Alcoa 2012 Annual Report Download - page 154

For calendar year 2012 and 2011, management again incorporated both actual historical return information and
expected future returns into its analysis. Based on strategic asset allocation changes and estimates of future returns by
asset class, management used 8.50% as its expected long-term rate of return for both years. 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.
For calendar year 2013, management used the same methodology as it did for 2012 and 2011 and determined that
8.50% will be the expected long-term rate of return.
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):
2012 2011 2010
Health care cost trend rate assumed for next year 6.0% 6.5% 6.5%
Rate to which the cost trend rate gradually declines 4.5% 5.0% 5.0%
Year that the rate reaches the rate at which it is assumed to remain 2017 2016 2015
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 2013, a 6.0% trend rate will be used, 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 (6.2)% to 3.8%. 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 other postretirement benefit obligations $124 $(114)
Effect on total of service and interest cost components 5 (5)
Plan Assets
Alcoa’s pension and other postretirement plans’ investment policy and weighted average asset allocations at
December 31, 2012 and 2011, by asset class, were as follows:
Plan assets
at
December 31,
Asset class Policy range 2012 2011
Equities 20–55% 33% 34%
Fixed income 25–55% 50 50
Other investments 15–35% 17 16
Total 100% 100%
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. Specific objectives for long-term investment strategy include reducing the volatility of pension
143