Aetna 2008 Annual Report Download - page 27

Annual Report - Page 22
Measurement of Defined Benefit Pension and Other Postretirement Benefit Plans
We sponsor defined benefit pension (“pension”) and other postretirement benefit (“OPEB”) plans for our employees
and retirees. Refer to Note 12 of Notes to Consolidated Financial Statements beginning on page 64 for additional
information. Major assumptions used in the accounting for these plans include the expected return on plan assets
and the discount rate. We select our assumptions based on our information and market indicators, and we evaluate
our assumptions at each annual measurement date (December 31). A change in any of our assumptions would have
an effect on our pension and OPEB plan costs.
Our expected return on plan assets assumption is based on many factors, including forecasted capital market real
returns over a long-term horizon, forecasted inflation rates, historical compounded asset returns and patterns and
correlations on those returns. Expectations for modest increases in interest rates, normal inflation trends and average
capital market real returns led us to an expected return on pension plan assets assumption of 8.5% for both 2008 and
2007 and an expected return on OPEB plan assets assumption of 5.5% for both 2008 and 2007. Our expected return
on pension plan assets is based on asset range allocations assumptions of 55% – 75% U.S. and international public
and private equity securities, 10% – 30% fixed income securities and 5% – 25% real estate and other assets. We
regularly review actual asset allocations and periodically rebalance our investments to the mid-point of our targeted
allocation ranges when we consider it appropriate. At December 31, 2008, our actual asset allocations were
consistent with our asset allocation assumptions. Investment returns can be volatile. Although our return on plan
assets is a long-term assumption, shorter-term volatility in our annual pension costs can occur if investment returns
differ from the assumed rate. For example, a one-percent deviation from our long-term 8.5% return assumption
would impact our annual pension costs by approximately $5 million after tax and would have a negligible effect on
our annual OPEB costs.
The discount rates we used in accounting for our pension and OPEB plans were calculated using a yield curve as of
our annual measurement date. The yield curve consists of a series of individual discount rates, with each discount
rate corresponding to a single point-in-time, based on high quality bonds (that is, bonds with a rating of Aa or better
from Moody’ s Investors Service or a rating of AA or better from Standard and Poor’ s). We project the benefits
expected to be paid from each plan at each point in the future based on each participant’ s current service (but
reflecting expected future pay increases). These projected benefit payments are then discounted to the measurement
date using the corresponding rate from the yield curve. A lower discount rate increases the present value of benefit
obligations and increases costs. In 2008, we increased our assumed discount rate to 6.89% and 6.92% for our
pension and OPEB plans, respectively, up from 6.56% and 6.35%, respectively, at the previous measurement date in
2007. A one-percentage point decrease in the assumed discount rate would increase our annual pension costs by
approximately $32 million after tax and would have a negligible effect on our annual OPEB costs.
At December 31, 2008, the pension and OPEB plans had aggregate actuarial losses of $2.6 billion. These losses are
primarily due to investment losses incurred in 2008. The accumulated actuarial loss is amortized over the remaining
service life of pension plan participants (estimated at 9.6 years at December 31, 2008) and the expected life of OPEB
plan participants (estimated at up to 16.2 years at December 31, 2008) to the extent the loss is outside of a corridor
established in accordance with GAAP. The corridor is established based on the greater of 10% of the plan assets or
10% of the projected benefit obligation. At December 31, 2008, $2.1 billion of the actuarial loss was outside of the
corridor, resulting in amortization of approximately $143 million after tax in our 2009 pension and OPEB expense.
Our expected return on plan assets and discount rate discussed above will not affect the cash contributions we are
required to make to our pension and OPEB plans because we have met all minimum funding requirements. We will
not have a minimum funding requirement for our pension or OPEB plans in 2009. However, we currently intend to
make a voluntary pension contribution of approximately $45 million in 2009.
Other-Than-Temporary Impairment of Investment Securities
We regularly review our debt and equity securities to determine whether a decline in fair value below the carrying
value is other-than-temporary. If a decline in fair value is considered other-than-temporary, the cost basis/carrying
amount of the security is written down, and the amount of the write-down is included in our results of operations.
This analysis requires significant diligence and involves judgment. We analyze all facts and circumstances we
believe are relevant for each investment when performing this analysis, in accordance with the guidance of FAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities,” FASB Staff Position FAS 115-1 and FAS
124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” and the
Securities and Exchange Commission’ s Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable
& Equities Securities.”