Cleveland-Cliffs Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

12 Months Ended

Dec. 31, 2021

PENSION AND OTHER POSTRETIREMENT BENEFITS

NOTE 10 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS

We offer defined benefit pension plans, defined contribution pension plans and OPEB plans to a significant portion of our employees and retirees. Benefits are also provided through multiemployer plans for certain union members.

As a result of the acquisitions of AK Steel and ArcelorMittal USA, we assumed the obligations under their defined benefit pension plans, OPEB plans, defined contribution plans and commitments to multiemployer pension plans according to collective bargaining agreements that cover certain union-represented employees. The AK Steel defined benefit pension plans and OPEB plans acquired amounted to a benefit obligation, net of assets of $949 million based on a March 13, 2020 measurement. The ArcelorMittal USA defined benefit pension plans and OPEB plans acquired amounted to a benefit obligation, net of assets of $3,294 million based on a December 9, 2020 measurement.

Defined Benefit Pension Plans

The defined benefit pension plans are largely noncontributory and limited in participation. Most plans are closed to new participants with only the legacy iron ore hourly and salaried plans still open. The pension benefit calculations vary by plan but are generally based on employees' years of service and compensation or a fixed rate and years of service. Certain salaried plans calculate benefits using a cash balance formula, which earns interest credits and allocations based on a percent of pay.

OPEB Plans

We offer postretirement health care and life insurance benefits to retirees through various plans. The vast majority of our plans are closed to new participants. In lieu of retiree medical coverage, many union-represented employees receive a 401(k) contribution per hour worked to a restricted Retiree Health Care Account. Cost sharing features between the employer and retiree vary by plan and several plans include employer caps. Retiree healthcare coverage is provided through programs administered by insurance companies whose charges are based on benefits paid. Certain labor agreements require the funding of VEBAs, which, depending on funding levels, may be used to reimburse the employer for paid benefits.

Obligations and Funded Status

The following tables and information provide additional disclosures:


	(In Millions)
	Pension Benefits				OPEB
Change in benefit obligations:	2021		2020		2021		2020
Benefit obligations — beginning of year	$	6,565	$	1,021	$	3,757	$	255
Service cost	56		23		51		8
Interest cost	103		64		74		19
Plan amendments	—		—		8		—
Actuarial loss (gain)	(131)		162		(456)		14
Benefits paid	(456)		(146)		(227)		(89)
Participant contributions	—		—		47		22
Acquired through business combinations	—		5,535		—		3,528
Effect of settlement	(101)		(94)		—		—

Benefit obligations — end of year	$	6,036	$	6,565	$	3,254	$	3,757

Change in plan assets:
Fair value of plan assets — beginning of year	$	5,332	$	749	$	783	$	260
Actual return on plan assets	668		472		29		45
Participant contributions	—		—		26		17
Employer contributions	155		50		139		30
Benefits paid	(454)		(146)		(165)		(88)
Acquired through business combinations	—		4,301		—		519
Effect of settlement	(95)		(94)		—		—

Fair value of plan assets — end of year	$	5,606	$	5,332	$	812	$	783
Funded status	$	(430)	$	(1,233)	$	(2,442)	$	(2,974)

Amounts recognized in Statements of Financial Position:
Non-current assets	$	153	$	3	$	71	$	54
Current liabilities	(5)		(12)		(130)		(139)
Non-current liabilities	(578)		(1,224)		(2,383)		(2,889)
Total amount recognized	$	(430)	$	(1,233)	$	(2,442)	$	(2,974)

Amounts recognized in accumulated other comprehensive loss (income):
Net actuarial loss (gain)	$	(286)	$	164	$	(392)	$	56
Prior service cost (credit)	5		6		4		(6)
Net amount recognized	$	(281)	$	170	$	(388)	$	50

The accumulated benefit obligation for all defined benefit pension plans was $6,013 million and $6,537 million at December 31, 2021 and 2020, respectively.

