AT&T Wireless 2008 Annual Report Download - page 72

Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
70
| AT&T Annual Report 2008
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 current asset allocation policy
for the VEBA assets is based on a study completed in 2008.
The plans’ weighted-average asset target and actual
allocations as a percentage of plan assets, including the
notional exposure of future contracts by asset categories
at December 31, are as follows:
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 2009 combined pension and postretirement cost to
increase $650 over 2008.
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
a better than expected claims experience. The following table
provides our assumed average health care cost trend based
on the demographics of plan participants.
2009 2008
Health care cost trend rate assumed
for current year
Retirees 64 and under 5.21% 5.76%
Retirees 65 and over 5.36% 6.36%
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
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 $ 390 $ (315)
Increase (decrease) in accumulated
postretirement benefit obligation 3,629 (3,034)