Note K – Employee and Retiree Benefit Plans

PENSION AND OTHER POSTRETIREMENT PLANS – The Company has defined benefit pension plans that are principally noncontributory and cover most full-time employees. All pension plans are funded except for the U.S. and Canadian nonqualified supplemental plans and the U.S. directors’ plan. All U.S. tax qualified plans meet the funding requirements of federal laws and regulations. Contributions to foreign plans are based on local laws and tax regulations. The Company also sponsors health care and life insurance benefit plans, which are not funded, that cover most retired U.S. employees. The health care benefits are contributory; the life insurance benefits are noncontributory.

Upon the disposal of Murphy’s former U.K. downstream assets, the Company retained all vested defined benefit pension obligations associated with former employees of this business. No additional benefits will accrue to these former U.K. employees under the Company’s retirement plan after the date of their separation from Murphy.

GAAP requires the Company to recognize the overfunded or underfunded status of its defined benefit plans as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status between periods through accumulated other comprehensive loss.

The tables that follow provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the years ended December 31, 2017 and 2016 and a statement of the funded status as of December 31, 2017 and 2016.



	Pension Benefits			Other Postretirement Benefits
(Thousands of dollars)	2017		2016	2017	2016
Change in benefit obligation
Obligation at January 1	$	815,593	794,589	106,679	115,222
Service cost		8,279	8,136	1,601	1,864
Interest cost		27,047	25,185	3,444	3,800
Participant contributions		–	–	2,075	1,278
Actuarial loss (gain)		60,855	58,236	(3,077)	(10,627)
Medicare Part D subsidy		–	–	318	510
Exchange rate changes		18,751	(30,447)	46	20
Benefits paid		(39,910)	(40,928)	(4,810)	(5,369)
Curtailments		–	822	–	(19)
Other		(8,683)	–	–	–
Obligation at December 31		881,932	815,593	106,276	106,679
Change in plan assets
Fair value of plan assets at January 1		519,357	521,682	–	–
Actual return on plan assets		50,079	61,860	–	–
Employer contributions		24,918	8,186	2,417	3,581
Participant contributions		–	–	2,075	1,278
Medicare Part D subsidy		–	–	318	510
Exchange rate changes		18,064	(30,609)	–	–
Benefits paid		(39,910)	(40,928)	(4,810)	(5,369)
Other		(8,683)	(834)	–	–
Fair value of plan assets at December 31		563,825	519,357	–	–
Funded status and amounts recognized in the Consolidated Balance Sheets at December 31
Deferred charges and other assets		5,905	7,591	–	–
Other accrued liabilities		(8,856)	(8,184)	(5,392)	(5,267)
Deferred credits and other liabilities		(315,156)	(295,643)	(100,884)	(101,412)
Funded status and net plan liability recognized at December 31	$	(318,107)	(296,236)	(106,276)	(106,679)

At December 31, 2017, amounts included in Accumulated other comprehensive loss (AOCL) in the Consolidated Balance Sheets, before reduction for associated deferred income taxes, which have not been recognized in net periodic benefit expense are shown in the following table.



(Thousands of dollars)	Pension Benefits		Other Postretirement Benefits
Net actuarial loss	$	(269,063)	221
Prior service (cost) credit		(5,824)	38
	$	(274,887)	259

Amounts included in AOCL at December 31, 2017 that are expected to be amortized into net periodic benefit expense during 2018 are shown in the following table.



(Thousands of dollars)	Pension Benefits		Other Postretirement Benefits
Net actuarial loss	$	(15,890)	–
Prior service (cost) credit		(1,021)	38
	$	(16,911)	38

The table that follows includes projected benefit obligations, accumulated benefit obligations and fair value of plan assets for plans where the accumulated benefit obligation exceeded the fair value of plan assets.



	Projected Benefit Obligations			Accumulated Benefit Obligations		Fair Value of Plan Assets
(Thousands of dollars)	2017		2016	2017	2016	2017	2016
Funded qualified plans where accumulated benefit obligation exceeds fair value of plan assets	$	691,923	643,174	640,230	599,730	540,161	497,894
Unfunded nonqualified and directors' plans where accumulated benefit obligation exceeds fair value of plan assets		172,364	156,088	163,319	150,780	–	–
Unfunded other postretirement plans		106,276	106,678	106,276	106,678	–	–

The table that follows provides the components of net periodic benefit expense for each of the three years ended December 31, 2017.


