K » Topics » Retirement benefits

This excerpt taken from the K 10-K filed Feb 26, 2010.

Retirement benefits

Our Company sponsors a number of U.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations and asset return performance. A substantial majority of plan assets are invested in a globally diversified portfolio of equity securities with smaller holdings of debt securities and other investments. We recognize the cost of benefits provided during retirement over the employees’ active working life to determine the obligations and expense related to our retiree benefit plans. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom and Canada.

To conduct our annual review of the long-term rate of return on plan assets, we model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. Our U.S. plan model, corresponding to approximately 68% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.5% and an active management premium of 1% (net of fees) validated by historical analysis. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are generally not revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return for U.S. plans in 2009 of 8.9% equated to approximately the 58th percentile expectation of our 2009 model. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 32% of our global benefit plan assets.

Based on consolidated benefit plan assets at January 2, 2010, a 100 basis point reduction in the assumed rate of return would increase 2010 benefits expense by approximately $40 million.

 

22


Correspondingly, a 100 basis point shortfall between the assumed and actual rate of return on plan assets for 2010 would result in a similar amount of arising experience loss. Any arising asset-related experience gain or loss is recognized in the calculated value of plan assets over a five-year period. Once recognized, experience gains and losses are amortized using a declining-balance method over the average remaining service period of active plan participants, which for U.S. plans is presently about 12 years. Under this recognition method, a 100 basis point shortfall in actual versus assumed performance of all of our plan assets in 2010 would reduce pre-tax earnings by approximately $1.4 million in 2011, increasing to approximately $7 million in 2015. For each of the three fiscal years, our actual return on plan assets exceeded (was less than) the recognized assumed return by the following amounts (in millions): 2009-$507; 2008–$(1,528); 2007–$(99).

To conduct our annual review of health care cost trend rates, we model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components in our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost growth rate of approximately 2.4%, our initial trend rate for 2010 of 7.1% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 0.5% per year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations at January 2, 2010, a 100 basis point increase in the assumed health care cost trend rates would increase 2010 benefits expense by approximately $17 million. A 100 basis point excess of 2010 actual health care claims cost over that calculated from the assumed trend rate would result in an arising experience loss of approximately $9 million. Any arising health care claims cost-related experience gain or loss is recognized in the calculated amount of claims experience over a four-year period. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years. The net experience gain arising from recognition of 2009 claims experience was approximately $16 million.

To conduct our annual review of discount rates, we selected the discount rate using the spot yield curve underlying the Citigroup Index (published monthly by Citigroup). Using this methodology, we determined the single discount rate for each of our retirement plans that was equivalent to discounting against the entire Citigroup spot yield curve. The measurement dates for our defined benefit plans are consistent with our fiscal year end. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices during December of each year.

Based on consolidated obligations at January 2, 2010, a 25 basis point decline in the weighted-average discount rate used for benefit plan measurement purposes would increase 2010 benefits expense by approximately $14 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.

Despite the previously-described rigorous policies for selecting major actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of January 2, 2010, we had consolidated unamortized prior service cost and net experience losses of approximately $1.7 billion, as compared to approximately $1.9 billion at January 3, 2009. The year-over-year decrease in net unamortized amounts was attributable primarily to favorable asset performance during 2009. Of the total unamortized amounts at January 2, 2010, approximately $1.5 billion was related to asset losses that occurred during 2008, offset by $0.5 billion in asset gains during 2009, with the remainder largely related to discount rate reductions and net unfavorable health care claims experience (including upward revisions in the assumed trend rate) prior to 2009. For 2010, we currently expect total amortization of prior service cost and net experience losses to be approximately $37 million higher than the actual 2009 amount of approximately $73 million. Total employee benefit expense for 2010 is expected to be higher than 2009 due to lower discount rates, a further phase in of the 2008 investment losses, offset by better than expected 2009 investment performance. Based on our current actuarial assumptions, we expect 2011 pension expense to increase significantly primarily due to the amortization of net experience losses.

During 2009 we made contributions in the amount of $87 million to Kellogg’s global tax-qualified pension programs. This amount was mostly discretionary. We anticipate making additional contributions in future years due to the poor performance of global equity markets during 2008. Additionally we contributed $13 million to our retiree medical programs; most of this contribution was also discretionary and largely used to fund benefit obligations related to our union retiree healthcare benefits.

Assuming actual future experience is consistent with our current assumptions, annual amortization of accumulated prior service cost and net experience

 

23


losses during each of the next several years would increase versus the 2009 amount.

