
14.	EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based primarily on years of service and compensation during specific periods under final average pay and cash balance formulas. We fund our pension plans as required by local regulations. In the U.S., all qualified pension plans are subject to the Employee Retirement Income Security Act (ERISA) minimum funding standard. We typically do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements because contributions to these pension plans may be less economic and investment returns may be less attractive than our other investment alternatives.

On February 15, 2013, we announced changes to certain of our U.S. qualified pension plans that cover the majority of our U.S. employees who work in our refining segment and corporate operations. Benefits under our primary pension plan will change from a final average pay formula to a cash balance formula with staged effective dates from July 1, 2013 through January 1, 2015 depending on the age and service of the affected employees. All final average pay benefits will be frozen as of December 31, 2014, with all future benefits to be earned under the new cash balance formula. The change will reduce our benefit costs and obligations for 2013 and future years.

We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most of our employees become eligible for these benefits if, while still working for us, they reach normal retirement age or take early retirement. These plans are unfunded, and retired employees share the cost with us. Individuals who became our employees as a result of an acquisition became eligible for other postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.

The changes in benefit obligation related to all of our defined benefit plans, the changes in fair value of plan assets^(a), and the funded status of our defined benefit plans as of and for the years ended December 31, 2012 and 2011 were as follows (in millions):



	Pension Plans						Other Postretirement Benefit Plans
	2012			2011			2012			2011
Changes in benefit obligation:
Benefit obligation at beginning of year	$	1,881		$	1,626		$	438		$	426
Service cost	140			104			12			11
Interest cost	93			85			21			22
Participant contributions	—			—			14			12
Plan amendments	9			4			—			—
Curtailment gain	(16		)	—			—			—
Benefits paid	(90		)	(117		)	(35		)	(30		)
Actuarial (gain) loss	289			179			(17		)	(9		)
Other	1			—			3			6
Benefit obligation at end of year	$	2,307		$	1,881		$	436		$	438

Changes in plan assets^(a):
Fair value of plan assets at beginning of year	$	1,487		$	1,362		$	—		$	—
Actual return on plan assets	167			(2		)	—			—
Valero contributions	164			244			19			15
Participant contributions	—			—			14			12
Benefits paid	(90		)	(117		)	(35		)	(30		)
Other	1			—			2			3
Fair value of plan assets at end of year	$	1,729		$	1,487		$	—		$	—

Reconciliation of funded status^(a):
Fair value of plan assets at end of year	$	1,729		$	1,487		$	—		$	—
Less benefit obligation at end of year	2,307			1,881			436			438
Funded status at end of year	$	(578	)	$	(394	)	$	(436	)	$	(438	)

Accumulated benefit obligation	$	1,857		$	1,550		n/a			n/a

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^(a)Plan assets include only the assets associated with pension plans subject to legal minimum funding standards. Plan assets associated with U.S. nonqualified pension plans are not included here because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans. As a result, the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 20 for the assets associated with certain U.S. nonqualified pension plans.

The accumulated benefit obligations for certain of our pension plans exceed the fair values of the assets of those plans. For those plans, the table below presents the total projected benefit obligation, accumulated benefit obligation, and fair value of the plan assets (in millions).



	December 31,
	2012		2011
Projected benefit obligation	$	250	$	244
Accumulated benefit obligation	191		189
Fair value of plan assets	31		40

Benefit payments that we expect to pay, including amounts related to expected future services, and the anticipated Medicare subsidies that we expect to receive are as follows for the years ending December 31 (in millions):



	Pension Benefits		Other Postretirement Benefits
2013	$	93	$	21
2014	116		22
2015	108		24
2016	117		25
2017	129		26
2018-2022	840		143

We have $30 million of minimum required contributions to one of our international pension plans during 2013. In addition, we plan to contribute approximately $115 million to our pension plans and $21 million to our other postretirement plans during 2013.

The components of net periodic benefit cost were as follows for the years ended December 31, 2012, 2011, and 2010 (in millions):



	Pension Plans									Other Postretirement Benefit Plans
	2012			2011			2010			2012			2011			2010
Components of net periodic benefit cost:
Service cost	$	140		$	104		$	88		$	12		$	11		$	10
Interest cost	93			85			83			21			22			26
Expected return on plan assets	(125		)	(112		)	(112		)	—			—			—
Amortization of:
Prior service cost (credit)	3			2			3			(23		)	(23		)	(20		)
Net actuarial loss	33			12			2			1			2			4
Net periodic benefit cost before special charges	144			91			64			11			12			20
Special charges (credits)	(3		)	4			8			—			4			—
Net periodic benefit cost	$	141		$	95		$	72		$	11		$	16		$	20

Amortization of prior service cost (credit) shown in the above table was based on the average remaining service period of employees expected to receive benefits under each respective plan. Special credits in 2012 include curtailments for termination benefits paid to employees at our Aruba Refinery, partially offset by settlements related to lump sum payments in excess of thresholds. Special charges in 2011 related to purchase accounting for the Meraux Acquisition and settlements related to lump sum payments in excess of thresholds. Special charges in 2010 related to early retirement programs for corporate employees and employees at our Delaware City and Paulsboro Refineries.

