Employee Retirement Plans

We maintain defined benefit pension plans for most of our employees. Most of these plans require employee contributions in order to accrue benefits. Benefits payable under the plans are based on employees’ years of service and compensation during specified years of employment. Effective December 31, 2010, we amended the USG Corporation defined benefit pension plan to replace the final average pay formula with a cash balance formula for employees hired after that date.

We also maintain plans that provide postretirement benefits (retiree health care and life insurance) for eligible employees. Employees hired before January 1, 2002 generally become eligible for the postretirement benefit plans when they meet minimum retirement age and service requirements. The cost of providing most postretirement benefits is shared with retirees.

In 2013, we communicated to certain terminated vested participants in our USG Corporation Retirement Plan an option to receive a lump sum payment for their accrued benefits. The option commenced on October 1, 2013 and expired on November 15, 2013. For participants who elected this option, payments were made in December 2013 and we incurred a settlement charge of approximately $15 million, with a corresponding reduction in accumulated other comprehensive loss. As a result, the measurement of the pension benefit obligation, or PBO, as of December 31, 2013 included a reduction of approximately $80 million.

In 2011, we amended our U.S. postretirement benefit plan to require retiree medical plan participants to begin purchasing individual coverage in the Affordable Insurance Exchanges or individual Medicare marketplace beginning January 1, 2015 using a company-funded subsidy. The subsidy will be determined based upon years of service at retirement and Medicare eligibility. The subsidy provided to retirees eligible for Medicare will end December 31, 2019. As a result of the amendment, the measurement of the accumulated postretirement benefit obligation, or APBO, as of December 31, 2011 includes a reduction of approximately $100 million. This amendment was accounted for as a credit to unrecognized prior service cost which will be amortized into the statement of operations over the average remaining service of active plan participants to retirement eligibility.

In 2010, we converted our prescription drug program for retirees over the age of 65 to a group-based company sponsored Medicare Part D program, or Employer Group Waiver Plan, or EGWP. Beginning in 2012, we use the Part D subsidies delivered through the EGWP each year to reduce net company retiree medical costs until net company costs are completely eliminated. When those costs are eliminated, the Part D subsidies will be shared with retirees to reduce retiree contributions. The amount of the subsidies shared with retirees will reflect the various subsidy levels of our plan (subsidies vary by years of service at retirement). We formally adopted this change effective with the December 31, 2010 measurement of our liability for retiree medical costs. As a result, in the fourth quarter of 2010, we reduced our APBO by approximately $47 million and unrecognized prior service cost by the same amount. The credit to unrecognized prior service cost is being amortized into the statement of operations over the average remaining service of active plan participants to retirement eligibility.

The components of net pension and postretirement benefit costs are summarized in the following table:



(millions)	2013			2012			2011
Pension Benefits:
Service cost of benefits earned	$	38		$	32		$	28
Interest cost on projected benefit obligation	63			64			63
Expected return on plan assets	(76		)	(70		)	(65		)
Settlement ^(a)	16			—			2
Net amortization	43			34			24
Net pension cost	$	84		$	60		$	52
Postretirement Benefits:
Service cost of benefits earned	$	3		$	3		$	6
Interest cost on projected benefit obligation	7			8			14
Net amortization	(34		)	(35		)	(22		)
Net postretirement (benefit) cost	$	(24	)	$	(24	)	$	(2	)

^(a) In 2013, the settlement charge primarily relates to lump sum payments made to certain terminated vested participants in our USG Corporation Retirement Plan.

We use a December 31 measurement date for our plans. The accumulated benefit obligation, or ABO, for the defined benefit pension plans was $1.186 billion as of December 31, 2013 and $1.370 billion as of December 31, 2012.