These excerpts taken from the K 10-K filed Feb 24, 2009.
Retirement benefits
Our Company sponsors a number of U.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations and asset return performance. A substantial majority of plan assets are invested in a globally diversified portfolio of equity securities with smaller holdings of debt securities and other investments. We follow SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”) for the measurement and recognition of obligations and expense related to our retiree benefit plans. Embodied in both of these standards is the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long- term rates of return on plan assets, the health care cost trend rates, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom, and Canada.
 
To conduct our annual review of the long-term rate of return on plan assets, we model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. Our U.S. plan model, corresponding to approximately 70% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.5% and an active management premium of 1% (net of fees) validated by historical analysis. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are generally not revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return for U.S. plans in 2008 of 8.9% equated to approximately the 50th percentile expectation of our 2008 model. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 30% of our global benefit plan assets.
 
Based on consolidated benefit plan assets at January 3, 2009, a 100 basis point reduction in the assumed rate of return would increase 2009 benefits expense by approximately $31 million. Correspondingly, a 100 basis point shortfall between the assumed and actual rate of return on plan assets for 2008 would result in a similar amount of arising experience loss. Any arising asset-related experience gain or loss is recognized in the calculated value of plan assets over a five-year period. Once recognized, experience gains and losses are amortized using a declining-balance method over the average remaining service period of active plan participants, which for U.S. plans is presently about 13 years. Under this recognition method, a 100 basis point shortfall in actual versus assumed performance of all of our plan assets in 2008 would reduce pre-tax earnings by approximately $1 million in 2010, increasing to approximately $5 million in 2014. For each of the three fiscal years, our actual return on plan assets exceeded/(was less than) the recognized assumed return by the following amounts (in millions): 2008–$(1,528); 2007–$(99); 2006–$257.
 
To conduct our annual review of health care cost trend rates, we model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost


23


Table of Contents

growth rate of approximately 5%, our initial trend rate for 2009 of 7.5% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 0.5% per year, until the ultimate trend rate of 4.5% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations at January 3, 2009, a 100 basis point increase in the assumed health care cost trend rates would increase 2009 benefits expense by approximately $15 million. A 100 basis point excess of 2009 actual health care claims cost over that calculated from the assumed trend rate would result in an arising experience loss of approximately $9 million. Any arising health care claims cost-related experience gain or loss is recognized in the calculated amount of claims experience over a four-year period. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years, resulting in at least the minimum amortization prescribed by SFAS No. 106. The net experience gain arising from recognition of 2008 claims experience was approximately $4 million.
 
To conduct our annual review of discount rates, we use several published market indices with appropriate duration weighting to assess prevailing rates on high quality debt securities, with a primary focus on the Citigroup Pension Liability Index® for our U.S. plans. To test the appropriateness of these indices, we periodically conduct a matching exercise between the expected settlement cash flows of our plans and the bond maturities, consisting principally of AA-rated (or the equivalent in foreign jurisdictions) non-callable issues with at least $25 million principal outstanding. The model does not assume any reinvestment rates and assumes that bond investments mature just in time to pay benefits as they become due. For those years where no suitable bonds are available, the portfolio utilizes a linear interpolation approach to impute a hypothetical bond whose maturity matches the cash flows required in those years. During 2008, we refined our methodology for setting our discount rate by inputting the cash flows for our pension, postretirement and postemployment plans into the spot yield curve underlying the Citigroup index. The measurement dates for our defined benefit plans are consistent with our fiscal year end. Accordingly, we select discount rates to measure our benefit obligations that are consistent with market indices during December of each year.
 
Based on consolidated obligations at January 3, 2009, a 25 basis point decline in the weighted-average discount rate used for benefit plan measurement purposes would increase 2009 benefits expense by approximately $13 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.
 
Despite the previously-described rigorous policies for selecting major actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of January 3, 2009, we had consolidated unamortized prior service cost and net experience losses of approximately $1.9 billion, as compared to approximately $0.6 billion at December 29, 2007. The year-over-year increase in net unamortized amounts was attributable primarily to poor asset performance during 2008. Of the total unamortized amounts at January 3, 2009, approximately $1.5 billion was related to asset losses during 2008, with the remainder largely related to discount rate reductions and net unfavorable health care claims experience (including upward revisions in the assumed trend rate) prior to 2008. For 2009, we currently expect total amortization of prior service cost and net experience losses to be approximately $11 million higher than the actual 2008 amount of approximately $58 million. Total employee benefit expense for 2009 is expected to be slightly higher than 2008 due to increased amortization of experience losses which is offset by assumed asset returns on our 2008 contributions. Based on our current actuarial assumptions, we expect 2010 pension expense to increase significantly primarily due to the amortization of net experience losses.
 
