Note J – Employee and Retiree Benefit Plans

PENSION AND OTHER POSTRETIREMENT PLANS – The Company has defined benefit pension plans that are principally noncontributory and cover most full-time employees. All pension plans are funded except for the U.S. and Canadian nonqualified supplemental plans and the U.S. directors’ plan. All U.S. tax qualified plans meet the funding requirements of federal laws and regulations. Contributions to foreign plans are based on local laws and tax regulations. The Company also sponsors health care and life insurance benefit plans, which are not funded, that cover most retired U.S. employees. The health care benefits are contributory; the life insurance benefits are noncontributory.

Effective with the spin-off of Murphy’s former U.S. retail marketing operation, Murphy USA Inc. (MUSA) on August 30, 2013, significant modifications were made to the U.S. defined benefit pension plan. Certain Murphy employees’ benefits under the U.S. plan were frozen at that time. No further benefit service will accrue for the affected employees, however, the plan will recognize future earnings after the spin-off. In addition, all previously unvested benefits became fully vested at the spin-off date. For those affected active employees of the Company, additional U.S. retirement plan benefits will accrue in future periods under a cash balance formula. Upon the spin-off of MUSA, Murphy retained all vested pension defined benefit and other postretirement benefit obligations associated with current and former employees of this separated business. No additional benefit will accrue for any employees of MUSA under the Company’s retirement plan after the spin-off date.

Generally accepted accounting principles require the Company to recognize the overfunded or underfunded status of its defined benefit plans as an asset or liability in its year-end consolidated balance sheet and to recognize changes in that funded status between periods through comprehensive income.

The tables that follow provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the years ended December 31, 2013 and 2012 and a statement of the funded status as of December 31, 2013 and 2012.


	Pension Benefits						Other Postretirement Benefits
(Thousands of dollars)	2013			2012			2013			2012
Change in benefit obligation
Obligation at January 1	$	721,531			629,568			124,134			114,962
Service cost		26,346			23,500			4,566			3,958
Interest cost		30,903			29,869			5,189			5,174
Plan amendments		1,989			0			0			0
Participant contributions		21			30			1,376			1,035
Actuarial loss (gain)		(9,876	)		55,479			(8,324	)		4,686
Medicare Part D subsidy		0			0			384			432
Exchange rate changes		1,852			7,125			(36	)		14
Benefits paid		(38,745	)		(30,217	)		(5,211	)		(6,127	)
Special termination benefits		849			6,177			0			0
Curtailments		(26,463	)		0			(15,077	)		0
Obligation assumed by MUSA at separation		(1,153	)		0			0			0

Obligation at December 31		707,254			721,531			107,001			124,134


Change in plan assets
Fair value of plan assets at January 1		463,546			404,350			0			0
Actual return on plan assets		61,932			41,674			0			0
Employer contributions		46,726			42,207			3,451			4,660
Participant contributions		21			30			1,376			1,035
Medicare Part D subsidy		0			0			384			432
Exchange rate changes		1,594			6,289			0			0
Benefits paid		(38,745	)		(30,217	)		(5,211	)		(6,127	)
Other		(1,966	)		(787	)		0			0

Fair value of plan assets at December 31		533,108			463,546			0			0


Funded status and amounts recognized in the Consolidated Balance Sheets at December 31
Deferred charges and other assets		10,254			9,679			0			0
Other accrued liabilities		(5,565	)		(5,556	)		(5,920	)		(5,646	)
Deferred credits and other liabilities		(158,589	)		(262,108	)		(101,081	)		(118,488	)
Liabilities associated with assets held for sale		(20,246	)		0			0			0

Funded status and net plan liability recognized at December 31	$	(174,146	)		(257,985	)		(107,001	)		(124,134	)

At December 31, 2013, amounts included in accumulated other comprehensive income (AOCI), before reduction for associated deferred income taxes, which have not been recognized in net periodic benefit expense are shown in the following table.


(Thousands of dollars)	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	(150,682	)		(13,815	)
Prior service (cost) credit		(3,559	)		372
Transitional asset (liability)		517			0

	$	(153,724	)		(13,443	)

Amounts included in AOCI at December 31, 2013 that are expected to be amortized into net periodic benefit expense during 2014 are shown in the following table.