	As of December 31,
(millions)	2013			2012
Selected information for pension plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	(32	)	$	(1,368	)
Fair value of plan assets	3			1,131
Selected information for pension plans with benefit obligations in excess of plan assets:
Benefit obligation	$	(1,146	)	$	(1,536	)
Fair value of plan assets	1,021			1,133

The following table summarizes projected benefit obligations, plan assets and funded status as of December 31:



	Pension						Postretirement
(millions)	2013			2012			2013			2012
Change in Benefit Obligation:
Benefit obligation as of January 1	$	1,536		$	1,334		$	186		$	174
Service cost	38			32			3			3
Interest cost	63			64			7			8
Curtailment/settlements	(103		)	—			—			—
Participant contributions	10			9			8			8
Benefits paid	(38		)	(75		)	(21		)	(22		)
Plan amendment	1			1			—			—
Actuarial (gain) loss	(115		)	164			(13		)	13
Foreign currency translation	(16		)	7			(4		)	2
Benefit obligation as of December 31	$	1,376		$	1,536		$	166		$	186
Change in Plan Assets:
Fair value as of January 1	$	1,133		$	965		$	—		$	—
Actual return on plan assets	203			162			—			—
Employer contributions	71			66			13			14
Participant contributions	10			9			8			8
Benefits paid	(38		)	(75		)	(21		)	(22		)
Curtailment/settlements	(103		)	—			—			—
Foreign currency translation	(14		)	6			—			—
Fair value as of December 31	$	1,262		$	1,133		$	—		$	—
Funded status	$	(114	)	$	(403	)	$	(166	)	$	(186	)
Components on the Consolidated Balance Sheets:
Noncurrent assets	$	11		$	—		$	—		$	—
Current liabilities	(1		)	(2		)	(13		)	(14		)
Noncurrent liabilities	(124		)	(401		)	(153		)	(172		)
Net liability as of December 31	$	(114	)	$	(403	)	$	(166	)	$	(186	)
Pretax Components in AOCI:
Net actuarial loss	$	259		$	563		$	21		$	37
Prior service cost (credit)	—			1			(179		)	(215		)
Total as of December 31	$	259		$	564		$	(158	)	$	(178	)

For our defined benefit pension plans, the 2013 actuarial gain of $115 million is primarily due to an increase in the discount rates used to determine the benefit obligation. The weighted-average discount rate increased from 4.20% at December 31, 2012 to 4.90% at December 31, 2013. The 2012 actuarial loss of $164 million was primarily due to reductions in discount rates used to determine the benefit obligation. The weighted-average discount rate used to determine the benefit obligation decreased from 4.95% at December 31, 2011 to 4.20% at December 31, 2012.

For the defined benefit pension plans, we estimate that during 2014 we will amortize from AOCI into net pension cost a net actuarial loss of $22 million and prior service cost of $1 million. For the postretirement benefit plans, we estimate that during 2014 we will amortize from AOCI into net postretirement cost a net actuarial loss of $1 million and a prior service credit of $36 million.

ASSUMPTIONS

The following tables reflect the assumptions used in the accounting for our plans:



	Pension				Postretirement
	2013		2012		2013		2012
Weighted average assumptions used to determine benefit obligations as of December 31:
Discount rate	4.90	%	4.20	%	4.60	%	3.95	%
Compensation increase rate *	3.50	%	3.40	%
Weighted average assumptions used to determine net cost for years ended December 31:
Discount rate	4.20	%	4.95	%	3.95	%	4.50	%
Expected return on plan assets *	7.00	%	7.00	%
Compensation increase rate *	3.40	%	3.30	%

* Compensation increase rate and expected return on plan assets only applicable to our defined benefit pension plans.

For the measurement of the APBO at December 31, 2013 for our U.S. postretirement health care plan, the assumed health care cost trend rates start with an 8.00% increase in 2014, followed by a gradual decline in increases to 5.00% for 2020 and beyond. For the measurement of the APBO at December 31, 2012, the assumed health care cost trend rates started with a 7.10% increase in 2013, followed by a gradual decline in increases to 5.25% for 2016 and beyond.