During 2008 we made contributions in the amount of $354 million to Kellogg’s global tax-qualified pension programs. This amount was mostly discretionary. We anticipate having to make additional contributions in future years to make up for the poor performance of global equity markets during 2008. Additionally we contributed $97 million to our retiree medical programs; most of this contribution was also discretionary and largely used to fund benefit obligations related to our union retiree healthcare benefits.
 
Assuming actual future experience is consistent with our current assumptions, annual amortization of accumulated prior service cost and net experience losses during each of the next several years would increase versus the 2008 amount.
 
 
Retirement
benefits






Our Company sponsors a number of U.S. and foreign defined
benefit employee pension plans and also provides retiree health
care and other welfare benefits in the United States and Canada.
Plan funding strategies are influenced by tax regulations and
asset return performance. A substantial majority of plan assets
are invested in a globally diversified portfolio of equity
securities with smaller holdings of debt securities and other
investments. We follow SFAS No. 87
“Employers’ Accounting for Pensions” and
SFAS No. 106 “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (as amended by
SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”)
for the measurement and recognition of obligations and expense
related to our retiree benefit plans. Embodied in both of these
standards is the concept that the cost of benefits provided
during retirement should be recognized over the employees’
active working life. Inherent in this concept is the requirement
to use various actuarial assumptions to predict and measure
costs and obligations many years prior to the settlement date.
Major actuarial assumptions that require significant management
judgment and have a material impact on the measurement of our
consolidated benefits expense and accumulated obligation include
the long- term rates of return on plan assets, the health care
cost trend rates, and the interest rates used to discount the
obligations for our major plans, which cover employees in the
United States, United Kingdom, and Canada.


 



To conduct our annual review of the long-term rate of return on
plan assets, we model expected returns over a
20-year
investment horizon with respect to the specific investment mix
of each of our major plans. The return assumptions used reflect
a combination of rigorous historical performance analysis and
forward-looking views of the financial markets including
consideration of current yields on long-term bonds,
price-earnings ratios of the major stock market indices, and
long-term inflation. Our U.S. plan model, corresponding to
approximately 70% of our trust assets globally, currently
incorporates a long-term inflation assumption of 2.5% and an
active management premium of 1% (net of fees) validated by
historical analysis. Although we review our expected long-term
rates of return annually, our benefit trust investment
performance for one particular year does not, by itself,
significantly influence our evaluation. Our expected rates of
return are generally not revised, provided these rates continue
to fall within a “more likely than not” corridor of
between the 25th and 75th percentile of expected
long-term returns, as determined by our modeling process. Our
assumed rate of return for U.S. plans in 2008 of 8.9%
equated to approximately the 50th percentile expectation of
our 2008 model. Similar methods are used for various foreign
plans with invested assets, reflecting local economic
conditions. Foreign trust investments represent approximately
30% of our global benefit plan assets.


 



Based on consolidated benefit plan assets at January 3,
2009, a 100 basis point reduction in the assumed rate of
return would increase 2009 benefits expense by approximately
$31 million. Correspondingly, a 100 basis point
shortfall between the assumed and actual rate of return on plan
assets for 2008 would result in a similar amount of arising
experience loss. Any arising asset-related experience gain or
loss is recognized in the calculated value of plan assets over a
five-year period. Once recognized, experience gains and losses
are amortized using a declining-balance method over the average
remaining service period of active plan participants, which for
U.S. plans is presently about 13 years. Under this
recognition method, a 100 basis point shortfall in actual
versus assumed performance of all of our plan assets in 2008
would reduce pre-tax earnings by approximately $1 million
in 2010, increasing to approximately $5 million in 2014.
For each of the three fiscal years, our actual return on plan
assets exceeded/(was less than) the recognized assumed return by
the following amounts (in millions): 2008–$(1,528);
2007–$(99); 2006–$257.


 



To conduct our annual review of health care cost trend rates, we
model our actual claims cost data over a five-year historical
period, including an analysis of pre-65 versus post-65 age
groups and other important demographic components of our covered
retiree population. This data is adjusted to eliminate the
impact of plan changes and other factors that would tend to
distort the underlying cost inflation trends. Our initial health
care cost trend rate is reviewed annually and adjusted as
necessary to remain consistent with recent historical experience
and our expectations regarding short-term future trends. In
comparison to our actual five-year compound annual claims cost





23





Table of Contents






growth rate of approximately 5%, our initial trend rate for 2009
of 7.5% reflects the expected future impact of faster-growing
claims experience for certain demographic groups within our
total employee population. Our initial rate is trended downward
by 0.5% per year, until the ultimate trend rate of 4.5% is
reached. The ultimate trend rate is adjusted annually, as
necessary, to approximate the current economic view on the rate
of long-term inflation plus an appropriate health care cost
premium. Based on consolidated obligations at January 3,
2009, a 100 basis point increase in the assumed health care
cost trend rates would increase 2009 benefits expense by
approximately $15 million. A 100 basis point excess of
2009 actual health care claims cost over that calculated from
the assumed trend rate would result in an arising experience
loss of approximately $9 million. Any arising health care
claims cost-related experience gain or loss is recognized in the
calculated amount of claims experience over a four-year period.
Once recognized, experience gains and losses are amortized using
a straight-line method over 15 years, resulting in at least
the minimum amortization prescribed by SFAS No. 106. The
net experience gain arising from recognition of 2008 claims
experience was approximately $4 million.