(Thousands of dollars)	Pension Benefits			Other Postretirement Benefits
Net actuarial loss	$	(8,190	)		(242	)
Prior service (cost) credit		(951	)		82
Transitional asset (liability)		517			0

	$	(8,624	)		(160	)

The table that follows includes projected benefit obligations, accumulated benefit obligations and fair value of plan assets for plans where the accumulated benefit obligation exceeded the fair value of plan assets.


	Projected Benefit Obligations				Accumulated Benefit Obligations				Fair Value of Plan Assets
(Thousands of dollars)	2013		2012		2013		2012		2013		2012
Funded qualified plans where accumulated benefit obligation exceeds fair value of plan assets	$	571,217		587,318		520,610		523,773		502,308		431,788
Unfunded nonqualified and directors’ plans where accumulated benefit obligation exceeds fair value of plan assets		115,492		112,135		102,198		98,498		0		0
Unfunded other postretirement plans		107,001		124,134		107,001		124,134		0		0

The table that follows provides the components of net periodic benefit expense for each of the three years ended December 31, 2013.


	Pension Benefits									Other Postretirement Benefits
(Thousands of dollars)	2013			2012			2011			2013			2012			2011
Service cost	$	26,346			23,500			22,406			4,566			3,958			4,547
Interest cost		30,903			29,869			30,785			5,189			5,174			6,141
Expected return on plan assets		(28,974	)		(25,826	)		(25,919	)		0			0			0
Amortization of prior service cost (credit)		1,006			1,254			1,314			(143	)		(173	)		(240	)
Amortization of transitional (asset) liability		(514	)		(529	)		(536	)		8			8			8
Recognized actuarial loss		17,338			16,389			12,484			1,484			1,317			2,329

		46,105			44,657			40,534			11,104			10,284			12,785
Termination benefits expense		849			6,177			695			0			0			0
Curtailment expense (benefit)		1,365			0			1,036			(442	)		0			(605	)

Net periodic benefit expense	$	48,319			50,834			42,265			10,662			10,284			12,180

Termination and curtailment expenses in 2013 primarily related to plan amendments made at the time of separation of Murphy USA Inc. The increase in net periodic pension benefit expense in 2012 compared to 2011 was primarily related to expense recognized in 2012 for enhanced retirement benefits provided to a former executive officer. Termination and curtailment expenses in 2011 related to sale of two U.S. petroleum refineries during that year. The reduction in the net periodic benefit expense for other postretirement plans in 2012 was due to no further service costs and lower other costs associated with postretirement benefits for the Meraux and Superior refineries sold in 2011.

The preceding tables in this note include the following amounts related to foreign benefit plans.


	Pension Benefits				Other Postretirement Benefits
(Thousands of dollars)	2013		2012		2013		2012
Benefit obligation at December 31	$	211,799		184,550		541		525
Fair value of plan assets at December 31		188,575		164,111		0		0
Net plan liabilities recognized		23,224		20,439		541		525
Net periodic benefit expense		12,622		11,022		92		88

The following table provides the weighted-average assumptions used in the measurement of the Company’s benefit obligations at December 31, 2013 and 2012 and net periodic benefit expense for 2013 and 2012.


	Benefit Obligations												Net Periodic Benefit Expense
	Pension Benefits						Other Postretirement Benefits						Pension Benefits						Other Postretirement Benefits
	December 31						December 31						Year						Year
	2013			2012			2013			2012			2013			2012			2013			2012
Discount rate		4.78	%		4.24	%		4.91	%		4.18	%		4.23	%		4.80	%		4.18	%		4.87	%
Expected return on plan assets		6.24	%		6.20	%		0	%		0	%		6.24	%		6.20	%		0	%		0	%
Rate of compensation increase		4.14	%		4.13	%		0	%		0	%		4.12	%		4.10	%		0	%		0	%

The discount rates used for determining the plan obligations and expense are based on the universe of high-quality corporate bonds that are available within each country. Cash flow analyses are performed in which a spot yield curve is used to discount projected benefit payment streams for the most significant plans. The discounted cash flows are used to determine an equivalent single rate which is the basis for selecting the discount rate within each country. Expected plan asset returns are based on long-term expectations for asset portfolios with similar investment mix characteristics. Expected compensation increases are based on anticipated future averages for the Company.

