Alcoa 2015 Annual Report Download - page 178

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, 2015 2014
Discount rate 4.29% 4.00%
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, consumer products, 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. For 2016, 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):
2015 2014 2013
Discount rate* 4.00% 4.80% 4.15%
Expected long-term rate of return on plan assets 7.75 8.00 8.50
Rate of compensation increase 3.50 3.50 3.50
* 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 2015, 2014, and 2013 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.
In conjunction with the annual measurement of the funded status of Alcoa’s pension and other postretirement benefit
plans at December 31, 2015, management elected to change the manner in which the interest cost component of net
periodic benefit cost will be determined in 2016 and beyond. Previously, the interest cost component was determined
by multiplying the single equivalent rate described above and the aggregate discounted cash flows of the plans’
projected benefit obligations. Under the new methodology, the interest cost component will be determined by
aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an
individual spot rate (referred to as the “spot rate” approach). This change will result in a lower interest cost component
of net periodic benefit cost under the new methodology compared to the previous methodology of approximately $100
($65 after-tax) in 2016. Management believes this new methodology, which represents a change in an accounting
estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of
bond payments in the same respective year.
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 is one that relies on a combination of historical asset return
information and forward-looking returns by asset class. As it relates to historical asset return information, management
focuses on the annual, 10-year moving, and 20-year moving averages when developing this assumption. Management
also incorporates expected future returns on current and planned asset allocations using information from various
external investment managers and consultants, as well as management’s own judgment.
154