 



To conduct our annual review of discount rates, we use several
published market indices with appropriate duration weighting to
assess prevailing rates on high quality debt securities, with a
primary focus on the Citigroup Pension Liability
Index®


for our U.S. plans. To test the appropriateness of these
indices, we periodically conduct a matching exercise between the
expected settlement cash flows of our plans and the bond
maturities, consisting principally of
AA-rated (or
the equivalent in foreign jurisdictions) non-callable issues
with at least $25 million principal outstanding. The model
does not assume any reinvestment rates and assumes that bond
investments mature just in time to pay benefits as they become
due. For those years where no suitable bonds are available, the
portfolio utilizes a linear interpolation approach to impute a
hypothetical bond whose maturity matches the cash flows required
in those years. During 2008, we refined our methodology for
setting our discount rate by inputting the cash flows for our
pension, postretirement and postemployment plans into the spot
yield curve underlying the Citigroup index. The
measurement dates for our defined benefit plans are consistent
with our fiscal year end. Accordingly, we select discount rates
to measure our benefit obligations that are consistent with
market indices during December of each year.


 



Based on consolidated obligations at January 3, 2009, a
25 basis point decline in the weighted-average discount
rate used for benefit plan measurement purposes would increase
2009 benefits expense by approximately $13 million. All
obligation-related experience gains and losses are amortized
using a straight-line method over the average remaining service
period of active plan participants.


 



Despite the previously-described rigorous policies for selecting
major actuarial assumptions, we periodically experience material
differences between assumed and actual experience. As of
January 3, 2009, we had consolidated unamortized prior
service cost and net experience losses of approximately
$1.9 billion, as compared to approximately
$0.6 billion at December 29, 2007. The year-over-year
increase in net unamortized amounts was attributable primarily
to poor asset performance during 2008. Of the total unamortized
amounts at January 3, 2009, approximately $1.5 billion
was related to asset losses during 2008, with the remainder
largely related to discount rate reductions and net unfavorable
health care claims experience (including upward revisions in the
assumed trend rate) prior to 2008. For 2009, we currently expect
total amortization of prior service cost and net experience
losses to be approximately $11 million higher than the
actual 2008 amount of approximately $58 million. Total
employee benefit expense for 2009 is expected to be slightly
higher than 2008 due to increased amortization of experience
losses which is offset by assumed asset returns on our 2008
contributions. Based on our current actuarial assumptions, we
expect 2010 pension expense to increase significantly primarily
due to the amortization of net experience losses.


 



During 2008 we made contributions in the amount of
$354 million to Kellogg’s global tax-qualified pension
programs. This amount was mostly discretionary. We anticipate
having to make additional contributions in future years to make
up for the poor performance of global equity markets during
2008. Additionally we contributed $97 million to our
retiree medical programs; most of this contribution was also
discretionary and largely used to fund benefit obligations
related to our union retiree healthcare benefits.


 



Assuming actual future experience is consistent with our current
assumptions, annual amortization of accumulated prior service
cost and net experience losses during each of the next several
years would increase versus the 2008 amount.


 


 




These excerpts taken from the K 10-K filed Feb 25, 2008.
Retirement benefits
Our Company sponsors a number of U.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations. A substantial majority of plan assets are invested in a globally diversified portfolio of equity securities with smaller holdings of debt securities and other investments. We follow SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”) for the measurement and recognition of obligations and expense related to our retiree benefit plans. Embodied in both of these standards is the concept that the cost of benefits


25


Table of Contents

provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom, and Canada.
 
 
To conduct our annual review of the long-term rate of return on plan assets, we model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. Our U.S. plan model, corresponding to approximately 70% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.7% and an active management premium of 1% (net of fees) validated by historical analysis. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are generally not revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return for U.S. plans in 2007 of 8.9% equated to approximately the 50th percentile expectation of our 2007 model. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 30% of our global benefit plan assets.
 