Assumed health care cost trend rates can have a significant effect on the amounts reported for retiree health care costs. Effective January 1, 2011, we modified our U.S. postretirement health care plan to limit the increase in the annual amount we pay for retiree health care coverage for certain current and future retirees to 3% per year, which mitigates the impact of the increasing health care cost trend rates, as any additional increase will be the responsibility of plan participants. However, after January 1, 2015, due to the changes to the U.S. postretirement health care plan announced in 2011, as previously described, we will no longer have a material exposure to health care cost inflation for that plan.

For the measurement of the APBO at December 31, 2013 for our Canadian postretirement health care plan, the assumed health care cost trend rates start with a 8.5% increase in 2014, followed by a gradual decline in increases to 4% for 2032. For the measurement of the APBO at December 31, 2012, the assumed health care cost trend rates started with a 8.75% increase in 2013, followed by a gradual decline in increases to 4% for 2032 and beyond.

A one percentage point change in the assumed health care cost trend rates would have the following effects on our U.S. and Canadian plans:



(millions)	One-Percentage- Point Increase		One-Percentage- Point Decrease
Effect on total service and interest cost	$	—	$	—
Effect on postretirement benefit obligation	11		(9		)

RETIREMENT PLAN ASSETS

Investment Policies and Strategies: We have established investment policies and strategies for the defined benefit pension plans’ assets with a long-term objective of maintaining the plans’ assets at a level equal to or greater than that of their liabilities (as measured by a funded ratio of 100% or more of the ABO) and maximizing returns on the plans’ assets consistent with our moderate tolerance for risk. Contributions are made to the plans periodically as needed to meet funding targets or requirements. Factors influencing our determination to accept a moderate degree of risk include the timing of plan participants’ retirements and the resulting disbursement of retirement benefits, the liquidity requirements of the plans and our financial condition.

Our overall long-term objective is to achieve a 7.0% rate of return on plan assets with a moderate level of risk as indicated by the volatility of investment returns. This rate of return target was established using a “building block” approach. In this approach, ranges of long-term expected returns for the various asset classes in which the plans invest are estimated. The estimated ranges are primarily based on observations of historical asset returns and their historical volatility. In determining the expected returns, we also consider consensus forecasts of certain market and economic factors that influence returns, such as inflation, gross domestic product trends and dividend yields. We then calculate an overall range of likely expected rates of return by applying the expected asset returns to the plans’ target asset allocation. The most likely rate of return is then determined and is adjusted to account for investment management fees.

Our investment strategy is to invest in a diversified mix of asset classes in accordance with an asset allocation that we believe is likely to achieve our long-term target return while prudently considering risk. This strategy recognizes that many investment professionals believe that certain asset classes, such as equities, may be expected to produce the greatest return in excess of inflation over time, but may also generate the greatest level of volatility. Conversely, many investment professionals believe that an asset class such as fixed income securities may be likely to be less volatile, but may also produce lower returns over time. In order to manage risk, the plans’ pension and investment committees periodically rebalance their asset allocations and monitor the investment performance of the individual investment managers compared to their benchmark returns and investment guidelines on an ongoing basis, in part through the use of quarterly investment portfolio reviews and compliance reporting by investment managers. The pension and investment committees also evaluate risk by periodically conducting asset/liability studies to assess the correlation of the plans’ assets and liabilities and the degree of risk in the target asset allocations. The plans limit the use of leverage to select investment strategies where leverage is typically employed, such as private equity and real estate. Certain investment managers utilize derivatives, such as swaps, bond futures, and options, as part of their investment strategies. This is done primarily to gain a desired market exposure or manage factors such as interest rate risk or duration of a bond portfolio. The following table shows the aggregate target asset allocation on a weighted average basis for all the plans and the acceptable ranges around the targets as of December 31, 2013.



