us to expense these costs as incurred if the amortization period related to the resulting asset would be one year or less. The Company has no significant instances of contracts that would be amortized for a period greater than a year, and therefore has no contract costs capitalized for these arrangements.
The Company has contracts for which performance obligations have not been satisfied as of December 31, 2018 or have been partially satisfied as of December 31, 2018. The following table shows the expected timing for the satisfaction of the remaining performance obligations. This table does not include contract renewals nor variable consideration, which was excluded from the transaction prices in accordance with the guidance on constraining estimates of variable consideration.
During 2016, segment revenue and operating income both include revenue that was deferred by Towers Watson at the time of the Merger, and eliminated due to purchase accounting. The impact of the elimination from purchase accounting (which is the reduction to 2016 consolidated revenue and operating income) has been included in the reconciliation to our consolidated results in order to provide the actual revenue that the segments would have recognized on an unadjusted basis.
None of the Company’s customers represented a significant amount of the Company’s consolidated revenue for the years ended December 31, 2018, 2017 and 2016.
An analysis of total restructuring costs recognized in the consolidated statements of comprehensive income, with costs by segment, and costs attributable to corporate functions, for the years ended December 31, 2017 and 2016 is as follows:
Reduction of the federal corporate tax rate - Beginning January 1, 2018, the Company’s U.S. income is taxed at a 21% federal corporate tax rate. Under ASC 740, deferred tax assets or liabilities must be recalculated as of the enactment date using current tax laws and rates expected to be in effect when the deferred tax items reverse in future periods, which is 21%. Consequently, the Company recorded a provisional decrease in its net deferred tax liabilities of $208 million, with a corresponding deferred income tax benefit of $208 million during the year ended December 31, 2017. On October 12, 2018, the Company filed its 2017 U.S. federal corporate income tax return. After refining our analysis of those items directly related to U.S. Tax Reform, the Company recorded additional deferred tax benefit of approximately $8 million related to deferred tax items that are now subject to tax at 21%. The effect of the measurement period adjustment on the 2018 effective tax rate is approximately 1%.
starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1 million deduction limit if paid to a covered executive. The Company recorded a provisional income tax expense of $8 million relating to our compensation plans not qualifying as a binding contract exception. During the fourth quarter the Company finalized its analysis and review of the executive compensation plans and IRS guidance released throughout the year. The Company has concluded that the reviewed plans are not subject to future limitation under the binding contract exception and grandfathering rules. This resulted in the re-establishment of the deferred tax asset through the recording of an income tax benefit of $8 million. The effect of the measurement period adjustment on the 2018 effective tax rate is approximately 1%.
Represents the reallocation of goodwill related to certain businesses which were realigned among the segments as of January 1, 2018. See Note 5 - Segment Information for further information.
The following table reflects changes in the net carrying amounts of the components of finite-lived intangible assets for the year ended December 31, 2018:
The weighted-average remaining life of amortizable intangible assets and liabilities at December 31, 2018 was 13.9 years.
Borrowings of $409 million and €45 million against the RCF were used to repay all outstanding borrowings against the previous $800 million revolving credit facility and the 7-year term loan due July 23, 2018.
The fair values of our Other plan assets by asset category at December 31, 2018 and 2017 are as follows:
Following is a description of the valuation methodologies used for investments at fair value:
The following table sets forth our projected pension contributions to our qualified plans for fiscal year 2019, as well as the pension contributions to our qualified plans in fiscal years 2018 and 2017:
On May 10, 2011, the court presiding over the Stanford-related actions in the Northern District of Texas entered an order providing that it would consider the applicability of SLUSA to the Stanford-related actions based on the decision in a separate Stanford action not involving a Willis entity, Roland v. Green, Civil Action No. 3:10-CV-0224-N (‘Roland’). On August 31, 2011, the court issued its decision in Roland, dismissing that action with prejudice under SLUSA.
Settlement. On March 31, 2016, the Company entered into a settlement in principle, as reflected in a Settlement Term Sheet, relating to the Stanford litigation matter. The Company agreed to the Settlement Term Sheet to eliminate the distraction, burden, expense and uncertainty of further litigation. In particular, the settlement and the related bar orders described below, if upheld through any appeals, would enable the Company (a newly-combined firm) to conduct itself with the bar orders’ protection from the continued overhang of matters alleged to have occurred approximately a decade ago. Further, the Settlement Term Sheet provided that the parties understood and agreed that there is no admission of liability or wrongdoing by the Company. The Company expressly denies any liability or wrongdoing with respect to the matters alleged in the Stanford litigation.
The notes issued by the Company are guaranteed by the following additional wholly owned subsidiaries on a joint and several basis: Willis Netherlands B.V., Willis Investment U.K. Holdings Limited, TA I Limited, Trinity Acquisition plc,