	Pension Benefits				Other Postretirement Benefits
(Thousands of dollars)		2017	2016	2015	2017	2016	2015
Service cost	$	8,279	8,136	17,948	1,601	1,864	3,180
Interest cost		27,047	25,185	33,168	3,444	3,800	4,883
Expected return on plan assets		(28,941)	(28,154)	(34,016)	–	–	–
Amortization of prior service cost (credit)		1,026	1,204	1,560	(74)	(75)	(82)
Amortization of transitional (asset) liability		–	–	(1)	–	–	–
Recognized actuarial loss		16,691	16,165	15,147	–	5	992
		24,102	22,536	33,806	4,971	5,594	8,973
Termination benefits expense		–	–	8,606	–	–	–
Curtailment expense		–	822	306	–	(19)	–
Net periodic benefit expense	$	24,102	23,358	42,718	4,971	5,575	8,973

Termination and curtailment expenses in 2016 and 2015 were primarily related to plan amendments made upon early retirement of certain employees during 2016 and 2015.

The preceding tables in this note include the following amounts related to foreign benefit plans.



	Pension Benefits			Other Postretirement Benefits
(Thousands of dollars)	2017		2016	2017	2016
Benefit obligation at December 31	$	222,483	206,502	791	615
Fair value of plan assets at December 31		212,535	197,575	–	–
Net plan liabilities recognized		9,948	8,927	791	615
Net periodic benefit expense (benefit)		194	(2,244)	133	154

The following table provides the weighted-average assumptions used in the measurement of the Company’s benefit obligations at December 31, 2017 and 2016 and net periodic benefit expense for 2017 and 2016.



	Benefit Obligations				Net Periodic Benefit Expense
	Pension Benefits		Other Postretirement Benefits		Pension Benefits		Other Postretirement Benefits
	December 31		December 31		Year		Year
	2017	2016	2017	2016	2017	2016	2017	2016
Discount rate	3.42%	3.94%	3.73%	4.41%	3.66%	3.84%	4.33%	4.24%
Expected return on plan assets	5.64%	5.62%	–	–	5.64%	5.62%	–	–
Rate of compensation increase	3.52%	3.52%	–	–	3.52%	3.52%	–	–

The discount rates used for determining the plan obligations and expense are based on the universe of high-quality corporate bonds that are available within each country. Cash flow analyses are performed in which a spot yield curve is used to discount projected benefit payment streams for the most significant plans. The discounted cash flows are used to determine an equivalent single rate which is the basis for selecting the discount rate within each country. Expected plan asset returns are based on long-term expectations for asset portfolios with similar investment mix characteristics. Expected compensation increases are based on anticipated future averages for the Company.

Benefit payments, reflecting expected future service as appropriate, which are expected to be paid in future years from the assets of the plans or by the Company are shown in the following table.



(Thousands of dollars)	Pension Benefits		Other Postretirement Benefits
2018	$	39,929	6,259
2019		40,236	6,280
2020		41,220	6,357
2021		42,276	6,489
2022		43,554	6,560
2023-2027		227,039	33,971

For purposes of measuring postretirement benefit obligations at December 31, 2017, the future annual rates of increase in the cost of health care were assumed to be 6.7% for 2017 decreasing each year to an ultimate rate of 4.5% in 2038 and thereafter.

Assumed health care cost trend rates have a significant effect on the expense and obligation reported for the postretirement benefit plan. A 1% change in assumed health care cost trend rates would have the following effects.



(Thousands of dollars)	1% Increase		1% Decrease
Effect on total service and interest cost components of net periodic postretirement benefit expense for the year ended December 31, 2017	$	919	(719)
Effect on the health care component of the accumulated postretirement benefit obligation at December 31, 2017		15,220	(12,277)

During 2017, the Company made contributions of $18.0 million to its domestic defined benefit pension plans, $6.9 million to its foreign defined benefit pension plans and $2.4 million to its domestic postretirement benefits plan. During 2018, Company currently expects to make contributions of $24.4 million to its domestic defined benefit pension plans, $0.6 million to its foreign defined benefit pension plans and $5.4 million to its domestic postretirement benefits plan.