 
Based on consolidated benefit plan assets at December 29, 2007, a 100 basis point reduction in the assumed rate of return would increase 2008 benefits expense by approximately $44 million. Correspondingly, a 100 basis point shortfall between the assumed and actual rate of return on plan assets for 2008 would result in a similar amount of arising experience loss. Any arising asset-related experience gain or loss is recognized in the calculated value of plan assets over a five-year period. Once recognized, experience gains and losses are amortized using a declining-balance method over the average remaining service period of active plan participants, which for U.S. plans is presently about 13 years. Under this recognition method, a 100 basis point shortfall in actual versus assumed performance of all of our plan assets in 2008 would reduce pre-tax earnings by approximately $1 million in 2009, increasing to approximately $7 million in 2013. For each of the three fiscal years, our actual return on plan assets exceeded/(was less than) the recognized assumed return by the following amounts (in millions): 2007–($99); 2006–$257; 2005–$39.
 
 
To conduct our annual review of health care cost trend rates, we model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost growth rate of approximately 6%, our initial trend rate for 2008 of 8.5% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 1% per year, until the ultimate trend rate of 4.75% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations at December 29, 2007, a 100 basis point increase in the assumed health care cost trend rates would increase 2008 benefits expense by approximately $16 million. A 100 basis point excess of 2008 actual health care claims cost over that calculated from the assumed trend rate would result in an arising experience loss of approximately $9 million. Any arising health care claims cost-related experience gain or loss is recognized in the calculated amount of claims experience over a four-year period. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years, resulting in at least the minimum amortization prescribed by SFAS No. 106. The net experience gain arising from recognition of 2007 claims experience was approximately $6 million.
 
 
To conduct our annual review of discount rates, we use several published market indices with appropriate duration weighting to assess prevailing rates on high quality debt securities, with a primary focus on the Citigroup Pension Liability Index® for our U.S. plans. To test the appropriateness of these indices, we periodically conduct a matching exercise between the expected settlement cash flows of our plans and bond maturities, consisting principally of AA-rated (or the equivalent in foreign jurisdictions) non-callable issues with at least $25 million principal outstanding. The model does not assume any reinvestment rates and assumes that bond investments mature just in time to


26


Table of Contents

pay benefits as they become due. For those years where no suitable bonds are available, the portfolio utilizes a linear interpolation approach to impute a hypothetical bond whose maturity matches the cash flows required in those years. As of three different interim dates during 2007 and four different dates during 2006, this matching exercise for our U.S. plans produced a discount rate within +/- 20 basis points of the equivalent-dated Citigroup Pension Liability Index®. The measurement dates for our defined benefit plans are consistent with our Company’s fiscal year end. Thus, we select discount rates to measure our benefit obligations that are consistent with market indices during December of each year. Based on consolidated obligations at December 29, 2007, a 25 basis point decline in the weighted-average discount rate used for benefit plan measurement purposes would increase 2008 benefits expense by approximately $15 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.
 
 
Despite the previously-described rigorous policies for selecting major actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of December 29, 2007, we had consolidated unamortized prior service cost and net experience losses of approximately $.6 billion, as compared to approximately $.9 billion at December 30, 2006. The year-over-year decline in net unamortized amounts was attributable primarily to the favorable impact of rising discount rates on our benefit obligations. Of the total unamortized amounts at December 29, 2007, approximately 50% was related to discount rate reductions prior to 2007, with the remainder primarily related to net unfavorable health care claims cost experience (including upward revisions in the assumed trend rate.) For 2008, we currently expect total amortization of prior service cost and net experience losses to be approximately $41 million lower than the actual 2007 amount of approximately $99 million. As discussed on page 14, total employee benefits expense for 2008 is expected to be slightly lower than the 2007 amount, due to increases in the discount rate environment and the on-going phase in of favorable asset returns.
 
 
Assuming actual future experience is consistent with our current assumptions, annual amortization of accumulated prior service cost and net experience losses during each of the next several years would decrease versus the 2008 amount.
 
 
Retirement
benefits




Our Company sponsors a number of U.S. and foreign defined
benefit employee pension plans and also provides retiree health
care and other welfare benefits in the United States and Canada.
Plan funding strategies are influenced by tax regulations. A
substantial majority of plan assets are invested in a globally
diversified portfolio of equity securities with smaller holdings
of debt securities and other investments. We follow
SFAS No. 87 “Employers’ Accounting for
Pensions” and SFAS No. 106 “Employers’
Accounting for Postretirement Benefits Other Than Pensions”
(as amended by SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans”) for the measurement and recognition of obligations
and expense related to our retiree benefit plans. Embodied in
both of these standards is the concept that the cost of benefits





25





Table of Contents






provided during retirement should be recognized over the
employees’ active working life. Inherent in this concept is
the requirement to use various actuarial assumptions to predict
and measure costs and obligations many years prior to the
settlement date. Major actuarial assumptions that require
significant management judgment and have a material impact on
the measurement of our consolidated benefits expense and
accumulated obligation include the long-term rates of return on
plan assets, the health care cost trend rates, and the interest
rates used to discount the obligations for our major plans,
which cover employees in the United States, United Kingdom, and
Canada.


