PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Ownership Restructure of Dow Corning

As part of the June 1, 2016 ownership restructure of Dow Corning, the Company assumed sponsorship of qualified and non-qualified pension and other postretirement benefit plans that provide defined benefits to U.S. and non-U.S. employees. Plan assets and obligations for all significant plans assumed from Dow Corning are as follows:



Plan Assets and Obligations for all Significant Plans Assumed from Dow Corning at June 1, 2016	Defined Benefit Pension Plans		Other Postretirement Benefits
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
Fair value of plan assets	$	2,327	$	—
Projected benefit obligations	3,252		313
Net liability assumed	$	925	$	313

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 2016, Dow contributed $629 million to its pension plans, including contributions to fund benefit payments for its non-qualified supplemental plans. Dow expects to contribute approximately $500 million to its pension plans in 2017.

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
	2016		2015		2014		2016		2015		2014
Discount rate	3.52	%	3.88	%	3.60	%	3.85	%	3.60	%	4.54	%
Rate of increase in future compensation levels	3.90	%	4.13	%	4.13	%	4.04	%	4.13	%	4.15	%
Expected long-term rate of return on plan assets	—		—		—		7.22	%	7.35	%	7.40	%



Weighted-Average Assumptions for U.S. Pension Plans	Benefit Obligations at December 31						Net Periodic Costs for the Year
	2016		2015		2014		2016		2015		2014
Discount rate	4.11	%	4.40	%	4.04	%	4.40	%	4.04	%	4.92	%
Rate of increase in future compensation levels	4.25	%	4.50	%	4.50	%	4.50	%	4.50	%	4.50	%
Expected long-term rate of return on plan assets	—		—		—		7.77	%	7.85	%	7.82	%

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 adopted the 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 calculates service cost and interest cost 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 flow components of service cost and interest cost; service cost and interest cost for all other plans (including all plans prior to adoption) are 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 accounted for this change as a change in accounting estimate and it was applied prospectively starting 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.

In 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 the Company's U.S. pension plans and the SOA's tables, effective for 2014 and forward, the Company adopted updated generational mortality tables for purposes of measuring U.S. pension and other postretirement obligations.

The accumulated benefit obligation for all defined benefit pension plans was $28.8 billion at December 31, 2016 and $24.5 billion at December 31, 2015.



Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31
In millions	2016		2015
Projected benefit obligations	$	27,877	$	23,421
Accumulated benefit obligations	$	26,590	$	22,409
Fair value of plan assets	$	18,523	$	16,066

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 $283 million in 2016, $235 million in 2015 and $243 million in 2014.

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.

On January 1, 2014, the Company implemented an Employer Group Waiver Plan (“EGWP”) for its Medicare-eligible, retiree medical plan participants. The Medicare Part D Retiree Drug Subsidy program (“RDS”) was eliminated on January 1, 2014. The EGWP does not significantly alter the benefits provided to retiree medical plan participants. Federal subsidies to be earned under the EGWP are expected to exceed those earned under the RDS and will be partially offset by increased costs related to the administration of the EGWP. The net periodic benefit cost decreased by $25 million in 2014 due to the EGWP.

The Company funds most of the cost of these health care and life insurance benefits as incurred. In 2016, Dow did not make any contributions to its other postretirement benefit plan trusts. The trusts did not hold assets at December 31, 2016. Dow does not expect to contribute assets to its other postretirement benefit plan trusts in 2017.

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
	2016		2015		2014		2016		2015		2014
Discount rate	3.83	%	3.97	%	3.68	%	3.96	%	3.68	%	4.37	%
Initial health care cost trend rate	7.00	%	7.25	%	7.06	%	7.25	%	7.06	%	7.45	%
Ultimate health care cost trend rate	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%
Year ultimate trend rate to be reached	2025		2025		2020		2025		2020		2020

Increasing the assumed medical cost trend rate for all plans by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2016, by $7 million and decrease the net periodic postretirement benefit cost for the year by $1 million. Decreasing the assumed medical cost trend rate for all plans by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2016, by $11 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	2016 (1)			2015			2014			2016 (1)			2015			2014
Service cost	$	463		$	484		$	411		$	13		$	14		$	14
Interest cost	846			975			1,096			52			59			72
Expected return on plan assets	(1,447		)	(1,382		)	(1,322		)	—			—			—
Amortization of prior service cost (credit)	(24		)	(28		)	22			(3		)	(2		)	(2		)
Amortization of unrecognized (gain) loss	587			706			500			(7		)	(11		)	(14		)
Curtailment/settlement/other (2)	(36		)	—			(2		)	—			—			—
Net periodic benefit cost	$	389		$	755		$	705		$	55		$	60		$	70


(1)	Includes net periodic benefit costs of $26 million for defined benefit pension plans and $8 million of other postretirement benefits for plans assumed from Dow Corning.


(2)	The 2016 impact relates to the curtailment of benefits for certain participants of a Dow Corning plan in the U.S. The 2014 impact relates to settlements associated with the wind-up of a pension plan in The Netherlands and a pension plan in Canada.



Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss for All Significant Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2016			2015			2014			2016		2015		2014
Net (gain) loss	$	1,954		$	(127	)	$	3,528		$	14	$	11	$	63
Prior service cost (credit) arising during period	—			63			(500		)	—		—		—
Amortization of prior service (cost) credit	24			28			(22		)	3		2		2
Amortization of unrecognized gain (loss)	(587		)	(706		)	(498		)	7		11		14
Total recognized in other comprehensive (income) loss	$	1,391		$	(742	)	$	2,508		$	24	$	24	$	79
Total recognized in net periodic benefit cost and other comprehensive loss	$	1,780		$	13		$	3,213		$	79	$	84	$	149



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:	2016			2015			2016			2015
Benefit obligations at beginning of year	$	25,652		$	27,979		$	1,597		$	1,707
Service cost	463			484			13			14
Interest cost	846			975			52			59
Plan participants’ contributions	19			19			—			—
Plan amendments	—			30			—			—
Actuarial changes in assumptions and experience	1,967			(929		)	13			11
Acquisition/divestiture/other activity (1)	3,201			(894		)	313			—
Benefits paid	(1,324		)	(1,289		)	(154		)	(172		)
Currency impact	(506		)	(723		)	1			(22		)
Termination benefits/curtailment cost/settlements (2)	(38		)	—			—			—
Benefit obligations at end of year	$	30,280		$	25,652		$	1,835		$	1,597

Change in plan assets:
Fair value of plan assets at beginning of year	$	18,774		$	19,629		$	—		$	—
Actual return on plan assets	1,437			314			—			—
Currency impact	(404		)	(488		)	—			—
Employer contributions	629			844			—			—
Plan participants’ contributions	19			19			—			—
Acquisition/divestiture/other activity (3)	2,077			(255		)	—			—
Benefits paid	(1,324		)	(1,289		)	—			—
Fair value of plan assets at end of year	$	21,208		$	18,774		$	—		$	—

Less: Fair value of assets due to Olin	$	—		$	(179	)	$	—		$	—

Net fair value of plan assets at end of year	$	21,208		$	18,595		$	—		$	—

Funded status at end of year	$	(9,072	)	$	(7,057	)	$	(1,835	)	$	(1,597	)

Net amounts recognized in the consolidated balance sheets at December 31:
Noncurrent assets	$	292		$	317		$	—		$	—
Current liabilities	(74		)	(64		)	(158		)	(146		)
Noncurrent liabilities	(9,290		)	(7,310		)	(1,677		)	(1,451		)
Net amounts recognized in the consolidated balance sheets	$	(9,072	)	$	(7,057	)	$	(1,835	)	$	(1,597	)

Pretax amounts recognized in AOCL at December 31:
Net loss (gain)	$	11,379		$	10,012		$	(133	)	$	(154	)
Prior service credit	(304		)	(328		)	—			(3		)
Pretax balance in AOCL at end of year	$	11,075		$	9,684		$	(133	)	$	(157	)

(1)

The 2016 impact includes pension benefit obligations of $3,252 million and other postretirement benefit obligations of $313 million assumed with the ownership restructure of Dow Corning. The 2016 impact also includes the transfer of benefit obligations of $53 million in the U.S. through the purchase of annuity contracts from an insurance company. The 2015 impact includes the transfer of benefit obligations associated with the Reverse Morris Trust transaction with Olin of $618 million and the transfer of benefit obligations associated with the divestiture of ANGUS to Golden Gate Capital of $34 million. The 2015 impact also includes the transfer of benefit obligations of $248 million in the U.S. through the purchase of annuity contracts from an insurance company. See Notes 4, 5 and 6 for additional information.


(2)	The 2016 impact primarily relates to the curtailment of benefits for certain participants of a U.S. Dow Corning plan of $36 million.

(3)

The 2016 impact includes plan assets assumed with the ownership restructure of Dow Corning of $2,327 million. The 2016 impact also includes the purchase of annuity contracts of $55 million in the U.S. associated with the transfer of benefit obligations to an insurance company and the transfer of plan assets associated with the Reverse Morris Trust transaction with Olin of $184 million. The 2015 impact includes the transfer of plan assets associated with the divestiture of ANGUS to Golden Gate Capital of $9 million. The 2015 impact also includes the purchase of annuity contracts of $247 million in the U.S. associated with the transfer of benefit obligations to an insurance company.

In 2017, an estimated net loss of $626 million and prior service credit of $24 million for the defined benefit pension plans will be amortized from AOCL to net periodic benefit cost. In 2017, an estimated net gain of $6 million for other postretirement benefit plans will be amortized from AOCL 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, 2016
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2017	$	1,433	$	161
2018	1,460		155
2019	1,501		151
2020	1,536		146
2021	1,571		142
2022 through 2026	8,374		627
Total	$	15,875	$	1,382

Plan Assets

Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private equity and absolute return strategies. At December 31, 2016, plan assets totaled $21.2 billion and included no Company common stock. At December 31, 2015, plan assets totaled $18.8 billion and included no Company common stock.

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 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 the risk within the portfolios and the surplus risk of the plans.

