NOTE 4—PENSION PLANS AND POSTRETIREMENT BENEFITS

Although we currently provide retirement benefits for most of our U.S. employees through sponsorship of the McDermott Thrift Plan (see “Defined Contribution Plans” below), some of our longer-term U.S. employees and former employees are entitled to retirement benefits under the McDermott (U.S.) Retirement Plan, a non-contributory qualified defined benefit pension plan (the “McDermott Plan”), and several non-qualified supplemental defined benefit pension plans. The McDermott Plan and the non-qualified supplemental defined benefit pension plans are collectively referred to herein as the “Domestic Plans.” The McDermott Plan has been closed to new participants since 2006, and benefit accruals under the McDermott Plan were frozen completely in 2010.

We also sponsor a defined benefit pension plan established under the laws of the Commonwealth of the Bahamas, the J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the “TCN Plan”) which provides retirement benefits for certain of our current and former foreign employees. Effective August 1, 2011, new entry into the TCN Plan was closed, and effective December 31, 2011, benefit accruals under the TCN Plan were frozen. Effective January 1, 2012, we established a new global defined contribution plan to provide retirement benefits to non-U.S. expatriate employees who may have otherwise obtained benefits under the TCN Plan.

Retirement benefits under the McDermott Plan and the TCN Plan are generally based on final average compensation and years of service, subject to the applicable freeze in benefit accruals under the plans. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or other applicable law. The Pension Protection Act of 2006 (“PPA”) amended ERISA and modified the funding requirements for certain defined benefit pension plans including the McDermott Plan. Funding provisions under the PPA accelerated funding requirements applicable to the McDermott Plan to ensure full funding of benefits accrued.

Obligations and Funded Status


	Domestic Plans						TCN Plan
	Year Ended December 31,						Year Ended December 31,
	2011			2010			2011			2010
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	551,231		$	552,854		$	47,190		$	37,800
Service cost		—			543			2,740			2,305
Interest cost		28,454			30,639			2,379			2,185
Actuarial loss (gain)		22,154			36,270			6,652			5,879
Transfers		—			(25,871	)		—			—
Divestitures		—			(6,863	)		—			—
Curtailments		(3	)		(2,258	)		(17,252	)		—
Benefits paid		(33,593	)		(34,083	)		(1,562	)		(979	)

Benefit obligation at end of year	$	568,243		$	551,231		$	40,147		$	47,190

Change in plan assets:
Fair value of plan assets at beginning of year	$	505,853		$	416,252		$	32,543		$	25,634
Actual return on plan assets		90,343			47,547			(906	)		2,588
Company contributions		4,770			90,568			4,000			5,300
Plan merger		—			(14,431	)		—			—
Benefits paid		(33,593	)		(34,083	)		(1,562	)		(979	)

Fair value of plan assets at end of year		567,373			505,853			34,075			32,543

Funded status	$	(870	)	$	(45,378	)	$	(6,072	)	$	(14,647	)

Amounts recognized in balance sheet consist of:
Other Assets	$	16,034		$	—		$	—		$	—

Accrued pension liability—current		(1,743	)		(4,797	)		(2,300	)		(4,000	)
Pension liability		(15,161	)		(40,581	)		(3,772	)		(10,647	)

Accrued benefit liability		(16,904	)		(45,378	)		(6,072	)		(14,647	)

Net Liability	$	(870	)	$	—		$	—		$	—

Amounts recognized in accumulated comprehensive loss:
Net actuarial loss (gain)	$	76,038		$	129,830		$	4,525		$	14,505
Prior service cost (credit)		—			—			—			31

Total before taxes	$	76,038		$	129,830		$	4,525		$	14,536


	Domestic Plans				TCN Plan
	Year Ended December 31,				Year Ended December 31,
	2011		2010		2011		2010
	(In thousands)
Supplemental information:

Plans with accumulated benefit obligation in excess of plan assets
Projected benefit obligation	$	568,243	$	551,231	$	40,147	$	47,190
Accumulated benefit obligation	$	568,243	$	551,231	$	40,147	$	38,165
Fair value of plan assets	$	567,373	$	505,853	$	34,075	$	32,543

We have recognized in 2011, and expect to recognize in 2012, the following amounts in other comprehensive loss as a component of net periodic benefit cost.


