PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Corporation has a defined benefit pension plan that covers substantially all employees in the United States. Benefits are based on length of service and the employee's three highest consecutive years of compensation. Employees hired on or after January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest. The Corporation also has a non-qualified supplemental pension plan.

The Corporation's funding policy is to contribute to the plan when pension laws or economics either require or encourage funding. In 2012, UCC contributed $158 million to its pension plans including contributions to fund benefits payments for its non-qualified supplemental plan. UCC expects to contribute approximately $160 million to its pension plans in 2013.

The weighted‑average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below:



Pension Plan Assumptions	Benefit Obligations at December 31						Net Periodic Costs for the Year
	2012		2011		2010		2012		2011		2010
Discount rate	3.85	%	4.85	%	5.35	%	4.85	%	5.35	%	5.85	%
Rate of increase in future compensation levels	4.50	%	4.50	%	4.50	%	4.50	%	4.50	%	4.50	%
Long-term rate of return on assets	—		—		—		6.90	%	7.40	%	7.40	%

The Corporation determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Corporation's historical experience with the pension fund asset performance is also considered. The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plans are matched against the Towers Watson RATE:Link yield curve (based on 60th and 90th percentile bond yields) to arrive at a single discount rate by plan.

The accumulated benefit obligation for all defined benefit pension plans was $4.4 billion at December 31, 2012 and $4.0 billion at December 31, 2011.



Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31
In millions	2012		2011
Projected benefit obligation	$	4,433	$	4,037
Accumulated benefit obligation	$	4,383	$	3,993
Fair value of plan assets	$	3,548	$	3,351

Other Postretirement Benefits

The Corporation provides certain health care and life insurance benefits to retired U.S. employees. The plan provides health care benefits, including hospital, physicians' services, drug and major medical expense coverage, and life insurance benefits. The Corporation and the retiree share the cost of these benefits, with the Corporation portion increasing as the retiree has increased years of credited service, although there is a cap on the Corporation portion. The Corporation has the ability to change these benefits at any time. Employees hired after January 1, 2008 are not covered under this plan.

The Corporation funds most of the cost of these health care and life insurance benefits as incurred. In 2012, UCC did not make any contributions to its other postretirement benefit plan trust. Likewise, UCC does not expect to contribute assets to its other postretirement benefit plan trust in 2013.

The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the plan are provided in the following table:



Plan Assumptions for Other Postretirement Benefits	Benefit Obligations at December 31						Net Periodic Costs for the Year
	2012		2011		2010		2012		2011		2010
Discount rate	3.65	%	4.60	%	5.10	%	4.60	%	5.10	%	5.60	%
Initial health care cost trend rate	7.85	%	8.30	%	8.72	%	8.30	%	8.72	%	9.17	%
Ultimate health care cost trend rate	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%
Year ultimate trend rate to be reached	2019		2019		2019		2019		2019		2019

Increasing the assumed medical cost trend rate by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2012 by $5 million and the net periodic postretirement benefit cost for the year by an immaterial amount. Decreasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2012 by $5 million and the net periodic postretirement benefit cost for the year by an immaterial amount.



Net Periodic Benefit Cost for all Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2012			2011			2010			2012			2011			2010
Service cost	$	28		$	25		$	16		$	2		$	2		$	2
Interest cost	189			200			209			17			19			23
Expected return on plan assets	(235		)	(255		)	(264		)	—			—			—
Amortization of prior service cost (credit)	7			7			7			(2		)	(2		)	(2		)
Amortization of net loss	60			85			59			—			—			—
Net periodic benefit cost	$	49		$	62		$	27		$	17		$	19		$	23



Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss) for all Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2012			2011			2010			2012		2011			2010
Net (gain) loss	$	375		$	254		$	100		$	16	$	(4	)	$	(7	)
Amortization of prior service (cost) credit	(7		)	(7		)	(7		)	2		2			2
Amortization of net loss	(60		)	(85		)	(59		)	—		—			—
Total recognized in other comprehensive (income) loss	$	308		$	162		$	34		$	18	$	(2	)	$	(5	)
Total recognized in net periodic benefit cost and other comprehensive loss	$	357		$	224		$	61		$	35	$	17		$	18



