Equifax 2003 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEM ENTS
56 EQUIFAX. INFORMATION THAT EMPOWERS.
For calculating net periodic benefit cost for the USRIP, a market-
related value of assets is used. The market-related value of assets
recognizes the difference between actual returns and expected
returns over five years at a rate of 20% per year.
For measurement purposes, an 8 percent annual rate of increase in
the per capita cost of covered healthcare benefits was assumed for
2004. The rate was assumed to decrease gradually to 5 percent for
2007 and remain at that level thereafter.
Assumed healthcare cost trend rates have an effect on the
amounts reported for the healthcare plan. A one-percentage-point
change in assumed healthcare cost trend rates would have the
following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service
cost and interest cost
components $0.1 $(0.1)
Effect on postretirement
benefit obligation $1.9 $(1.7)
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.
Following the guidance of the Financial Accounting Standards
Board, the Company has elected not to defer recognition of this
Act. The 2003 year-end benefit obligation reflects the effect of the
Act on the plan. Specific authoritative guidance on the accounting
for the federal subsidy is pending, and guidance, when issued,
could require a change to previously reported information.
The obligations reflect that the Company will recognize the 28%
subsidy as an offset to healthcare plan costs and this is reflected
as an unrecognized net gain to that plan. This gain will be reflected
in net periodic benefit cost for the first time in 2004. For retirees
paying no premiums for coverage, the 28% subsidy is expected to
reduce the Company’s prescription drug plan costs by about $389
per individual in 2006 and this amount is expected to increase by
the valuation trend rates. The Company’s actuaries have deter-
mined that the Company’s prescription drug plan provides a benefit
that is at least actuarially equivalent to the M edicare prescription
drug plan. The obligations assume no change to the participation
assumption. For retirees paying a premium of more than 40% of
total medical costs, the M edicare Rx subsidy is not reflected.
USRIP (the “Plan”) Investment and
Asset Allocation Strategies
The primary goal of the asset allocation strategy of the Plan is to
produce a total investment return, employing the lowest possible
level of financial risk, which will: (1) satisfy annual cash benefits
payments to Plan participants and (2) maintain and increase the
total market value of the USRIP, after cash benefits payments, on a
real (inflation adjusted) basis. In pursuit of this goal, we adhere to
the following asset allocation risk control objectives:
• The asset allocation strategy employed should diversify the
Plan in a manner consistent with “ prudent man” guidelines.
• The asset allocation of the Plan shall be designed to move the
Plan as close to the “efficient investment frontier” as possible.
Maximization of total investment return is not, taken in isolation,
a goal of the asset allocation strategy of the USRIP. Return maxi-
mization is pursued subject to the asset allocation risk control
constraints noted previously.
The Plan’s investment managers are required to abide by the provi-
sions of the “Employment Retirement Income Security Act” (“ ERISA”).
Standards of performance for each manager include an expected
return, a measure of volatility, and a time period of evaluation.
Based upon methodologies developed by our external investment
advisor, we employ two primary models in estimating future
returns for each asset class held in the USRIP: a forward-looking,
return decomposition approach and a method which estimates
future risk premiums based on historical risk premiums.
Return Decomposition Approach
The return decomposition approach is based on the Gordon Dividend
Discount Model. Our version of the model specifies the expected
return of an equity asset class as a function of three factors: (1) the
current dividend yield, (2) the expected growth rate, and (3) an
additional term capturing expected changes in future price/ earnings
(“P/E” ) ratios. Using this approach, it is possible to combine esti-
mates for each of the three components to arrive at a projected
return for various asset categories.
The current dividend/price ratio is used as a proxy for the first
factor, the dividend yield. For the second factor, expected earnings
growth is forecasted using two techniques. The first technique is
based on the sustainable growth formula used in financial forecast-
ing, which recognizes that long-term earnings growth is a function
of a firm’s return on equity and the earnings retention rate. The
second approach is based on Wall Street consensus growth fore-
casts. For the third factor, a 15-year historical average of P/E ratio
is used as an estimate of the future P/E ratio.
Estimated Risk Premium Approach
Using historical data, we estimate future risk premiums, in excess
of the risk-free rate, which will be demanded by the marketplace
for each asset class held by the Plan. Our estimate of the risk-free
rate is based on the current yield to maturity of 5-year U.S. Treasury
STRIPs. We base our estimate of the future risk premium for each