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 2016, UCC contributed $52 million to its pension plans including contributions to fund benefit payments for its non-qualified supplemental plan. UCC expects to contribute approximately $160 million to its pension plans in 2017.

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
	2016		2015		2014		2016		2015		2014
Discount rate	4.00	%	4.26	%	3.90	%	4.26	%	3.90	%	4.75	%
Rate of increase in future compensation levels	4.25	%	4.50	%	4.50	%	4.50	%	4.50	%	4.50	%
Expected long-term rate of return on plan assets	—		—		—		6.80	%	6.80	%	6.80	%

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.

Effective January 1, 2016, the Corporation adopted the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs. Under the spot rate approach, the Corporation calculates service cost and interest cost by applying individual spot rates from the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to the separate expected cash flow components of service cost and interest cost. Prior to 2016, the interest and service cost components were determined based on the single discount rate used to measure the benefit obligation. The Corporation changed to the new method to provide a more precise measure of interest and service costs by improving the correlation between projected benefit cash flows and the discrete spot yield curves. The Corporation accounted for this change as a change in accounting estimate and it was applied prospectively starting in 2016.

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 corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows for the plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s obligations as of the measurement date.

In 2014, the Society of Actuaries ("SOA") published updated mortality tables and mortality improvement scales (generational mortality tables), which reflect increased life expectancy. Based on an evaluation of the mortality experience of the Corporation's U.S. pension plans and the SOA's tables, effective for 2014 and forward, the Corporation adopted updated generational mortality tables for purposes of measuring U.S. pension and other postretirement obligations.

The accumulated benefit obligation for all defined benefit pension plans was $4.0 billion at December 31, 2016 and $4.0 billion at December 31, 2015.



Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31
In millions	2016		2015
Projected benefit obligation	$	4,025	$	3,993
Accumulated benefit obligation	$	3,997	$	3,960
Fair value of plan assets	$	3,097	$	3,173

In addition to the qualified defined benefit pension plan, U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by the Corporation. Expense recognized for all defined contribution plans was $17 million in 2016, $16 million in 2015 and $15 million in 2014.

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.

In the fourth quarter of 2013, the Corporation started implementing an Employer Group Waiver Plan (“EGWP”) for its Medicare-eligible, retiree medical plan participants, which became effective on January 1, 2014. As a result, the Medicare Part D Retiree Drug Subsidy program (“RDS”) was eliminated on January 1, 2014. The EGWP does not significantly alter the benefits provided to retiree medical plan participants. The federal subsidies to be earned under the EGWP are expected to exceed those earned under the RDS and will be partially offset by increased costs related to the administration of the EGWP. The net periodic benefit cost decreased by $10 million in 2014 due to the EGWP.

The Corporation funds most of the cost of these health care and life insurance benefits as incurred. In 2016, 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 2017.

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
	2016		2015		2014		2016		2015		2014
Discount rate	3.88	%	4.08	%	3.75	%	4.08	%	3.75	%	4.40	%
Initial health care cost trend rate	7.00	%	7.25	%	7.05	%	7.25	%	7.05	%	7.46	%
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	2025		2025		2020		2025		2020		2020

Increasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2016, by $4 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 decrease the accumulated postretirement benefit obligation at December 31, 2016, 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	2016			2015			2014			2016			2015			2014
Service cost	$	39		$	44		$	30		$	1		$	1		$	1
Interest cost	131			164			183			8			10			13
Expected return on plan assets	(217		)	(226		)	(232		)	—			—			—
Amortization of prior service cost (credit)	(1		)	(1		)	6			—			(1		)	—
Amortization of net (gain) loss	75			87			66			(7		)	(10		)	(10		)
Net periodic benefit cost	$	27		$	68		$	53		$	2		$	—		$	4



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	2016			2015			2014			2016		2015		2014
Net (gain) loss	$	208		$	34		$	450		$	4	$	19	$	(12	)
Prior service cost (credit) arising during period	—			4			(38		)	—		—		—
Amortization of prior service (cost) credit	1			1			(6		)	—		1		—
Amortization of net gain (loss)	(75		)	(87		)	(66		)	7		10		10
Total recognized in other comprehensive (income) loss	$	134		$	(48	)	$	340		$	11	$	30	$	(2	)
Total recognized in net periodic benefit cost and other comprehensive loss	$	161		$	20		$	393		$	13	$	30	$	2



Change in Projected Benefit Obligations, Plan Assets and Funded Status for all Plans
In millions	Defined Benefit Pension Plans						Other Postretirement Benefits
Change in projected benefit obligation:	2016			2015			2016			2015
Benefit obligation at beginning of year	$	3,993		$	4,345		$	276		$	270
Service cost	39			44			1			1
Interest cost	131			164			8			10
Plan amendments	—			4			—			—
Actuarial changes in assumptions and experience	155			(178		)	4			19
Benefits paid	(285		)	(293		)	(25		)	(24		)
Other (1)	(8		)	(93		)	—			—
Benefit obligation at end of year	$	4,025		$	3,993		$	264		$	276

Change in plan assets:
Fair value of plan assets at beginning of year	$	3,173		$	3,543		$	—		$	—
Actual return on plan assets	165			14			—			—
Employer contributions	52			2			—			—
Asset transfers (1)	(8		)	(93		)	—			—
Benefits paid	(285		)	(293		)	—			—
Fair value of plan assets at end of year	$	3,097		$	3,173		$	—		$	—

Funded status at end of year	$	(928	)	$	(820	)	$	(264	)	$	(276	)



Net amounts recognized in the consolidated balance sheets at December 31:
Current liabilities	$	(2	)	$	(2	)	$	(24	)	$	(26	)
Noncurrent liabilities	(926		)	(818		)	(240		)	(250		)
Net amounts recognized in the consolidated balance sheets	$	(928	)	$	(820	)	$	(264	)	$	(276	)

Pretax amounts recognized in AOCL at December 31:
Net loss (gain)	$	2,035		$	1,902		$	(69	)	$	(80	)
Prior service credit	(13		)	(14		)	—			—
Pretax balance in AOCL at end of year	$	2,022		$	1,888		$	(69	)	$	(80	)


(1)	The 2015 impact includes the transfer of benefit obligations of $71 million through the purchase of annuity contracts from an insurance company.