 


 



To conduct our annual review of the long-term rate of return on
plan assets, we model expected returns over a
20-year
investment horizon with respect to the specific investment mix
of each of our major plans. The return assumptions used reflect
a combination of rigorous historical performance analysis and
forward-looking views of the financial markets including
consideration of current yields on long-term bonds,
price-earnings ratios of the major stock market indices, and
long-term inflation. Our U.S. plan model, corresponding to
approximately 70% of our trust assets globally, currently
incorporates a long-term inflation assumption of 2.7% and an
active management premium of 1% (net of fees) validated by
historical analysis. Although we review our expected long-term
rates of return annually, our benefit trust investment
performance for one particular year does not, by itself,
significantly influence our evaluation. Our expected rates of
return are generally not revised, provided these rates continue
to fall within a “more likely than not” corridor of
between the 25th and 75th percentile of expected
long-term returns, as determined by our modeling process. Our
assumed rate of return for U.S. plans in 2007 of 8.9%
equated to approximately the 50th percentile expectation of
our 2007 model. Similar methods are used for various foreign
plans with invested assets, reflecting local economic
conditions. Foreign trust investments represent approximately
30% of our global benefit plan assets.


 


 



Based on consolidated benefit plan assets at December 29,
2007, a 100 basis point reduction in the assumed rate of
return would increase 2008 benefits expense by approximately
$44 million. Correspondingly, a 100 basis point
shortfall between the assumed and actual rate of return on plan
assets for 2008 would result in a similar amount of arising
experience loss. Any arising asset-related experience gain or
loss is recognized in the calculated value of plan assets over a
five-year period. Once recognized, experience gains and losses
are amortized using a declining-balance method over the average
remaining service period of active plan participants, which for
U.S. plans is presently about 13 years. Under this
recognition method, a 100 basis point shortfall in actual
versus assumed performance of all of our plan assets in 2008
would reduce pre-tax earnings by approximately $1 million
in 2009, increasing to approximately $7 million in 2013.
For each of the three fiscal years, our actual return on plan
assets exceeded/(was less than) the recognized assumed return by
the following amounts (in millions): 2007–($99);
2006–$257; 2005–$39.


 


 



To conduct our annual review of health care cost trend rates, we
model our actual claims cost data over a five-year historical
period, including an analysis of pre-65 versus post-65 age
groups and other important demographic components of our covered
retiree population. This data is adjusted to eliminate the
impact of plan changes and other factors that would tend to
distort the underlying cost inflation trends. Our initial health
care cost trend rate is reviewed annually and adjusted as
necessary to remain consistent with recent historical experience
and our expectations regarding short-term future trends. In
comparison to our actual five-year compound annual claims cost
growth rate of approximately 6%, our initial trend rate for 2008
of 8.5% reflects the expected future impact of faster-growing
claims experience for certain demographic groups within our
total employee population. Our initial rate is trended downward
by 1% per year, until the ultimate trend rate of 4.75% is
reached. The ultimate trend rate is adjusted annually, as
necessary, to approximate the current economic view on the rate
of long-term inflation plus an appropriate health care cost
premium. Based on consolidated obligations at December 29,
2007, a 100 basis point increase in the assumed health care
cost trend rates would increase 2008 benefits expense by
approximately $16 million. A 100 basis point excess of
2008 actual health care claims cost over that calculated from
the assumed trend rate would result in an arising experience
loss of approximately $9 million. Any arising health care
claims cost-related experience gain or loss is recognized in the
calculated amount of claims experience over a four-year period.
Once recognized, experience gains and losses are amortized using
a straight-line method over 15 years, resulting in at least
the minimum amortization prescribed by SFAS No. 106.
The net experience gain arising from recognition of 2007 claims
experience was approximately $6 million.