	Recognized in 2011				To Be Recognized in 2012
	Domestic Plans		TCN Plan		Domestic Plans		TCN Plan
	(In thousands)
Pension cost in accumulated other comprehensive loss:
Net actuarial loss	$	16,913	$	2,736	$	9,922	$	1,785
Prior service cost (credit)		—		16		—		—

	$	16,913	$	2,752	$	9,922	$	1,785

Assumptions


	Domestic Plans						TCN Plan
	2011			2010			2011			2010
Weighted average assumptions used to determine net periodic benefit obligations at December 31:
Discount rate		4.80	%		5.30	%		4.80	%		5.25	%
Rate of compensation increase		N/A			N/A			N/A			4.50	%


	Domestic Plans									TCN Plan
	Year Ended December 31,									Year Ended December 31,
	2011			2010			2009			2011			2010			2009
	(In thousands)
Supplemental information:

Components of periodic benefit cost:
Service cost	$	—		$	543		$	888		$	2,740		$	2,305		$	2,179
Interest cost		28,454			30,639			31,460			2,379			2,185			1,766
Expected return on plan assets		(30,216	)		(30,830	)		(28,210	)		(2,450	)		(1,829	)		(1,392	)
Amortization of net loss		15,842			18,071			18,698			2,736			2,167			2,390
Amortization of prior service cost (credit)		—			(268	)		(725	)		16			16			16
Recognized (gain) loss due to curtailments and other adjustments		(24	)		(1,185	)		—			15			—			282

Net periodic benefit cost	$	14,056		$	16,970		$	22,111		$	5,436		$	4,844		$	5,241

Increase (decrease) in accumulated other comprehensive loss due to actuarial losses—before taxes	$	(37,973	)		16,492		$	13,757		$	10,008		$	5,120		$	474
Decrease in accumulated other comprehensive loss due to curtailment gain		—			—			—			(17,267	)		—			—

Net periodic benefit cost	$	(37,973	)	$	16,492		$	13,757		$	(7,259	)	$	5,120		$	474
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
Discount rate		5.75	%		5.85	%		5.67	%		5.75	%		5.25	%		6.00	%
Expected return on plan assets		5.75	%		7.05	%		6.87	%		5.75	%		7.50	%		6.80	%
Rate of compensation increase		N/A			1.49	%		2.34	%		4.50	%		4.50	%		4.50	%

During the year ended December 31, 2011, the Investment Committee of the McDermott Plan changed the investment strategy for the assets in the McDermott Master Trust (“McDermott Trust”), the funding vehicle underlying the McDermott Plan. The investment strategy change resulted in the portfolio of assets moving from a dollar-duration-matched-fixed-income asset mix to more of a return-seeking asset mix under which assets would be allocated predominantly to dollar-duration-matched-fixed-income investments with a long credit tilt, but also apportioned to high-yield fixed income and global equity investments. This change in investment strategy caused us to remeasure the McDermott Plan’s assets and benefit obligations as of April 30, 2011. In connection with the investment strategy change, we increased the expected rate of return on plan assets assumption for the McDermott Plan to 6.50% from 5.30% as of the remeasurement date. This assumption is consistent with the long-term asset returns expected from the McDermott Trust after the investment strategy change. Additionally, as part of the remeasurement, we increased the discount assumption to 5.40%, as compared to 5.30% at December 31, 2010.

We set the expected rate of return on plan assets assumption for the Domestic Plans at 6.50% and the TCN Plan at 7.30%. The expected rate of return is determined to be the weighted average of the nominal returns based on the weightings of the asset classes within the McDermott Trust and TCN Trust investment portfolios. In setting these rates, we used a building-block approach. Historic real return trends for the various asset classes in both investment portfolios were combined with anticipated future market conditions to estimate the real rate of return for each class. These rates were then adjusted for anticipated future inflation to determine estimated nominal rates of return for each class.