Benefit payments, reflecting expected future service as appropriate, which are expected to be paid in future years from the assets of the plans or by the Company are shown in the following table.


(Thousands of dollars)	Pension Benefits		Other Postretirement Benefits
2014	$	32,822		6,746
2015		33,459		6,971
2016		33,723		7,148
2017		34,455		7,303
2018		35,383		7,500
2019-2023		194,717		41,148

For purposes of measuring postretirement benefit obligations at December 31, 2013, the future annual rates of increase in the cost of health care were assumed to be 7.4% for 2014 decreasing each year to an ultimate rate of 5.0% in 2020 and thereafter.

Assumed health care cost trend rates have a significant effect on the expense and obligation reported for the postretirement benefit plan. A 1% change in assumed health care cost trend rates would have the following effects.


(Thousands of dollars)	1% Increase		1% Decrease
Effect on total service and interest cost components of net periodic postretirement benefit expense for the year ended December 31, 2013	$	2,011		(1,551	)
Effect on the health care component of the accumulated postretirement benefit obligation at December 31, 2013		14,331		(11,812	)

During 2013, the Company made contributions of $30,570,000 to its domestic defined benefit pension plans, $16,156,000 to its foreign defined benefit pension plans, $3,412,000 to its domestic postretirement benefits plan and $39,000 to its foreign postretirement benefits plan. The Company currently expects during 2014 to make contributions of $27,133,000 to its domestic defined benefit pension plans, $21,977,000 to its foreign defined benefit pension plans, $5,883,000 to its domestic postretirement benefits plan and $36,000 to its foreign postretirement benefits plan.

U.S. Health Care Reform – In March 2010, the United States Congress enacted a health care reform law. Along with other provisions, the law (a) eliminated the tax free status of federal subsidies to companies with qualified retiree prescription drug plans that are actuarially equivalent to Medicare Part D plans beginning in 2013; (b) imposes a 40% excise tax on high-cost health plans as defined in the law beginning in 2018; (c) eliminated lifetime or annual coverage limits and required coverage for preventative health services beginning in September 2010; and (d) imposed a fee of $2 (subsequently adjusted for inflation) for each person covered by a health insurance policy beginning in September 2010. The Company provides a health care benefit plan to eligible U.S. employees and most U.S. retired employees. The law did not significantly affect the Company’s consolidated financial statements as of December 31, 2013, 2012 and 2011 and for the years then ended. The Company continues to evaluate the various components of the law as guidance is issued and cannot predict with certainty all the ways it may impact the Company. However, based on information available to date, the Company currently believes that the health care reform law will not have a material effect on its financial condition, net income or cash flow in future periods.

Plan Investments – Murphy Oil Corporation maintains an Investment Policy Statement (Statement) that establishes investment standards related to its two funded domestic qualified retirement plans. The Statement specifies that all assets will be held in a Master Trust sponsored by the Company, which is administrated by a trustee appointed by the Investment Committee (Committee). Members of the Committee are appointed by the Board of Directors. The Committee hires Investment Managers to invest trust assets within the guidelines established by the Committee as allowed by the Statement. The investment goals call for a portfolio of assets consisting of equity, fixed income and cash equivalent securities. The primary consideration for investments is the preservation of capital, and investment growth should exceed the rate of inflation. The Committee has directed the asset investment advisors of its benefit plans to maintain a portfolio consisting of both equity and fixed income securities. The Company believes that over time a balanced to slightly heavier weighting of the portfolio in equity securities compared to fixed income securities represents the most appropriate long-term mix for future investment return on assets held by domestic plans. The parameters for asset allocation call for the following minimum and maximum percentages: equity securities of between 40% and 70%; fixed income securities of between 30% and 60%; long/short equity of between 0% and 15%; and cash and equivalents of between 0% and 15%. The Committee is authorized to direct investments within these parameters. Equity investments may include common, preferred and convertible preferred stocks, emerging markets stocks and similar funds, and long/short equity funds. Long/short equity is a strategy invested in a portfolio of long stocks hedged with short sales of stocks and/or stock index options, with the combination of investment intended to produce equity-like returns with lower volatility over the long term. Generally no more than 10% of an Investment Manager’s portfolio is to be held in equity securities of any one issuer, and equity securities should have a minimum market capitalization of $100 million. Equities held in the trust should be listed on the New York or American Stock Exchanges, principal U.S. regional exchanges, major foreign exchanges or quoted in significant over-the-counter markets. Equity or fixed income securities issued by the Company may not be held in the trust. Fixed income securities include maturities greater than one year to maturity. The fixed income portfolio should not exceed an average maturity of 11 years. The portfolio may include investment grade corporate bonds, issues of the U.S. government, its agencies and government sponsored entities, government agency issued collateralized mortgage backed securities, agency issued mortgage backed securities, municipal bonds, asset backed securities, commercial mortgage backed securities and international and emerging markets bond funds. The Committee routinely reviews the investment performance of Investment Managers.

