Alcoa 2010 Annual Report Download - page 143

Assumptions
Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit
plans were as follows (assumptions for non-U.S plans did not differ materially):
December 31, 2010 2009
Discount rate 5.75% 6.15%
Rate of compensation increase 3.5 3.5
The discount rate is determined using a Company-specific yield curve model (above-median) developed with the
assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a
single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of
issuers in various sectors, including finance and banking, manufacturing, transportation, insurance, and pharmaceutical,
among others. The yield curve model parallels the plans’ projected cash flows, which have an average duration of 10
years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to satisfy the
Company’s plans’ obligations multiple times.
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 2011, the rate of compensation
increase will be 3.5%, which approximates the five-year average.
Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement
benefit plans were as follows (assumptions for non-U.S plans did not differ materially):
2010 2009 2008
Discount rate* 6.15% 6.40% 6.20%
Expected long-term rate of return on plan assets 8.75 8.75 9.00
Rate of compensation increase 3.50 4.00 4.00
* In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S.
pension plans for the full annual period. However, the discount rates for a limited number of plans were updated
during the respective years to reflect the remeasurement of these plans due to new union labor agreements,
settlements, and (or) curtailments. The updated discount rates used were not significantly different from the discount
rates presented.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan
assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The
process used by management to develop this assumption has expanded from one that relied primarily on historical asset
return information to one that also incorporates forward-looking returns by asset class, as described below.
Prior to developing the expected long-term rate of return for calendar year 2009, management focused on historical
actual returns (annual, 10-year moving, and 20-year moving averages) when developing this assumption. Based on that
process, management utilized 9% for the expected long-term rate of return for several years through 2008. For calendar
year 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 then global economic downturn. This was supported by the fact that, in 2008, the 10-year moving average
of actual performance fell below 9% for the first time in 20 years, although the 20-year moving average continued to
exceed 9%.
For calendar year 2010, management expanded its process by incorporating expected future returns on current and
planned asset allocations using information from various external investment managers and management’s own
judgment. Management considered this forward-looking analysis as well as the historical return information, and
concluded the expected rate of return for calendar 2010 would remain at 8.75%, which was between the 20-year
moving average actual return performance and the estimated future return developed by asset class.
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