 


 



To conduct our annual review of discount rates, we use several
published market indices with appropriate duration weighting to
assess prevailing rates on high quality debt securities, with a
primary focus on the Citigroup Pension Liability
Index®
for our U.S. plans. To test the appropriateness of
these indices, we periodically conduct a matching exercise
between the expected settlement cash flows of our plans and bond
maturities, consisting principally of AA-rated (or the
equivalent in foreign jurisdictions) non-callable issues with at
least $25 million principal outstanding. The model does not
assume any reinvestment rates and assumes that bond investments
mature just in time to





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pay benefits as they become due. For those years where no
suitable bonds are available, the portfolio utilizes a linear
interpolation approach to impute a hypothetical bond whose
maturity matches the cash flows required in those years. As of
three different interim dates during 2007 and four different
dates during 2006, this matching exercise for our
U.S. plans produced a discount rate within +/-
20 basis points of the equivalent-dated Citigroup
Pension Liability
Index®
.
The measurement dates for our defined benefit plans are
consistent with our Company’s fiscal year end. Thus, we
select discount rates to measure our benefit obligations that
are consistent with market indices during December of each year.
Based on consolidated obligations at December 29, 2007, a
25 basis point decline in the weighted-average discount
rate used for benefit plan measurement purposes would increase
2008 benefits expense by approximately $15 million. All
obligation-related experience gains and losses are amortized
using a straight-line method over the average remaining service
period of active plan participants.


 


 



Despite the previously-described rigorous policies for selecting
major actuarial assumptions, we periodically experience material
differences between assumed and actual experience. As of
December 29, 2007, we had consolidated unamortized prior
service cost and net experience losses of approximately
$.6 billion, as compared to approximately $.9 billion
at December 30, 2006. The year-over-year decline in net
unamortized amounts was attributable primarily to the favorable
impact of rising discount rates on our benefit obligations. Of
the total unamortized amounts at December 29, 2007,
approximately 50% was related to discount rate reductions prior
to 2007, with the remainder primarily related to net unfavorable
health care claims cost experience (including upward revisions
in the assumed trend rate.) For 2008, we currently expect total
amortization of prior service cost and net experience losses to
be approximately $41 million lower than the actual 2007
amount of approximately $99 million. As discussed on
page 14, total employee benefits expense for 2008 is
expected to be slightly lower than the 2007 amount, due to
increases in the discount rate environment and the on-going
phase in of favorable asset returns.


 


 



Assuming actual future experience is consistent with our current
assumptions, annual amortization of accumulated prior service
cost and net experience losses during each of the next several
years would decrease versus the 2008 amount.


 


 




This excerpt taken from the K 10-K filed Feb 23, 2007.
Retirement benefits
 
Our Company sponsors a number of U.S. and foreign defined benefit employee pension plans and also provides retiree health care and other welfare benefits in the United States and Canada. Plan funding strategies are influenced by tax regulations. A substantial majority of plan assets are invested in a globally diversified portfolio of equity securities with smaller holdings of debt securities and other investments. We follow SFAS No. 87 “Employers’ Accounting for Pensions” and SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (as amended by SFAS No. 158, effective as of our fiscal year-end 2006) for the measurement and recognition of obligations and expense related to our retiree benefit plans. Embodied in both of these standards is


22


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the concept that the cost of benefits provided during retirement should be recognized over the employees’ active working life. Inherent in this concept is the requirement to use various actuarial assumptions to predict and measure costs and obligations many years prior to the settlement date. Major actuarial assumptions that require significant management judgment and have a material impact on the measurement of our consolidated benefits expense and accumulated obligation include the long-term rates of return on plan assets, the health care cost trend rates, and the interest rates used to discount the obligations for our major plans, which cover employees in the United States, United Kingdom, and Canada.
 
To conduct our annual review of the long-term rate of return on plan assets, we work with third-party financial consultants to model expected returns over a 20-year investment horizon with respect to the specific investment mix of each of our major plans. The return assumptions used reflect a combination of rigorous historical performance analysis and forward-looking views of the financial markets including consideration of current yields on long-term bonds, price-earnings ratios of the major stock market indices, and long-term inflation. Our U.S. plan model, corresponding to approximately 70% of our trust assets globally, currently incorporates a long-term inflation assumption of 2.8% and an active management premium of 1% (net of fees) validated by historical analysis. Although we review our expected long-term rates of return annually, our benefit trust investment performance for one particular year does not, by itself, significantly influence our evaluation. Our expected rates of return are generally not revised, provided these rates continue to fall within a “more likely than not” corridor of between the 25th and 75th percentile of expected long-term returns, as determined by our modeling process. Our assumed rate of return for U.S. plans in 2006 of 8.9% equated to approximately the 50th percentile expectation of our 2006 model. Similar methods are used for various foreign plans with invested assets, reflecting local economic conditions. Foreign trust investments represent approximately 30% of our global benefit plan assets.
 
