
14.	EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based on years of service and compensation during specific periods. We fund our pension plans as required by local regulations. In the U.S., all qualified pension plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard. We typically do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements because contributions to these pension plans may be less economic and investment returns may be less attractive than our other investment alternatives.

We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most of our employees become eligible for these benefits if, while still working for us, they reach normal retirement age or take early retirement. These plans are unfunded, and retired employees share the cost with us. Individuals who became our employees as a result of an acquisition became eligible for other postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.

The changes in benefit obligation, the changes in fair value of plan assets, and the funded status of our pension plans and other postretirement benefit plans as of and for the years ended December 31, 2011 and 2010 were as follows (in millions):



	Pension Plans						Other Postretirement Benefit Plans
	2011			2010			2011			2010
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,626		$	1,454		$	426		$	466
Service cost	104			88			11			10
Interest cost	85			83			22			26
Acquisitions	—			—			4			—
Participant contributions	—			—			12			12
Plan amendments	4			—			—			(31		)
Special termination benefits	—			4			—			—
Medicare subsidy for prescription drugs	—			—			3			1
Benefits paid	(117		)	(109		)	(30		)	(31		)
Actuarial (gain) loss	179			106			(9		)	(28		)
Foreign currency exchange rate changes	—			—			(1		)	1
Benefit obligation at end of year	$	1,881		$	1,626		$	438		$	426

Change in plan assets:
Fair value of plan assets at beginning of year	$	1,362		$	1,251		$	—		$	—
Actual return on plan assets	(2		)	149			—			—
Valero contributions	244			71			15			18
Participant contributions	—			—			12			12
Medicare subsidy for prescription drugs	—			—			3			1
Benefits paid	(117		)	(109		)	(30		)	(31		)
Fair value of plan assets at end of year	$	1,487		$	1,362		$	—		$	—

Reconciliation of funded status:
Fair value of plan assets at end of year	$	1,487		$	1,362		$	—		$	—
Less benefit obligation at end of year	1,881			1,626			438			426
Funded status at end of year	$	(394	)	$	(264	)	$	(438	)	$	(426	)

The accumulated benefit obligations for certain of our pension plans exceed the fair values of the assets of those plans. For those plans, the table below presents the total projected benefit obligation, accumulated benefit obligation, and fair value of the plan assets (in millions).



	December 31,
	2011		2010
Projected benefit obligation	$	244	$	231
Accumulated benefit obligation	189		192
Fair value of plan assets	40		44

Benefit payments that we expect to pay, including amounts related to expected future services, and the anticipated Medicare subsidies that we expect to receive are as follows for the years ending December 31 (in millions):



	Pension Benefits		Other Postretirement Benefits		Medicare Subsidy
2012	$	84	$	23	$	(2	)
2013	99		24		n/a
2014	101		26		n/a
2015	107		28		n/a
2016	117		29		n/a
2017-2021	766		159		n/a

We have minimum required contributions of $2 million to our pension plans during 2012 under ERISA and other local regulations; however, we plan to contribute approximately $100 million to our pension plans during 2012.

The components of net periodic benefit cost were as follows for the years ended December 31, 2011, 2010, and 2009 (in millions):



	Pension Plans									Other Postretirement Benefit Plans
	2011			2010			2009			2011			2010			2009
Components of net periodic benefit cost:
Service cost	$	104		$	88		$	104		$	11		$	10		$	12
Interest cost	85			83			79			22			26			25
Expected return on plan assets	(112		)	(112		)	(108		)	—			—			—
Amortization of:
Prior service cost (credit)	2			3			3			(23		)	(20		)	(19		)
Net loss	12			2			10			2			4			6
Net periodic benefit cost before special charges	91			64			88			12			20			24
Special charges	4			8			7			4			—			1
Net periodic benefit cost	$	95		$	72		$	95		$	16		$	20		$	25

Amortization of prior service cost (credit) shown in the above table was based on the average remaining service period of employees expected to receive benefits under each respective plan. Special charges in 2011 relate to purchase accounting for the Meraux Acquisition and settlements related to lump sum payments in excess of thresholds. Special charges in 2010 and 2009 related to early retirement programs for corporate employees and employees at our Delaware City and Paulsboro Refineries.

