Benefit Plans

The combined statements of income for the years ended December 31, 2012 and 2011 and the pre-Separation period included in the consolidated statement of income for the year ended December 31, 2013, included all of the benefit plan expenses attributable to the animal health operations of Pfizer, including expenses associated with pension plans, postretirement plans and defined contribution plans. The expenses included allocations of direct expenses, as well as expenses that were deemed attributable to the animal health operations. The combined balance sheet as of December 31, 2012 included the benefit plan assets and liabilities of only those plans that were dedicated to animal health employees. The consolidated balance sheet as of December 31, 2013 includes those dedicated plans, as well as the benefit plan assets and liabilities that were transferred to Zoetis from Pfizer as part of the Separation, as further discussed below. All dedicated benefit plans are pension plans.

Prior to the Separation from Pfizer, employees who met certain eligibility requirements participated in various defined benefit pension plans and postretirement plans administered and sponsored by Pfizer. Generally, most of our employees were eligible to participate in Pfizer’s pension plans. An employee’s pension benefits were determined based on a combination of years of service and average earnings, as defined in the specific plans. Participants in Pfizer's U.S. plans generally vested in benefits after three years of service. Participant vesting in the international plans varies based on the specific plan in each country.

Effective December 31, 2012, our employees ceased to participate in the Pfizer U.S. qualified defined benefit and U.S. retiree medical plans, and liabilities associated with our employees under these plans were retained by Pfizer. Pfizer is continuing to credit certain employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. defined benefit pension and retiree medical plans. In connection with the employee matters agreement, Zoetis is responsible for payment of three-fifths of the total cost of the service credit continuation (approximately $38 million) for these plans and Pfizer is responsible for the remaining two-fifths of the total cost (approximately $25 million). The $25 million capital contribution from Pfizer and corresponding contra-equity account (which is being reduced as the service credit continuation is incurred) is included in Employee benefit plan contribution from Pfizer Inc. in the consolidated statement of equity. At December 31, 2013, the balance in the contra-equity account was approximately $23 million. The amount of the service cost continuation payment to be paid by Zoetis to Pfizer was determined and fixed based on an actuarial assessment of the value of the grow-in benefits and will be paid in equal installments over a period of ten years. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans totaled approximately $6 million in 2013. For additional information see Note 19B. Transactions and Agreements with Pfizer—Agreements with Pfizer—Employee matters agreement.

Pension expense, associated with the U.S. and certain significant international locations, totaled approximately $15 million in 2013 (inclusive of service cost grow-in benefits discussed above), $61 million in 2012 and $64 million in 2011.

A. International Pension Plans

As part of the Separation, certain Separation Adjustments (see Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation) were made to transfer the assets and liabilities of certain international defined benefit pension plans including Austria, France, Germany, India, Mexico, South Africa, Taiwan and Venezuela to Zoetis in 2013, and we assumed the liabilities allocable to employees transferring to us. Prior to the Separation, these benefit plans were accounted for as multi-employer plans. Also as part of the Separation Adjustments, a benefit plan in Germany was retained by Pfizer. The net obligation of these transferred plans totaled $21 million. At December 31, 2013, the projected benefit obligation and fair value of plan assets of the dedicated international pension plans in the Netherlands, Germany, India and Korea, as well as those plans transferred in 2013, were $73 million and $45 million, respectively. Also as part of the Separation, a net liability has been recognized for the pension obligations less the fair value of plan assets associated with additional defined benefit pension plans in certain international locations that will be transferred to us in 2014 (approximately $21 million), in accordance with the applicable local separation agreements or employee matters agreement.

Information about the dedicated pension plans (inclusive of plans transferred in 2013 as part of the Separation) is provided in the tables below.

Virtually all of the dedicated pension plan assets are associated with the pension plan in the Netherlands. The Netherlands plan is financed through an insurance contract for which the insurer is responsible for the investment of the plan assets. The insurance contract covers certain investment and mortality risks in relation to accrued benefits earned in the plan. The assets held in the insurance contract are predominantly fixed income securities. The expected return on assets is determined based on the yields available on those assets. During 2012, the Netherlands manufacturing plant was sold. The active participants in the plan were transferred to the buyer at the time of sale and the plan liability associated with inactive participants remained with the insurance contract. The insurance contract, which is used to finance the plan, was also transferred to the buyer although we remain liable for the proportion of administrative costs that relate to inactive members under the terms of this contract through December 31, 2013. Under the terms of the sale agreement, the contract was terminated on December 31, 2013 (fiscal year 2014 for our international operations) and the liability for benefits associated with this plan reverted in full to the insurance company. The related settlement charge of approximately $4 million was recognized in the first quarter of 2014.

Net Periodic Benefit Costs and Other Costs––Dedicated Plans

The net periodic benefit cost associated with dedicated pension plans (including those transferred to us in 2013) recognized in our consolidated and combined statements of income is approximately $4 million in 2013, $2 million in 2012 and $3 million in 2011, the majority of which relate to service cost and interest cost.

