Avon 2006 Annual Report Download - page 72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rate used for determining future pension obliga-
tions for each individual plan is based on a review of long-term
bonds that receive a high-quality rating from a recognized rating
agency. The discount rates for our most significant plans, were
based on the internal rate of return for a portfolio of high-quality
bonds with maturities that are consistent with the projected
future benefit payment obligations of each plan. The weighted-
average discount rate for U.S. and non-U.S.
plans determined on this basis has increased to 5.43% at
December 31, 2006, from 5.20% at December 31, 2005. In
determining the long-term rates of return, we consider the
nature of each plan’s investments, an expectation for each plan’s
investment strategies, historical rates of return and current
economic forecasts, among other factors. We evaluate the
expected rate of return on plan assets annually and adjust 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
2006 2005 2004 2006 2005 2004 2006 2005 2004
Discount rate 5.50% 5.80% 6.25% 5.01% 5.48% 5.77% 6.33% 5.65% 6.25%
Rate of compensation increase 6.00 6.00 4.50 3.14 2.80 3.01 N/A N/A N/A
Rate of return on assets 8.00 8.00 8.75 6.97 7.14 7.18 N/A N/A N/A
In determining the net cost for the year ended December 31,
2006, the assumed rate of return on assets globally was 7.55%,
which represents the weighted-average rate of return on all plan
assets, including the U.S. and non-U.S. plans.
The majority of our pension plan assets relate to the U.S. pension
plan. The assumed rate of return for determining 2006 net costs
for the U.S. plan was 8.0%. Historical rates of return for the U.S.
plan for the most recent ten-year and 20-year periods were
7.6% and 9.7%, respectively. In the U.S plan, our asset alloca-
tion policy has favored U.S. equity securities, which have
returned 8.0% and 11.8%, respectively, over the ten-year and
20-year period.
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 secu-
rities (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 our weighted-average
rate of return of 7.55% for determining 2006 net cost.
Plan Assets
Our U.S. and non-U.S. pension plans target and weighted-average asset allocations at December 31, 2006 and 2005, by asset category were
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 2007 2006 2005 2007 2006 2005
Equity securities 65% 65% 65% 62% 61% 65%
Debt securities 35 35 35 31 28 30
Other – – – 7 11 5
Total 100% 100% 100% 100% 100% 100%
The overall objective of our U.S. 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. This is expected to be achieved through the investment of our contributions and other trust assets
and by utilizing investment policies designed to achieve adequate funding over a reasonable period of time.