Defined Benefit Postretirement Plans and Defined Contribution Plan

We have noncontributory defined benefit pension plans covering substantially all domestic employees as well as international employees located in Norway and the U.K. Benefits under these plans are based on plan provisions specific to each plan.

We also have defined benefit plans for other postretirement benefits covering our U.S. employees. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions subject to various cost-sharing features. Life insurance benefits are provided to certain retiree beneficiaries. Other postretirement benefits are not funded in advance.

Obligations and funded status – The accumulated benefit obligation for all defined benefit pension plans was $1,359 million and $1,442 million as of December 31, 2013 and 2012.

As of December 31, 2013, our U.S. plans had accumulated benefit obligations in excess of plan assets, and as of December 31, 2012, our U.S. plans and our international ("Int'l") plans had accumulated benefit obligations in excess of plan assets. Summary information for these defined benefit pension plans follows.



	December 31,
	2013			2012
(In millions)	U.S.			U.S.			Int’l
Projected benefit obligation	$	(933	)	$	(1,146	)	$	(565	)
Accumulated benefit obligation	(791		)	(937		)	(505		)
Fair value of plan assets	625			630			500

The following summarizes the obligations and funded status for our defined benefit pension and other postretirement plans.



	Pension Benefits
	2013						2012						Other Benefits
(In millions)	U.S.			Int’l			U.S.			Int’l			2013			2012
Change in benefit obligations:
Beginning balance	$	1,146		$	565		$	986		$	465		$	311		$	301
Service cost	33			22			31			19			4			4
Interest cost	40			24			42			22			12			14
Actuarial loss (gain)	(140		)	40			196			49			(31		)	8
Foreign currency exchange rate changes	—			11			—			25			—			—
Benefits paid	(146		)	(13		)	(109		)	(15		)	(17		)	(16		)
Ending balance	$	933		$	649		$	1,146		$	565		$	279		$	311
Change in fair value of plan assets:
Beginning balance	$	630		$	500		$	516		$	412		$	—		$	—
Actual return on plan assets	65			74			66			57			—			—
Employer contributions	76			23			157			24			—			—
Foreign currency exchange rate changes	—			13			—			22			—			—
Benefits paid	(146		)	(13		)	(109		)	(15		)	—			—
Ending balance	$	625		$	597		$	630		$	500		$	—		$	—
Funded status of plans at December 31	$	(308	)	$	(52	)	$	(516	)	$	(65	)	$	(279	)	$	(311	)
Amounts recognized in the consolidated balance sheets:
Current liabilities	(16		)	—			(17		)	—			(19		)	(19		)
Noncurrent liabilities	(292		)	(52		)	(499		)	(65		)	(260		)	(292		)
Accrued benefit cost	$	(308	)	$	(52	)	$	(516	)	$	(65	)	$	(279	)	$	(311	)
Pretax amounts in accumulated other comprehensive loss:
Net loss (gain)	$	262		$	59		$	511		$	74		$	(8	)	$	23
Prior service cost (credit)	15			9			21			10			(5		)	(11		)

Components of net periodic benefit cost and other comprehensive (income) loss – The following summarizes the net periodic benefit costs and the amounts recognized as other comprehensive (income) loss for our defined benefit pension and other postretirement plans.



