Avon 2003 Annual Report Download - page 63

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Postretirement
For 2004, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 12% for pre-age 65 claims and
post-age 65 claims and will gradually decrease each year thereafter to 5.0% in 2008 and beyond. A one-percentage point change in the assumed health care
cost trend rates would have the following effects:
1 Percentage 1 Percentage
(In millions) Point Increase Point Decrease
Effect on total of service and interest cost components $ .2 $ (.3)
Effect on postretirement benefit obligation 2.2 (2.7)
Plan Assets
Avon’s U.S. and non-U.S. pension plans target and weighted-average asset allocations at December 31, 2003 and 2002, by asset category are as follows:
U.S. Plans Non-U.S. Plans
% of Plan Assets % of Plan Assets
Target at Year End Target at Year End
Asset Category 2004 2003 2002 2004 2003 2002
Equity securities 65% 65% 65% 67% 65% 61%
Debt securities 35 35 35 26 27 28
Other — — — 7 811
Total 100% 100% 100% 100% 100% 100%
Notes to Consolidated Financial Statements
notes to statements
82
The overall objective of Avon’s domestic pension plan is to provide the means
to pay benefits to participants and their beneficiaries in the amounts and at
the times called for by the plan through the investment of Avon’s contributions
and other trust assets, utilizing investment policies designed to achieve ade-
quate funding over a reasonable period of time.
Pension trust assets are invested so as to achieve a return on investment,
based on levels of liquidity and investment risk, that is prudent and reason-
able under circumstances which exist from time to time. While Avon recog-
nizes the importance of the preservation of capital, it also adheres to the
theory of capital market pricing which maintains that varying degrees of
investment risk should be rewarded with compensating returns.
Consequently, prudent risk-taking is justifiable.
The asset allocation decision includes consideration of the non-investment
aspects of the Avon Retirement Plan, including future retirements, lump sum elec-
tions, growth in the number of participants, company contributions, and cash
flow. These actual characteristics of the plan place certain demands upon the
level, risk, and required growth of trust assets. Avon regularly conducts analyses
of the plan’s current and likely future financial status by forecasting assets, liabili-
ties, benefits and company contributions over time. In so doing, the impact of
alternative investment policies upon the plan’s financial status is measured and
an asset mix which balances high asset return and low risk is selected.
Avon’s decision with regard to asset mix is reviewed periodically. Asset mix
guidelines include target allocations and permissible ranges for each asset cat-
egory. Assets are monitored on an ongoing basis and rebalanced as required to
maintain an asset mix within the permissible ranges. The guidelines will change
from time to time, based on an ongoing, evaluation of the Plan’s tolerance to
assume investment risk.