For the U.K. retirement plan, trustees have been appointed by the wholly-owned subsidiary that sponsors the plan for U.K. employees. The trustees have hired an investment consultant to manage the assets of the plan within the parameters of the Investment Policy Implementation Document (Document). The objective of investments is to earn a reasonable return within the allocation strategy permitted in the Document while limiting the risk for the funded position of the plan. The Document specifies a strategy with an allocation goal of 60% equities and 40% bonds. The Document allows for ranges of equity investments from 27% to 98%, fixed income securities may range from 25% to 60%, and cash can be held for up to 5% of investments. Approximately one-half of the equity allocation is to be invested in U.K. securities and the remainder split between North American, European, Japanese and other Pacific Basin securities. A minimum of 95% of the fixed income allocation is to be invested in U.K. securities with up to 5% in international or high yield bonds. Tolerance ranges are specified in the Document within the general equity/bond allocation guidelines. Asset performance is compared to a benchmark return based on the allocation guidelines and is targeted to outperform the benchmark by 0.75% per annum over a rolling three-year period. Small working cash balances are permitted to facilitate daily management of payments and receipts within the plan. The trustees routinely review the investment performance of the plan.

For the Canadian retirement plan, the wholly-owned subsidiary that sponsors the plan has a Statement of Investment Policies and Procedures (Policy) applicable to the plan assets. A pension committee appointed by the board of directors of the subsidiary oversees the plan, selects the investment advisors and routinely reviews performance of the asset portfolio. The Policy permits assets to be invested in various Canadian and foreign equity securities, various fixed income securities, real estate, natural resource properties or participation rights and cash. The objective for plan investments is to achieve a total rate of return equal to the long-term interest rate assumption used for the going-concern actuarial funding valuation. The normal allocation includes total equity securities of 60% with a range of 40% to 75% of total assets. Fixed income securities have a normal allocation of 35% with a range of 25% to 45%. Cash will normally have an allocation of 5% with a range of 0% to 15%. The Policy calls for diversification norms within the investment portfolios of both equity securities and fixed income securities.

The weighted average asset allocation for the Company’s funded pension benefit plans at December 31, 2013 and 2012 are presented in the following table.


	December 31,
	2013			2012
Equity securities		68.4	%		62.9	%
Fixed income securities		30.7			36.1
Cash equivalents		0.9			1.0

		100.0	%		100.0	%

The Company’s weighted average expected return on plan assets was 6.24% in 2013 and the return was determined based on an assessment of actual long-term historical returns and expected future returns for a portfolio with investment characteristics similar to that maintained by the plans. The 6.24% expected return was based on an expected average future equity securities return of 8.40% and a fixed income securities return of 3.90% and is net of average expected investment expenses of 0.45%. Over the last 10 years, the return on funded retirement plan assets has averaged 6.93%.

At December 31, 2013, the fair value measurements of retirement plan assets within the fair value hierarchy are included in the table that follows.