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 related 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	35	%
Fixed income securities	34	%
Alternative investments	30	%
Other investments	1	%
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, collateral support agreements and centralized clearing, where appropriate.

The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately 40 percent 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, 2016 and 2015:



Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2016	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	$	73	$	806		$	—	$	879
Equity securities:
U.S. equity (1)	$	2,642	$	983		$	1	$	3,626
Non-U.S. equity – developed countries	1,955		1,232			1		3,188
Emerging markets	508		557			31		1,096
Convertible bonds	21		199			1		221
Total equity securities	$	5,126	$	2,971		$	34	$	8,131
Fixed income securities:
U.S. government and municipalities	$	—	$	2,091		$	—	$	2,091
U.S. agency and agency mortgage-backed securities	—		309			—		309
Corporate bonds – investment grade	—		1,562			—		1,562
Non-U.S. governments – developed countries	—		1,135			—		1,135
Non-U.S. corporate bonds – developed countries	—		1,176			—		1,176
Emerging market debt	—		131			—		131
Other asset-backed securities	—		95			2		97
High yield bonds	—		190			13		203
Other fixed income funds	—		351			483		834
Fixed income derivatives	—		(17		)	—		(17		)
Total fixed income securities	$	—	$	7,023		$	498	$	7,521
Alternative investments:
Real estate	$	21	$	24		$	2,042	$	2,087
Private equity	—		—			1,128		1,128
Absolute return	—		723			465		1,188
Total alternative investments	$	21	$	747		$	3,635	$	4,403
Other investments	$	—	$	179		$	95	$	274
Total pension plan assets at fair value	$	5,220	$	11,726		$	4,262	$	21,208


(1)	Includes no Company common stock.



Basis of Fair Value Measurements of Pension Plan Assets at December 31, 2015	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	$	84		$	733	$	—	$	817
Equity securities:
U.S. equity (1)	$	2,525		$	558	$	1	$	3,084
Non-U.S. equity – developed countries	1,877			1,167		—		3,044
Emerging markets	462			542		27		1,031
Convertible bonds	26			177		—		203
Equity derivatives	—			8		—		8
Total equity securities	$	4,890		$	2,452	$	28	$	7,370
Fixed income securities:
U.S. government and municipalities	$	—		$	1,320	$	—	$	1,320
U.S. agency and agency mortgage-backed securities	—			279		—		279
Corporate bonds – investment grade	—			1,527		—		1,527
Non-U.S. governments – developed countries	—			1,161		—		1,161
Non-U.S. corporate bonds – developed countries	—			917		—		917
Emerging market debt	—			109		—		109
Other asset-backed securities	—			88		1		89
High yield bonds	47			166		16		229
Other fixed income funds	—			295		276		571
Fixed income derivatives	—			33		—		33
Total fixed income securities	$	47		$	5,895	$	293	$	6,235
Alternative investments:
Real estate	$	22		$	38	$	1,772	$	1,832
Private equity	—			—		1,054		1,054
Absolute return	—			483		695		1,178
Total alternative investments	$	22		$	521	$	3,521	$	4,064
Other investments	$	—		$	250	$	38	$	288
Total pension plan assets at fair value	$	5,043		$	9,851	$	3,880	$	18,774
Less: Fair value of pension plan assets due to Olin (2)	(179		)	—		—		(179		)
Net pension plan assets at fair value	$	4,864		$	9,851	$	3,880	$	18,595


(1)	Includes no Company common stock.


(2)	Pension plan assets were transferred to Olin in 2016. The final plan assets transferred totaled $184 million, which reflected return on plan assets and benefits paid to participants from the closing date of the Transaction with Olin to the date of transfer. See Note 6 for additional information.

For pension 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 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 and 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. For other pension 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 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. Some pension plan assets are held in funds where fair value is based on an estimated net asset value per share (or its equivalent) as of the most recently available fund financial statements, and adjusted for estimated earnings and investment activity. These funds are classified as Level 3 due to the significant unobservable inputs inherent in the fair value measurement.

The following table summarizes the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2015 and 2016:



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, 2015	$	32		$	311		$	3,342		$	40		$	3,725
Actual return on plan assets:
Relating to assets sold during 2015	—			18			233			—			251
Relating to assets held at Dec 31, 2015	—			(9		)	58			(2		)	47
Purchases, sales and settlements	2			(27		)	(90		)	—			(115		)
Transfers in (out) of Level 3, net	(6		)	(1		)	5			—			(2		)
Foreign currency impact	—			1			(27		)	—			(26		)
Balance at December 31, 2015	$	28		$	293		$	3,521		$	38		$	3,880
Actual return on plan assets:
Relating to assets sold during 2016	—			2			163			(7		)	158
Relating to assets held at Dec 31, 2016	9			(4		)	10			11			26
Purchases, sales and settlements (1)	1			202			(35		)	53			221
Transfers in (out) of Level 3, net	(2		)	3			—			—			1
Foreign currency impact	(2		)	2			(24		)	—			(24		)
Balance at December 31, 2016	$	34		$	498		$	3,635		$	95		$	4,262


(1)	Includes $35 million of alternative investments associated with the ownership restructure of Dow Corning.