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RETIREMENT AND POSTRETIREMENT BENEFIT PLANS | 12 Months Ended
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Dec. 31, 2017
RETIREMENT AND POSTRETIREMENT BENEFIT PLANS |
RETIREMENT AND POSTRETIREMENT BENEFIT PLANS |
NOTE 13 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
Occidental has various benefit plans for its salaried, domestic union and nonunion hourly, and certain foreign national employees. DEFINED CONTRIBUTION PLANS All domestic employees and certain foreign national employees are eligible to participate in one or more of the defined contribution retirement or savings plans that provide for periodic contributions by Occidental based on plan-specific criteria, such as base pay, level and employee contributions. Certain salaried employees participate in a supplemental retirement plan that restores benefits lost due to governmental limitations on qualified retirement benefits. The accrued liabilities for the supplemental retirement plan were $175 million and $163 million as of December 31, 2017 and 2016, respectively, and Occidental expensed $130 million in 2017, $113 million in 2016 and $136 million in 2015 under the provisions of these defined contribution and supplemental retirement plans. DEFINED BENEFIT PLANS Participation in defined benefit plans is limited and approximately 500 domestic and 900 foreign national employees, mainly union, nonunion hourly and certain employees that joined Occidental from acquired operations with grandfathered benefits, are currently accruing benefits under these plans. Pension costs for Occidental’s defined benefit pension plans, determined by independent actuarial valuations, are generally funded by payments to trust funds, which are administered by independent trustees. POSTRETIREMENT AND OTHER BENEFIT PLANS Occidental provides medical and dental benefits and life insurance coverage for certain active, retired and disabled employees and their eligible dependents. Occidental generally funds the benefits as they are paid during the year. These benefit costs, including the postretirement costs, were approximately $181 million in 2017, $182 million in 2016 and $200 million in 2015. OBLIGATIONS AND FUNDED STATUS The following tables show the amounts recognized in the consolidated balance sheets of Occidental related to its pension and postretirement benefit plans:
(in millions) |  | Pension Benefits |  | Postretirement Benefits |
As of December 31, |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Amounts recognized in the consolidated balance sheet: |  |  |  |  |  |  |  |  |
Other assets |  | $ | 82 |  | $ | 61 |  | $ | — |  | $ | — |
Accrued liabilities |  | (5) |  | (3) |  | (59) |  | (58) |
Deferred credits and other liabilities — pension and postretirement obligations |  | (65) |  | (71) |  | (940) |  | (892) |
|  | $ | 12 |  | $ | (13) |  | $ | (999) |  | $ | (950) |
AOCI included the following after-tax balances: |  |  |  |  |  |  |  |  |
Net loss |  | $ | 59 |  | $ | 76 |  | $ | 192 |  | $ | 169 |
Prior service cost |  | — |  | — |  | 1 |  | 1 |
|  | $ | 59 |  | $ | 76 |  | $ | 193 |  | $ | 170 |
The following tables show the funding status, obligations and plan asset fair values of Occidental related to its pension and postretirement benefit plans:
|  | Pension Benefits |  | Postretirement Benefits |
For the years ended December 31, |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Changes in the benefit obligation: |  |  |  |  |  |  |  |  |
Benefit obligation — beginning of year |  | $ | 399 |  | $ | 411 |  | $ | 950 |  | $ | 979 |
Service cost — benefits earned during the period |  | 6 |  | 7 |  | 21 |  | 20 |
Interest cost on projected benefit obligation |  | 17 |  | 18 |  | 38 |  | 39 |
Actuarial (gain) loss |  | 14 |  | (1) |  | 61 |  | (28) |
Foreign currency exchange rate (gain) loss |  | — |  | 1 |  | — |  | — |
Liability (gain) loss due to curtailment |  | (2) |  | — |  | (9) |  | — |
Special termination benefits |  | 1 |  | — |  | — |  | — |
Benefits paid |  | (44) |  | (37) |  | (62) |  | (60) |
Settlements |  | — |  |  | — |  | — |  |  | — |
Benefit obligation — end of year |  | $ | 391 |  | $ | 399 |  | $ | 999 |  | $ | 950 |
Changes in plan assets: |  |  |  |  |  |  |  |  |  |
Fair value of plan assets — beginning of year |  | $ | 386 |  | $ | 384 |  | $ | — |  | $ | — |
Actual return on plan assets |  | 52 |  | 34 |  | — |  | — |
Foreign currency exchange rate loss |  | — |  | — |  | — |  | — |
Employer contributions |  | 9 |  | 5 |  | — |  | — |
Benefits paid |  | (44) |  | (37) |  | — |  | — |