Fair Value Measurements Using

(Thousands of dollars)

Fair Value at
December 31, 2013

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Domestic Plans

Equity securities:

U.S. core equity

89,255

U.S. small/midcap

37,149

Hedged funds and other alternative strategies

32,788

International commingled trust fund

77,041

Emerging market commingled equity fund

9,654

Fixed income securities:

U.S. fixed income

72,240

International commingled trust fund

14,865

Emerging market mutual fund

8,549

Cash and equivalents

2,992

Total Domestic Plans

344,533

129,396

182,349

32,788

Foreign Plans

Equity securities funds

99,085

Fixed income securities funds

57,030

Diversified pooled fund

30,800

Cash and equivalents

1,660

Total Foreign Plans

188,575

1,660

186,915

Total

533,108

131,056

369,264

32,788

At December 31, 2012, the fair value measurements of retirement plan assets within the fair value hierarchy are included in the table that follows.


			Fair Value Measurements Using
(Thousands of dollars)	Fair Value at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Domestic Plans
Equity securities:
U.S. core equity	$	83,392		83,392		0		0
U.S. small/midcap		20,894		20,894		0		0
Hedged funds and other alternative strategies		14,654		0		0		14,654	*
International commingled trust fund		62,111		0		62,111		0
Emerging market commingled equity fund		9,535		0		9,535		0
Fixed income securities:
U.S. fixed income		80,203		0		80,203		0
International commingled trust fund		15,179		0		15,179		0
Emerging market mutual fund		10,060		0		10,060		0
Cash and equivalents		3,407		3,407		0		0

Total Domestic Plans		299,435		107,693		177,088		14,654

Foreign Plans
Equity securities funds		79,233		0		79,233		0
Fixed income securities funds		51,777		0		51,777		0
Diversified pooled fund		31,758		0		31,758		0
Cash and equivalents		1,343		1,343		0		0

Total Foreign Plans		164,111		1,343		162,768		0

Total	$	463,546		109,036		339,856		14,654

*	Reclassified to Level 3 to conform to current presentation.

The definition of levels within the fair value hierarchy in the tables above is included in Note P.

For domestic plans, U.S. core and small/midcap equity securities are valued based on daily market prices as quoted on national stock exchanges or in the over-the-counter market. U.S. long/short equity securities are valued monthly based on a pro-rata share of value. International equities held in a commingled trust are valued monthly based on prices as quoted on various international stock exchanges. The emerging market commingled equity fund is valued monthly based on net asset value. U.S. fixed income securities are valued daily based on bids for the same or similar securities or using net asset values. International fixed income securities held in a commingled trust are valued on a monthly basis using net asset values. The fixed income emerging market mutual fund is valued daily based on net asset value. The domestic plan commingled trusts have waiting periods for withdrawals ranging from 6 to 30 days. Hedged funds and other alternative strategies funds consist of one investment which permits withdrawals semi-annually and another investment which has a three year lock-up period and a 95 day notice following the lock-up period. For foreign plans, the equity securities funds are comprised of U.K. and foreign equity funds valued daily based on fund net asset values. Fixed income securities funds are U.K. securities valued daily at net asset values. The diversified pooled fund is valued daily at net asset value and contains a combination of Canadian and foreign equity securities, Canadian fixed income securities and cash.

The effects of fair value measurements using significant unobservable inputs on changes in Level 3 plan assets are outlined below:


(Thousands of dollars)	Hedged Funds and Other Alternative Strategies
Total at December 31, 2011	$	13,860
Actual return on plan assets:
Relating to assets held at the reporting date		794
Relating to assets sold during the period		0
Purchases, sales and settlements		0

Total at December 31, 2012		14,654

Actual return on plan assets:
Relating to assets held at the reporting date		3,134
Relating to assets sold during the period		0
Purchases, sales and settlements		15,000

Total at December 31, 2013	$	32,788

THRIFT PLANS – Most full-time employees of the Company may participate in thrift or savings plans by allotting up to a specified percentage of their base pay. The Company matches contributions at a stated percentage of each employee’s allotment based on years of participation in the plans, with a maximum match of 6%. A U.K. savings plan allows eligible employees to allot a portion of their base pay to purchase Company Common stock at market value. Such employee allotments are matched by the Company. Amounts charged to expense for these U.S. and U.K. plans were $13,839,000 in 2013, $12,594,000 in 2012 and $10,725,000 in 2011.