	Pension Benefits
	2013						2012						2011						Other Benefits
(In millions)	U.S.			Int’l			U.S.			Int’l			U.S.			Int’l			2013			2012			2011
Components of net periodic benefit cost:
Service cost	$	33		$	22		$	31		$	19		$	28		$	19		$	4		$	4		$	4
Interest cost	40			24			42			22			44			22			12			14			16
Expected return on plan assets	(43		)	(24		)	(43		)	(22		)	(43		)	(23		)	—			—			—
Amortization:
- prior service cost (credit)	6			1			7			1			6			—			(6		)	(7		)	(7		)
- actuarial loss	43			4			48			4			47			2			—			—			—
Net settlement loss^(a)	45			—			45			—			30			—			—			—			—
Net periodic benefit cost^(b)	$	124		$	27		$	130		$	24		$	112		$	20		$	10		$	11		$	13
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss (pretax):
Actuarial loss (gain)	$	(161	)	$	(11	)	$	172		$	15		$	97		$	24		$	(31	)	$	7		$	1
Amortization of actuarial (loss) gain	(88		)	(4		)	(93		)	(4		)	(77		)	(2		)	—			—			—
Prior service cost (credit)	—			—			—			1			—			(11		)	—			—			—
Amortization of prior service credit (cost)	(6		)	(1		)	(7		)	(1		)	(6		)	—			6			7			7
Spin-off downstream business ^(c)	—			—			—			—			(24		)	—			—			—			—
Total recognized in other comprehensive (income) loss	$	(255	)	$	(16	)	$	72		$	11		$	(10	)	$	11		$	(25	)	$	14		$	8
Total recognized in net periodic benefit cost and other comprehensive (income) loss	$	(131	)	$	11		$	202		$	35		$	102		$	31		$	(15	)	$	25		$	21


^(a)	Settlement losses are recorded when lump sum payments from a plan in a period exceed the plan’s total service and interest costs for the period. Such settlements occurred in one or more of our U.S. plans in 2013, 2012 and 2011.


^(b)	Net periodic benefit cost reflects a calculated market-related value of plan assets which recognizes changes in fair value over three years.


^(c)	Includes net inter-company transfers of (gains)/losses due to the spin-off of the downstream business.

The estimated net loss and prior service cost for our defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 are $24 million and $6 million. The estimated prior service credit for our other defined benefit postretirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2014 is $5 million.

Plan assumptions – The following summarizes the assumptions used to determine the benefit obligations at December 31, and net periodic benefit cost for the defined benefit pension and other postretirement plans for 2013, 2012 and 2011.



	Pension Benefits
	2013					2012				2011				Other Benefits
(In millions)	U.S.			Int’l		U.S.		Int’l		U.S.		Int’l		2013		2012		2011
Weighted average assumptions used to determine benefit obligation:
Discount rate	4.28	%		4.60	%	3.44	%	4.40	%	4.45	%	4.70	%	4.85	%	4.06	%	4.90	%
Rate of compensation increase	5.00	%		4.90	%	5.00	%	4.50	%	5.00	%	4.30	%	5.00	%	5.00	%	5.00	%
Weighted average assumptions used to determine net periodic benefit cost:
Discount rate	3.79	%		4.40	%	4.21	%	4.70	%	5.05	%	5.40	%	4.06	%	4.90	%	5.55	%
Expected long-term return on plan assets	7.25	%	^(a)	4.90	%	7.75	%	5.20	%	8.50	%	5.86	%	—		—		—
Rate of compensation increase	5.00	%		4.50	%	5.00	%	4.30	%	5.00	%	5.10	%	5.00	%	5.00	%	5.00	%


^(a)	Effective January 1, 2014, the expected long-term return on U.S. plan assets was changed from 7.25 percent to 6.75 percent.

Expected long-term return on plan assets

U.S. plan – The expected long-term return on plan assets assumption for our U.S. funded plan is determined based on an asset rate-of-return modeling tool developed by a third-party investment group. The tool utilizes underlying assumptions based on actual returns by asset category and inflation and takes into account our U.S. pension plan’s asset allocation to derive an expected long-term rate of return on those assets. Capital market assumptions reflect the long-term capital market outlook. The assumptions for equity and fixed income investments are developed using a building-block approach, reflecting observable inflation information and interest rate information available in the fixed income markets. Long-term assumptions for other asset categories are based on historical results, current market characteristics and the professional judgment of our internal and external investment teams.