Pre-tax amounts recognized in other comprehensive income for the years ended December 31, 2011, 2010, and 2009 were as follows (in millions):



	Pension Plans									Other Postretirement Benefit Plans
	2011			2010			2009			2011			2010			2009
Net loss (gain) arising during the year:
Net actuarial loss (gain)	$	294		$	68		$	(273	)	$	(9	)	$	(28	)	$	(27	)
Prior service credit	4			—			—			—			(31		)	(51		)

Net gain (loss) reclassified into income:
Net actuarial loss	(12		)	(2		)	(10		)	(2		)	(4		)	(6		)
Prior service (cost) credit	(2		)	(3		)	(3		)	23			20			19
Curtailment and settlement	(4		)	(4		)	(1		)	—			—			—
Total changes in other comprehensive (income) loss	$	280		$	59		$	(287	)	$	12		$	(43	)	$	(65	)

The pre-tax amounts in accumulated other comprehensive income as of December 31, 2011 and 2010 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):



	Pension Plans				Other Postretirement Benefit Plans
	2011		2010		2011			2010
Prior service cost (credit)	$	16	$	14	$	(103	)	$	(126	)
Net actuarial loss	681		403		50			61
Total	$	697	$	417	$	(53	)	$	(65	)

The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2011 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2012 (in millions):



	Pension Plans		Other Postretirement Benefit Plans
Amortization of prior service cost (credit)	$	3	$	(23	)
Amortization of net actuarial loss	33		1
Total	$	36	$	(22	)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2011 and 2010 were as follows:



	Pension Plans				Other Postretirement Benefit Plans
	2011		2010		2011		2010
Discount rate	5.08	%	5.40	%	4.97	%	5.22	%
Rate of compensation increase	3.68	%	3.56	%	—	%	—	%

The discount rate assumption used to determine the benefit obligations as of December 31, 2011 for the pension plans and other postretirement benefit plans was based on the Aon Hewitt AA Only Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was designed by Aon Hewitt to provide a means for plan sponsors to value the liabilities of their pension plans or postretirement benefit plans. It is a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from one-half year to 99 years. Each bond issue underlying the curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investor Services (Moody’s), Standard and Poor’s Ratings Service (S&P), and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuance among these with average ratings of double-A are included in this yield curve.

The discount rate assumption used to determine the benefit obligations as of December 31, 2010 for the pension plans and other postretirement benefit plans was based on the Hewitt Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was also designed by Aon Hewitt to provide a means for plan sponsors to value the liabilities of their pension plans or other postretirement benefit plans. This curve was a hypothetical double yield curve represented by a series of annualized individual discount rates with maturities from one-half year to more than 30 years. Each bond issue underlying the curve was required to have a rating of Aa or better by Moody’s or a rating of AA or better by S&P.

We based our December 31, 2011 discount rate assumption on the Aon Hewitt AA Only Above Median yield curve because we believe it is representative of the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of that date. We believe that the market volatility of the last two to three years has largely subsided and that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates. In 2010 and 2009, we based our discount rate assumption on the Hewitt Above Median yield curve because it included a larger number of bonds which lessened the effect of outlier bonds whose yields were influenced by the volatility in the market at that time.

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2011, 2010, and 2009 were as follows:



	Pension Plans						Other Postretirement Benefit Plans
	2011		2010		2009		2011		2010		2009
Discount rate	5.40	%	5.80	%	5.40	%	5.22	%	5.68	%	5.39	%
Expected long-term rate of return on plan assets	7.69	%	7.71	%	7.72	%	—	%	—	%	—	%
Rate of compensation increase	3.56	%	4.18	%	4.18	%	—	%	—	%	—	%

The assumed health care cost trend rates as of December 31, 2011 and 2010 were as follows:



	2011		2010
Health care cost trend rate assumed for the next year	7.43	%	7.46	%
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate)	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2018		2018

Assumed health care cost trend rates have an impact on the amounts reported for retiree health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects on other postretirement benefits (in millions):



	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	1	$	(1	)
Effect on accumulated postretirement benefit obligation	18		(16		)

The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2011 and 2010 by level of the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value as a practical expedient for fair value. As previously noted, we do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans. Plan assets for certain U.S. nonqualified pension plans are disclosed in Note 20 and are not included in the plan assets reflected below because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans.



	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total as of December 31, 2011
Equity securities:
Valero Energy Corporation common stock	$	5	$	—	$	—	$	5
Other U.S. companies (a)	375		—		—		375
International companies	120		—		—		120
Preferred stock	2		—		—		2
Mutual funds:
International growth	102		—		—		102
Index funds (b)	63		—		—		63
Corporate debt instruments	246		—		—		246
Government securities:
U.S. Treasury securities	67		—		—		67
Mortgage-backed securities	3		—		—		3
Other government securities	81		—		—		81
Common collective trusts	—		247		—		247
Insurance contracts	—		17		—		17
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	154		—		—		154
Total	$	1,223	$	264	$	—	$	1,487

______________________

See notes on page 99.



