The company has defined-benefit pension plans for many employees. The company typically prefunds defined-benefit plans as required by local regulations or in certain situations where prefunding provides economic advantages. In the United States, all qualified plans are subject to the Employee Retirement Income Security Act minimum funding standard. The company does not typically fund U.S. nonqualified pension plans that are not subject to funding requirements under laws and regulations because contributions to these pension plans may be less economic and investment returns may be less attractive than the company's other investment alternatives.

The provisions of the Pension Protection Act of 2006 (PPA) became effective for the company in 2008. These provisions change, among other things, the methodology for determining the interest rate to be used in calculating lump-sum benefits. This change in methodology increased the lump-sum interest rate and lowered the company's pension benefit obligations by about $300 at December 31, 2007. The effect of the interest rate change on pension plan contributions during 2008 is expected to be de minimis, as the company's funded pension plans are considered "well-funded" under PPA provisions.

The company also sponsors other postretirement plans that provide medical and dental benefits, as well as life insurance for some active and qualifying retired employees. The plans are unfunded, and the company and retirees share the costs. Medical coverage for Medicare-eligible retirees in the company's main U.S. medical plan is secondary to Medicare (including Part D), and the increase to the company contribution for retiree medical coverage is limited to no more than 4 percent per year. Certain life insurance benefits are paid by the company.

Effective December 31, 2006, the company implemented the recognition and measurement provisions of Financial Accounting Standards Board Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R), which requires the recognition of the overfunded or underfunded status of each of its defined benefit pension and other postretirement benefit plans as an asset or liability, with the offset to "Accumulated other comprehensive loss."

The company uses a measurement date of December 31 to value its benefit plan assets and obligations. The funded status of the company's pension and other postretirement benefit plans for 2007 and 2006 is as follows:

Pension Benefits
2007 2006 Other Benefits
U.S. Int'l. U.S. Int'l. 2007 2006
Change in Benefit Obligation
Benefit obligation at January 1 $8,792 $4,207 $8,594 $3,611 $3,257 $3,252
Service cost 260 125 234 98 49 35
Interest cost 483 255 468 214 184 181
Plan participants' contributions – 7 – 7 122 134
Plan amendments (301) 97 14 37 – 107
Curtailments – (12) – – – –
Actuarial (gain) loss (131) (40) 297 97 (413) (102)
Foreign currency exchange rate changes – 219 – 355 12 (5)
Benefits paid (708) (225) (815) (212) (272) (345)
Benefit obligation at December 31 8,395 4,633 8,792 4,207 2,939 3,257
Change in Plan Assets
Fair value of plan assets at January 1 7,941 3,456 7,463 2,890 – –
Actual return on plan assets 607 232 1,069 225 – –
Foreign currency exchange rate changes – 183 – 321 – –
Employer contributions 78 239 224 225 150 211
Plan participants' contributions – 7 – 7 122 134
Benefits paid (708) (225) (815) (212) (272) (345)
Fair value of plan assets at December 31 7,918 3,892 7,941 3,456 – –
Funded Status at December 31 $(477) $(741) $(851) $(751) $(2,939) $(3,257)

Amounts recognized on the Consolidated Balance Sheet for the company's pension and other postretirement benefit plans at December 31, 2007 and 2006, include:

Pension Benefits
2007 2006 Other Benefits
U.S. Int'l. U.S. Int'l. 2007 2006
Deferred charges and other assets $181 $279 $18 $96 $– $–
Accrued liabilities (68) (55) (53) (47) (207) (223)
Reserves for employee benefit plans (590) (965) (816) (800) (2,732) (3,034)
Net amount recognized at December 31 $(477) $(741) $(851) $(751) $(2,939) $(3,257)

Amounts recognized on a before-tax basis in "Accumulated other comprehensive loss" for the company's pension and other postretirement plans were $2,990 and $4,065 at the end of 2007 and 2006. These amounts consisted of:

Pension Benefits
2007 2006 Other Benefits
U.S. Int'l. U.S. Int'l. 2007 2006
Net actuarial loss $1,539 $1,237 $1,892 $1,288 $490 $972
Prior-service costs (credit) (75) 203 272 126 (404) (485)
Total recognized at December 31 $1,464 $1,440 $2,164 $1,414 $86 $487

The accumulated benefit obligations for all U.S. and international pension plans were $7,712 and $4,000, respectively, at December 31, 2007, and $7,987 and $3,669, respectively, at December 31, 2006.