Change in Projected Benefit Obligations, Plan Assets and Funded Status for all Plans
	Defined Benefit Pension Plans						Other Postretirement Benefits
In millions	2012			2011			2012			2011
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	4,037		$	3,867		$	412		$	423
Service cost	28			25			2			2
Interest cost	189			200			17			19
Actuarial changes in assumptions and experience	472			237			16			(4		)
Benefits paid	(286		)	(288		)	(33		)	(33		)
Other	(7		)	(4		)	—			5
Benefit obligation at end of year	$	4,433		$	4,037		$	414		$	412

Change in plan assets:
Fair value of plan assets at beginning of year	$	3,351		$	3,357		$	—		$	—
Actual return on plan assets	331			238			—			—
Employer contributions	158			48			—			—
Asset transfer	(6		)	(4		)	—			—
Benefits paid	(286		)	(288		)	—			—
Fair value of plan assets at end of year	$	3,548		$	3,351		$	—		$	—

Funded status at end of year	$	(885	)	$	(686	)	$	(414	)	$	(412	)



Net amounts recognized in the consolidated balance sheets at December 31:
Current liabilities	$	(1	)	$	(2	)	$	(36	)	$	(42	)
Noncurrent liabilities	(884		)	(684		)	(378		)	(370		)
Net amounts recognized in the consolidated balance sheets	$	(885	)	$	(686	)	$	(414	)	$	(412	)

Pretax amounts recognized in AOCI at December 31:
Net loss (gain)	$	1,941		$	1,626		$	(5	)	$	(21	)
Prior service cost (credit)	33			40			(2		)	(4		)
Pretax balance in AOCI at end of year	$	1,974		$	1,666		$	(7	)	$	(25	)

In 2013, an estimated net loss of $88 million and prior service cost of $7 million for the defined benefit pension plans will be amortized from AOCI to net periodic benefit cost. In 2013, an estimated prior service credit of $1 million for the other postretirement benefit plan will be amortized from AOCI to net periodic benefit cost.

Estimated Future Benefit Payments

The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:



Estimated Future Benefit Payments at December 31, 2012
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2013	$	283	$	36
2014	280		35
2015	277		35
2016	275		33
2017	273		32
2018 through 2022	1,345		133
Total	$	2,733	$	304

Plan Assets

Plan assets consist mainly of equity and fixed income securities of U.S. and foreign issuers, and may include alternative investments such as real estate, private equity and other absolute return strategies. At December 31, 2012, plan assets totaled $3.5 billion and $3.4 billion at December 31, 2011 which included no Dow common stock.

Investment Strategy and Risk Management for Plan Assets

The Corporation's investment strategy for the plan assets is to manage the assets in order to pay retirement benefits to plan participants while minimizing cash contributions from the Corporation over the life of the plans. This is accomplished by diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plan.

The plan is permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposures and rebalancing the asset allocation. The plan uses value at risk, stress testing, scenario analysis and Monte Carlo simulation to monitor and manage both asset risk in the portfolios and surplus risk.

Equity securities include investments in large and small cap companies located in both developed and emerging markets around the world. Fixed income securities are primarily U.S. dollar based and include investment grade corporate bonds of companies diversified across industries, and U.S. treasuries. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts; and interest rate, equity and foreign derivative investments and hedges.



Strategic Target Allocation of Plan Assets
Asset Category	Target Allocation
Equity securities	25	%
Fixed income securities	45	%
Alternative investments	25	%
Other	5	%
Total	100	%

Concentration of Risk

The Corporation mitigates the credit risk of investments by establishing guidelines with the investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Corporation and the external managers. Credit risk for hedging activity is mitigated by utilizing multiple counterparties and through collateral support agreements.

The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plan, which from time to time can represent a significant investment. Approximately half of the liability of the U.S. plan is covered by a participating group annuity issued by Prudential Insurance Company.

