Occidental Petroleum 2008 Annual Report Download - page 77

The following table sets forth the weighted-average assumptions used to determine Occidental's benefit obligation and net periodic
benefit cost for domestic plans:
Pension
Benefits Postretirement Benefits
Unfunded Plans Funded Plans
For the years ended December 31, 2008 2007 2008 2007 2008 2007
Benefit Obligation Assumptions:
Discount rate 5.25% 5.68% 5.25% 5.68% 5.25% 5.68%
Rate of compensation increase 4.00% 4.00% — — — —
Net Periodic Benefit Cost Assumptions:
Discount rate 5.68% 5.53% 5.68% 5.53% 5.68% 5.53%
Assumed long term rate of return on assets 7.00% 7.00% — — 7.00% 7.00%
Rate of compensation increase 4.00% 4.00% — — — —
For domestic pension plans and postretirement benefit plans, Occidental based the discount rate on the Hewitt Bond Universe yield
curve in 2008 and 2007. The weighted-average rate of increase in future compensation levels is consistent with Occidental’s past and
anticipated future compensation increases for employees participating in retirement plans that determine benefits using compensation. The
assumed long-term rate of return on assets is estimated with regard to current market factors but within the context of historical returns.
Occidental considers historical returns and correlation of equities and fixed income securities and current market factors such as inflation and
interest rates.
For pension plans outside the United States, Occidental bases its discount rate on rates indicative of government or investment grade
corporate debt in the applicable country, taking into account hyperinflationary environments when necessary. The discount rates used for the
foreign pension plans ranged from 1.5 percent to 12.0 percent at both December 31, 2008 and 2007. The average rate of increase in future
compensation levels ranged from a low of 1.5 percent to a high of 12.0 percent in 2008, depending on local economic conditions and salary
budgets. The expected long-term rate of return on plan assets was 5.2 percent and 5.5 percent in excess of local inflation in 2008 and 2007,
respectively.
The postretirement benefit obligation was determined by application of the terms of medical and dental benefits and life insurance
coverage, including the effect of established maximums on covered costs, together with relevant actuarial assumptions and health care cost
trend rates projected at an assumed Consumer Price Index (CPI) increase of 2.25 percent and 2.5 percent as of December 31, 2008 and
2007, respectively. Beginning in 1993, participants other than certain union employees have paid for all medical cost increases in excess of
increases in the CPI. For those union employees, the health care cost trend rates were projected at annual rates ranging ratably from 9
percent in 2008 to 6 percent through the year 2011 and level thereafter. A 1-percent increase or a 1-percent decrease in these assumed health
care cost trend rates would result in an increase of $24 million or a reduction of $23 million, respectively, in the postretirement benefit
obligation as of December 31, 2008, and a corresponding increase or reduction of $1 million in interest cost in 2008. The annual service
costs would not be materially affected by these changes.
The actuarial assumptions used could change in the near term as a result of changes in expected future trends and other factors that,
depending on the nature of the changes, could cause increases or decreases in the plan liabilities.
Asset allocations of Occidental’s defined benefit pension and funded postretirement benefit plans are as follows:
Pension Benefits Postretirement Benefit
Funded Plans
As of December 31, 2008 2007 2008 2007
Asset Category:
Equity securities 48% 57% 53% 54%
Debt securities 52 43 47 46
Total 100% 100% 100% 100%
Occidental employs a total return investment approach that uses a mix of equity and fixed income investments to maximize the long-
term return of plan assets at a prudent level of risk. The investments are monitored by Occidental’s Investment Committee in its role as
fiduciary. The Investment Committee, consisting of senior Occidental executives, selects and employs various external professional
investment management firms to manage specific assignments across the spectrum of asset classes. The resulting aggregate investment
portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across United
States and non-United States stocks, as well as differing styles and market capitalizations. Other asset classes such as private equity and
real estate may be used to enhance long-term returns while improving portfolio diversification. Investment performance is measured and
monitored on an ongoing basis through quarterly investment and manager guideline compliance reviews, annual liability measurements,
and periodic studies.
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Occidental expects to contribute $10 million to its defined benefit pension plans during 2009. All of the contributions are expected to be