The other changes associated with dedicated pension plans recognized in our consolidated and combined statements of comprehensive income are approximately $2 million loss in 2013, $1 million income in 2012 and $5 million income in 2011. These other changes are primarily due to changes in actuarial assumptions and for 2013, reflects the Separation Adjustments associated with plans transferred to us from Pfizer.

The amount in Accumulated other comprehensive loss expected to be amortized into 2014 net periodic benefit cost is $0.2 million attributable to the amortization of previously unrecognized actuarial losses.

Actuarial Assumptions––Dedicated Plans

The following table provides the weighted average actuarial assumptions for the dedicated pension plans:



	As of December 31,
(PERCENTAGES)	2013		2012		2011
Weighted average assumptions used to determine benefit obligations:
Discount rate	5.0	%	4.6	%	5.8	%
Rate of compensation increase	4.4	%	5.3	%	2.7	%
Weighted average assumptions used to determine net benefit cost for the year ended December 31:
Discount rate	4.6	%	5.8	%	5.1	%
Expected return on plan assets	4.5	%	3.6	%	3.6	%
Rate of compensation increase	5.3	%	2.7	%	2.7	%

The assumptions above are used to develop the benefit obligations at the end of the year and to develop the net periodic benefit cost for the following year. Therefore, the assumptions used to determine the net periodic benefit cost for each year are established at the end of each previous year, while the assumptions used to determine the benefit obligations are established at each year-end. The net periodic benefit cost and the benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The assumptions are revised based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits. In 2013 and 2012, the calculation of the weighted average expected rate of compensation increase used to determine benefit obligations excludes the Netherlands plan as that plan has no active participants at December 31, 2013 and 2012.

Actuarial and other assumptions for pension plans can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For a description of the risks associated with estimates and assumptions, see Note 4. Significant Accounting Policies—Estimates and Assumptions.

Obligations and Funded Status––Dedicated Plans

An analysis of the changes in our benefit obligations, plan assets and funded status of our dedicated plans follows:



	As of and for the
	Year Ended December 31,
(MILLIONS OF DOLLARS)	2013			2012
Change in benefit obligation:
Projected benefit obligation, beginning	$	39		$	37
Separation adjustments^(a)	28			—
Changes in actuarial assumptions and other	(2		)	2
Adjustments for foreign currency translation	2			(1		)
Other––net	6			1
Benefit obligation, ending	73			39
Change in plan assets:
Fair value of plan assets, beginning	35			33
Separation adjustments^(a)	7			—
Actual return on plan assets	—			2
Company contributions	—			2
Adjustments for foreign currency translation	2			(1		)
Other––net	1			(1		)
Fair value of plan assets, ending	45			35
Funded status—Projected benefit obligation in excess of plan assets at end of year^(b)	$	(28	)	$	(4	)


^(a)	Represents the benefit obligations and plan assets (net obligation of approximately $21 million) transferred to us in 2013 from Pfizer as part of the Separation, as described above.


^(b)	Included in Other noncurrent liabilities.

Actuarial losses were approximately $10 million at December 31, 2013 and $5 million at December 31, 2012. The actuarial gains and losses primarily represent the cumulative difference between the actuarial assumptions and actual return on plan assets, changes in discount rates and changes in other assumptions used in measuring the benefit obligations. These actuarial gains and losses are recognized in Accumulated other comprehensive income/(loss). At December 31, 2013 and 2012, the actuarial losses included approximately $4 million and $3 million, respectively, associated with the Netherlands plan. The actuarial loss associated with the Netherlands plan was recognized into net periodic benefit costs in full as a result of the termination of the insurance contract associated with the Netherlands plan in the first quarter of 2014. The remaining losses will be amortized into net periodic benefit costs over an average period of 12.4 years.

Information related to the funded status of selected plans follows:



	As of December 31,
(MILLIONS OF DOLLARS)	2013		2012
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets	$	37	$	35
Accumulated benefit obligation	58		38
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets	42		35
Projected benefit obligation	70		39

Plan Assets—Dedicated Plans

The components of plan assets follow:



	As of December 31,
(MILLIONS OF DOLLARS)	2013		2012
Cash and cash equivalents	$	—	$	1
Equity securities: Equity commingled funds	7		5
Debt securities: Government bonds	31		28
Real estate	2		1
Other investments	5		—
Total^(a)	$	45	$	35


^(a)	Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 4. Significant Accounting Policies—Fair Value). All investment plan assets are valued using Level 1 or Level 2 inputs.

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 4. Significant Accounting Policies—Estimates and Assumptions.

Specifically, the following methods and assumptions were used to estimate the fair value of our pension assets:


•	Equity commingled funds––observable market prices.


•	Government bonds and other investments––principally observable market prices.