	Investment Policy
	Target		Range
Asset Categories:
Equity	61	%	48% - 70%
Fixed income	23	%	14% - 32%
Limited partnerships	12	%	4% - 20%
Real estate	4	%	0% - 10%
Cash equivalents and short-term investments	—		0% - 8%
Total	100	%

Equity investments are in institutional commingled/pooled equity funds, equity mutual funds and direct holdings of the common stock of U.S. and non-U.S. companies. Both the equity funds and direct holdings are invested in companies with a range of market capitalizations. This category also includes an investment in USG Corporation shares of common stock as described below. Fixed income securities include U.S. Treasury securities, non-U.S. government debt securities such as Canadian federal bonds, corporate bonds of companies from diversified industries and mortgage-backed securities. Limited partnerships include investments in funds that follow any of several different strategies, including investing in distressed debt, energy development, infrastructure and a multi-strategy hedge fund. These investments use strategies with returns normally expected to have a reduced correlation to the return of equities as compared to other asset classes and often provide a current income component that is a meaningful portion of the investment’s total return. Real estate is primarily investments in large core, private real estate funds that directly own a diverse portfolio of properties located in the United States.

During 2012, we made contributions to our pension plans that included 1,249,219 shares of our common stock, or the Contributed Shares. The Contributed Shares were contributed to the USG Corporation Retirement Plan Trust, or Trust, and were recorded on the consolidated balance sheet at the June 25, 2012 closing price of $16.48 per share, or approximately $20.6 million in the aggregate. The Contributed Shares are not reflected on the consolidated statement of cash flows because they were treated as a noncash financing activity. The Contributed Shares were valued for purposes of crediting the contribution to the Trust at a discounted value of $16.01 per share ($16.48 less a 2.8% discount), or approximately $20 million in the aggregate, by an independent appraiser retained by Evercore Trust Company, N.A., or Evercore, an independent fiduciary that has been appointed as investment manager with respect to the Contributed Shares. The Contributed Shares are registered for resale, and Evercore has authority to sell some or all of them, as well as other of our shares in the Trust, in its discretion as fiduciary. The remainder of our 2012 pension plan contributions, and all of our 2013 contributions, were made in cash. The Trust held no shares of our common stock as of December 31, 2013.

Fair Values of Plan Assets:

Pension assets are classified based on the valuation methodologies and inputs used to determine the fair value as described in Note 1.

Level 1 investments include mutual funds, or direct investments in common stocks of U.S. and non-U.S. companies that trade on liquid exchanges. These investments are valued based on the closing price on these exchanges.

Level 2 investments include primarily fixed income securities such as corporate, or government debentures, mortgage- and asset-backed securities. They are valued using income and market approaches and values are based on quoted prices or other observable market inputs received from data providers. The valuation process may include pricing matrices, or prices based upon yields, credit spreads or prices of securities of comparable quality, coupon, maturity and type. Commingled funds not traded on an exchange, even though their underlying investments are common stocks traded on liquid exchanges, are also included in the Level 2 category. The net asset value of commingled funds investing in either stocks or fixed income securities is calculated by subtracting the value of any liabilities from the market value of all securities owned by a fund.

Level 3 investments include real estate, infrastructure, or direct energy investments as well as distressed securities or hedge funds. These are valued using income approach methodologies such as discounted cash flows, or market approach methodologies such as relative value (specific to equity securities), direct capitalization and comparable sales (specific to real estate investments). Some of the key inputs used to value these securities include discount rate, EBITDA multiple, yield-to-worst, yield-to-maturity, and cap rate (specific to real estate investments).

The fair values by hierarchy of inputs as of December 31 were as follows:



	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
(millions)	2013		2012		2013		2012		2013		2012		2013			2012
Asset Categories:
Equity: (a)
Common and preferred stock	$	293	$	273	$	—	$	—	$	—	$	—	$	293		$	273
USG common stock	—		12		—		—		—		—		—			12
Commingled/pooled/mutual funds	131		112		396		324		—		—		527			436
Total equity	424		397		396		324		—		—		820			721
Fixed income: (b)
U.S. government and agency debt securities	—		—		23		20		—		—		23			20
Non-U.S. government and agency debt securities	—		—		15		15		—		—		15			15
Corporate debt securities	—		—		25		19		—		—		25			19
Commingled/pooled funds	—		—		279		227		—		—		279			227
Other	—		—		1		—		1		1		2			1
Total fixed income	—		—		343		281		1		1		344			282
Limited partnerships (c)	—		—		—		—		39		45		39			45
Real estate funds (d)	—		—		—		—		35		36		35			36
Cash equivalents and short-term investments (e)	—		—		22		45		—		—		22			45
Total	$	424	$	397	$	761	$	650	$	75	$	82	$	1,260		$	1,129
Cash on hand													3			—
Receivables													—			5
Accounts payable													(1		)	(1		)
Total													$	1,262		$	1,133

