Retirement Plans

12 Months Ended

Dec. 31, 2012

Compensation and Retirement Disclosure [Abstract]

Retirement Plans

Retirement Plans

Our company and subsidiaries have various plans that cover a significant number of our employees. These plans include defined contribution plans, defined benefit plans, and other postretirement plans:

- our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of pension benefits the participant is to receive. Contributions to these plans are based on pretax income and/or discretionary amounts determined on an annual basis. Our expense for the defined contribution plans for continuing operations totaled $293 million in 2012, $245 million in 2011, and $196 million in 2010;

- our defined benefit plans, which include both funded and unfunded pension plans, define an amount of pension benefit to be provided, usually as a function of age, years of service, and/or compensation. The unfunded obligations and net periodic benefit cost of our United States defined benefit plans were not material for the periods presented; and

- our postretirement plans other than pensions are offered to specific eligible employees. The accumulated benefit obligations and net periodic benefit cost for these plans were not material for the periods presented.

Funded status

For our international pension plans at December 31, 2012, the projected benefit obligation was $1.0 billion and the fair value of plan assets was $754 million, which resulted in an unfunded obligation of $276 million. At December 31, 2011, the projected benefit obligation was $928 million and the fair value of plan assets was $705 million, which resulted in an unfunded obligation of $223 million. The accumulated benefit obligation for our international plans was $961 million at December 31, 2012 and $868 million at December 31, 2011.

The following table presents additional information about our international pension plans.

	December 31
Millions of dollars	2012		2011
Amounts recognized on the Consolidated Balance Sheets
Accrued employee compensation and benefits	$	10	$	10
Employee compensation and benefits	266		213
Pension plans in which projected benefit obligation exceeded plan assets
Projected benefit obligation	$	1,004	$	928
Fair value of plan assets	727		705
Pension plans in which accumulated benefit obligation exceeded plan assets
Accumulated benefit obligation	$	935	$	784
Fair value of plan assets	726		621

Fair value measurements of plan assets

The following table sets forth by level within the fair value hierarchy the fair value of assets held by our international pension plans.

Millions of dollars	Level 1		Level 2		Level 3		Total
Common/collective trust funds (a)
Equity funds	$	—	$	204	$	—	$	204
Bond funds	—		112		—		112
Balanced funds	—		13		—		13
Non-United States equity securities	130		—		—		130
United States equity securities	110		—		—		110
Corporate bonds	—		107		—		107
Other assets	27		16		35		78
Fair value of plan assets at December 31, 2012	$	267	$	452	$	35	$	754
Common/collective trust funds (a)
Equity funds	$	—	$	241	$	—	$	241
Bond funds	—		110		—		110
Balanced funds	—		12		—		12
Corporate bonds	—		89		—		89
United States equity securities	67		—		—		67
Non-United States equity securities	64		—		—		64
Other assets	15		16		91		122
Fair value of plan assets at December 31, 2011	$	146	$	468	$	91	$	705

(a) Strategies are generally to invest in equity or debt securities, or a combination thereof, that match or outperform certain predefined indices.

Our Level 1 assets' fair values are based on quoted prices in active markets for identical assets, our Level 2 assets' fair values are based on significant observable inputs for similar assets, and our Level 3 assets' fair values are based on significant unobservable inputs.

Equity securities are traded in active markets and valued based on their quoted fair value by independent pricing vendors. Government bonds and corporate bonds are valued using quotes from independent pricing vendors based on recent trading activity and other relevant information, including market interest rate curves, referenced credit spreads, and estimated prepayment rates. Common/collective trust funds are valued at the net asset value of units held by the plans at year-end.

Our investment strategy varies by country depending on the circumstances of the underlying plan. Typically, less mature plan benefit obligations are funded by using more equity securities, as they are expected to achieve long-term growth while exceeding inflation. More mature plan benefit obligations are funded using more fixed income securities, as they are expected to produce current income with limited volatility. The fixed income allocation is generally invested with a similar maturity profile to that of the benefit obligations to ensure that changes in interest rates are adequately reflected in the assets of the plan. Risk management practices include diversification by issuer, industry, and geography, as well as the use of multiple asset classes and investment managers within each asset class.

For our United Kingdom pension plan, which constituted 78% of our international pension plans’ projected benefit obligation at December 31, 2012, the target asset allocation is 65% equity securities and 35% fixed income securities.

Net periodic benefit cost

Net periodic benefit cost for our international pension plans was $26 million in 2012, $27 million in 2011, and $28 million in 2010.

Actuarial assumptions

Certain weighted-average actuarial assumptions used to determine benefit obligations of our international pension plans at December 31 were as follows:

	2012	2011
Discount rate	4.8%	5.2%
Rate of compensation increase	5.5%	5.4%

Certain weighted-average actuarial assumptions used to determine net periodic benefit cost of our international pension plans for the years ended December 31 were as follows:

	2012	2011	2010
Discount rate	5.2%	7.1%	7.9%
Expected long-term return on plan assets	6.5%	5.7%	5.6%
Rate of compensation increase	5.4%	6.2%	6.4%

Assumed long-term rates of return on plan assets, discount rates for estimating benefit obligations, and rates of compensation increases vary by plan according to local economic conditions. Discount rates were determined based on the prevailing market rates of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations. Expected long-term rates of return on plan assets were determined based upon an evaluation of our plan assets and historical trends and experience, taking into account current and expected market conditions.

Other information

Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In certain countries the funding requirements are mandatory, while in other countries they are discretionary. We currently expect to contribute $16 million to our international pension plans in 2013.

Benefit payments. Expected benefit payments over the next 10 years are approximately $35 million annually for our international pension plans.