AT&T Wireless 2006 Annual Report Download - page 71

2006 AT&T Annual Report : : 69
Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
Our combined net pension and postretirement cost recognized in our Consolidated Statements of Income was $1,635, $1,336 and
$1,287 for the years ended December 31, 2006, 2005 and 2004. The following table presents the components of net periodic
benefit obligation cost (gains are denoted with parentheses and losses are not):
Pension Benefits Postretirement Benefits
2006 2005 2004 2006 2005 2004
Service cost – benefits earned during the period $ 1,050 $ 804 $ 818 $ 435 $ 390 $ 383
Interest cost on projected benefit obligation 2,507 1,725 1,642 1,943 1,496 1,495
Expected return on plan assets (3,989) (2,736) (2,684) (935) (781) (720)
Amortization of prior service cost (benefit) and transition asset 149 186 188 (359) (344) (349)
Recognized actuarial loss 361 156 44 473 440 470
Net pension and postretirement cost1 $ 78 $ 135 $ 8 $1,557 $1,201 $1,279
1 During 2006, 2005 and 2004, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act) reduced postretirement benefit cost by $349, $304 and $255.
This effect is included in several line items above.
medical and prescription drug costs increase at a rate greater
than assumed, we would expect increasing annual combined
net pension and postretirement costs for the next several
years. Additionally, should actual experience differ from
actuarial assumptions, combined net pension and postretire-
ment cost would be affected in future years.
Discount Rate Our assumed discount rate of 6.00% at
December 31, 2006 reflects the hypothetical rate at which the
projected benefit obligations could be effectively settled or
paid out to participants on that date. We determined our
discount rate based on a range of factors, including the rates
of return on high-quality, fixed-income corporate bonds
available at the measurement date and the related expected
duration for the obligations. For the year ended December 31,
2006, we increased our discount rate by 0.25%, resulting in a
decrease in our pension plan benefit of $1,040 and a
decrease in our postretirement benefit obligation of $1,030.
For the year ended December 31, 2005, we reduced our
discount rate by 0.25%, resulting in an increase in our pension
plan benefit obligation of $609 and an increase in our
postretirement benefit obligation of $844. Should actual
experience differ from actuarial assumptions, the projected
pension benefit obligation and net pension cost, and accumu-
lated 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 2007 and
2006 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 2007 combined pension and postretirement cost to
increase $802 over 2006.
The estimated net loss and prior service cost for pension
benefits that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the
next fiscal year are $248 and $127, respectively. The estimated
net loss and prior service benefit for postretirement benefits
that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year
are $293 and $355.
Assumptions
In determining the projected benefit obligation and the net
pension and postemployment benefit cost, we used the
following significant weighted-average assumptions:
2006 2005 2004
Discount rate for determining
projected benefit obligation
at December 31 6.00% 5.75% 6.00%
Discount rate in effect for
determining net cost (benefit)1 5.75% 6.00% 6.25%
Long-term rate of return
on plan assets 8.50% 8.50% 8.50%
Composite rate of compensation
increase for determining
projected benefit obligation
at December 31 4.00% 4.00% 4.00%
Composite rate of
compensation increase
for net pension cost (benefit) 4.00% 4.00% 4.25%
1 Discount rate in effect for determining net cost (benefit) of BellSouth and AT&T Mobility
pension and postretirement plans for the two-day period ended December 31, 2006, was
6.00%. The discount rate in effect for determining net cost (benefit) of ATTC pension and
postretirement plans for the 43-day period ended December 31, 2005 was 5.75%.
Approximately 10% of pension and postretirement costs are
capitalized as part of construction labor, providing a small
reduction in the net expense recorded. While we will continue
our cost-cutting efforts, certain factors, such as investment
returns, depend largely on trends in the U.S. securities
markets and the general U.S. economy. In particular, uncer-
tainty in the securities markets and U.S. economy could result
in investment returns less than those assumed and a decline
in the value of plan assets used in pension and postretirement
calculations, which under GAAP we will recognize over the
next several years. Should the securities markets decline or