International plans – To determine the expected long-term return on plan assets assumption for our international plans, we consider the current level of expected returns on risk-free investments (primarily government bonds), the historical levels of the risk premiums associated with the other applicable asset categories and the expectations for future returns of each asset class. The expected return for each asset category is then weighted based on the actual asset allocation in our international pension plans to develop the overall expected long-term return on plan assets assumption.

Assumed health care cost trend rates



	2013		2012		2011
Health care cost trend rate assumed for the following year:
Medical
Pre-65	7.50	%	8.00	%	7.50	%
Post-65	6.50	%	7.00	%	7.00	%
Prescription drugs	7.00	%	7.00	%	7.50	%
EGWP subsidy^(a)	8.70	%	7.50	%	n/a
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate):
Medical
Pre-65	5.00	%	5.00	%	5.00	%
Post-65	5.00	%	5.00	%	5.00	%
Prescription drugs	5.00	%	5.00	%	5.00	%
EGWP subsidy^(a)	5.00	%	5.00	%	n/a
Year that the rate reaches the ultimate trend rate:
Medical
Pre-65	2020		2020		2018
Post-65	2020		2018		2017
Prescription drugs	2020		2018		2018
EGWP subsidy^(a)	2020		2020		n/a


^(a)	An employee group waiver plan ("EGWP") is a group Medicare Part D prescription drug plan. Effective January 1, 2013, we implemented the EGWP as a result of the Patient Protection and Affordable Care Act, which ended tax-free status of retiree drug subsidy programs but increased federal funding to Part D prescription drug plans.

Assumed health care cost trend rates have a significant effect on the amounts reported for defined benefit retiree health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



(In millions)	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on total of service and interest cost components	$	2	$	(2	)
Effect on other postretirement benefit obligations	$	30	$	(25	)

Plan investment policies and strategies – The investment policies for our U.S. and international pension plan assets reflect the funded status of the plans and expectations regarding our future ability to make further contributions. Long-term investment goals are to: (1) manage the assets in accordance with the legal requirements of all applicable laws; (2) produce investment returns which meet or exceed the rates of return achievable in the capital markets while maintaining the risk parameters set by the plans’ investment committees and protecting the assets from any erosion of purchasing power; and (3) position the portfolios with a long-term risk/return orientation.

U.S. plan – Historical performance and future expectations suggest that common stocks will provide higher total investment returns than fixed income securities over a long-term investment horizon. Short-term investments are utilized for pension payments, expenses, and other liquidity needs. However, to reduce volatility in returns and to better match the plan’s liabilities over time, as the plan’s funded ratio (as defined by the investment policy) improves, the allocation to equity securities will decrease while the amount allocated to fixed income securities will increase. As such, the plan’s current targeted asset allocation is comprised of 55 percent equity securities and high-yield bonds and 45 percent other fixed income securities.

The plan's assets are managed by a third-party investment manager. The investment manager is limited to pursuing the investment strategies regarding asset mix and purchases and sales of securities within the parameters defined in the investment policy guidelines and investment management agreement. Investment performance and risk is measured and monitored on an ongoing basis through quarterly investment meetings and periodic asset and liability studies.

International plans – Our international plans’ target asset allocation is comprised of 70 percent equity securities and 30 percent fixed income securities. The plan assets are invested in eleven separate portfolios, mainly pooled fund vehicles, managed by several professional investment managers. Investments are diversified by industry and type, limited by grade and maturity. The use of derivatives by the investment managers is permitted, subject to strict guidelines. The investment managers' performance is measured independently by a third-party asset servicing consulting firm. Overall, investment performance and risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and periodic asset and liability studies.

Fair value measurements – Plan assets are measured at fair value. The following provides a description of the valuation techniques employed for each major plan asset class at December 31, 2013 and 2012.

Cash and cash equivalents – Cash and cash equivalents include cash on deposit and an investment in a money market mutual fund that invests mainly in short-term instruments and cash, both of which are valued using a market approach and are considered Level 1. The money market mutual fund is valued at the net asset value ("NAV") of shares held. Cash and cash equivalents also include a cash reserve account (a collective short-term investment fund) that is valued using an income approach and is considered Level 2. The underlying assets are usually short-term bonds, discount notes, and commercial paper.

