16. Retirement Plans

Devon has various non-contributory defined benefit pension plans, including qualified plans and nonqualified plans. The qualified plans provide retirement benefits for certain U.S. and Canadian employees meeting certain age and service requirements. Benefits for the qualified plans are based on the employees' years of service and compensation and are funded from assets held in the plans' trusts.

The nonqualified plans provide retirement benefits for certain employees whose benefits under the qualified plans are limited by income tax regulations. The nonqualified benefits are based on the employees' years of service and compensation. For certain nonqualified plans, Devon has established trusts to fund these plans' benefit obligations. The total value of these trusts was $32 million and $36 million at December 31, 2011 and 2010, respectively, and is included in other long-term assets in the accompanying balance sheets. For the remaining nonqualified plans for which trusts have not been established, benefits are funded from Devon's available cash and cash equivalents.

Devon also has defined benefit postretirement plans ("Postretirement Plans") that provide benefits for substantially all U.S. employees. The Postretirement Plans provide medical and, in some cases, life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. Benefit obligations for the Postretirement Plans are estimated based on Devon's future cost-sharing intentions. Devon's funding policy for the Postretirement Plans is to fund the benefits as they become payable with available cash and cash equivalents.

Benefit Obligations and Funded Status

The following table presents the funded status of Devon's qualified and nonqualified pension and other postretirement benefit plans. The benefit obligation for pension plans represents the projected benefit obligation, while the benefit obligation for the postretirement benefit plans represents the accumulated benefit obligation. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. The accumulated benefit obligation for pension plans at December 31, 2011 and 2010 was $1.2 billion and $1.0 billion, respectively. Devon's benefit obligations and plan assets are measured each year as of December 31. Devon's 2011 pension plan contributions of $454 million presented in the table were primarily discretionary. After these contributions, the projected benefit obligation for Devon's qualified plans was fully funded as of December 31, 2011.


	Pension Benefits		Postretirement Benefits
	2011	2010	2011	2010
	(In millions)
Change in benefit obligation:
Benefit obligation at beginning of year	$ 1,124	$ 980	$ 43	$ 64
Service cost	37	33	1	1
Interest cost	60	58	2	3
Actuarial loss (gain)	123	82	(8)	1
Plan amendments	—	5	5	(22)
Plan settlements	—	—	(4)	—
Foreign exchange rate changes	(1)	2	—	—
Participant contributions	—	—	3	2
Benefits paid	(40)	(36)	(5)	(6)
Benefit obligation at end of year	1,303	1,124	37	43

Change in plan assets:
Fair value of plan assets at beginning of year	632	532	—	—
Actual return on plan assets	141	69	—	—
Employer contributions	454	66	7	4
Participant contributions	—	—	3	2
Plan settlements	—	—	(5)	—
Benefits paid	(40)	(36)	(5)	(6)
Foreign exchange rate changes	—	1	—	—
Fair value of plan assets at end of year	1,187	632	—	—

Funded status at end of year	$ (116)	$ (492)	$ (37)	$ (43)

Amounts recognized in balance sheet:
Noncurrent assets	$ 116	$ 2	$ —	$ —
Current liabilities	(10)	(9)	(3)	(4)
Noncurrent liabilities	(222)	(485)	(34)	(39)
Net amount	$ (116)	$ (492)	$ (37)	$ (43)

Amounts recognized in accumulated other comprehensive earnings:
Net actuarial loss (gain)	$ 348	$ 357	$ (9)	$ (5)
Prior service cost (credit)	18	21	(5)	(12)
Total	$ 366	$ 378	$ (14)	$ (17)

The plan assets for pension benefits in the table above exclude the assets held in trusts for the nonqualified plans. However, employer contributions for pension benefits in the table above include $8 million for both 2011 and 2010, which were transferred from the trusts established for the nonqualified plans.

Certain of Devon's pension plans have a projected benefit obligation and accumulated benefit obligation in excess of plan assets at December 31, 2011 and 2010 as presented in the table below.


	December 31,
	2011	2010
	(In millions)
Projected benefit obligation	$ 232	$ 1,110
Accumulated benefit obligation	$ 189	$ 996
Fair value of plan assets	$ —	$ 616

Net Periodic Benefit Cost and Other Comprehensive Earnings

The following table presents the components of net periodic benefit cost and other comprehensive earnings.