	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total as of December 31, 2010
Equity securities:
Valero Energy Corporation common stock	$	5	$	—	$	—	$	5
Other U.S. companies (a)	369		—		—		369
International companies	107		—		—		107
Preferred stock	1		—		—		1
Mutual funds:
International growth	117		—		—		117
Index funds (b)	64		—		—		64
Corporate debt instruments	274		—		—		274
Government securities:
U.S. Treasury securities	30		—		—		30
Mortgage-backed securities	3		—		—		3
Other government securities	93		—		—		93
Common collective trusts	—		231		—		231
Insurance contracts	—		18		—		18
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	45		—		—		45
Total	$	1,113	$	249	$	—	$	1,362


(a)	Equity securities are held in a wide range of industrial sectors, including consumer goods, information technology, healthcare, industrials, and financial services.


(b)	This class include primarily investments in approximately 60 percent equities and 40 percent bonds.

The investment policies and strategies for the assets of our pension plans incorporate a diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment return objective and risk parameters, the pension plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. As of December 31, 2011, the target allocations for plan assets are 70 percent equity securities and 30 percent fixed income investments. Equity securities include international stocks and a blend of U.S. growth and value stocks of various sizes of capitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis.

The overall expected long-term rate of return on plan assets for the pension plans is estimated using models of asset returns. Model assumptions are derived using historical data given the assumption that capital markets are informationally efficient. Three methods are used to derive the long-term expected returns for each asset class. Because each method has distinct advantages and disadvantages and differing results, an equal weighted average of the methods’ results is used.

Defined Contribution Plans

Valero Energy Corporation Thrift Plan

The Valero Energy Corporation Thrift Plan covers substantially all U.S. employees except for those employees covered by the plans discussed below. Employees are immediately eligible to participate in the plan and receive employer matching contributions.

Through December 31, 2009, participants could make basic contributions up to 8 percent of their total annual salary, which included overtime and cash bonuses. In addition, participants who made a basic contribution of 8 percent could also make a supplemental contribution of up to 22 percent of their total eligible annual salary. We matched 75 percent of each participant’s total basic contributions up to 8 percent based on the participant’s total annual salary, excluding cash bonuses. Commencing January 1, 2010, we match 100 percent of basic contributions up to 6 percent of each participant’s total annual salary, excluding cash bonuses.

Valero Savings Plan

The Valero Savings Plan covers our U.S. retail store employees, certain other employees supporting the retail organization, and employees at our ethanol plants. Under this plan, participants can contribute from 1 percent to 30 percent of their eligible compensation. We contribute $0.60 for every $1.00 of the participant’s contribution up to 6 percent of eligible compensation. At our discretion, we may also make profit-sharing contributions, which can range from 3.5 to 5 percent of eligible compensation, to the Plan to be allocated to the participants.

Premcor Retirement Savings Plan

The Premcor Retirement Savings Plan covers certain union employees. Under this plan, participants can contribute from 1 percent to 50 percent of their eligible compensation. We contribute 200 percent of the first 3 percent of a participant’s eligible compensation. In addition, we contribute 100 percent of the next 3 percent of a participant’s eligible compensation for certain union participants who contribute to the plan.

Ultramar Ltd. Savings Plan

The Ultramar Ltd. Savings Plan covers all Canadian employees. Permanent employees are eligible after three months of service, temporary employees are eligible after one year of service, and seasonal employees are eligible after 220 days of service during 36 consecutive months. We contribute 9 percent of the employee’s base salary plus 50 percent of the employee’s voluntary contribution, which is limited to 6 percent of the base salary. Our contribution does not exceed 12 percent of the base salary.

Valero Refining Company – Aruba N.V. Thrift Plan

The Valero Refining Company – Aruba N.V. Thrift Plan covers all Aruban employees. Employees are eligible to participate after completing one year of service and can contribute a maximum of 8 percent of salary. We match 100 percent of employee contributions up to a maximum of 8 percent based on years of service.

Our contributions to these defined contribution plans were as follows (in millions):



	Year Ended December 31,
	2011		2010		2009
Valero Energy Corporation Thrift Plan	$	35	$	36	$	37
Valero Savings Plan	8		6		5
Premcor Retirement Savings Plan	5		5		6
Ultramar Ltd. Savings Plan	10		9		8
Valero Refining Company – Aruba N.V. Thrift Plan	1		1		1

Other Plans

We have several defined contribution plans in the U.K. and Ireland that cover employees of those countries. Employer contributions to these plans were immaterial for the year ended December 31, 2011.

We also have two defined contribution plans in the U.S., the assets and liabilities of which are measured and recorded at fair value on a recurring basis as disclosed in Note 20. No employer contributions were made to these defined contribution plans for the years ended December 31, 2011, 2010, and 2009.