Investment Goals

General

The investment goals of the McDermott Trust and the trust underlying the TCN Plan (“TCN Trust”) are generally to provide for the solvency of the respective plans and fulfillment of pension obligations over time, and to maximize long-term investment return consistent with a reasonable level of risk. Asset allocations within the McDermott Trust and TCN Trust are reviewed periodically and rebalanced, if appropriate, to ensure the continued conformance to the investment goals, objectives and strategies. Both the McDermott Trust and the TCN Trust employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the applicable trust’s overall investment objectives.

The specific goals of each investment manager are set out in the investment policy adopted by the investment committee for the respective trust, but, in general, the goals are (1) to perform in line with (in the case of passive accounts) or outperform (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust, and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark. The estimated allocations discussed below are periodically reviewed to assess the appropriateness of the particular funds in which they are invested, and these estimated allocations are subject to change.

The performance of each investment manager’s portfolio is periodically measured against commonly accepted benchmarks, including the individual investment manager’s benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.

Domestic Plans

The following is a summary of the Domestic Plans’ asset allocations at December 31, 2011 and 2010 by asset category. The changes in the allocation of assets at December 31, 2011 compared to December 31, 2010 are primarily a result of the investment strategy change implemented during the year ended December 31, 2011. The estimated allocation for 2012 for the Domestic Plans, by asset class, is expected to remain the same as the year ended December 31, 2011.


	2011			2010
Asset Category:
Fixed Income		85	%		99	%
Equity Securities		15	%		—	%
Other		—	%		1	%

Total		100	%		100	%

TCN Plan

The weighted average asset allocations of the TCN Plan at December 31, 2011 and 2010 by asset category was as follows:


	2011			2010
Asset Category:
Equity Securities		70	%		70	%
Fixed Income		30	%		30	%

Total		100	%		100	%

In connection with our decision to freeze benefit accruals under the TCN plan, we plan to reconsider the estimated allocation for 2012.

Fair Value

The following is a summary of total investments for our plans, measured at fair value at December 31, 2011 and 2010.


	12/31/11		Level 1		Level 2		Level 3
	(In thousands)
Pension Benefits:
Fixed Income	$	482,767	$	482,767	$	—	$	—
Equities		102,785		24,162		78,623		—
Cash and Accrued Items		15,896		15,896		—		—

Total Investments	$	601,448	$	522,825	$	78,623	$	—


	12/31/10		Level 1		Level 2		Level 3
	(In thousands)
Pension Benefits:
Fixed Income	$	514,594	$	514,594	$	—	$	—
Equities		23,424		23,424		—		—
Cash and Accrued Items		378		378		—		—

Total Investments	$	538,396	$	538,396	$	—	$	—

Cash Flows


	Domestic Plans		TCN Plan
	(In thousands)
Expected employer contributions to trusts of defined benefit plans:
2012	$	—	$	2,300
Expected benefit payments:
2012	$	35,054	$	1,098
2013	$	35,592	$	2,180
2014	$	36,182	$	1,340
2015	$	36,683	$	1,816
2016	$	37,311	$	3,191
2017-2021	$	192,781	$	14,215

The expected employer contributions to trusts for 2012 are included in current liabilities at December 31, 2011.

Defined Contribution Plans

We provide retirement benefits for most of our U.S. employees through the McDermott Thrift Plan, a qualified defined contribution plan with a Code section 401(k) feature (“Thrift Plan”). The Thrift Plan generally provides for matching employer contributions of 50% of participants’ contributions up to 6% of compensation and unmatched employer cash contributions equal to 3% of participants’ base pay, plus overtime pay, expatriate pay and commissions, which we refer to collectively as “thriftable earnings.” Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately $6.6 million, $6.7 million and $7.3 million in the years ended December 31, 2011, 2010 and 2009, respectively.

We also provide benefits under the McDermott International, Inc. Director and Executive Deferred Compensation Plan (“Deferred Compensation Plan”), which is a non-qualified defined contribution plan. Expense associated with the Deferred Compensation Plan was not material to the consolidated financial statements for the years presented.