Equity securities – Investments in common stock, preferred stock, and real estate investment trusts ("REIT") are valued using a market approach at the closing price reported in an active market and are therefore considered Level 1. The non-public investment trust is valued using a market approach based on the underlying investments in the trust, which are publicly-traded securities, and is considered Level 2. Private equity investments include interests in limited partnerships which are valued based on the sum of the estimated fair values of the investments held by each partnership, determined using a combination of market, income and cost approaches, plus working capital, adjusted for liabilities, currency translation and estimated performance incentives. These private equity investments are considered Level 3.

Mutual funds – Investments in mutual funds are valued using a market approach. The shares or units held are traded on the public exchanges and such prices are Level 1 inputs.

Pooled funds – Investments in pooled funds are valued using a market approach at the NAV of units held, but investment opportunities in such funds are limited to institutional investors on the behalf of defined benefit plans. The various funds consist of either an equity or fixed income investment portfolio with underlying investments held in U.S. and non-U.S. securities. Nearly all of the underlying investments are publicly-traded. The majority of the pooled funds are benchmarked against a relative public index. These are considered Level 2.

Fixed income securities – Fixed income securities are valued using a market approach. U.S. treasury notes and exchange traded funds are valued at the closing price reported in an active market, and are considered Level 1. Treasury inflation-protected securities ("TIPS") are valued at the daily closing price reported in an active market. TIPS prices exclude adjustment factors for inflation and are considered Level 1. Corporate bonds, non-U.S. government bonds, private placements, and yankee bonds are valued using calculated yield curves created by models that incorporate factors such as interest rate, benchmark quotes, trade data, dealer quotes, primary and secondary market spread activity, and other market information and are considered Level 2. Taxable municipal bonds are valued using calculated yield curves considering market factors such as benchmark issues, trades, trading spreads between similar issuers or creditors, historical trading spreads over widely accepted market benchmarks, and verified bid information. These assets are considered Level 2. Municipal bonds are valued by an evaluation of terms and conditions of the security and considering market factors such as benchmark curves, trades, bid price or spreads, two-sided markets, and quotes. These assets are considered Level 2. The investment in the commingled fund is valued using the NAV of units held, and is considered Level 2. The commingled fund consists mostly of high-yield U.S. and non-U.S. corporate bonds. Investment opportunities in this fund are limited to qualified retirement plans and their plan participants. The investment objective of the portfolio is to provide long-term total return in excess of the Barclays U.S. High Yield Bond Index.

Real estate – Real estate investments are valued using a combination of the income and market approaches that is based on discounted cash flows, comparable sales, outside appraisals, price per square foot or some combination thereof and therefore are considered Level 3.

Other – Other investments are composed of an investment in an unallocated annuity contract, an investment contract with an international insurance carrier, and investments in two limited liability companies (“LLCs") with no public market. The LLCs were formed to acquire timberland in the northwest and other properties. The investment in an unallocated annuity contract is valued using a market approach based on the experience of the assets held in an insurer’s general account. The majority of the general account is invested in a well-diversified portfolio of high-quality fixed income securities, primarily consisting of investment-grade bonds. Investment income is allocated among pension plans participating in the general account based on the investment year method. Under this method, a record of the book value of assets held is maintained in subdivisions according to the calendar year in which the funds are invested. The earnings rate for each of these calendar year subdivisions varies from year to year, reflecting the actual earnings on the assets attributed to that year. Due to the lack of transparency in the use of investment year subdivisions, this asset is considered Level 3. The insurance carrier contract is funded by premiums paid annually by the participating plans and the funds are invested by the insurance carrier in portfolios with different risk profiles (low, medium, high) that can be elected by clients. The majority of the underlying investments consists of a well-diversified mix of non-U.S. publicly traded equity securities valued at the closing price reported in an active market and fixed income securities valued using calculated yield curves. This asset is considered Level 2. The values of the LLCs are determined using a cost approach based on historical cost less depletion for timber previously harvested. These assets are considered Level 3.