Components of Net Periodic Benefit Cost (Credit)


	(In Millions)
	Pension Benefits						OPEB
	2021		2020		2019		2021		2020		2019
Service cost	$	56	$	23	$	17	$	51	$	8	$	2
Interest cost	103		64		35		74		19		10
Expected return on plan assets	(359)		(140)		(55)		(40)		(20)		(17)
Amortization:
Net actuarial loss	32		27		24		3		3		5
Prior service costs (credits)	1		1		1		(2)		(2)		(2)
Settlements	(22)		(6)		—		—		—		—
Net periodic benefit cost (credit)	$	(189)	$	(31)	$	22	$	86	$	8	$	(2)

For 2022, we estimate net periodic benefit cost (credit) as follows:


	(In Millions)
Defined benefit pension plans	$	(179)
OPEB plans	72
Total	$	(107)

Components of Accumulated Other Comprehensive Loss (Income)

The following includes details on the significant actuarial losses (gains) impacting the benefit obligation:


	(In Millions)
	Pension Benefits				OPEB
	2021		2020		2021		2020
Discount rates	$	(224)	$	181	$	(117)	$	44
Demographic updates	76		(3)		3		(11)
Mortality	19		(16)		13		(4)
Per capita health care costs	—		—		(350)		(10)
Other	(2)		—		(5)		(5)
Actuarial loss (gain) on benefit obligation	(131)		162		(456)		14
Actual returns on assets under (over) expected	(309)		(332)		11		(26)
Amortization of net actuarial gain (loss)	(32)		(27)		2		(3)
Amortization of prior service credits (costs)	(1)		(1)		(3)		2
Settlements	22		6		—		—
Other	—		(27)		8		(2)
Total recognized in accumulated other comprehensive income	$	(451)	$	(219)	$	(438)	$	(15)

Contributions

Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance with statutory regulations. OPEB plans are not subject to minimum regulatory funding requirements, but rather amounts are contributed pursuant to bargaining agreements.


	(In Millions)
	Pension Benefits1		Other Benefits2
Company Contributions & Payments			VEBA		Direct Payments		Total
2020	$	50	$	—	$	25	$	25
2021	163		67		113		180
2022 (Expected)	4		28		110		138

1 The 2021 pension contributions include $118 million in deferred 2020 pension contributions in connection with the CARES Act that were paid on January 4, 2021.
2 Pursuant to the applicable bargaining agreements, benefits can be paid from certain VEBAs that are at least 70% funded (all VEBAs were over 70% funded at December 31, 2021). Certain agreements with plans holding VEBA assets have capped healthcare costs. For the Cleveland-Cliffs Steel LLC VEBA, we are required to make contributions based on earnings, and we may withdraw money from the VEBA plan to the extent funds are available for costs in excess of the cap. VEBA withdrawals are represented net of direct payments. The amount expected for 2022 in the VEBA column reflects the contribution to be made in February 2022 for earnings in the quarter ended December 31, 2021. We do not include an estimate for contributions beyond that due to the variability of the calculation.

Estimated Future Benefit Payments


	(In Millions)
	Pension Benefits		OPEB
2022	$	475	$	180
2023	477		171
2024	451		167
2025	428		163
2026	424		163
2027-2031	1,879		823

Assumptions

The discount rates used to measure plan liabilities as of the December 31 measurement date are determined individually for each plan. The discount rates are determined by matching the projected cash flows used to determine the plan liabilities to a projected yield curve of high-quality corporate bonds available at the measurement date. Discount rates for expense are calculated using the granular approach for each plan.

Depending on the plan, we use either company-specific base mortality tables or tables issued by the Society of Actuaries. We use the Pri-2012 mortality tables from the Society of Actuaries with adjustments for blue collar, white collar or no collar depending on the plan. On December 31, 2021, the assumed mortality improvement projection was updated from generational scale MP-2020 to generational scale MP-2021 for the Pri-2012 mortality tables.

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


	Pension Benefits				OPEB
	December 31,				December 31,
	2021		2020		2021		2020
Discount rate	2.75	%	2.34	%	3.01	%	2.71	%
Interest crediting rate	5.35		5.25		N/A		N/A
Compensation rate increase	2.52		2.56		3.00		3.00

The following represents weighted-average assumptions used to determine net benefit cost:


	Pension Benefits						OPEB
	December 31,						December 31,
	2021		2020		2019		2021		2020		2019
Obligation discount rate	2.32	%	3.02	%	4.27	%	2.46	%	3.28	%	4.29	%
Service cost discount rate	2.78		3.34		4.35		3.28		3.35		4.49
Interest cost discount rate	1.64		2.53		3.92		2.04		2.51		3.94

