AT&T Uverse 2007 Annual Report Download - page 76

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
74
| 2007 AT&T Annual Report
A one percentage-point change in the assumed combined
medical and dental cost trend rate would have the following
effects:
One Percentage- One Percentage-
Point Increase Point Decrease
Increase (decrease) in total
of service and interest
cost components $ 438 $ (351)
Increase (decrease) in accumulated
postretirement benefit obligation 4,314 (3,583)
For the majority of our labor contracts that contain an annual
dollar value cap for the purpose of determining contributions
required from nonmanagement retirees who retire during the
term of the labor contract, we have waived the cap during the
relevant contract periods and thus not collected contributions
from those retirees, and we have similarly waived the cap for
nonmanagement retirees who retired prior to inception of the
labor contract. Therefore, in accordance with the substantive
plan provisions required in accounting for postretirement
benefits under GAAP, we do not account for the cap in the
value of our accumulated postretirement benefit obligation
(i.e., for GAAP purposes, we assumed the cap would be
waived for all future contract periods).
Plan Assets
Plan assets consist primarily of private and public equity,
government and corporate bonds, and real estate. The asset
allocations of the pension plans are maintained to meet
ERISA requirements. Any plan contributions, as determined
by ERISA regulations, are made to a pension trust for the
benefit of plan participants. We maintain VEBA trusts to
partially fund postretirement benefits; however, there are no
ERISA or regulatory requirements that these postretirement
benefit plans be funded annually.
The principal investment objectives are: to ensure the
availability of funds to pay pension and postretirement
benefits as they become due under a broad range of future
economic scenarios; to maximize long-term investment return
with an acceptable level of risk based on our pension and
postretirement obligations; and to be broadly diversified
across and within the capital markets to insulate asset values
against adverse experience in any one market. Each asset
class has a broadly diversified style. Substantial biases
toward any particular investing style or type of security are
sought to be avoided by managing the aggregation of all
accounts with portfolio benchmarks. Asset and benefit
obligation forecasting studies are conducted periodically,
generally every two to three years, or when significant
changes have occurred in market conditions, benefits,
participant demographics or funded status. Decisions
regarding investment policy are made with an understanding
of the effect of asset allocation on funded status, future
contributions and projected expenses. The current asset
allocation policy for the pension plan is based on a study
completed during 2007. The asset allocation policy for the
VEBA assets is based on our legacy operations, and the
pre-acquisition allocation policies of ATTC and BellSouth.
It is our intention to complete an asset allocation study
during 2008.
postretirement benefit obligation of $2,492. For the year
ended December 31, 2006, we increased our discount rate
by 0.25%, resulting in a decrease in our pension plan benefit
obligation of $1,040 and a decrease in our postretirement
benefit obligation of $1,030. Should actual experience
differ from actuarial assumptions, the projected pension
benefit obligation and net pension cost and accumulated
postretirement benefit obligation and postretirement benefit
cost would be affected in future years.
Expected Long-Term Rate of Return Our expected
long-term rate of return on plan assets of 8.50% for 2008 and
2007 reflects the average rate of earnings expected on the
funds invested, or to be invested, to provide for the benefits
included in the projected benefit obligations. We consider
many factors that include, but are not limited to, historical
returns on plan assets, current market information on
long-term returns (e.g., long-term bond rates) and current and
target asset allocations between asset categories. The target
asset allocation is determined based on consultations with
external investment advisors. This assumption, which is based
on our long-term expectations of market returns in future
years, is one of the most significant of the weighted-average
assumptions used to determine our actuarial estimates of
pension and postretirement benefit expense. If all other
factors were to remain unchanged, we expect that a 1%
decrease in the expected long-term rate of return would
cause 2008 combined pension and postretirement cost to
increase $814 over 2007.
Composite Rate of Compensation Increase Our expected
composite rate of compensation increase of 4% reflects the
long-term average rate of salary increases.
Health Care Cost Trend Our health care cost trend
assumptions are developed based on historical cost data, the
near-term outlook and an assessment of likely long-term
trends. Additionally, to recognize the disproportionate growth
in prescription drug costs, we have developed separate trend
assumptions for medical and prescription drugs. In addition to
the health care cost trend, we assume an annual 3% growth
in administrative expenses and an annual 3% growth in
dental claims. Due to benefit design changes in recent years
(e.g., increased co-pays and deductibles for prescription drugs
and certain medical services), we continue to experience
better than expected claims experience. The following table
provides our assumed average health care cost trend based
on the demographics of plan participants.
2008 2007
Health care cost trend rate assumed
for current year
Retirees 64 and under 5.76% 6.43%
Retirees 65 and over 6.36% 7.50%
Rate to which the cost trend is assumed
to decline (the ultimate trend rate) 5.00% 5.00%
Year that rate reaches the
ultimate trend rate 2010 2010