Dow Chemical 2015 Annual Report Download - page 129

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NOTE 18 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Company has defined benefit pension plans that cover employees in the United States and a number of other countries. The
U.S. qualified plan covering the parent company is the largest plan. Benefits for employees hired before January 1, 2008 are
based on length of service and the employee’s three highest consecutive years of compensation. Employees hired after
January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest.
The Company’s funding policy is to contribute to the plans when pension laws and/or economics either require or encourage
funding. In 2015, Dow contributed $844 million to its pension plans, including contributions to fund benefit payments for its
non-qualified supplemental plans. Dow expects to contribute approximately $620 million to its pension plans in 2016.
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for the plans are
provided in the two tables below:
Weighted-Average Assumptions
for All Pension Plans
Benefit Obligations
at December 31
Net Periodic Costs
for the Year
2015 2014 2013 2015 2014 2013
Discount rate 3.88% 3.60% 4.54% 3.60% 4.54% 3.88%
Rate of increase in future compensation levels 4.13% 4.13% 4.15% 4.13% 4.15% 3.96%
Expected long-term rate of return on plan assets — — — 7.35% 7.40% 7.47%
Weighted-Average Assumptions
for U.S. Pension Plans
Benefit Obligations
at December 31
Net Periodic Costs
for the Year
2015 2014 2013 2015 2014 2013
Discount rate 4.40% 4.04% 4.92% 4.04% 4.92% 4.02%
Rate of increase in future compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets — — — 7.85% 7.82% 7.85%
The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of key
economic and market factors driving historical returns for each asset class and formulating a projected return based on factors
in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate
yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each
asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The
Company’s historical experience with the pension fund asset performance is also considered.
Effective January 1, 2016, the Company elected to adopt a spot rate approach to determine the discount rate utilized to measure
the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and
other selected countries. Under the spot rate approach, the Company will calculate service costs and interest costs by applying
individual spot rates from the Willis Towers Watson RATE:Link yield curve (based on high-quality corporate bond yields) for
each selected country to the separate expected cash flows components of service cost and interest cost; service cost and interest
cost for all other plans will continue to be determined on the basis of the single equivalent discount rates derived in determining
those plan obligations. The Company changed to the new method to provide a more precise measure of interest and service
costs for certain countries by improving the correlation between projected benefit cash flows and the discrete spot yield curves.
The Company has accounted for this change as a change in accounting estimate and it will be applied prospectively starting in
2016. The adoption of the spot rate approach is expected to decrease the service cost and interest cost components of net
periodic benefit costs by approximately $210 million in 2016.
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 corporate fixed income investments at the measurement date. Future expected actuarially determined
cash flows for Dow’s U.S. plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link
60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s
obligations as of the measurement date.
On October 27, 2014, the Society of Actuaries ("SOA") published updated mortality tables and mortality improvement scales
(generational mortality tables), which reflect increased life expectancy. Based on an evaluation of the mortality experience of