The following tables summarize the bases used to measure the Corporation's pension plan assets at fair value for the years ended December 31, 2012 and 2011:



Basis of Fair Value Measurements at December 31, 2012 In millions	Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash and cash equivalents	$	5	$	371	$	—	$	376
Equity securities:
U.S. equity	$	211	$	42	$	—	$	253
Non-U.S. equity - developed countries	208		71		—		279
Emerging markets	133		137		3		273
Convertible bonds	—		2		—		2
Equity derivatives	—		1		—		1
Total equity securities	$	552	$	253	$	3	$	808
Fixed income securities:
U.S. government and municipalities	$	—	$	733	$	—	$	733
U.S. agency mortgage backed securities	—		115		—		115
Corporates - investment grade	—		685		—		685
Non-U.S. governments - developed countries	—		3		—		3
Non-U.S. corporates - developed countries	—		104		—		104
Emerging markets debt	—		10		—		10
Other asset-backed securities	—		6		—		6
Other fixed income funds	—		—		17		17
High yield bonds	—		2		—		2
Total fixed income securities	$	—	$	1,658	$	17	$	1,675
Alternative investments:
Real estate	$	—	$	—	$	248	$	248
Private equity	—		—		230		230
Absolute return	—		115		74		189
Total alternative investments	$	—	$	115	$	552	$	667
Other securities:
Insurance contracts	$	—	$	—	$	22	$	22
Total other securities	$	—	$	—	$	22	$	22
Total pension plan assets at fair value	$	557	$	2,397	$	594	$	3,548



Basis of Fair Value Measurements at December 31, 2011 In millions	Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash and cash equivalents	$	5	$	515	$	—	$	520
Equity securities:
U.S. equity	$	228	$	4	$	1	$	233
Non-U.S. equity - developed countries	136		77		—		213
Emerging markets	69		122		1		192
Equity derivatives	—		8		—		8
Total equity securities	$	433	$	211	$	2	$	646
Fixed income securities:
U.S. government and municipalities	$	—	$	601	$	—	$	601
U.S. agency mortgage backed securities	—		116		—		116
Corporates - investment grade	—		687		—		687
Non-U.S. governments - developed countries	—		8		—		8
Non-U.S. corporates - developed countries	—		110		—		110
Emerging markets debt	—		6		—		6
Other asset-backed securities	—		5		—		5
Other fixed income funds	—		—		11		11
High yield bonds	—		3		—		3
Fixed income derivatives	—		2		—		2
Total fixed income securities	$	—	$	1,538	$	11	$	1,549
Alternative investments:
Real estate	$	—	$	—	$	191	$	191
Private equity	—		—		247		247
Absolute return	—		128		46		174
Total alternative investments	$	—	$	128	$	484	$	612
Other securities:
Foreign exchange derivatives	$	—	$	2	$	—	$	2
Insurance contracts	—		—		22		22
Total other securities	$	—	$	2	$	22	$	24
Total pension plan assets at fair value	$	438	$	2,394	$	519	$	3,351

For assets classified as Level 1 measurements (measured using quoted prices in active markets), the total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs such as foreign exchange rates, commodity prices, swap rates, interest rates, and implied volatilities obtained from various market sources.

Some plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 2 or 3 measurements) is determined based on the lowest level classification of significant holdings within the fund. For all other assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.

For assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager's investment valuation.

The following tables summarize the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2012 and 2011:



Fair Value Measurement of Level 3 Pension Plan Assets In millions	Equity Securities			Fixed Income Securities		Alternative Investments			Other Investments		Total
Balance at January 1, 2011	$	—		$	5	$	477		$	22	$	504
Actual return on plan assets:
Relating to assets held at Dec. 31, 2011	—			—		3			—		3
Relating to assets sold during 2011	—			—		33			—		33
Purchases, sales and settlements	—			6		(29		)	—		(23		)
Transfers into Level 3, net	2			—		—			—		2
Balance at December 31, 2011	$	2		$	11	$	484		$	22	$	519
Actual return on plan assets:
Relating to assets held at Dec. 31, 2012	$	(1	)	$	—	$	53		$	—	52
Relating to assets sold during 2012	(1		)	—		(7		)	—		(8		)
Purchases, sales and settlements	3			6		(7		)	—		2
Transfers into Level 3, net	—			—		29			—		29
Balance at December 31, 2012	$	3		$	17	$	552		$	22	$	594