Interest crediting rate	5.35		5.50		6.00		N/A		N/A		N/A
Expected return on plan assets	6.84		7.69		8.25		5.20		6.82		7.00
Compensation rate increase	2.54		2.56		2.53		3.00		3.00		3.00

The following represents assumed weighted-average health care cost trend rates:


	December 31,
	2021		2020
Health care cost trend rate assumed for next year	2.36	%	6.05	%
Ultimate health care cost trend rate	4.50		4.59
Year that the ultimate rate is reached	2031		2031

Plan Assets

Our financial objectives with respect to our pension and VEBA assets are to fully fund the actuarial accrued liability for each of the plans, to maximize investment returns within reasonable and prudent levels of risk, and to maintain sufficient liquidity to meet benefit obligations on a timely basis.

Our investment objective is to outperform the expected return on assets assumption used in the plans’ actuarial reports over the life of the plans. The expected return on assets takes into account historical returns and estimated future long-term returns based on capital market assumptions applied to the asset allocation strategy. The expected return is net of investment expenses paid by the plans. In addition, investment performance is monitored quarterly by benchmarking to various indices and metrics for the one-, three- and five-year periods.

The asset allocation strategy is determined through a detailed analysis of assets and liabilities by plan, which defines the overall risk that is acceptable with regard to the expected level and variability of portfolio returns, surplus (assets compared to liabilities), contributions and pension expense.

The asset allocation review process involves simulating capital market behaviors including global asset class performance, inflation and interest rates in order to evaluate various asset allocation scenarios and determine the asset mix with the highest likelihood of meeting financial objectives. The process includes factoring in the current funded status and likely future funded status levels of the plans by taking into account expected growth or decline in the contributions over time.

The asset allocation strategy varies by plan. The following table reflects the actual asset allocations for pension and VEBA assets as of December 31, 2021 and 2020, as well as the 2022 weighted average target asset allocations. Equity investments include securities in large-cap, mid-cap and small-cap companies located in the U.S. and worldwide. Fixed income investments primarily include corporate bonds and government debt securities.


	Pension Assets						VEBA Assets
Asset Category	2022 Target Allocation		Percentage of Plan Assets at December 31,				2022 Target Allocation		Percentage of Plan Assets at December 31,
			2021		2020				2021		2020
Equity securities	46.3	%	47.6	%	51.8	%	21.2	%	22.5	%	22.2	%
Fixed income	34.6		34.6		33.8		68.5		66.4		66.4
Hedge funds	2.2		2.2		2.2		1.4		1.8		1.8
Private equity	5.0		2.7		2.1		1.1		—		0.4
Structured credit	5.2		5.6		5.0		1.0		1.2		0.9
Real estate	5.2		5.6		3.3		1.0		2.1		1.8
Absolute return fixed income	1.5		1.7		1.8		5.8		6.0		6.5
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

As a practical expedient, in accordance with ASC 820-10, certain investments that are measured at fair value using the NAV per share have not been classified in the fair value hierarchy below. NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by its number of shares outstanding.

The fair value of our pension assets by asset category is as follows:


	(In Millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Investments Measured at Net Asset Value				Total
Asset Category	2021		2020		2021		2020		2021		2020		2021		2020		2021		2020
Equity securities:
U.S. equities	$	1,157	$	1,163	$	—	$	—	$	—	$	—	$	775	$	787	$	1,932	$	1,950
Global equities	617		615		—		—		—		—		117		195		734		810
Fixed income:
U.S. government securities1	140		141		310		295		—		—		50		40		500		476
U.S. corporate bonds	502		512		371		466		—		—		503		303		1,376		1,281
Non U.S. and other bonds	—		—		66		46		—		—		—		—		66		46
Hedge funds	—		—		—		—		125		118		—		—		125		118
Private equity	—		—		—		—		151		114		—		—		151		114
Structured credit	—		—		—		—		315		264		—		—		315		264
Real estate	—		—		—		—		313		174		—		—		313		174
Absolute return fixed income	—		—		—		—		—		—		94		99		94		99
Total	$	2,416	$	2,431	$	747	$	807	$	904	$	670	$	1,539	$	1,424	$	5,606	$	5,332

1 Includes cash equivalents.

Assets for OPEB plans include VEBA trusts pursuant to bargaining agreements that are available to fund retired employees’ life insurance obligations and medical benefits. The fair value of our other benefit plan assets by asset category is as follows:


	(In Millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Investments Measured at Net Asset Value				Total
Asset Category	2021		2020		2021		2020		2021		2020		2021		2020		2021		2020
Equity securities:
U.S. equities	$	26	$	26	$	—	$	—	$	—	$	—	$	103	$	93	$	129	$	119
Global equities	6		6		—		—		—		—		48		49		54		55
Fixed income:
U.S. government securities1	111		62		80		94		—		—		—		—		191		156
U.S. corporate bonds	219		237		129		127		—		—		—		—		348		364
Hedge funds	—		—		—		—		15		14		—		—		15		14
Private equity	—		—		—		—		—		3		—		—		—		3
Structured credit	—		—		—		—		10		7		—		—		10		7
Real estate	—		—		—		—		17		14		—		—		17		14
Absolute return fixed income	—		—		—		—		—		—		48		51		48		51
Total	$	362	$	331	$	209	$	221	$	42	$	38	$	199	$	193	$	812	$	783
1 Includes cash equivalents.

The following represents the fair value measurements of changes in plan assets using significant unobservable inputs (Level 3):


	(In Millions)
	Pension Assets				VEBA Assets
	2021		2020		2021		2020
Beginning balance — January 1	$	670	$	212	$	38	$	34
Actual return on plan assets:
Relating to assets still held at the reporting date	124		8		6		2
Relating to assets sold during the period	8		6		—		1
Purchases	142		195		—		—
Sales	(40)		(13)		(2)		(1)
Acquired through business combinations	—		262		—		2

Ending balance — December 31	$	904	$	670	$	42	$	38

Following is a description of the inputs and valuation methodologies used to measure the fair value of our plan assets.

Equity Securities

Equity securities classified as Level 1 investments include U.S. large-, small- and mid-cap investments and international equities. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.

Fixed Income

Fixed income securities classified as Level 1 investments include bonds, government debt securities and cash equivalents. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a

market approach and is based upon unadjusted quoted prices for identical assets in active markets. Also included in fixed income is a portfolio of U.S. Treasury STRIPS, which are zero-coupon bearing fixed income securities backed by the full faith and credit of the U.S. government. The securities sell at a discount to par because there are no incremental coupon payments. STRIPS are not issued directly by the Treasury, but rather are created by a financial institution, government securities broker or government securities dealer. Liquidity on the issue varies depending on various market conditions; however, in general, the STRIPS market is slightly less liquid than that of the U.S. Treasury Bond market. The STRIPS are priced daily through a bond pricing vendor and are classified as Level 2.

Hedge Funds

Hedge funds are alternative investments comprised of direct or indirect investment in offshore hedge funds with an investment objective to achieve equity-like returns with one half the volatility of equities and moderate correlation. The valuation techniques used to measure fair value attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. Considerable judgment is required to interpret the factors used to develop estimates of fair value. Valuations of the underlying investment funds are obtained and reviewed. The securities that are valued by the funds are interests in the investment funds and not the underlying holdings of such investment funds. Thus, the inputs used to value the investments in each of the underlying funds may differ from the inputs used to value the underlying holdings of such funds. Hedge funds are valued monthly and recorded on a one-month lag.

Private Equity Funds

Private equity funds are alternative investments that represent direct or indirect investments in partnerships, venture funds or a diversified pool of private investment vehicles (fund of funds).

Investment commitments are made in private equity funds based on an asset allocation strategy, and capital calls are made over the life of the funds to fund the commitments. As of December 31, 2021, remaining commitments total $151 million for our pension and OPEB plans. Committed amounts are funded from plan assets when capital calls are made. Investment commitments are not pre-funded in reserve accounts.

Private equity investments are valued quarterly and recorded on a one-quarter lag. For private equity investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Capital distributions for the funds do not occur on a regular frequency. Liquidation of these investments would require sale of the partnership interest.

Structured Credit

Structured credit funds provide flexibility and access to both complex and illiquid premiums by investing across global, public and private residential, commercial, corporate and specialty credit markets that are priced based on valuations provided by independent, third-party pricing agents, if available. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value structured credit investments at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations or other methodologies designed to identify the market value of such securities.

Structured credit investments are valued monthly and certain funds have an initial lock-up period and withdrawal restrictions on a semi-annual and quarterly basis. For structured credit investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date.

