Alcoa 2009 Annual Report Download - page 139

postretirement benefits for the years ended December 31, 2009, 2008, and 2007 reflected a reduction of $42, $42, and
$58, respectively, related to the recognition of the federal subsidy awarded under Medicare Part D. Future net periodic
postretirement benefit costs will be adjusted to reflect the lower interest cost due to the reduction in the APBO
resulting from the impact of the federal subsidy.
Assumptions
Weighted average assumptions used to determine benefit obligations are as follows:
December 31, 2009 2008
Discount rate 6.15% 6.4%
Rate of compensation increase 3.5 4.0
The discount rate is determined using a yield curve model developed with the assistance of the Company’s external
actuaries. The plans’ projected benefit obligation cash flows are discounted using yields on high quality corporate
bonds to produce a single equivalent rate. In 2008, the yield curve model was refined to exclude certain corporate
bonds severely affected by the global economic downturn, as they were deemed not to be representative of equivalent
yields on high-quality fixed income investments. In 2009, this methodology was continued as the output of the refined
yield curve model parallels the plans’ projected cash flows, which have an average duration of 10 years.
The rate of compensation increase is based upon actual experience. The global salary freeze enacted at the beginning of
2009 did not significantly impact this rate since it is a long-term assumption. For 2010, the rate of compensation
increase will be 3.5%, which approximates the five-year average.
Weighted average assumptions used to determine the net periodic benefit cost are as follows:
2009 2008 2007
Discount rate 6.40% 6.20% 5.95%
Expected long-term rate of return on plan assets 8.75 9.00 9.00
Rate of compensation increase 4.00 4.00 4.00
The long-term rate of return on plan assets is estimated by considering expected returns on current asset allocations,
which is supported by historical actual returns, and is generally applied to a five-year average market value of assets. In
2009, the expected long-term rate of return was reduced to 8.75% due to lower future expected market returns as a
result of the global economic downturn. This was supported by the fact that for the first time in 20 years in 2008, the
10-year moving average of actual performance fell below 9%, even though the 20-year moving average continued to
exceed 9%. In 2009, the 20-year moving average of actual performance fell below 9% for the first time in more than 15
years, but has continued to exceed 8.75%. The expected long-term rate of return on plan assets will be 8.75% in 2010.
Assumed health care cost trend rates are as follows:
2009 2008 2007
Health care cost trend rate assumed for next year 6.5% 6.5% 7.0%
Rate to which the cost trend rate gradually declines 5.0% 5.0% 5.0%
Year that the rate reaches the rate at which it is assumed to remain 2014 2013 2012
The health care cost trend rate in the calculation of the 2008 benefit obligation was 6.5% from 2008 to 2009 and from
2009 to 2010. Alcoa’s actual annual health care cost trend experience over the past three years has ranged from (6.2)%
to 0.3%. Due to the decline in Alcoa’s health care cost trend experience in recent years, the use of a 6.5% trend rate
will continue for 2010. Although the low-end of the range of actual annual health care costs is favorable, it is not
indicative of expected future actual costs. As a result, the assumed health care cost trend rate for next year was not
impacted.
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