Information for U.S. and international pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2007 and 2006, was:

Pension Benefits
2007 2006
U.S. Int'l. U.S. Int'l.
Projected benefit obligations $678 $1,089 $848 $849
Accumulated benefit obligations 638 926 806 741
Fair value of plan assets 20 271 12 172

The components of net periodic benefit cost for 2007, 2006 and 2005 and amounts recognized in other comprehensive income for 2007 are shown in the table below. For 2007, changes in pension plan assets and benefit obligations were recognized as changes in other comprehensive income.

Pension Benefits
2007 2006 2005 Other Benefits
U.S. Int'l. U.S. Int'l. U.S. Int'l. 2007 2006 2005
Net Periodic Benefit Cost
Service cost $260 $125 $234 $98 $208 $84 $49 $35 $30
Interest cost 483 255 468 214 395 199 184 181 164
Expected return on plan assets (578) (266) (550) (227) (449) (208) – – –
Amortization of transitional assets – – – 1 – 2 – – –
Amortization of prior-service costs (credits) 46 17 46 14 45 16 (81) (86) (91)
Recognized actuarial losses 128 82 149 69 177 51 81 97 93
Settlement losses 65 – 70 – 86 – – – –
Curtailment losses – 3 – – – – – – –
Net periodic benefit cost 404 216 417 169 462 144 233 227 196
Changes Recognized in Other Comprehensive Income
Net actuarial (gain) loss during period (160) 31 – – – – (401) – –
Amortization of actuarial (loss) (193) (82) – – – – (81) – –
Prior service (credit) cost during period (301) 97 – – – – – – –
Amortization of prior-service (costs) credits (46) (20) – – – – 81 – –
Total changes recognized in other comprehensive income (700) 26 – – – – (401) – –
Recognized in Net Periodic Benefit Cost and Other Comprehensive Income $(296) $242 $417 $169 $462 $144 $(168) $227 $196

Net actuarial losses recorded in "Accumulated other comprehensive loss" at December 31, 2007, for the company's U.S. pension, international pension and other postretirement benefit plans are being amortized on a straight-line basis over approximately 10, 13 and 10 years, respectively. These amortization periods represent the estimated average remaining service of employees expected to receive benefits under the plans. These losses are amortized to the extent they exceed 10 percent of the higher of the projected benefit obligation or market-related value of plan assets. The amount subject to amortization is determined on a plan-by-plan basis. During 2008, the company estimates actuarial losses of $59, $80 and $39 will be amortized from "Accumulated other comprehensive loss" for U.S. pension, international pension and other postretirement benefit plans, respectively. In addition, the company estimates an additional $78 will be recognized from "Accumulated other comprehensive loss" during 2008 related to lump-sum settlement costs from U.S. pension plans.

The weighted average amortization period for recognizing prior service costs (credits) recorded in "Accumulated other comprehensive loss" at December 31, 2007, was approximately nine and 11 years for U.S. and international pension plans, respectively, and six years for other postretirement benefit plans. During 2008, the company estimates prior service (credits) costs of $(7), $25 and $(81) will be amortized from "Accumulated other comprehensive loss" for U.S. pension, international pension and other postretirement benefit plans, respectively.

Assumptions

The following weighted-average assumptions were used to determine benefit obligations and net periodic benefit costs for years ended December 31:

Pension Benefits
2007 2006 2005 Other Benefits
U.S. Int'l. U.S. Int'l. U.S. Int'l. 2007 2006 2005
1 The 2005 discount rate, expected return on plan assets and rate of compensation increase reflect the remeasurement of the acquired Unocal benefit plans at July 31, 2005.
2 The 2006 U.S. discount rate reflects remeasurement on July 1, 2006, due to plan combinations and changes, primarily several Unocal plans into related Chevron plans.
Assumptions used to determine benefit obligations
Discount rate 6.3% 6.7% 5.8% 6.0% 5.5% 5.9% 6.3% 5.8% 5.6%
Rate of compensation increase 4.5% 6.4% 4.5% 6.1% 4.0% 5.1% 4.5% 4.5% 4.0%
Assumptions used to determine net periodic benefit cost
Discount rate1,2 5.8% 6.0% 5.8% 5.9% 5.5% 6.4% 5.8% 5.9% 5.8%
Expected return on plan assets1 7.8% 7.5% 7.8% 7.4% 7.8% 7.9% N/A N/A N/A
Rate of compensation increase1 4.5% 6.1% 4.2% 5.1% 4.0% 5.0% 4.5% 4.2% 4.0%

Expected Return on Plan Assets

The company's estimated long-term rate of return on pension assets is driven primarily by actual historical asset-class returns, an assessment of expected future performance, advice from external actuarial firms and the incorporation of specific asset-class risk factors. Asset allocations are periodically updated using pension plan asset/liability studies, and the company's estimated long-term rates of return are consistent with these studies.