Plan Investments – Murphy Oil Corporation maintains an Investment Policy Statement (Statement) that establishes investment standards related to its funded domestic qualified retirement plan. The Statement specifies that all assets will be held in a Trust sponsored by the Company, which is administrated by a trustee appointed by the Investment Committee (Committee). Members of the Committee are appointed by the Chief Executive Officer of Murphy. The Committee hires Investment Managers to invest trust assets within the guidelines established by the Committee as allowed by the Statement. The investment goals call for a portfolio of assets consisting of equity, fixed income and cash equivalent securities. The primary consideration for investments is the preservation of capital, and investment growth should exceed the rate of inflation. The Committee has directed the asset investment advisors of its benefit plans to maintain a portfolio consisting of both equity and fixed income securities. The Company believes that over time a balanced to slightly heavier weighting of the portfolio in equity securities compared to fixed income securities represents the most appropriate long-term mix for future investment return on assets held by domestic plans. The parameters for asset allocation call for the following minimum and maximum percentages: equity securities of between 40% and 70%; fixed income securities of between 30% and 60%; long/short equity of between 0% and 15%; and cash and equivalents of between 0% and 15%. The Committee is authorized to direct investments within these parameters. Equity investments may include common, preferred and convertible preferred stocks, emerging markets stocks and similar funds, and long/short equity funds. Long/short equity is a strategy invested in a portfolio of long stocks hedged with short sales of stocks and/or stock index options, with the combination of investment intended to produce equity-like returns with lower volatility over the long term. Generally, no more than 10% of an Investment Manager’s portfolio is to be held in equity securities of any one issuer, and equity securities should have a minimum market capitalization of $100 million. Equities held in the trust should be listed on the New York or American Stock Exchanges, principal U.S. regional exchanges, major foreign exchanges or quoted in significant over-the-counter markets. Equity or fixed income securities issued by the Company may not be held in the trust. Fixed income securities include maturities greater than one year to maturity. The fixed income portfolio should not exceed an average maturity of 11 years. The portfolio may include investment grade corporate bonds, issues of the U.S. government, its agencies and government sponsored entities, government agency issued collateralized mortgage backed securities, agency issued mortgage backed securities, municipal bonds, asset backed securities, commercial mortgage backed securities and international and emerging markets bond funds. The Committee routinely reviews the investment performance of Investment Managers.

For the U.K. retirement plan, trustees have been appointed by the wholly-owned subsidiary that sponsors the plan for U.K. employees. The trustees have hired a fiduciary investment manager to manage the assets of the plan within the parameters of the Statement of Investment Principles (Statement). The objective of investments is to earn a reasonable return within the allocation strategy permitted in the Statement while limiting the risk for the funded position of the plan. The Statement specifies a strategy with an allocation goal of 60% Delegated growth fund (DGF) equities and 40% Delegated liability fund (DLF). Also, the allocation goal includes interest rate hedge ratio and inflation rate hedge ratio of 100%. Hewitt Risk Management Services Limited (Manager) has discretion to vary the level of interest rate and inflation hedge ratios from the strategic levels. The DGF is diversified by style, strategy and asset class by investing with underlying funds that may include equity funds, fixed income funds, debt funds, currency funds, hedge funds, fund of hedge funds and other collective investment schemes covering a broad range of asset classes and strategies. The DLF aims to provide returns in line with the liabilities of typical pension schemes on an exposure basis in the relevant tenures and instruments (long/short, real/nominal). The DLF holds cash as collateral for the leveraged positions. Small working cash balances are permitted to facilitate daily management of payments and receipts within the plan. The trustee routinely reviews the investment performance of the plan.

For the Canadian retirement plan, the wholly-owned subsidiary that sponsors the plan has a Statement of Investment Policies and Procedures (Policy) applicable to the plan assets. A pension committee appointed by the board of directors of the subsidiary oversees the plan, selects the investment advisors and routinely reviews performance of the asset portfolio. The Policy permits assets to be invested in various Canadian and foreign equity securities, various fixed income securities, real estate, natural resource properties or participation rights and cash. The objective for plan investments is to achieve a total rate of return equal to the long-term interest rate assumption used for the going-concern actuarial funding valuation. The normal allocation for 2017 includes total equity securities of 60% with a range of 55% to 65% of total assets. Fixed income securities have a normal allocation of 35% with a range of 30% to 40%. Cash will normally have an allocation of 5% with a range of 0% to 10%. The Policy calls for diversification norms within the investment portfolios of both equity securities and fixed income securities.

The weighted average asset allocation for the Company’s funded pension benefit plans at December 31, 2017 and 2016 are presented in the following table.



	December 31,
	2017		2016
Equity securities	60.3	%	58.4	%
Fixed income securities	37.2		39.0
Cash equivalents	2.5		2.6
	100.0	%	100.0	%

The Company’s weighted average expected return on plan assets was 5.64% in 2017 and the return was determined based on an assessment of actual long-term historical returns and expected future returns for a portfolio with investment characteristics similar to that maintained by the plans. The 5.64% expected return was based on an expected average future equity securities return of 7.15% and a fixed income securities return of 4.26% and is net of average expected investment expenses of 0.60%. Over the last 10 years, the return on funded retirement plan assets has averaged 6.66%.