Settlements |  | — |  | — |  | — |  | — |
Fair value of plan assets — end of year |  | $ | 403 |  | $ | 386 |  | $ | — |  | $ | — |
Funded/(Unfunded) status: |  | $ | 12 |  | $ | (13) |  | $ | (999) |  | $ | (950) |
The following table sets forth details of the obligations and assets of Occidental’s defined benefit pension plans:
(in millions) |  | Accumulated Benefit Obligation in Excess of Plan Assets |  | Plan Assets in Excess of Accumulated Benefit Obligation |
As of December 31, |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Projected Benefit Obligation |  | $ | 287 |  | $ | 193 |  | $ | 104 |  | $ | 206 |
Accumulated Benefit Obligation |  | $ | 283 |  | $ | 189 |  | $ | 104 |  | $ | 206 |
Fair Value of Plan Assets |  | $ | 312 |  | $ | 119 |  | $ | 91 |  | $ | 267 |
Occidental does not expect any plan assets to be returned during 2018. COMPONENTS OF NET PERIODIC BENEFIT COST The following table sets forth the components of net periodic benefit costs:
|  | Pension Benefits |  | Postretirement Benefits |
For the years ended December 31, (in millions) |  | 2017 |  | 2016 |  | 2015 |  | 2017 |  | 2016 |  | 2015 |
Net periodic benefit costs: |  |  |  |  |  |  |  |  |  |  |  |  |
Service cost — benefits earned during the period |  | $ | 6 |  | $ | 7 |  | $ | 7 |  | $ | 21 |  | $ | 20 |  | $ | 26 |
Interest cost on projected benefit obligation |  | 17 |  | 18 |  | 18 |  | 38 |  | 39 |  | 40 |
Expected return on plan assets |  | (24) |  | (24) |  | (27) |  | — |  | — |  | — |
Recognized actuarial loss |  | 10 |  | 12 |  | 10 |  | 14 |  | 15 |  | 27 |
Other costs and adjustments |  | 3 |  | 4 |  | (4) |  | 1 |  | — |  | 1 |
Net periodic benefit cost |  | $ | 12 |  | $ | 17 |  | $ | 4 |  | $ | 74 |  | $ | 74 |  | $ | 94 |
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year are $5 million and zero, respectively. The estimated net loss and prior service cost for the defined benefit postretirement plans that will be amortized from AOCI into net periodic benefit cost over the next fiscal year are $17 million and $1 million, respectively. ADDITIONAL INFORMATION The following table sets forth the weighted-average assumptions used to determine Occidental’s benefit obligation and net periodic benefit cost for domestic plans:
|  | Pension Benefits |  | Postretirement Benefits |
For the years ended December 31, |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Benefit Obligation Assumptions: |  |  |  |  |  |  |  |  |
Discount rate |  | 3.45% |  | 3.90% |  | 3.61% |  | 4.15% |
Net Periodic Benefit Cost Assumptions: |  |  |  |  |  |  |  |  |
Discount rate |  | 3.90% |  | 4.14% |  | 4.15% |  | 4.36% |
Assumed long-term rate of return on assets |  | 6.50% |  | 6.50% |  | — |  | — |
For domestic pension plans and postretirement benefit plans, Occidental based the discount rate on the Aon/Hewitt AA-AAA Universe yield curve in 2017 and 2016. The assumed long-term rate of return on assets is estimated with regard to current market factors but within the context of historical returns for the asset mix that exists at year end. In 2017, Occidental adopted the Society of Actuaries 2017 Mortality Improvement Scale, which updated the mortality assumptions that private defined-benefit plans in the United States use in the actuarial valuations that determine a plan sponsor’s pension obligations. The new mortality improvement scale reflects additional data that the Social Security Administration has released since the MP-2016 scale released in 2016. This additional data shows a lower degree of mortality improvement than previously reflected. The changes in the mortality improvement scale results in a decrease of $2 million and $9 million in the pension and postretirement benefit obligation at December 31, 2017. For pension plans outside the United States, Occidental based its discount rate on rates indicative of government or investment grade corporate debt in the applicable country, taking into account hyperinflationary environments when necessary. The discount rates used for the foreign pension plans ranged from 1.0 percent to 10.8 percent at December 31, 2017 and 2016. The average rate of increase in future compensation levels ranged from 1.0 percent to 8.0 percent in 2017, depending on local economic conditions. The postretirement benefit obligation was determined by application of the terms of medical and dental benefits and life insurance coverage, including the effect of established maximums on covered costs, together with relevant actuarial assumptions and health care cost trend rates projected at an assumed U.S. Consumer