Based on consolidated benefit plan assets at December 30, 2006, a 100 basis point reduction in the assumed rate of return would increase 2007 benefits expense by approximately $42 million. Correspondingly, a 100 basis point shortfall between the assumed and actual rate of return on plan assets for 2007 would result in a similar amount of arising experience loss. Any arising asset-related experience gain or loss is recognized in the calculated value of plan assets over a five-year period. Once recognized, experience gains and losses are amortized using a declining-balance method over the average remaining service period of active plan participants, which for U.S. plans is presently about 13 years. Under this recognition method, a 100 basis point shortfall in actual versus assumed performance of all of our plan assets in 2007 would reduce pre-tax earnings by approximately $1 million in 2008, increasing to approximately $7 million in 2012. For each of the three years ending December 30, 2006, our actual return on plan assets exceeded the recognized assumed return by the following amounts (in millions): 2006−$257.1; 2005−$39.4; 2004−$95.6.
 
To conduct our annual review of health care cost trend rates, we work with third-party financial consultants to model our actual claims cost data over a five-year historical period, including an analysis of pre-65 versus post-65 age groups and other important demographic components of our covered retiree population. This data is adjusted to eliminate the impact of plan changes and other factors that would tend to distort the underlying cost inflation trends. Our initial health care cost trend rate is reviewed annually and adjusted as necessary to remain consistent with recent historical experience and our expectations regarding short-term future trends. In comparison to our actual five-year compound annual claims cost growth rate of approximately 8%, our initial trend rate for 2007 of 9.5% reflects the expected future impact of faster-growing claims experience for certain demographic groups within our total employee population. Our initial rate is trended downward by 1% per year, until the ultimate trend rate of 4.75% is reached. The ultimate trend rate is adjusted annually, as necessary, to approximate the current economic view on the rate of long-term inflation plus an appropriate health care cost premium. Based on consolidated obligations at December 30, 2006, a 100 basis point increase in the assumed health care cost trend rates would increase 2007 benefits expense by approximately $18 million. A 100 basis point excess of 2007 actual health care claims cost over that calculated from the assumed trend rate would result in an arising experience loss of approximately $9 million. Any arising health care claims cost-related experience gain or loss is recognized in the calculated amount of claims experience over a four-year period. Once recognized, experience gains and losses are amortized using a straight-line method over 15 years, resulting in at least the minimum amortization prescribed by SFAS No. 106. The net experience gain arising from recognition of 2006 claims experience was approximately $6 million.


23


Table of Contents

 
To conduct our annual review of discount rates, we use several published market indices with appropriate duration weighting to assess prevailing rates on high quality debt securities, with a primary focus on the Citigroup Pension Liability Index® for our U.S. plans. To test the appropriateness of these indices, we periodically engage third-party financial consultants to conduct a matching exercise between the expected settlement cash flows of our plans and bond maturities, consisting principally of AA-rated (or the equivalent in foreign jurisdictions) non-callable issues with at least $25 million principal outstanding. The model does not assume any reinvestment rates and assumes that bond investments mature just in time to pay benefits as they become due. For those years where no suitable bonds are available, the portfolio utilizes a linear interpolation approach to impute a hypothetical bond whose maturity matches the cash flows required in those years. As of four different interim dates during 2005 and 2006, this matching exercise for our U.S. plans produced a discount rate within +/− 15 basis points of the equivalent-dated Citigroup Pension Liability Index®. The measurement dates for our defined benefit plans are consistent with our Company’s fiscal year end. Thus, we select discount rates to measure our benefit obligations that are consistent with market indices during December of each year. Based on consolidated obligations at December 30, 2006, a 25 basis point decline in the weighted-average discount rate used for benefit plan measurement purposes would increase 2007 benefits expense by approximately $17 million. All obligation-related experience gains and losses are amortized using a straight-line method over the average remaining service period of active plan participants.
 
Despite the previously-described rigorous policies for selecting major actuarial assumptions, we periodically experience material differences between assumed and actual experience. As of December 30, 2006, we had consolidated unamortized prior service cost and net experience losses of approximately $.9 billion, as compared to approximately $1.4 billion at December 31, 2005. The year-over-year decline in net unamortized amounts was attributable largely to trust asset performance and the favorable impact of rising interest rates on our benefit obligations. Of the total unamortized amounts at December 30, 2006, approximately 80% was related to discount rate reductions, with the remainder primarily related to net unfavorable health care claims cost experience (including upward revisions in the assumed trend rate.) For 2007, we currently expect total amortization of prior service cost and net experience losses to be approximately $25 million lower than the actual 2006 amount of approximately $123 million. As discussed on page 14, total employee benefits expense for 2007 is expected to be approximately even with the 2006 amount, with higher active health care claims cost and postretirement service and interest cost components offsetting the lower amortization expense.
 
Assuming actual future experience is consistent with our current assumptions, annual amortization of accumulated prior service cost and net experience losses during each of the next several years would remain approximately level with the 2007 amount.
 
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