The following tables present the fair values of our defined benefit pension plans’ assets, by level within the fair value hierarchy, as of December 31, 2013 and 2012.



	December 31, 2013
(In millions)	Level 1				Level 2				Level 3				Total
	U.S.		Int’l		U.S.		Int’l		U.S.		Int’l		U.S.		Int’l
Cash and cash equivalents	$	19	$	1	$	1	$	—	$	—	$	—	$	20	$	1
Equity securities:
Common stock^(a)	288		—		—		—		—		—		288		—
Preferred stock	4		—		—		—		—		—		4		—
Private equity	—		—		—		—		23		—		23		—
REIT	2		—		—		—		—		—		2		—
Mutual funds^(b)	—		219		—		—		—		—		—		219
Pooled funds^(c)	—		—		—		186		—		—		—		186
Fixed income securities:
U.S. treasury notes	63		—		—		—		—		—		63		—
Exchange traded funds	1		—		—		—		—		—		1		—
Corporate bonds^(d)	—		—		127		—		—		—		127		—
Municipal bonds	—		—		1		—		—		—		1
Non-U.S. government bonds	—		—		7		—		—		—		7		—
Private placements	—		—		21		—		—		—		21		—
Taxable municipal bonds	—		—		13		—		—		—		13		—
Treasury inflation-protected securities	1		—		—		—		—		—		1		—
Yankee bonds	—		—		3		—		—		—		3		—
Commingled fund^(e)	—		—		17		—		—		—		17		—
Pooled funds^(f)	—		—		—		178		—		—		—		178
Real estate^(g)	—		—		—		—		22		—		22		—
Other	—		—		—		13		12		—		12		13
Total investments, at fair value	$	378	$	220	$	190	$	377	$	57	$	—	$	625	$	597



	December 31, 2012
(In millions)	Level 1				Level 2				Level 3				Total
	U.S.		Int’l		U.S.		Int’l		U.S.		Int’l		U.S.		Int’l
Cash and cash equivalents	$	16	$	1	$	1	$	—	$	—	$	—	$	17	$	1
Equity securities:
Common stock^(a)	312		—		—		—		—		—		312		—
Private equity	—		—		—		—		25		—		25		—
REIT	2		—		—		—		—		—		2		—
Investment trust	—		—		1		—		—		—		1		—
Mutual funds^(b)	—		171		—		—		—		—		—		171
Pooled funds^(c)	—		—		—		152		—		—		—		152
Fixed income securities:
U.S. treasury notes	67		—		—		—		—		—		67		—
Exchange traded funds	8		—		—		—		—		—		8		—
Corporate bonds^(d)	—		—		96		—		—		—		96		—
Non-U.S. government bonds	—		—		5		—		—		—		5		—
Private placements	—		—		18		—		—		—		18		—
Taxable municipal bonds	—		—		14		—		—		—		14		—
Yankee bonds	—		—		2		—		—		—		2		—
Commingled fund^(e)	—		—		28		—		—		—		28		—
Pooled funds^(f)	—		—		—		166		—		—		—		166
Real estate^(g)	—		—		—		—		23		—		23		—
Other	—		—		—		10		12		—		12		10
Total investments, at fair value	$	405	$	172	$	165	$	328	$	60	$	—	$	630	$	500


^(a)	Includes approximately 60 percent of investments held in U.S. and non-U.S. common stocks in the banking, pharmaceuticals, oil and gas, insurance, telecommunications, electric, aerospace/defense, retail, transportation, food processing, semiconductors, and chemicals sectors. The remaining 40 percent of common stock is held in various other sectors.