Pre-tax amounts recognized in other comprehensive income for the years ended December 31, 2012, 2011, and 2010 were as follows (in millions):



	Pension Plans									Other Postretirement Benefit Plans
	2012			2011			2010			2012			2011			2010
Net loss (gain) arising during the year:
Net actuarial loss (gain)	$	245		$	294		$	68		$	(17	)	$	(9	)	$	(28	)
Prior service cost (credit)	9			4			—			—			—			(31		)

Net gain (loss) reclassified into income:
Net actuarial loss	(33		)	(12		)	(2		)	(1		)	(2		)	(4		)
Prior service (cost) credit	(3		)	(2		)	(3		)	23			23			20
Curtailment and settlement	(12		)	(4		)	(4		)	—			—			—
Total changes in other comprehensive (income) loss	$	206		$	280		$	59		$	5		$	12		$	(43	)

The pre-tax amounts in accumulated other comprehensive income as of December 31, 2012 and 2011 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):



	Pension Plans				Other Postretirement Benefit Plans
	2012		2011		2012			2011
Prior service cost (credit)	$	21	$	16	$	(81	)	$	(103	)
Net actuarial loss	882		681		34			50
Total	$	903	$	697	$	(47	)	$	(53	)

The following pre-tax amounts included in accumulated other comprehensive income as of December 31, 2012 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2013 (in millions):



	Pension Plans		Other Postretirement Benefit Plans
Amortization of prior service cost (credit)	$	3	$	(13	)
Amortization of net actuarial loss	57		—
Total	$	60	$	(13	)

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2012 and 2011 were as follows:



	Pension Plans				Other Postretirement Benefit Plans
	2012		2011		2012		2011
Discount rate	4.28	%	5.08	%	4.19	%	4.97	%
Rate of compensation increase	3.73	%	3.68	%	—	%	—	%

The discount rate assumption used to determine the benefit obligations as of December 31, 2012 and 2011 for the pension plans and other postretirement benefit plans was based on the Aon Hewitt AA Only Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was designed by Aon Hewitt to provide a means for plan sponsors to value the liabilities of their pension plans or postretirement benefit plans. It is a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from one-half year to 99 years. Each bond issue underlying the curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investor Services (Moody’s), Standard and Poor’s Ratings Service (S&P), and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuance among these with average ratings of double-A are included in this yield curve.

We based our December 31, 2012 and 2011 discount rate assumption on the Aon Hewitt AA Only Above Median yield curve because we believe it is representative of the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates. In 2010, we based our discount rate assumption on the Hewitt Above Median yield curve because it included a larger number of bonds which lessened the effect of outlier bonds whose yields were influenced by the volatility in the market at that time.

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2012, 2011, and 2010 were as follows:



	Pension Plans						Other Postretirement Benefit Plans
	2012		2011		2010		2012		2011		2010
Discount rate	5.08	%	5.40	%	5.80	%	4.97	%	5.22	%	5.68	%
Expected long-term rate of return on plan assets	7.67	%	7.69	%	7.71	%	—	%	—	%	—	%
Rate of compensation increase	3.68	%	3.56	%	4.18	%	—	%	—	%	—	%

The assumed health care cost trend rates as of December 31, 2012 and 2011 were as follows:



	2012		2011
Health care cost trend rate assumed for the next year	7.32	%	7.43	%
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate)	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2020		2018

Assumed health care cost trend rates impact the amounts reported for retiree health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects on other postretirement benefits (in millions):



	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	1	$	(1	)
Effect on accumulated postretirement benefit obligation	20		(17		)

The tables below present the fair values of the assets of our pension plans (in millions) as of December 31, 2012 and 2011 by level of the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value as a practical expedient for fair value. As previously noted, we do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans.



	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total as of December 31, 2012
Equity securities:
U.S. companies^(a)	$	441	$	—	$	—	$	441
International companies	135		—		—		135
Preferred stock	2		1		—		3
Mutual funds:
International growth	127		—		—		127
Index funds^(b)	117		—		—		117
Corporate debt instruments	—		290		—		290
Government securities:
U.S. Treasury securities	107		—		—		107
Other government securities	3		65		—		68
Common collective trusts	—		294		—		294
Insurance contracts	—		17		—		17
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	98		27		—		125
Total	$	1,035	$	694	$	—	$	1,729

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See notes on page 102.



	Fair Value Measurements Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total as of December 31, 2011
Equity securities:
Valero Energy Corporation common stock	$	5	$	—	$	—	$	5
Other U.S. companies^(a)	375		—		—		375
International companies	120		—		—		120
Preferred stock	2		—		—		2
Mutual funds:
International growth	102		—		—		102
Index funds^(b)	63		—		—		63
Corporate debt instruments	—		246		—		246
Government securities:
U.S. Treasury securities	67		—		—		67
Other government securities	—		84		—		84
Common collective trusts	—		247		—		247
Insurance contracts	—		17		—		17
Interest and dividends receivable	5		—		—		5
Cash and cash equivalents	153		1		—		154
Total	$	892	$	595	$	—	$	1,487

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^(a)	Equity securities are held in a wide range of industrial sectors, including consumer goods, information technology, healthcare, industrials, and financial services.


^(b)	This class includes primarily investments in approximately 60 percent equities and 40 percent bonds.

The investment policies and strategies for the assets of our pension plans incorporate a diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment return objective and risk parameters, the pension plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. As of December 31, 2012, the target allocations for plan assets are 70 percent equity securities and 30 percent fixed income investments. Equity securities include international stocks and a blend of U.S. growth and value stocks of various sizes of capitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis.

The overall expected long-term rate of return on plan assets for the pension plans is estimated using models of asset returns. Model assumptions are derived using historical data given the assumption that capital markets are informationally efficient. Three methods are used to derive the long-term expected returns for each asset class. Because each method has distinct advantages and disadvantages and differing results, an equal weighted average of the methods’ results is used.

Defined Contribution Plans

We have defined contribution plans that cover substantially most of our employees. Our contributions to these plans are based on employees’ compensation and/or a partial match of employee contributions to the plans. Our contributions to these defined contribution plans were $61 million, $59 million, and $57 million for the years ended December 31, 2012, 2011, and 2010, respectively.