Avon 2004 Annual Report Download - page 52

Global Beauty 73
Notes to Consolidated
Financial Statements
Assumptions
Weighted-average assumptions used to determine benefit obligations recorded on the Consolidated Balance Sheets
as of December 31 were as follows:
Pension Benefits Postretirement
U.S. Plans Non-U.S. Plans Benefits
2004 2003 2004 2003 2004 2003
Discount rate 5.80% 6.25% 5.48% 5.75% 5.65% 6.25%
Rate of compensation increase 6.00 4.50 2.91 3.00 N/A N/A
Rate of return on assets 8.00 8.75 7.14 7.18 N/A N/A
The discount rate used for determining future pension
obligations for each individual plan is based on a
review of long-term bonds that receive a high rating
from a recognized rating agency. Additionally, for the
U.S. Plan, the discount rate was based on the internal
rate of return for a portfolio of Moody’s Aa-rated high
quality bonds with maturities that are consistent with
the projected future benefit payment obligations of the
plan. The weighted-average discount rate for U.S. and
non-U.S. plans determined on this basis has decreased
to 5.65% at December 31, 2004, from 6.03% at
December 31, 2003. In determining the long-term
rates of return, the Company considers the nature of
the plans’investments, an expectation for the plans’
investment strategies, historical rates of return and
current economic forecasts, among other factors. The
Company evaluates the expected rate of return on
plan assets annually and adjusts as necessary.
Weighted-average assumptions used to determine net cost recorded in the Consolidated Statements of Income for the
years ended December 31 were as follows:
Pension Benefits
U.S. Plans Non-U.S. Plans Postretirement Benefits
2004 2003 2002 2004 2003 2002 2004 2003 2002
Discount rate 6.25% 6.75% 7.25% 5.77% 5.68% 6.00% 6.25% 6.75% 7.25%
Rate of compensation increase 4.50 4.50 4.50 3.01 2.96 3.10 N/A N/A N/A
Rate of return on assets 8.75 8.75 8.75 7.18 7.16 7.53 N/A N/A N/A
In determining the net cost for the year ended
December 31, 2004, the assumed rate of return on
assets globally was 8.21%, which represents the
weighted-average rate of return on all plan assets,
including the U.S. and non-U.S. plans.
The majority of the Company’s pension plan assets
relate to the U.S. pension plan. The assumed rate of
return for determining 2004 net costs for the U.S. plan
was 8.75%. Historical rates of return for the U.S. plan for
the most recent 10-year and 20-year periods were 9.4%
and 10.8%, respectively. In the U.S. plan, the Company’s
asset allocation policy has favored U.S. equity securities,
which have returned 11.2% and 13.1%, respectively,
over the 10-year and 20-year period. The assumed rate
of return for determining future pension obligations at
December 31, 2004 and 2005 pension cost was lowered
from 8.75% to 8.00%.
In addition, the current rate of return assumption for
the U.S. plan was based on an asset allocation of
approximately 35% in corporate and government
bonds and mortgage-backed securities (which are
expected to earn approximately 5% to 7% in the long
term) and 65% in equity securities (which are expected
to earn approximately 8% to 10% in the long term).
Similar assessments were performed in determining
rates of return on non-U.S. pension plan assets, to arrive
at the Company’s weighted-average rate of return of
8.21% for determining 2004 net cost.