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 2011, Dow contributed $806 million to its pension plans, including contributions to fund benefit payments for its non-qualified supplemental plans. Dow expects to contribute approximately $885 million to its pension plans in 2012.

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
	2011		2010		2011		2010
Discount rate	4.93	%	5.38	%	5.38	%	5.71	%
Rate of increase in future compensation levels	4.14	%	4.13	%	4.16	%	4.17	%
Expected long-term rate of return on plan assets	—		—		7.86	%	7.74	%



Weighted-Average Assumptions for U.S. Pension Plans	Benefit Obligations at December 31				Net Periodic Costs for the Year
	2011		2010		2011		2010
Discount rate	4.98	%	5.51	%	5.51	%	5.97	%
Rate of increase in future compensation levels	4.50	%	4.50	%	4.50	%	4.50	%
Expected long-term rate of return on plan assets	—		—		8.18	%	8.16	%

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. A similar process is followed in determining the expected long-term rate of return for assets held in the Company’s other postretirement benefit plan trusts. 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 investments 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 for each plan.

The accumulated benefit obligation for all defined benefit pension plans was $21.6 billion at December 31, 2011 and $20.1 billion at December 31, 2010.



Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31
In millions	2011		2010
Projected benefit obligations	$	21,003	$	18,424
Accumulated benefit obligations	$	19,990	$	17,571
Fair value of plan assets	$	13,993	$	12,912

In addition to the U.S. qualified defined benefit pension plan, U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by the Company. Defined contribution plans also cover employees in some subsidiaries in other countries, including Australia, Brazil, Canada, Italy, Spain and the United Kingdom. Expense recognized for all defined contribution plans was $163 million in 2011, $184 million in 2010 and $156 million in 2009.

Other Postretirement Benefits

The Company provides certain health care and life insurance benefits to retired employees. The Company’s plans outside of the United States are not significant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. In general, for employees hired before January 1, 1993, the plans provide benefits supplemental to Medicare when retirees are eligible for these benefits. The Company and the retiree share the cost of these benefits, with the Company portion increasing as the retiree has increased years of credited service, although there is a cap on the Company portion. The Company has the ability to change these benefits at any time. Employees hired after January 1, 2008 are not covered under the plans.

The Company funds most of the cost of these health care and life insurance benefits as incurred. In 2011, Dow did not make any contributions to its other postretirement benefit plan trusts. Likewise, Dow does not expect to contribute assets to its other postretirement benefits plan trusts in 2012.

The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the U.S. plans are provided below:



U.S. Plan Assumptions for Other Postretirement Benefits	Benefit Obligations at December 31				Net Periodic Costs for the Year
	2011		2010		2011		2010
Discount rate	4.66	%	5.15	%	5.15	%	5.69	%
Expected long-term rate of return on plan assets	—		—		3.60	%	4.35	%
Initial health care cost trend rate	8.28	%	8.70	%	8.70	%	9.13	%
Ultimate health care cost trend rate	5.00	%	5.00	%	5.00	%	5.00	%
Year ultimate trend rate to be reached	2019		2019		2019		2019

Increasing the assumed medical cost trend rate by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2011 by $3 million and decrease the net periodic postretirement benefit cost for the year by less than $1 million. Decreasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2011 by $25 million and the net periodic postretirement benefit cost for the year by $1 million.



Net Periodic Benefit Cost for All Significant Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2011			2010			2009			2011			2010			2009
Service cost	$	347		$	309		$	270		$	15		$	15		$	16
Interest cost	1,121			1,098			1,081			100			111			138
Expected return on plan assets	(1,305		)	(1,212		)	(1,254		)	(6		)	(10		)	(17		)
Amortization of prior service cost (credit)	28			28			31			(1		)	—			(3		)
Amortization of unrecognized loss (gain)	374			268			106			1			(1		)	(1		)
Curtailment/settlement/other (1)	(4		)	11			13			—			3			—
Net periodic benefit cost	$	561		$	502		$	247		$	109		$	118		$	133


(1)	Included $11 million of curtailment and settlement costs recorded in 2010 related to the divestiture of Styron (see Note E).



Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income for All Significant Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2011			2010			2009			2011			2010			2009
Net loss (gain)	$	2,009		$	591		$	804		$	20		$	59		$	(114	)
Prior service cost	—			2			2			—			—			—
Amortization of prior service (cost) credit	(28		)	(36		)	(31		)	1			(3		)	3
Amortization of unrecognized (loss) gain	(370		)	(271		)	(119		)	(1		)	1			1
Total recognized in other comprehensive loss (income)	$	1,611		$	286		$	656		$	20		$	57		$	(110	)
Total recognized in net periodic benefit cost and other comprehensive loss	$	2,172		$	788		$	903		$	129		$	175		$	23



Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans
In millions	Defined Benefit Pension Plans						Other Postretirement Benefits
Change in projected benefit obligations	2011			2010			2011			2010
Benefit obligations at beginning of year	$	21,158		$	19,914		$	2,095		$	2,079
Service cost	347			309			15			15
Interest cost	1,121			1,098			100			111
Plan participants’ contributions	31			22			—			—
Amendments	—			2			—			—
Actuarial changes in assumptions and experience	1,562			1,133			20			68
Acquisition/divestiture/other activity	(20		)	(53		)	16			(1		)
Benefits paid	(1,277		)	(1,148		)	(154		)	(180		)
Currency impact	(129		)	(86		)	(4		)	3
Termination benefits/curtailment cost	(30		)	(33		)	—			—
Benefit obligations at end of year	$	22,763		$	21,158		$	2,088		$	2,095

Change in plan assets
Fair value of plan assets at beginning of year	$	15,851		$	14,589		$	238		$	367
Actual return on plan assets	853			1,724			6			17
Currency impact	(121		)	(28		)	—			—
Employer contributions	806			708			(16		)	(60		)
Plan participants’ contributions	31			22			—			—
Acquisition/divestiture/other activity	(24		)	(16		)	—			—
Benefits paid	(1,277		)	(1,148		)	(74		)	(86		)
Fair value of plan assets at end of year	$	16,119		$	15,851		$	154		$	238

Funded status at end of year	$	(6,644	)	$	(5,307	)	$	(1,934	)	$	(1,857	)

Net amounts recognized in the consolidated balance sheets at December 31:
Noncurrent assets	$	366		$	235		$	—		$	—
Current liabilities	(64		)	(58		)	(82		)	(88		)
Noncurrent liabilities	(6,946		)	(5,484		)	(1,852		)	(1,769		)
Net amounts recognized in the consolidated balance sheets	$	(6,644	)	$	(5,307	)	$	(1,934	)	$	(1,857	)

Pretax amounts recognized in AOCI at December 31:
Net loss (gain)	$	8,335		$	6,696		$	(7	)	$	(26	)
Prior service cost (credit)	154			182			(15		)	(16		)
Pretax balance in AOCI at end of year	$	8,489		$	6,878		$	(22	)	$	(42	)

In 2012, an estimated net loss of $547 million and prior service cost of $26 million for the defined benefit pension plans will be amortized from AOCI to net periodic benefit cost. In 2012, an estimated net loss of $2 million and prior service credit of $4 million for other postretirement benefit plans will be amortized from AOCI to net periodic benefit cost.

Estimated Future Benefit Payments

The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:



Estimated Future Benefit Payments at December 31, 2011
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2012	$	1,326	$	184
2013	1,184		181
2014	1,208		168
2015	1,238		163
2016	1,277		157
2017 through 2021	6,941		720
Total	$	13,174	$	1,573

Plan Assets

Plan assets consist mainly of equity and fixed income securities of U.S. and foreign issuers, and may include alternative investments such as real estate, private equity and absolute return strategies. At December 31, 2011, plan assets totaled $16.1 billion and included directly held Company common stock with a value of less than $1 million (less than 1 percent of total plan assets). At December 31, 2010, plan assets totaled $15.9 billion and included directly held Company common stock with a value of $13 million (less than 1 percent of total plan assets). In 2012, the Company expects to receive approximately $23 million from residual plan assets after the completion of a non-U.S. pension plan wind-up.

Investment Strategy and Risk Management for Plan Assets

The Company’s investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants while minimizing cash contributions from the Company over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans.

The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposure and rebalancing the asset allocation. The plans use value at risk, stress testing, scenario analysis and Monte Carlo simulations to monitor and manage both risk in the portfolios and surplus risk.

Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities include investment and non investment grade corporate bonds of companies diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities, emerging market securities and fixed income funds. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts; and interest rate, equity, commodity and foreign exchange derivative investments and hedges.



Strategic Weighted-Average Target Allocation of Plan Assets for All Significant Plans
Asset Category	Target Allocation
Equity securities	40	%
Fixed Income securities	40	%
Alternative investments	15	%
Other investments	5	%
Total	100	%

Concentration of Risk

The Company mitigates the credit risk of investments by establishing guidelines with investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Company and external managers. Credit risk related to derivative activity is mitigated by utilizing multiple counterparties and through collateral support agreements.

The JP Morgan Federal Agency money market fund is utilized as the sweep vehicle for one of the largest U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately half of the liability is covered by a participating group annuity issued by Prudential Insurance Company.

The following tables summarize the bases used to measure the Company’s pension plan assets at fair value for the years ended December 31, 2011 and 2010:



Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2011	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs		Significant Unobservable Inputs
In millions	(Level 1)		(Level 2)		(Level 3)		Total
Cash and cash equivalents	$	52	$	771	$	—	$	823
Equity securities:
U.S. equity (1)	$	2,257	$	184	$	3	$	2,444
Non-U.S. equity – developed countries	1,660		1,059		9		2,728
Emerging markets	415		414		4		833
Convertible bonds (2)	—		169		—		169
Equity derivatives	1		6		—		7
Total equity securities	$	4,333	$	1,832	$	16	$	6,181
Fixed income securities:
U.S. government and municipalities	$	—	$	1,181	$	1	$	1,182
U.S. agency and agency mortgage-backed securities	—		482		2		484
Corporate bonds – investment grade	—		1,461		—		1,461
Non-U.S. governments – developed countries	—		1,073		—		1,073
Non-U.S. corporate bonds – developed countries	—		664		—		664
Emerging market debt	—		54		—		54
Other asset-backed securities	—		147		15		162
High yield bonds	—		337		16		353
Other fixed income funds	—		268		66		334
Fixed income derivatives	—		167		—		167
Total fixed income securities	$	—	$	5,834	$	100	$	5,934
Alternative investments:
Real estate	$	30	$	29	$	999	$	1,058
Private equity	—		—		985		985
Absolute return	—		448		344		792
Total alternative investments	$	30	$	477	$	2,328	$	2,835
Other investments	$	—	$	304	$	42	$	346
Total pension plan assets at fair value	$	4,415	$	9,218	$	2,486	$	16,119

(1) Included less than $1 million of the Company’s common stock.

