Allegheny Power 2010 Annual Report Download - page 89
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74
The following table provides a reconciliation of changes in the fair value of postretirement benefit investments classified
as Level 3 in the fair value hierarchy during 2010 and 2009:
Private Equity Real Estate
Funds Funds
(in millions)
Balance as of January 1, 2009 $ 2 $ 10
A
ctual return on plan assets:
Unrealized gains (losses) - (3)
Realized gains (losses) - -
Purchases, sales and settlements 1 -
Transfers in (out) 1 -
Balance as of December 31, 2009 4 7
A
ctual return on plan assets:
Unrealized gains - -
Realized gains (losses) - 2
Purchases, sales and settlements (1) -
Transfers in (out) - -
Balance at December 31, 2010 $ 3 $ 9
In selecting an assumed discount rate, FirstEnergy considers currently available rates of return on high-quality fixed
income investments expected to be available during the period to maturity of the pension and other postretirement
benefit obligations. The assumed rates of return on pension plan assets consider historical market returns and economic
forecasts for the types of investments held by FirstEnergy's pension trusts. The long-term rate of return is developed
considering the portfolio’s asset allocation strategy.
FirstEnergy generally employs a total return investment approach whereby a mix of equities and fixed income
investments are used to maximize the long-term return on plan assets for a prudent level of risk. Risk tolerance is
established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The
investment portfolio contains a diversified blend of equity and fixed-income investments. Equity investments are
diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization funds. Other
assets such as real estate and private equity are used to enhance long-term returns while improving portfolio
diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives
are not used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is
measured and monitored on a continuing basis through periodic investment portfolio reviews, annual liability
measurements, and periodic asset/liability studies.
FirstEnergy’s target asset allocations for its pension and OPEB portfolio for 2010 and 2009 are shown in the following
table:
Target Asset
Allocations
2010 2009
Equities 21 % 58 %
Fixed income 50 30
A
bsolute return strategies 21 -
Real estate 6 8
Private equity 2 4
Total 100 % 100 %
Assumed Health Care Cost Trend Rates
As of December 31 2010 2009
Health care cost trend rate assumed
(pre/post-Medicare) 8.0-9.0% 8.5 -10%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) 5 % 5 %
Year that the rate reaches the ultimate trend
rate (pre/post-Medicare) 2016-2018 2016-2018