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 2017, UCC contributed $162 million to its pension plans including contributions to fund benefit payments for its non-qualified supplemental plan. UCC expects to contribute approximately $42 million to its pension plans in 2018.

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



Pension Plan Assumptions	Benefit Obligations at Dec 31				Net Periodic Costs for the Year Ended
	2017		2016		2017		2016		2015
Discount rate	3.59	%	4.00	%	4.00	%	4.26	%	3.90	%
Rate of compensation increase	4.25	%	4.25	%	4.25	%	4.50	%	4.50	%
Expected return on plan assets	—		—		6.80	%	6.80	%	6.80	%

Other Postretirement Benefits

The Corporation provides certain health care and life insurance benefits to retired U.S. employees and survivors. 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 2017, 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 2018.

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 Dec 31				Net Periodic Costs for the Year Ended
	2017		2016		2017		2016		2015
Discount rate	3.51	%	3.88	%	3.88	%	4.08	%	3.75	%
Health care cost trend rate assumed for next year	6.75	%	7.00	%	7.00	%	7.25	%	7.05	%
Rate to which the cost trend rate is assumed to decline (the ultimate health care cost trend rate)	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate health care cost trend rate	2025		2025		2025		2025		2020

Assumed health care cost trend rates have a modest effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have an immaterial impact on service and interest cost and the postretirement benefit obligation.

Assumptions

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 service and interest 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 service and interest 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 were 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.

The Corporation utilizes the Society of Actuaries’ mortality tables released in 2014 and a modified version of the generational mortality improvement scale released in 2014 for purposes of measuring the U.S. pension and other postretirement obligations, based on an evaluation of the mortality experience of its pension plans.

Summarized information on the Corporation's pension and other postretirement benefit plans is as follows:



Change in Projected Benefit Obligations, Plan Assets and Funded Status for all Plans	Defined Benefit Pension Plans						Other Postretirement Benefits
In millions	2017			2016			2017			2016
Change in projected benefit obligations:
Benefit obligation at beginning of year	$	4,025		$	3,993		$	264		$	276
Service cost	38			39			1			1
Interest cost	129			131			8			8
Actuarial changes in assumptions and experience	241			155			(23		)	4
Benefits paid	(281		)	(285		)	(26		)	(25		)
Other	(2		)	(8		)	—			—
Benefit obligation at end of year	$	4,150		$	4,025		$	224		$	264

Change in plan assets:
Fair value of plan assets at beginning of year	$	3,097		$	3,173		$	—		$	—
Actual return on plan assets	331			165			—			—
Employer contributions	162			52			—			—
Asset transfers	(2		)	(8		)	—			—
Benefits paid	(281		)	(285		)	—			—
Fair value of plan assets at end of year	$	3,307		$	3,097		$	—		$	—

Funded status at end of year	$	(843	)	$	(928	)	$	(224	)	$	(264	)



Net amounts recognized in the consolidated balance sheets at Dec 31:
Accrued and other current liabilities	$	(2	)	$	(2	)	$	(15	)	$	(24	)
Pension and other postretirement benefits - noncurrent	(841		)	(926		)	(209		)	(240		)
Net amount recognized	$	(843	)	$	(928	)	$	(224	)	$	(264	)

Pretax amounts recognized in accumulated other comprehensive (income) loss at Dec 31:
Net loss (gain)	$	2,083		$	2,035		$	(86	)	$	(69	)
Prior service credit	(12		)	(13		)	—			—
Pretax balance in accumulated other comprehensive (income) loss at end of year	$	2,071		$	2,022		$	(86	)	$	(69	)

The accumulated benefit obligation for all defined benefit pension plans was $4.1 billion at December 31, 2017 and $4.0 billion at December 31, 2016.



Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31
In millions	2017		2016
Projected benefit obligations	$	4,150	$	4,025
Accumulated benefit obligations	$	4,120	$	3,997
Fair value of plan assets	$	3,307	$	3,097



Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31	2017		2016
In millions	2017		2016
Projected benefit obligations	$	4,150	$	4,025
Accumulated benefit obligations	$	4,120	$	3,997
Fair value of plan assets	$	3,307	$	3,097



Net Periodic Benefit Cost for All Plans for the Year Ended Dec 31	Defined Benefit Pension Plans									Other Postretirement Benefits
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2017			2016			2015			2017			2016			2015
Net Periodic Benefit Cost:
Service cost	$	38		$	39		$	44		$	1		$	1		$	1
Interest cost	129			131			164			8			8			10
Expected return on plan assets	(221		)	(217		)	(226		)	—			—			—
Amortization of prior service credit	(1		)	(1		)	(1		)	—			—			(1		)
Amortization of net (gain) loss	83			75			87			(6		)	(7		)	(10		)
Net periodic benefit cost	$	28		$	27		$	68		$	3		$	2		$	—
Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss:
Net (gain) loss	$	131		$	208		$	34		$	(23	)	$	4		$	19
Prior service cost	—			—			4			—			—			—
Amortization of prior service credit	1			1			1			—			—			1
Amortization of net gain (loss)	(83		)	(75		)	(87		)	6			7			10
Total recognized in other comprehensive (income) loss	$	49		$	134		$	(48	)	$	(17	)	$	11		$	30
Total recognized in net periodic benefit cost and other comprehensive (income) loss	$	77		$	161		$	20		$	(14	)	$	13		$	30

