Avon 2012 Annual Report Download - page 33

PART II
Pension, Postretirement and Postemployment Expense
We maintain defined benefit pension plans, which cover substantially all employees in the U.S. and a portion of employees in international
locations. Additionally, we have unfunded supplemental pension benefit plans for some current and retired executives and provide retiree
health care and life insurance benefits (through the end of 2012 only) subject to certain limitations to the majority of retired employees in
the U.S. and certain foreign countries. See Note 12, Employee Benefit Plans, on pages F-31 through F-39 of our 2012 Annual Report for
further information on our benefit plans.
Pension plan expense and the requirements for funding our major pension plans are determined based on a number of actuarial
assumptions. These assumptions include the expected rate of return on pension plan assets, the interest crediting rate for hybrid plans and
the discount rate applied to pension plan obligations.
For 2012, the weighted average assumed rate of return on all pension plan assets, including the U.S. and non-U.S. plans was 7.28%,
compared to 7.54% for 2011. In determining the long-term rates of return, we consider the nature of the plans’ investments, an
expectation for the plans’ investment strategies, historical rates of return and current economic forecasts. We evaluate the expected long-
term rate of return annually and adjust as necessary.
The majority of our pension plan assets relate to the U.S. pension plan. The assumed rate of return for 2012 for the U.S. plan was 7.75%,
which was based on an asset allocation of approximately 35% in corporate and government bonds and mortgage-backed securities (which
are expected to earn approximately 2% to 4% in the long term) and approximately 65% in equity securities and high yield securities (which
are expected to earn approximately 6% to 10% in the long term). Historical rates of return on the assets of the U.S. plan were
approximately 9% for the most recent 10-year period and approximately 8% for the 20-year period. In the U.S. plan, our asset allocation
policy has favored U.S. equity securities, which have returned approximately 8% over the 10-year period and approximately 8% over the 20-
year period. The rate of return on the plan assets in the U.S. was approximately 15% in 2012 and approximately 7% in 2011.
Regulations under the Pension Protection Act of 2006, which are finalized but not yet effective, will require that hybrid plans limit the
maximum interest crediting rate to one among several choices of crediting rates which are considered “market rates of return”. The rate
chosen will affect total pension obligations. 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-quality rating from a recognized rating agency. The discount rates for our more
significant plans, including our U.S. plan, were based on the internal rates 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 was 4.11% at December 31, 2012, and 4.69% at December 31, 2011. For the determination of the expected
rate of return on assets and the discount rate, we take into consideration external actuarial advice.
Our funding requirements may be impacted by regulations or interpretations thereof. Our calculations of pension, postretirement and
postemployment costs are dependent on the use of assumptions, including discount rates, hybrid plan maximum interest crediting rates and
expected return on plan assets discussed above, rate of compensation increase of plan participants, interest cost, health care cost trend
rates, benefits earned, mortality rates, the number of associate retirements, the number of associates electing to take lump-sum payments
and other factors. Actual results that differ from assumptions are accumulated and amortized to expense over future periods and, therefore,
generally affect recognized expense in future periods. At December 31, 2012, we had pretax actuarial losses, prior service credits, and
transition obligations totaling $491 for the U.S. pension and postretirement plans and $313 for the non-U.S. pension and postretirement
plans that have not yet been charged to expense. These actuarial losses have been charged to accumulated other comprehensive loss within
shareholders’ equity. While we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions
may materially affect our pension, postretirement and postemployment obligations and future expense. For 2013, our assumption for the
expected rate of return on assets is 7.75% for our U.S. plans and 6.85% for our non-U.S. plans. Our assumptions are reviewed and
determined on an annual basis.