Alcoa 2010 Annual Report Download - page 144

For calendar year 2011, management again incorporated both actual historical return information and expected future
returns into its analysis. Based on strategic asset allocations and current estimates of future returns by asset class,
management will be using 8.50% as its expected long-term rate of return for 2011. This rate again falls within the
range of the 20-year moving average of actual performance and the expected future return developed by asset class.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for
non-U.S plans did not differ materially):
2010 2009 2008
Health care cost trend rate assumed for next year 6.5% 6.5% 6.5%
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 2015 2014 2013
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by
Alcoa’s other postretirement benefit plans. For 2011, the use of a 6.5% trend rate will continue, reflecting
management’s best estimate of the change in future health care costs covered by the plans. The plans’ actual annual
health care cost trend experience over the past three years has ranged from (1.3)% to 1.8%. Management does not
believe this three-year range is indicative of expected increases for future health care costs over the long-term.
Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage
point change in these assumed rates would have the following effects:
1%
increase
1%
decrease
Effect on total of service and interest cost components $ 5 $ (4)
Effect on other postretirement benefit obligations 77 (66)
Plan Assets
Alcoa’s pension and other postretirement plans’ investment policy and weighted average asset allocations at
December 31, 2010 and 2009, by asset category, were as follows:
Plan assets
at
December 31,
Asset category Policy range 2010 2009*
Equity securities 20–55% 36% 38%
Debt securities 30–65% 52 55
Other 5–25% 12 7
Total 100% 100%
* Percentages were revised to reflect the reclassification of certain investments, such as moving private equities from
Other to Equity securities.
The principal objectives underlying the investment of the pension and other postretirement plans’ assets are to ensure
that Alcoa can properly fund benefit obligations as they become due under a broad range of potential economic and
financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such
obligations, and broadly diversify investments across and within the capital markets to protect asset values against
adverse movements in any one market. Specific objectives for long-term investment strategy include reducing the
volatility of pension assets relative to pension liabilities and achieving risk factor diversification across the balance of
the asset portfolio. Investments are diversified by strategy, asset class, geography, and sector to enhance returns and
mitigate downside risk. A large number of external investment managers are used to gain broad exposure to the
financial markets and to mitigate manager-concentration risk.
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