The estimated pretax net (gain) loss and prior service credit for defined benefit pension plans and other postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2018 are summarized below:



Estimated Pretax Amortization of Net (Gain) Loss and Prior Service Credit for the Year Ended Dec 31	2018
In millions	2018
Defined Benefit Pension Plans:
Net loss	$	95
Prior service credit	$	(1	)
Other Postretirement Benefit Plans:
Net gain	$	(9	)

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 Dec 31, 2017	Defined Benefit Pension Plans		Other Postretirement Benefits
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2018	$	275	$	16
2019	275		17
2020	274		17
2021	274		18
2022	272		19
2023-2027	1,307		79
Total	$	2,677	$	166

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. Plan assets totaled $3.3 billion at December 31, 2017 and $3.1 billion at December 31, 2016, of which no DowDuPont or Dow common stock was directly held.

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 market 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.

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 35 percent of the liability of the pension plan is covered by a participating group annuity issued by Prudential Insurance Company.

The weighted-average target allocation for plan assets of the Corporation's pension plans is summarized as follows:



Target Allocation for Plan Assets at Dec 31, 2017	Target Allocation
Asset Category	Target Allocation
Equity securities	23	%
Fixed income securities	45
Alternative investments	27
Other	5
Total	100	%

Fair value calculations may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

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 bases used to measure the Corporation’s pension plan assets at fair value for the years ended December 31, 2017 and 2016:



Basis of Fair Value Measurements	Dec 31, 2017										Dec 31, 2016 ¹
In millions	Total			Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3
Cash and cash equivalents	$	193		$	153	$	40		$	—	$	242		$	237	$	5		$	—
Equity securities:
U.S. equity securities	$	374		$	357	$	17		$	—	$	253		$	236	$	17		$	—
Non - U.S. equity securities	472			404		61			7		294			234		54			6
Total equity securities	$	846		$	761	$	78		$	7	$	547		$	470	$	71		$	6
Fixed income securities:
Debt - government-issued	$	873		$	—	$	873		$	—	$	893		$	—	$	893		$	—
Debt - corporate-issued	515			—		515			—		512			—		512			—
Debt - asset-backed	24			—		24			—		33			—		33			—
Total fixed income securities	$	1,412		$	—	$	1,412		$	—	$	1,438		$	—	$	1,438		$	—
Alternative investments:
Hedge funds	$	292		$	—	$	124		$	168	$	341		$	21	$	139		$	181
Private market securities	237			—		—			237		214			—		—			214
Real estate	360			—		—			360		329			—		—			329
Derivatives - asset position	6			—		6			—		55			—		55			—
Derivatives - liability position	(32		)	—		(32		)	—		(66		)	—		(66		)	—
Total alternative investments	$	863		$	—	$	98		$	765	$	873		$	21	$	128		$	724
Other investments	$	(6	)	$	—	$	(6	)	$	—	$	18		$	—	$	(1	)	$	19
Subtotal	$	3,308		$	914	$	1,622		$	772	$	3,118		$	728	$	1,641		$	749
Items to reconcile to fair value of plan assets:
Pension trust receivables ²	$	2									$	4
Pension trust payables ³	(3		)								(25		)
Total	$	3,307									$	3,097

As a result of the DowDuPont merger, certain asset categories and classifications of prior period amounts have been revised to improve comparability with the presentation of Dow and DowDuPont, including the reclassification of cash and cash equivalents of $237 million, equity securities of $124 million and alternative investments of $21 million from Level 2 to Level 1. Further, pension trust receivables and pension trust payables previously presented with Level 2 investments are now separately presented.


2.	Primarily receivables for investment securities sold.


3.	Primarily payables for investment securities purchased.

The following table summarizes the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2017 and 2016:



Fair Value Measurement of Level 3 Pension Plan Assets ¹	Equity Securities		Alternative Investments			Other Investments			Total
In millions	Equity Securities		Alternative Investments			Other Investments			Total
Balance at Jan 1, 2016	$	5	$	720		$	22		$	747
Actual return on plan assets:
Relating to assets held at Dec 31, 2016	1		(37		)	2			(34		)
Relating to assets sold during 2016	—		39			(8		)	31
Purchases, sales and settlements	—		2			3			5
Balance at Dec 31, 2016	$	6	$	724		$	19		$	749
Actual return on plan assets:
Relating to assets held at Dec 31, 2017	—		4			—			4
Relating to assets sold during 2017	—		25			—			25
Purchases, sales and settlements	1		12			(19		)	(6		)
Balance at Dec 31, 2017	$	7	$	765		$	—		$	772


1.	As a result of the DowDuPont merger, certain classifications of prior period amounts have been revised to improve comparability with the presentation of Dow and DowDuPont, including the reclassification of $77 million at December 31, 2016 ($51 million at December 31, 2015) of assets from fixed income securities to alternative investments.

Defined Contribution Plans

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 $21 million in 2017, $17 million in 2016 and $16 million in 2015.