^(b)

Includes approximately 75 percent of investments held in U.S. and non-U.S. common stocks in the consumer staples, financial services, health care, energy, basic materials, leisure, and industrial goods and services sectors and 25 percent of investments held among various other sectors. The funds' objective is to outperform their respective benchmark indexes, FTSE ALL Share 5% Capped Index and MSCI World Index, as defined by the investment policy.

^(c)

Includes approximately 80 percent of investments held in non-U.S. publicly traded common stocks (specifically Asia Pacific, except Japan, and the U.K.) in the financial, consumer staples, information technology, materials, energy, industrials, and telecommunication services sectors and the remaining 20 percent of investments held among various other sectors. The funds' objective is to outperform their respective benchmark indexes, MSCI AC Asia Pacific ex Japan Index, FTSE Small Cap Index, and MSCI Emerging Markets Index, as defined by the investment policy.


^(d)	Includes approximately 70 percent of U.S. and non-U.S. corporate bonds in the banking and finance, utilities, oil and gas, news/media, and health care sectors. The remaining 30 percent of corporate bonds are in various other sectors.


^(e)	Includes approximately 90 percent of investments held in U.S. and non-U.S. corporate bonds in the consumer discretionary, financial, industrial, telecommunication services, energy, health care, information technology and materials sectors and 10 percent of investments held among various other sectors.

^(f)

Includes approximately 75 percent of investments held in U.S. and non-U.S. publicly traded investment grade government and corporate bonds which include gilts, treasuries, financial, corporates, and collateralized asset backed securities and 25 percent of investments held among various other sectors. The funds' objective is to outperform their respective benchmark indexes, as defined by the investment policy.


^(g)	Includes investments diversified by property type and location. The largest property sector holdings, which represent approximately 70 percent of investments held, are office, hotel, residential, and retail with the greatest percentage of investments made in the U.S. and Asia, which includes the emerging markets of China and India.

The following is a reconciliation of the beginning and ending balances recorded for plan assets classified as Level 3 in the fair value hierarchy.



	2013
(In millions)	Private Equity			Real Estate			Other		Total
Beginning balance	$	25		$	23		$	12	$	60
Actual return on plan assets:
Realized gain	6			1			—		7
Unrealized gain (loss)	(1		)	1			—		—
Purchases	6			1			—		7
Sales	(13		)	(4		)	—		(17		)
Ending balance	$	23		$	22		$	12	$	57



	2012
(In millions)	Private Equity			Real Estate			Other			Total
Beginning balance	$	23		$	21		$	14		$	58
Actual return on plan assets:
Realized gain	2			—			—			2
Unrealized gain (loss)	1			1			(2		)	—
Purchases	4			3			—			7
Sales	(5		)	(2		)	—			(7		)
Ending balance	$	25		$	23		$	12		$	60

Cash flows

Estimated future benefit payments – The following gross benefit payments, which were estimated based on actuarial assumptions applied at December 31, 2013 and reflect expected future services, as appropriate, are to be paid in the years indicated.



	Pension Benefits				Other Benefits
(In millions)	U.S.		Int’l		Other Benefits
2014^(a)	$	96	$	14	$	19
2015	94		14		20
2016	95		16		20
2017	96		18		20
2018	92		21		20
2019 through 2023	368		120		98


^(a)	Primarily as a result of retirements effective January 1, 2014, actual 2014 U.S. gross benefit payments will exceed the actuarial estimate above, including approximately $163 million which will be paid during the first quarter of 2014.

Contributions to defined benefit plans – We expect to make contributions to the funded pension plans of up to $77 million in 2014, and $11 million of that amount was paid in January 2014. Cash contributions to be paid from our general assets for the unfunded pension and postretirement plans are expected to be approximately $74 million and $19 million in 2014.

Contributions to defined contribution plan – We contribute to a defined contribution plan for eligible employees. Contributions to this plan totaled $26 million, $25 million and $21 million in 2013, 2012 and 2011.