There have been no changes in the expected long-term rate of return on plan assets since 2002 for U.S. plans, which account for 67 percent of the company's pension plan assets. At December 31, 2007, the estimated long-term rate of return on U.S. pension plan assets was 7.8 percent.

The market-related value of assets of the major U.S. pension plan used in the determination of pension expense was based on the market values in the three months preceding the year-end measurement date, as opposed to the maximum allowable period of five years under U.S. accounting rules. Management considers the three-month time period long enough to minimize the effects of distortions from day-to-day market volatility and still be contemporaneous to the end of the year. For other plans, market value of assets as of the measurement date is used in calculating the pension expense.

Discount Rate

The discount rate assumptions used to determine U.S. and international pension and postretirement benefit plan obligations and expense reflect the prevailing rates available on high-quality, fixed-income debt instruments. At December 31, 2007, the company selected a 6.3 percent discount rate for the major U.S. pension and postretirement plans. This rate was based on a cash flow analysis that matched estimated future benefit payments to the Citigroup Pension Discount Yield Curve as of year-end 2007. The discount rates at the end of 2006 and 2005 were 5.8 percent and 5.5 percent, respectively.

Other Benefit Assumptions

For the measurement of accumulated postretirement benefit obligation at December 31, 2007, for the main U.S. postretirement medical plan, the assumed health care cost-trend rates start with 8 percent in 2008 and gradually decline to 5 percent for 2014 and beyond. For this measurement at December 31, 2006, the assumed health care cost-trend rates started with 9 percent in 2007 and gradually declined to 5 percent for 2011 and beyond. In both measurements, the annual increase to company contributions was capped at 4 percent.

Assumed health care cost-trend rates can have a significant effect on the amounts reported for retiree health care costs. The impact is mitigated by the 4 percent cap on the company's medical contributions for the primary U.S. plan. A one-percentage-point change in the assumed health care cost-trend rates would have the following effects:

1 Percent Increase 1 Percent Decrease
Effect on total service and interest cost components $9 $(8)
Effect on postretirement benefit obligation $86 $(75)

Plan Assets and Investment Strategy

The company's pension plan weighted-average asset allocations at December 31 by asset category are as follows:

  U.S. International
Asset Category 2007 2006 2007 2006
Equities 64% 68% 56% 62%
Fixed Income 23% 21% 43% 37%
Real Estate 12% 10% 1% 1%
Other 1% 1% – –
Total 100% 100% 100% 100%

The pension plans invest primarily in asset categories with sufficient size, liquidity and cost efficiency to permit investments of reasonable size. The pension plans invest in asset categories that provide diversification benefits and are easily measured. To assess the plans' investment performance, long-term asset allocation policy benchmarks have been established.

For the primary U.S. pension plan, the Chevron Board of Directors has approved the following percentage asset-allocation ranges: equities 40-70, fixed income/cash 20-60, real estate 0-15 and other 0-5. The significant international pension plans also have established maximum and minimum asset allocation ranges that vary by each plan. Actual asset allocation within approved ranges is based on a variety of current economic and market conditions and consideration of specific asset category risk.

Equities include investments in the company's common stock in the amount of $36 and $17 at December 31, 2007 and 2006, respectively. The "Other" asset category includes minimal investments in private-equity limited partnerships.

Cash Contributions and Benefit Payments

In 2007, the company contributed $78 and $239 to its U.S. and international pension plans, respectively. In 2008, the company expects contributions to be approximately $300 and $200 to its U.S. and international pension plans, respectively. Actual contribution amounts are dependent upon plan-investment returns, changes in pension obligations, regulatory environments and other economic factors. Additional funding may ultimately be required if investment returns are insufficient to offset increases in plan obligations.

The company anticipates paying other postretirement benefits of approximately $207 in 2008, as compared with $150 paid in 2007.

The following benefit payments, which include estimated future service, are expected to be paid in the next 10 years:

Pension Benefits
  U.S. Int'l. Other Benefits
2008 $832 $238 $207
2009 $841 $272 $213
2010 $849 $282 $219
2011 $856 $279 $225
2012 $863 $296 $228
2013-2017 $4,338 $1,819 $1,195

Employee Savings Investment Plan

Eligible employees of Chevron and certain of its subsidiaries participate in the Chevron Employee Savings Investment Plan (ESIP).