(a)

The majority of these funds are invested with investment managers that invest in common stocks of large capitalization U.S. companies. Approximately 82% of these investments are actively managed. USG common stock represents 424,219 shares of New York Stock Exchange listed common stock at December 31, 2012. Certain investments in commingled/pooled equity funds have been classified as Level 2 in 2013 and 2012 because observable quoted prices for these institutional funds are not available.


(b)	Includes investments in individual fixed income securities and in institutional funds that invest in fixed income securities. For 2013 and 2012, these fixed income assets were classified as Level 2.

(c)

Limited partnerships include investments in funds that follow several different strategies, including investing in distressed debt, energy development, infrastructure and a multi-strategy hedge fund. These investments use strategies with returns normally expected to have a low correlation to the return of equities and often provide a current income component that is a meaningful portion of the investment’s total return.


(d)	Includes investments in three different private real estate funds that invest primarily in a variety of property types in geographically diverse markets across the U.S.


(e)	Cash equivalents and short-term investments are primarily held in short-term investment funds or registered money market funds with daily liquidity.

A reconciliation of the change in the fair value measurement of the defined benefit plans’ consolidated assets using significant unobservable inputs (Level 3) between December 31, 2011 and December 31, 2013 is as follows:



(millions)	Fixed Income		Real Estate			Limited Partnerships			Total
Balance as of December 31, 2011	$	1	$	33		$	88		$	122
Realized gains (losses)	—		1			10			11
Unrealized gains (losses)	—		1			(8		)	(7		)
Purchases, sales and settlements:
Purchases	—		1			3			4
Sales	—		—			(48		)	(48		)
Settlements	—		—			—			—
Net transfers into (out of) Level 3	—		—			—			—
Balance as of December 31, 2012	$	1	$	36		$	45		$	82
Realized gains (losses)	—		1			5			6
Unrealized gains (losses)	—		2			(1		)	1
Purchases, sales and settlements:
Purchases	—		—			—			—
Sales	—		(4		)	(10		)	(14		)
Settlements	—		—			—			—
Net transfers into (out of) Level 3	—		—			—			—
Balance as of December 31, 2013	$	1	$	35		$	39		$	75

CASH FLOWS

For 2014, our defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974. We are evaluating our level of funding for pension plans and currently estimate that we will contribute approximately $59 million to our pension plans in 2014. Our cash payments for postretirement plans are estimated to be $13 million in 2014.

Total benefit payments we expect to make to participants, which include payments funded from USG’s assets as well as payments from our pension plans' assets, are as follows (in millions):



Years ended December 31	Pension Benefits		Postretirement Benefits
2014	$	72	$	13
2015	79		10
2016	84		11
2017	83		11
2018	100		12
2019 - 2023	558		53

Total charges for our defined contribution plans amounted to approximately $3 million in each of the years ended December 31, 2013, 2012 and 2011 and primarily consisted of contributions to our U.S. plan, commonly known as a 401(k) plan. The U.S. plan provides participating employees the opportunity to invest 1% to 50% of their compensation on a pretax basis in any of 21 investment options offered, subject to limitations on the amount that may be contributed by highly compensated employees. Participants earned a guaranteed company match of 10% on their contributions of up to 6% of their eligible compensation during 2013, 2012 and 2011. Effective as of January 1, 2014, the company match was increased to 25% of employee contributions up to 6% of their pay. Employees are fully vested in company matching contributions after three years of participation in the plan. USG’s contributions are charged to cost of products sold and selling and administrative expenses.