(2) In 2011, convertible bonds were moved from fixed income securities to equity securities for asset allocation purposes.



Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2010	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs			Significant Unobservable Inputs
In millions	(Level 1)		(Level 2)			(Level 3)		Total
Cash and cash equivalents	$	56	$	751		$	—	$	807
Equity securities:
U.S. equity (1)	$	2,038	$	167		$	—	$	2,205
Non-U.S. equity – developed countries	2,300		932			—		3,232
Emerging markets	759		469			—		1,228
Equity derivatives	8		3			—		11
Total equity securities	$	5,105	$	1,571		$	—	$	6,676
Fixed income securities:
U.S. government and municipalities	$	—	$	961		$	—	$	961
U.S. agency and agency mortgage-backed securities	—		385			—		385
Corporate bonds – investment grade	—		1,313			—		1,313
Non-U.S. governments – developed countries	—		643			—		643
Non-U.S. corporate bonds – developed countries	—		897			—		897
Emerging market debt	—		51			—		51
Other asset-backed securities	—		217			13		230
Convertible bonds	32		385			—		417
High yield bonds	14		279			17		310
Other fixed income funds	—		208			20		228
Fixed income derivatives	—		(11		)	—		(11		)
Total fixed income securities	$	46	$	5,328		$	50	$	5,424
Alternative investments:
Real estate	$	29	$	45		$	727	$	801
Private equity	—		—			997		997
Absolute return	—		395			303		698
Total alternative investments	$	29	$	440		$	2,027	$	2,496
Other investments	$	—	$	408		$	40	$	448
Total pension plan assets at fair value	$	5,236	$	8,498		$	2,117	$	15,851

(1) Included $13 million of the Company’s common stock.

For pension or other postretirement benefit plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For pension or other postretirement benefit plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources.

Some pension or other postretirement benefit plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 1, 2 or 3 measurements) is determined based on the classification of the significant holdings within the fund. For all other pension or other postretirement benefit plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.

For pension or other postretirement benefit plan assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager’s investment valuation.

The following tables summarize the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2010 and 2011:



Fair Value Measurement of Level 3 Pension Plan Assets	Equity Securities			Fixed Income Securities			Alternative Investments			Other Investments			Total
In millions	Equity Securities			Fixed Income Securities			Alternative Investments			Other Investments			Total
Balance at January 1, 2010	$	—		$	50		$	1,458		$	43		$	1,551
Actual return on plan assets:
Relating to assets sold during 2010	(3		)	2			32			—			31
Relating to assets held at Dec 31, 2010	2			2			162			(1		)	165
Purchases, sales and settlements	1			(6		)	379			(2		)	372
Transfers into Level 3, net	—			2			1			—			3
Foreign currency impact	—			—			(5		)	—			(5		)
Balance at December 31, 2010	$	—		$	50		$	2,027		$	40		$	2,117
Actual return on plan assets:
Relating to assets sold during 2011	—			—			115			3			118
Relating to assets held at Dec 31, 2011	1			1			34			—			36
Purchases, sales and settlements	3			48			152			(1		)	202
Transfers into Level 3, net	12			2			11			—			25
Foreign currency impact	—			(1		)	(11		)	—			(12		)
Balance at December 31, 2011	$	16		$	100		$	2,328		$	42		$	2,486

The following tables summarize the bases used to measure the Company’s other postretirement benefit plan assets at fair value for the years ended December 31, 2011 and 2010:



Basis of Fair Value Measurements of Other Postretirement Benefit Plan Assets at December 31, 2011	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs
	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs
In millions	(Level 1)		(Level 2)		Total
Cash and cash equivalents	$	—	$	63	$	63
Equity securities (1, 2)	41		17		58
Fixed income securities (2)	—		33		33
Total assets at fair value	$	41	$	113	$	154

(1) Included no common stock of the Company.

(2) In 2011, convertible bonds were moved from fixed income securities to equity securities for asset allocation purposes.



Basis of Fair Value Measurements of Other Postretirement Benefit Plan Assets at December 31, 2010	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs
	Quoted Prices in Active Markets for Identical Items		Significant Other Observable Inputs
In millions	(Level 1)		(Level 2)		Total
Cash and cash equivalents	$	—	$	39	$	39
Equity securities (1)	66		—		66
Fixed income securities	4		129		133
Total assets at fair value	$	70	$	168	$	238

(1) Included no common stock of the Company.