Price Index (CPI) increase of 1.97 percent as of December 31, 2017 and 2016. Since 1993, participants other than certain union employees have paid for all medical cost increases in excess of increases in the CPI. For those union employees, Occidental projected that health care cost trend rates would decrease from 8.00 percent in 2017 until they reach 4.50 percent in 2025, and remain at 4.50 percent thereafter. A 1 percent increase or a 1 percent decrease in these assumed health care cost trend rates would result in an increase of $42 million or a reduction of $34 million, respectively, in the postretirement benefit obligation as of December 31, 2017. The annual service and interest costs would not be materially affected by these changes. The actuarial assumptions used could change in the near term as a result of changes in expected future trends and other factors that, depending on the nature of the changes, could cause increases or decreases in the plan assets and liabilities. FAIR VALUE OF PENSION PLAN ASSETS Occidental employs a total return investment approach that uses a diversified blend of equity and fixed-income investments to optimize the long-term return of plan assets at a prudent level of risk. The investments are monitored by Occidental’s Pension and Retirement Trust and Investment Committee (Investment Committee) in its role as fiduciary. The Investment Committee, consisting of senior Occidental executives, selects and employs various external professional investment management firms to manage specific investments across the spectrum of asset classes. Equity investments are diversified across U.S. and non-U.S. stocks, as well as differing styles and market capitalizations. Other asset classes, such as private equity and real estate, may be used with the goals of enhancing long-term returns and improving portfolio diversification. The target allocation of plan assets is 65 percent equity securities and 35 percent debt securities. Investment performance is measured and monitored on an ongoing basis through quarterly investment portfolio and manager guideline compliance reviews, annual liability measurements and periodic studies. The fair values of Occidental’s pension plan assets by asset category are as follows:
(in millions) |  | Fair Value Measurements at December 31, 2017, Using |
Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Asset Class: |  |  |  |  |  |  |  |  |
U.S. government securities |  | $ | 12 |  | $ | — |  | $ | — |  | $ | 12 |
Corporate bonds (a) |  | — |  | 83 |  | — |  | 83 |
Common/collective trusts (b) |  | — |  | 20 |  | — |  | 20 |
Mutual funds: |  |  |  |  |  |  |  |  |
Bond funds |  | 19 |  | — |  | — |  | 19 |
Blend funds |  | 59 |  | — |  | — |  | 59 |
Common and preferred stocks (c) |  | 188 |  | — |  | — |  | 188 |
Other |  | — |  | 30 |  | — |  | 30 |
Total pension plan assets (d) |  | $ | 278 |  | $ | 133 |  | $ | — |  | $ | 411 |
(in millions) |  | Fair Value Measurements at December 31, 2016, Using |
Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Asset Class: |  |  |  |  |  |  |  |  |
U.S. government securities |  | $ | 13 |  | $ | — |  | $ | — |  | $ | 13 |
Corporate bonds (a) |  | — |  | 85 |  | — |  | 85 |
Common/collective trusts (b) |  | — |  | 18 |  | — |  | 18 |
Mutual funds: |  |  |  |  |  |  |  |  |
Bond funds |  | 18 |  | — |  | — |  | 18 |
Blend funds |  | 48 |  | — |  | — |  | 48 |
Common and preferred stocks (c) |  | 178 |  | — |  | — |  | 178 |
Other |  | — |  | 29 |  | — |  | 29 |
Total pension plan assets (d) |  | $ | 257 |  | $ | 132 |  | $ | — |  | $ | 389 |
| (a) |  | This category represents investment grade bonds of U.S. and non-U.S. issuers from diverse industries.
| (b) |  | This category includes investment funds that primarily invest in U.S. and non-U.S. common stocks and fixed-income securities.
| (c) |  | This category represents direct investments in common and preferred stocks from diverse U.S. and non-U.S. industries.
| (d) |  | Amounts exclude net payables of approximately $8 million and $3 million as of December 31, 2017 and 2016, respectively.
Occidental expects to contribute $5 million in cash to its defined benefit pension plans during 2018. Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:
For the years ended December 31, (in millions) |  | Pension Benefits |  | Postretirement Benefits |
2018 |  | $ | 47 |  | $ | 60 |
2019 |  | $ | 30 |  | $ | 59 |
2020 |  | $ | 30 |  | $ | 59 |
2021 |  | $ | 31 |  | $ | 59 |
2022 |  | $ | 30 |  | $ | 58 |
2023 - 2027 |  | $ | 181 |  | $ | 286 |

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