Dow Chemical 2012 Annual Report Download - page 86

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from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and
obligations recorded in future periods. The U.S. pension plans represent 71 percent of the Company’s pension plan assets
and 71 percent of the pension obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determines the expected long-term rate of return on assets by performing a detailed analysis of
historical and expected returns based on the strategic asset allocation approved by the Company's Investment Committee
and the underlying return fundamentals of each asset class. The Company’s historical experience with the pension fund
asset performance is also considered. The expected return of each asset class is derived from a forecasted future return
confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be
earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net
periodic pension expense for 2012 was 7.83 percent. This assumption was unchanged for determining 2013 net periodic
pension expense. Future actual pension expense will depend on future investment performance, changes in future discount
rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are
based on the yield on high-quality fixed income instruments at the measurement date. Future expected actuarially
determined cash flows of Dow’s major U.S. plans are matched against the Towers Watson RATE:Link yield curve (based
on 60th to 90th percentile bond yields) to arrive at a single discount rate by plan. The weighted average discount rate
decreased to 4.02 percent at December 31, 2012, from 4.98 percent at December 31, 2011.
At December 31, 2012, the U.S. qualified plans were underfunded on a projected benefit obligation basis by $5.5
billion. The underfunded amount increased by approximately $1.2 billion compared with December 31, 2011. The increase
was primarily due to lower discount rates. The Company contributed $628 million to the U.S. qualified plans in 2012.
The assumption for the long-term rate of increase in compensation levels for the principal U.S. qualified plans was
4.50 percent. Since 2002, the Company has used a generational mortality table to determine the duration of its pension and
other postretirement obligations.
The following discussion relates to the Company’s significant pension plans.
The Company bases the determination of pension expense on a market-related valuation of plan assets that reduces
year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the
year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return
calculated using the market-related value of plan assets and the actual return based on the market value of plan assets.
Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan
assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and
losses have been recognized and amortized. At December 31, 2012, net gains of $652 million remain to be recognized in
the calculation of the market-related value of plan assets. These net gains will result in decreases in future pension expense
as they are recognized in the market-related value of assets. The increase in the market-related value of assets due to the
recognition of prior gains and losses is presented in the following table:
Increase in Market-Related Asset Value Due to
Recognition of Prior Gains and Losses
In millions
2013 $ 321
2014 146
2015 50
2016 135
Total $ 652
Based on the 2013 pension assumptions, the Company expects net periodic benefit costs to increase by approximately
$275 million for all pension and other postretirement benefits in 2013 compared with 2012. The increase in net periodic
benefit costs is primarily due to lower discount rates.