Charges to expense for the ESIP represent the company's contributions to the plan, which are funded either through the purchase of shares of common stock on the open market or through the release of common stock held in the leveraged employee stock ownership plan (LESOP), which follows. Total company matching contributions to employee accounts within the ESIP were $206, $169 and $145 in 2007, 2006 and 2005, respectively. This cost was reduced by the value of shares released from the LESOP totaling $33, $6 and $4 in 2007, 2006 and 2005, respectively. The remaining amounts, totaling $173, $163 and $141 in 2007, 2006 and 2005, respectively, represent open market purchases.

Employee Stock Ownership Plan

Within the Chevron ESIP is an employee stock ownership plan (ESOP). In 1989, Chevron established a LESOP as a constituent part of the ESOP. The LESOP provides partial prefunding of the company's future commitments to the ESIP.

As permitted by American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans, the company has elected to continue its practices, which are based on AICPA Statement of Position 76-3, Accounting Practices for Certain Employee Stock Ownership Plans, and subsequent consensus of the EITF of the FASB. The debt of the LESOP is recorded as debt, and shares pledged as collateral are reported as "Deferred compensation and benefit plan trust" on the Consolidated Balance Sheet and the Consolidated Statement of Stockholders' Equity.

The company reports compensation expense equal to LESOP debt principal repayments less dividends received and used by the LESOP for debt service. Interest accrued on LESOP debt is recorded as interest expense. Dividends paid on LESOP shares are reflected as a reduction of retained earnings. All LESOP shares are considered outstanding for earnings-per-share computations.

Total (credits) expenses recorded for the LESOP were $(1), $(1) and $94 in 2007, 2006 and 2005, respectively, including $16, $17 and $18 of interest expense related to LESOP debt and a (credit) charge to compensation expense of $(17), $(18) and $76.

Of the dividends paid on the LESOP shares, $8, $59 and $55 were used in 2007, 2006 and 2005, respectively, to service LESOP debt. The amount in 2006 included $28 of LESOP debt service that was scheduled for payment on the first business day of January 2007 and was paid in late December 2006. In addition, the company made contributions in 2005 of $98 to satisfy LESOP debt service in excess of dividends received by the LESOP. No contributions were required in 2007 or 2006 as dividends received by the LESOP were sufficient to satisfy LESOP debt service.

Shares held in the LESOP are released and allocated to the accounts of plan participants based on debt service deemed to be paid in the year in proportion to the total of current year and remaining debt service. LESOP shares as of December 31, 2007 and 2006, were as follows:

Thousands 2007 2006
Allocated shares 20,506 21,827
Unallocated shares 7,365 8,316
Total LESOP shares 27,871 30,143

Benefit Plan Trusts

Texaco established a benefit plan trust for funding obligations under some of its benefit plans. At year-end 2007, the trust contained 14.2 million shares of Chevron treasury stock. The company intends to continue to pay its obligations under the benefit plans. The trust will sell the shares or use the dividends from the shares to pay benefits only to the extent that the company does not pay such benefits. The trustee will vote the shares held in the trust as instructed by the trust's beneficiaries. The shares held in the trust are not considered outstanding for earnings-per-share purposes until distributed or sold by the trust in payment of benefit obligations.

Unocal established various grantor trusts to fund obligations under some of its benefit plans, including the deferred compensation and supplemental retirement plans. At December 31, 2007 and 2006, trust assets of $69 and $98, respectively, were invested primarily in interest-earning accounts.

Employee Incentive Plans

Chevron has two incentive plans, the Management Incentive Plan (MIP) and the Long-Term Incentive Plan (LTIP), for officers and other regular salaried employees of the company and its subsidiaries who hold positions of significant responsibility. MIP is an annual cash incentive plan that links awards to performance results of the prior year. The cash awards may be deferred by the recipients by conversion to stock units or other investment fund alternatives. Aggregate charges to expense for MIP were $184, $180 and $155 in 2007, 2006 and 2005, respectively. Awards under LTIP consist of stock options and other share-based compensation that are described in Note 21.

Through 2007 the company had a program that provided eligible employees, other than those covered by MIP and LTIP, with an annual cash bonus if the company achieves certain financial and safety goals. Charges for the program were $431, $329 and $324 in 2007, 2006 and 2005, respectively. Effective in 2008, this program was modified to mirror the design of MIP and both were combined into a single plan named the Chevron Incentive Plan (CIP).