Discover 2011 Annual Report Download - page 141

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For the Qualified Plan, the expected long-term rate of return on plan assets was estimated by computing a weighted
average return of the underlying long-term expected returns on the different asset classes, based on the target asset allocations.
Asset class return assumptions are created by integrating information on past capital market performance, current levels of key
economic indicators, and the market insights of investment professionals. Individual asset classes are analyzed as part of a
larger system, acknowledging both the interaction between asset classes and the influence of larger macroeconomic variables
such as inflation and economic growth on the entire structure of capital markets. Medium and long-term economic outlooks for
the U.S. and other major industrial economies are forecast in order to understand the range of possible economic scenarios and
evaluate their likelihood. Historical relationships between key economic variables and asset class performance patterns are
analyzed using empirical models. Finally, comprehensive asset class performance projections are created by blending
descriptive asset class characteristics with capital market insight and the initial economic analyses. The expected long-term
return on plan assets is a long-term assumption that generally is expected to remain the same from one year to the next but is
adjusted when there is a significant change in the target asset allocation, the fees and expenses paid by the plan.
The following table presents assumed health care cost trend rates used to determine the postretirement benefit obligations:
Health care cost trend rate assumed for next year:
Medical
Prescription
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
For the Years Ended November 30,
2011
6.90%-7.60%
8.80%
5.00%
2027
2010
7.00%-7.70%
9.20%
5.00%
2027
Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company’s
postretirement benefit plans. As of November 30, 2011, a one-percentage point change in assumed health care cost trend rates
would have the following effects (dollars in thousands):
Effect on total of service and interest cost
Effect on postretirement benefit obligations
One-Percentage
Point Increase
$10
$ 266
One-Percentage
Point Decrease
$(10)
$(235)
Qualified Plan Assets. The targeted asset allocation for 2012 by asset class was 35%, 64% and 1% for equity securities,
fixed income securities and other investments, respectively. The actual asset allocation for the Qualified Plan at November 30,
2010 was 36% for equity securities, 64% for fixed income securities and 0% for other investments.
The Discover Financial Services Retirement Plan Investment Committee (the “Investment Committee”) determined the
asset allocation targets for the Qualified Plan based on its assessment of business and financial conditions, demographic and
actuarial data, funding characteristics and related risk factors. Other relevant factors, including industry practices and long-term
historical and prospective capital market returns were considered as well.
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 a target index consisting of with relevant benchmarks, such
as the by Standard & Poor's (“S&P”) 500 Index, the Russell 2000 Index, the MSCI EAFE Index, a custom fixed index, and the
U.S. 90-day Treasury bill.
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 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 rebalanced
back to target allocation levels, if the Investment Committee deems such action appropriate.
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