	Pension Benefits			Postretirement Benefits
	2011	2010	2009	2011	2010	2009
	(In millions)
Net periodic benefit cost:
Service cost	$ 37	$ 33	$ 43	$ 1	$ 1	$ 1
Interest cost	60	58	58	2	3	3
Expected return on plan assets	(42)	(36)	(35)	—	—	—
Curtailment and settlement expense	—	—	5	(3)	—	—
Recognition of net actuarial loss (gain)	32	27	45	—	—	(1)
Recognition of prior service cost	3	3	3	(2)	1	2
Total net periodic benefit cost	90	85	119	(2)	5	5
Other comprehensive earnings:
Actuarial loss (gain) arising in current year	23	50	(66)	(7)	1	7
Prior service cost (credit) arising in current year.	—	4	—	5	(22)	—
Recognition of net actuarial loss, including settlement expense, in net periodic benefit cost	(32)	(27)	(45)	3	—	1
Recognition of prior service cost, including curtailment, in net periodic benefit cost	(3)	(3)	(8)	2	(1)	(2)
Total other comprehensive (loss) earnings	(12)	24	(119)	3	(22)	6
Total recognized	$ 78	$ 109	$ —	$ 1	$ (17)	$ 11

The following table presents the estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive earnings into net periodic benefit cost during 2012.

	Pension Benefits	Postretirement Benefits
	(In millions)
Net actuarial loss (gain)	$ 24	$ (1)
Prior service cost (credit)	3	(1)
Total	$ 27	$ (2)

Assumptions

The following table presents the weighted average actuarial assumptions used to determine obligations and periodic costs.


	Pension Benefits			Postretirement Benefits
	2011	2010	2009	2011	2010	2009
Assumptions to determine benefit obligations:
Discount rate	4.65%	5.50%	6.00%	4.25%	4.90%	5.70%
Rate of compensation increase	4.97%	6.94%	6.95%	N/A	N/A	N/A
Assumptions to determine net periodic benefit cost:
Discount rate	5.50%	6.00%	6.00%	4.90%	5.70%	6.00%
Expected return on plan assets	6.48%	6.94%	7.18%	N/A	N/A	N/A
Rate of compensation increase	6.94%	6.95%	6.95%	N/A	N/A	N/A

Discount rate – Future pension and postretirement obligations are discounted at the end of each year based on the rate at which obligations could be effectively settled, considering the timing of estimated future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk.

Rate of compensation increase – For measurement of the 2011 benefit obligation for the pension plans, a 4.97% compensation increase was assumed.

Expected return on plan assets – The expected rate of return on plan assets was determined by evaluating input from external consultants and economists, as well as long-term inflation assumptions. Devon expects the long-term asset allocation to approximate the targeted allocation. Therefore, the expected long-term rate of return on plan assets is based on the target allocation of investment types. See the pension plan assets section below for more information on Devon's target allocations.

Other assumptions – For measurement of the 2011 benefit obligation for the other postretirement medical plans, an 8.2% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2012. The rate was assumed to decrease annually to an ultimate rate of 5% in the year 2029 and remain at that level thereafter. Assumed health care cost-trend rates affect the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have changed the postretirement benefits obligation as of December 31, 2011, by $2 million and would change the 2012 service and interest cost components of net periodic benefit cost by less than $1 million.

Pension Plan Assets

Devon's overall investment objective for its pension plans' assets is to achieve stability of the plans' funded status while providing long-term growth of invested capital and income to ensure benefit payments can be funded when required. To assist in achieving this objective, Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. Derivatives or other speculative investments considered high risk are generally prohibited. The following table presents Devon's target allocation for its pension plan assets. Devon made significant contributions to its qualified pension plans in 2011. As a result, Devon revised its target allocations in 2011.


	December 31,
	2011	2010
Fixed income	70%	40%
Equity	20%	47.5%
Other	10%	12.5%

The fair values of Devon's pension assets are presented by asset class in the following tables.