At December 31, 2017, the fair value measurements of retirement plan assets within the fair value hierarchy are included in the table that follows.



			Fair Value Measurements Using
(Thousands of dollars)	Fair Value at December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Domestic Plans
Equity securities:
U.S. core equity	$	67,343	67,343	–	–
U.S. small/midcap		24,544	24,544	–	–
Hedged funds and other alternative strategies		50,522	–	12,572	37,950
International commingled trust fund		83,960	–	83,960	–
Emerging market commingled equity fund		20,774	–	20,774	–
Fixed income securities:
U.S. fixed income		79,890	–	79,890	–
International commingled trust fund		13,122	–	13,122	–
Emerging market mutual fund		5,266	–	5,266	–
Cash and equivalents		5,871	5,871	–	–
Total Domestic Plans		351,292	97,758	215,584	37,950
Foreign Plans
Equity securities funds		78,666	–	78,666	–
Fixed income securities funds		103,314	–	103,314	–
Diversified pooled fund		23,665	–	23,665	–
Cash and equivalents		6,888	–	6,888	–
Total Foreign Plans		212,533	–	212,533	–
Total	$	563,825	97,758	428,117	37,950

At December 31, 2016, the fair value measurements of retirement plan assets within the fair value hierarchy are included in the table that follows.



			Fair Value Measurements Using
(Thousands of dollars)	Fair Value at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Domestic Plans
Equity securities:
U.S. core equity	$	61,554	61,554	–	–
U.S. small/midcap		23,103	23,103	–	–
Hedged funds and other alternative strategies		48,113	–	13,999	34,114
International commingled trust fund		67,451	–	67,451	–
Emerging market commingled equity fund		16,006	–	16,006	–
Fixed income securities:
U.S. fixed income		78,473	–	78,473	–
International commingled trust fund		13,486	–	13,486	–
Emerging market mutual fund		5,775	–	5,775	–
Cash and equivalents		7,821	7,821	–	–
Total Domestic Plans		321,782	92,478	195,190	34,114
Foreign Plans
Equity securities funds		74,108	–	74,108	–
Fixed income securities funds		97,075	–	97,075	–
Diversified pooled fund		21,463	–	21,463	–
Cash and equivalents		4,929	–	4,929	–
Total Foreign Plans		197,575	–	197,575	–
Total	$	519,357	92,478	392,765	34,114

The definition of levels within the fair value hierarchy in the tables above is included in Note Q.

For domestic plans, U.S. core and small/midcap equity securities are valued based on daily market prices as quoted on national stock exchanges or in the over-the-counter market. Hedged funds and other alternative strategies funds consist of three investments. One of these investments is valued based on daily market prices as quoted on national stock exchanges, another investment is valued monthly based on net asset value and permits withdrawals semi-annually after a 90-day notice, and the third investment is also valued monthly based on net asset values and has a two-year lock-up period and a 95-day notice following the lock-up period. International equities held in a commingled trust are valued monthly based on prices as quoted on various international stock exchanges. The emerging market commingled equity fund is valued monthly based on net asset value. These commingled equity funds can be withdrawn monthly and have a 10-day notice period. U.S. fixed income securities are valued daily based on bids for the same or similar securities or using net asset values. International fixed income securities held in a commingled trust are valued on a monthly basis using net asset values. The fixed income emerging market mutual fund is valued daily based on net asset value. For foreign plans, the equity securities funds are comprised of U.K. and foreign equity funds valued daily based on fund net asset values. Fixed income securities funds are U.K. securities valued daily at net asset values. The diversified pooled fund is valued daily at net asset value and contains a combination of Canadian and foreign equity securities, Canadian fixed income securities and cash.

The effects of fair value measurements using significant unobservable inputs on changes in Level 3 plan assets are outlined below:



(Thousands of dollars)	Hedged Funds and Other Alternative Strategies
Total at December 31, 2015		$	33,929
Actual return on plan assets:
Relating to assets held at the reporting date			185
Relating to assets sold during the period			–
Purchases, sales and settlements			–
Total at December 31, 2016			34,114
Actual return on plan assets:
Relating to assets held at the reporting date			3,836
Relating to assets sold during the period			–
Purchases, sales and settlements			–
Total at December 31, 2017		$	37,950

THRIFT PLANS – Most full-time U.S. employees of the Company may participate in thrift or similar savings plans by allotting up to a specified percentage of their base pay. The Company matches contributions at a stated percentage of each employee’s allotment based on years of participation in the plans, with a maximum match of 6%. Amounts charged to expense for these plans were $7.8 million in 2017, $7.4 million in 2016 and $7.6 million in 2015.