In 2017, an estimated net loss of $83 million and prior service credit of $1 million for the defined benefit pension plans will be amortized from AOCL to net periodic benefit cost. In 2017, an estimated net gain of $6 million for the other postretirement benefit plan will be amortized from AOCL 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, 2016
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2017	$	275	$	25
2018	274		22
2019	273		22
2020	273		21
2021	272		21
2022 through 2026	1,314		88
Total	$	2,681	$	199

Plan Assets

Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private equity and other absolute return strategies. At December 31, 2016, plan assets totaled $3.1 billion and $3.2 billion at December 31, 2015 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 relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various markets risks, 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 primarily 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 U.S. treasuries and investment grade corporate bonds of companies diversified across industries. 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 exchange derivative investments and hedges.



Strategic Target Allocation of Plan Assets
Asset Category	Target Allocation
Equity securities	23	%
Fixed income securities	45	%
Alternative investments	27	%
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, collateral support agreements, and centralized clearing where appropriate.

The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the pension plan, which from time to time can represent a significant investment. Approximately 40 percent of the liability of the pension 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, 2016 and 2015:



Basis of Fair Value Measurements at December 31, 2016 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	$	—	$	242		$	—	$	242
Equity securities:
U.S. equity	$	235	$	17		$	—	$	252
Non-U.S. equity - developed countries	67		98			—		165
Emerging markets	43		80			6		129
Convertible bonds	1		—			—		1
Equity derivatives	—		(3		)	—		(3		)
Total equity securities	$	346	$	192		$	6	$	544
Fixed income securities:
U.S. government and municipalities	$	—	$	838		$	—	$	838
U.S. agency mortgage backed securities	—		50			—		50
Corporates - investment grade	—		423			—		423
Non-U.S. governments - developed countries	—		4			—		4
Non-U.S. corporates - developed countries	—		81			—		81
Emerging markets debt	—		7			—		7
Other asset-backed securities	—		33			—		33
Other fixed income funds	—		—			77		77
Fixed income derivatives	—		(16		)	—		(16		)
High yield bonds	—		1			—		1
Total fixed income securities	$	—	$	1,421		$	77	$	1,498
Alternative investments:
Real estate	$	—	$	—		$	329	$	329
Private equity	—		—			214		214
Absolute return	—		160			104		264
Total alternative investments	$	—	$	160		$	647	$	807
Total other securities	$	—	$	(13	)	$	19	$	6
Total pension plan assets at fair value	$	346	$	2,002		$	749	$	3,097



Basis of Fair Value Measurements at December 31, 2015 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	$	1	$	173	$	—	$	174
Equity securities:
U.S. equity	$	237	$	35	$	—	$	272
Non-U.S. equity - developed countries	71		136		—		207
Emerging markets	45		90		5		140
Equity derivatives	—		3		—		3
Total equity securities	$	353	$	264	$	5	$	622
Fixed income securities:
U.S. government and municipalities	$	—	$	574	$	—	$	574
U.S. agency mortgage backed securities	—		56		—		56
Corporates - investment grade	—		677		—		677
Non-U.S. governments - developed countries	—		5		—		5
Non-U.S. corporates - developed countries	—		146		—		146
Emerging markets debt	—		12		—		12
Other asset-backed securities	—		13		—		13
Other fixed income funds	—		—		51		51
Fixed income derivatives	—		15		—		15
High yield bonds	—		3		—		3
Total fixed income securities	$	—	$	1,501	$	51	$	1,552
Alternative investments:
Real estate	$	—	$	—	$	284	$	284
Private equity	—		—		220		220
Absolute return	—		114		165		279
Total alternative investments	$	—	$	114	$	669	$	783
Total other securities	$	—	$	20	$	22	$	42
Total pension plan assets at fair value	$	354	$	2,072	$	747	$	3,173

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 and 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. For 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. Some pension plan assets are held in funds where fair value is based on an estimated net asset value per share (or its equivalent) as of the most recently available fund financial statements, and adjusted for estimated earnings and investment activity. These funds are classified as Level 3 due to the significant unobservable inputs inherent in the fair value measurement.

The following table summarizes the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2016 and 2015:



Fair Value Measurement of Level 3	Equity Securities			Fixed Income Securities			Alternative Investments			Other Securities			Total
Pension Plan Assets
In millions
Balance at January 1, 2015	$	4		$	33		$	687		$	22		$	746
Actual return on plan assets:
Relating to assets held at Dec 31, 2015	2			(4		)	(35		)	—			(37		)
Relating to assets sold during 2015	—			1			60			—			61
Purchases, sales and settlements	—			21			(42		)	—			(21		)
Transfers out of Level 3, net	(1		)	—			—			—			(1		)
Foreign currency impact	—			—			(1		)	—			(1		)
Balance at December 31, 2015	$	5		$	51		$	669		$	22		$	747
Actual return on plan assets:
Relating to assets held at Dec 31, 2016	1			(6		)	(30		)	2			(33		)
Relating to assets sold during 2016	—			—			39			(8		)	31
Purchases, sales and settlements	—			32			(30		)	3			5
Foreign currency impact	—			—			(1		)	—			(1		)
Balance at December 31, 2016	$	6		$	77		$	647		$	19		$	749