	As of December 31, 2011
			Fair Value Measurements Using:
	Actual Allocation	Total	Level 1 Inputs	Level 2 Inputs	Level 3 Inputs
	($ In millions)
Fixed-income securities:
U.S. Treasury obligations	43.9%	$ 522	$ 27	$ 495	$ —
Corporate bonds	24.8%	294	265	29	—
Other bonds	3.1%	36	36	—	—
Total fixed-income securities	71.8%	852	328	524	—
Equity securities:
Global (large, mid, small cap)	18.0%	214	—	214	—
Other securities:
Hedge fund & alternative investments.	8.9%	106	16	—	90
Short-term investment funds	1.3%	15	—	15	—
Total other securities	10.2%	121	16	15	90
Total investments	100.0%	$ 1,187	$ 344	$ 753	$ 90


	As of December 31, 2010
			Fair Value Measurements Using:
	Actual Allocation	Total	Level 1 Inputs	Level 2 Inputs	Level 3 Inputs
	($ In millions)
Equity securities:
U.S. large cap	22.3%	$ 141	$ —	$ 141	$ —
U.S. small cap	14.1%	89	89	—	—
International large cap	14.4%	91	50	41	—
Total equity securities	50.8%	321	139	182	—
Fixed-income securities:
Corporate bonds	22.0%	139	139	—	—
U.S. Treasury obligations	10.9%	69	69	—	—
Other bonds	4.6%	29	29	—	—
Total fixed-income securities	37.5%	237	237	—	—
Other securities:
Hedge funds	9.2%	58	—	—	58
Short-term investment funds	2.5%	16	—	16	—
Total other securities	11.7%	74	—	16	58
Total investments	100.0%	$ 632	$ 376	$ 198	$ 58

The following methods and assumptions were used to estimate the fair values in the tables above.

Fixed-income securities – Devon's fixed-income securities consist of United States Treasury obligations, bonds issued by investment-grade companies from diverse industries, and asset-backed securities. These fixed-income securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices.

Devon's fixed income securities also include commingled funds that primarily invest in long-term bonds and U.S. Treasury securities. These fixed income securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

Equity securities – Devon's equity securities include a commingled global equity fund that invests in large, mid and small capitalization stocks across the world's developed and emerging markets. These equity securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

At December 31, 2010, Devon's equity securities consisted of investments in United States large and small capitalization companies and international large capitalization companies. These equity securities were actively traded securities that could be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices.

At December 31, 2010, Devon's equity securities also included a commingled fund that invested in large capitalization companies. These equity securities could be redeemed on demand but were not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

Other securities – Devon's other securities include commingled, short-term investment funds. These securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by investment managers.

Devon other securities include an investment in an actively traded global mutual fund that focuses on alternative investment strategies and a hedge fund of funds that invests both long and short using a variety of investment strategies. Management of the hedge fund has the ability to shift investments from value to growth strategies, from small to large capitalization stocks, and from a net long position to a net short position. Devon's hedge fund is not actively traded and Devon is subject to redemption restrictions with regards to this investment. The fair value of this Level 3 investment represents the fair value as determined by the hedge fund manager.

Included below is a summary of the changes in Devon's Level 3 plan assets (in millions).

December 31, 2009	$ 51
Purchases	3
Investment returns	4
December 31, 2010	58
Purchases	33
Investment returns	(1)
December 31, 2011	$ 90

Expected Cash Flows

The following table presents expected cash flow information for Devon's pension and other postretirement benefit plans.

	Pension Benefits	Postretirement Benefits
	(In millions)
Devon's 2012 contributions	$ 9	$ 3
Benefit payments:
2012	$ 44	$ 3
2013	$ 49	$ 3
2014	$ 52	$ 3
2015	$ 56	$ 3
2016	$ 61	$ 3
2017 to 2021	$ 390	$ 14

Expected contributions included in the table above include amounts related to Devon's qualified plans, nonqualified plans and Postretirement Plans. Of the benefits expected to be paid in 2012, the $9 million of pension benefits is expected to be funded from the trusts established for the nonqualified and the $3 million of other postretirement benefits is expected to be funded from Devon's available cash and cash equivalents. Expected employer contributions and benefit payments for other postretirement benefits are presented net of employee contributions.

Defined Contribution Plans

Devon maintains several defined contribution plans covering its employees in the U.S. and Canada. Such plans include Devon's 401(k) plan, enhanced contribution plan and Canadian pension and savings plan. Contributions are primarily based upon percentages of annual compensation and years of service. In addition, each plan is subject to regulatory limitations by each respective government. The following table presents Devon's expense related to these defined contribution plans.


	Year Ended December 31,
	2011	2010	2009
	(In millions)
401(k) and enhanced contribution plans	$ 33	$ 32	$ 34
Canadian pension and savings plans	21	17	15
Total	$ 54	$ 49	$ 49