Real Estate

The real estate portfolio for the pension plans is an alternative investment comprised of funds with strategic categories of real estate investments. All real estate holdings are appraised externally at least annually, and appraisals are conducted by reputable, independent appraisal firms that are members of the Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. The property valuations and assumptions about each property are reviewed quarterly by the investment manager and values are adjusted if there has been a significant change in circumstances relating to the property since the last external appraisal. The fair values of the funds are updated on either a monthly or quarterly basis. Redemption requests are considered on a quarterly basis, subject to notice requirements.

The real estate fund of funds investment for the VEBA trusts invests in pooled investment vehicles that, in turn, invest in commercial real estate properties. Valuations are performed quarterly and financial statements are prepared on a semi-annual basis, with annual audited statements. Asset values for this fund are reported with a one-

quarter lag, and current market information is reviewed for any material changes in values at the reporting date. Withdrawals are permitted on the last business day of each quarter subject to a 95-day prior written notice.

Absolute Return Fixed Income

Absolute return fixed income investments consist of a global fixed income fund with the investment objective of generating positive absolute returns over a full market cycle. The fund's investments in securities, forward exchange contracts and futures contracts are reported at fair value on a recurring monthly basis. The fund's trustee values securities based upon independent pricing sources and futures contracts are valued at closing settled prices. Redemptions of the fund at NAV are permitted monthly under most circumstances.

Defined Contribution Plans

Most employees are eligible to participate in various defined contribution plans. Certain of these plans have features with matching contributions or other Company contributions based on our financial results. Company contributions to these plans are expensed as incurred. Total expense from these plans was $55 million, $22 million and $3 million in 2021, 2020 and 2019, respectively.

Multiemployer Plans

We contribute to multiemployer pension plans according to collective bargaining agreements that cover certain union-represented employees. The risks of participating in these multiemployer plans are different from the risks of participating in single-employer pension plans in the following respects:

•Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

•If a participating employer stops contributing to a multiemployer plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

•If the multiemployer plan becomes significantly underfunded or is unable to pay its benefits, we may be required to contribute additional amounts in excess of the rate required by the collective bargaining agreements.

•If we choose to stop participating in a multiemployer plan, we may be required to pay that plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

Information with respect to multiemployer plans in which we participate follows:


Pension Fund	EIN/Pension Plan Number	Pension Protection Act Zone Status (a)		FIP/RP Status Pending/Implemented (b)	Contributions						Surcharge Imposed (c)	Expiration Date of Collective Bargaining Agreement (d)
		2021	2020		2021		2020		2019
Steelworkers Pension Trust	23-6648508/499	Green	Green	No	$	88	$	14	$	4	No	9/1/2022 to 09/1/2025
IAM National Pension Fund’s National Pension Plan	51-6031295/002	Red	Red	Yes	16		16		—		Yes	5/31/2022 to 5/15/2023
Other Plans(e)					—		—		—
Total					$	104	$	30	$	4

(a) The most recent Pension Protection Act zone status available in 2021 and 2020 is for each plan's year-end at December 31, 2020 and 2019. The plan's actuary certifies the zone status. Generally, plans in the red zone are less than 65% funded, plans in the yellow zone are between 65% and 80% funded, and plans in the green zone are at least 80% funded. The IAM National Pension Fund's National Pension Plan voluntarily elected to place itself in the "Red Zone" in April 2019 and has implemented a rehabilitation plan to address its underfunded status. Additional contributions will be required as part of the rehabilitation plan until the plan exits the "Red Zone".
(b) The "FIP/RP Status Pending/Implemented" column indicates plans for which a financial improvement plan or a rehabilitation plan is either pending or has been implemented, as defined by ERISA.
(c) The surcharge represents an additional required contribution due as a result of the critical funding status of the plan.
(d) We are a party to five collective bargaining agreements that require contributions to the Steelworkers Pension Trust and three collective bargaining agreements that require contributions to the IAM National Pension Fund's National Pension Plan.
(e) Plans that are not individually significant to our Company are presented in aggregate.

With the 2020 Acquisitions, we are one of the largest contributors to the Steelworkers Pension Trust. Our contributions exceeded 5% of total combined contributions in 2021 and 2020. As of January 1, 2021 (the last date for which we have information), the Steelworkers Pension Trust had a total actuarial liability of $5,960 million and assets with a market value of $5,998 million, for a funded ratio of about 101%.