Discover 2009 Annual Report Download - page 136

The Qualified Plan return objectives provide long-term measures for monitoring the investment performance against
growth in the pension obligations. The overall allocation is expected to help protect the Qualified Plan’s funded status
while generating sufficiently stable real returns (net of inflation) to help cover current and future benefit payments. Total
Qualified Plan portfolio performance is assessed by comparing actual returns with relevant benchmarks, such as the by
Standard & Poor’s (“S&P”) 500 Index, the Russell 2000 Index, the MSCI EAFE Index and, in the case of the fixed income
portfolio, the Qualified Plan’s liability profile.
Both the equity and fixed income portions of the asset allocation use a combination of active and passive investment
strategies and different investment styles. The fixed income asset allocation consists of longer duration fixed income
securities in order to help reduce plan exposure to interest rate variation and to better correlate assets with obligations.
The longer duration fixed income allocation is expected to help stabilize plan contributions over the long term.
The asset mix of the Qualified Plan is reviewed by the Discover Financial Services Retirement Plan Investment
Committee (the “Investment Committee”) on a regular basis. When asset class exposure reaches a minimum or maximum
level, an asset allocation review process is initiated and the portfolio is automatically rebalanced back to target allocation
levels, unless the Investment Committee determines otherwise.
The Investment Committee has determined to allocate no more than 10% of the Qualified Plan assets to “alternative”
asset classes that provide attractive diversification benefits, absolute return enhancement and/or other potential benefit to
the plan. Allocations to alternative asset classes will be made based upon an evaluation of particular attributes and
relevant considerations of each asset class.
Derivative instruments are permitted in the Qualified Plan’s portfolio only to the extent that they comply with all of the
plan’s policy guidelines and are consistent with the plan’s risk and return objectives. In addition, any investment in
derivatives must meet the following conditions:
• Derivatives may be used only if the vehicle is deemed by the investment manager to be more attractive than a
similar direct investment in the underlying cash market; or if the vehicle is being used to manage risk of the
portfolio.
• Under no circumstances may derivatives be used in a speculative manner or to leverage the portfolio.
• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the Qualified Plan is
that investment activity is undertaken for long-term investment, rather than short-term trading.
• Derivatives may only be used in the management of the Qualified Plan’s portfolio when their possible effects can
be quantified, shown to enhance the risk-return profile of the portfolio and reported in a meaningful and
understandable manner.
As a fundamental operating principle, any restrictions on the underlying assets apply to a respective derivative
product. This includes percentage allocations and credit quality. The purpose of the use of derivatives is to enhance
investment in the underlying assets, not to circumvent portfolio restrictions.
Cash Flows. The Company expects to contribute approximately $2.7 million to its pension and postretirement benefit
plans in 2010 based upon their current funded status and expected asset return assumptions for 2010, as applicable.
Expected benefit payments associated with the Company’s pension and postretirement benefit plans for the next five
years and in aggregate for the years thereafter are as follows (dollars in thousands):
Pension Postretirement
2010 ............................................................................................................................................................................ $12,634 $ 1,750
2011 ............................................................................................................................................................................ $12,775 $ 1,865
2011 ............................................................................................................................................................................ $13,715 $ 1,866
2012 ............................................................................................................................................................................ $14,596 $ 1,897
2013 ............................................................................................................................................................................ $15,266 $ 1,940
Following five years thereafter........................................................................................................................................... $89,538 $10,804
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