The long-term target asset allocations and the percentage of the fair value of plans assets for dedicated benefit plans follow:



	As of December 31,
	Target
	allocation
	percentage		Percentage of Plan Assets
(PERCENTAGES)	2013		2013		2012
Cash and cash equivalents	0-20%		—	%	1.8	%
Equity securities	0-20%		14.2	%	13.0	%
Debt securities	65-80%		70.1	%	79.5	%
Other investments	0-20%		15.7	%	5.7	%
Total	100	%	100	%	100	%

Zoetis utilizes long-term asset allocation ranges in the management of our plans’ invested assets. Long-term return expectations are developed with input from outside investment consultants based on the company’s investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the investment consultant’s view of current and future economic and financial market conditions. As market conditions and other factors change, the targets may be adjusted accordingly and actual asset allocations may vary from the target allocations.

The long-term asset allocation ranges reflect the asset class return expectations and tolerance for investment risk within the context of the respective plans’ long-term benefit obligations. These ranges are supported by an analysis that incorporates historical and expected returns by asset class, as well as volatilities and correlations across asset classes and our liability profile. This analysis, referred to as an asset-liability analysis, also provides an estimate of expected returns on plan assets, as well as a forecast of potential future asset and liability balances.

The investment consultants review investment performance with Zoetis on a quarterly basis in total, as well as by asset class, relative to one or more benchmarks.

Cash Flows—Dedicated Plans

Our plans are generally funded in amounts that are at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax and other laws.

Contributions to the dedicated plans were approximately $2 million per year in 2013, 2012 and 2011. We expect to contribute approximately $1 million to our dedicated pension plans in 2014. The benefit payment for 2014 is expected to be approximately $39 million as the majority of this payment is expected to be made in association with the planned settlement of the liability for the Netherlands plan. Zoetis will fund virtually all of the plan settlement using the existing plan assets. The expected benefit payment for each of the next four years is approximately $1 million per year, and approximately $12 million in the aggregate for the five years thereafter. These expected benefit payments reflect the future plan benefits subsequent to 2014 projected to be paid from the plans or from the general assets of Zoetis entities in India, Korea, Mexico and Taiwan under the current actuarial assumptions used for the calculation of the projected benefit obligation and, therefore, actual benefit payments may differ from projected benefit payments.

Multi-employer Plans

Pension expense associated with certain international benefit plans that are expected to transfer to us from Pfizer in 2014, and accounted for as multi-employer plans, was approximately $7 million in 2013, $6 million in 2012 and $5 million in 2011. Contributions to these plans were approximately $6 million per year in 2013, 2012 and 2011. We expect to contribute a total of approximately $7 million to these plans in 2014.

B. Postretirement Plans

Prior to the Separation from Pfizer, many of our employees were eligible to participate in postretirement plans sponsored by Pfizer. As discussed above, Pfizer is continuing to credit certain United States employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. retiree medical plans. Postretirement benefit expense, associated with the U.S. and certain significant international locations, totaled approximately $4 million in 2013 (inclusive of service cost grow-in benefits discussed above), $17 million in 2012 and $17 million in 2011. The expected benefit payments for each of the next five years is approximately $4 million per year, and approximately $14 million in the aggregate for the five years thereafter.

Also prior to the Separation from Pfizer, employees in the United States who met certain eligibility requirements participated in a supplemental (non-qualified) savings plan sponsored by Pfizer. In 2013, Pfizer transferred the supplemental savings plan liability of approximately $14 million, cash of $9 million and a deferred tax asset of $5 million associated with employees transferred to us. Post-Separation, employees in the United States who meet certain eligibility requirements participate in a supplemental (non-qualified) savings plan sponsored by Zoetis.

C. Defined Contribution Plans

Zoetis has a voluntary defined contribution plan (Zoetis Savings Plan) that allows participation by substantially all U. S. employees. Zoetis matches 100% of employee contributions, up to a maximum of 5% of each employee’s eligible compensation. The Zoetis Savings Plan also includes a profit-sharing feature that provides for an additional contribution ranging between 0 and 8 percent of each employee’s eligible compensation. All eligible employees receive the profit-sharing contribution regardless of the amount they choose to contribute to the Zoetis Savings Plan. The profit-sharing contribution is a discretionary amount provided by Zoetis and is determined on an annual basis. Employees can direct their contributions and the company's matching and profit-sharing contributions (initially made into the Zoetis stock fund) into any of the funds offered. These funds provide participants with a cross section of investing options, including the Zoetis stock fund. Matching and profit-sharing contributions are funded through the issuance of Zoetis common stock.

Prior to the Separation from Pfizer, our U.S. employees were eligible to participate in Pfizer’s defined contribution plans, whereby employees contributed a portion of their salaries and bonuses to the plans, which was partially matched by Pfizer, largely in Pfizer stock or Pfizer stock units. The matching contributions in Pfizer stock were sourced through open market purchases.

Employees are permitted to subsequently diversify all or any portion of their company matching or profit-sharing contribution. Once the contributions have been paid, Zoetis has no further payment obligations. Contribution expense, associated with the U.S. defined contribution plans, totaled approximately $35 million in 2013, $20 million in 2012 and $18 million in 2011.