Ford 2014 Annual Report Download - page 88

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• Expected contributions. Our expected amount and timing of contributions are based on an assessment of
minimum requirements, cash availability, and other considerations (e.g., funded status, avoidance of regulatory
premiums and levies, and tax efficiency).
• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.
• Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the
near-term outlook, and an assessment of likely long-term trends.
Assumptions are set at each year end and are generally not changed during the year unless there is a major plan
event such as a significant curtailment or settlement that would trigger a plan remeasurement.
The effects of actual results differing from our assumptions and the effects of changing assumptions are recorded as
unamortized net gains or losses in Accumulated other comprehensive income/(loss) on our balance sheet. Unamortized
gains and losses are amortized over future periods and, therefore, generally affect our recognized expense in future
periods.
Mortality Assumptions. As part of the normal management of our defined benefit pension and OPEB plans, we
consistently review our demographic assumptions and actual experience, including our assumptions for mortality. At year-
end 2014, we updated our assumptions for future mortality improvements in our North American defined benefit pension
and OPEB plans, taking into consideration recent mortality information published by recognized experts in this field,
primarily the U.S. Society of Actuaries and the Canadian Institute of Actuaries. This information was considered, along
with the characteristics of our plan-specific populations and other data where appropriate, in developing our best estimate
of the expected mortality of plan participants. The impact of this update on our global pension and OPEB obligations was
not significant and is included in the benefit obligations shown in Note 12 of the Notes to the Financial Statements.
See Note 12 of the Notes to the Financial Statements for more information regarding pension and OPEB costs and
assumptions.
Pension Plans
Effect of Actual Results. The year-end 2014 weighted average discount rate was 3.94% for U.S. plans and 3.06% for
non-U.S. plans, reflecting decreases of 80 and 101 basis points, respectively, compared with year-end 2013. In 2014, the
U.S. actual return on assets was 16.4%, which was higher than the expected long-term rate of return of 6.89%. Non-U.S.
actual return on assets was 15.7%, which was higher than the expected long-term rate of return of 6.63%. In total, these
differences resulted in a net increase in unamortized losses of about $3 billion which are expected to be recognized as a
component of net expense over the expected future years of service (approximately 10 years for our major U.S. plans and
11 years for our major non-U.S. plans).
For 2015, the expected long-term rate of return on assets is 6.75% for U.S. plans and 6.11% for non-U.S. plans, down
14 basis points and 52 basis points, respectively, compared with a year ago, reflecting primarily a higher fixed income
allocation.
Worldwide pension expense, excluding special items, was $1 billion in 2014, $600 million lower than 2013, driven
primarily by higher discount rates at year-end 2013 compared with 2012. Based on year-end assumptions, we expect
2015 pension expense to be higher compared with 2014, reflecting primarily lower discount rates at year-end 2014
compared with 2013.
De-risking Strategy. In 2012, we adopted a broad global de-risking strategy which increases the matching
characteristics of our assets relative to our obligation as funded status improves. Changes in interest rates (which directly
influence changes in discount rates), in addition to other factors, have a significant impact on the value of our pension
obligation and fixed income asset portfolio. As we de-risk our plans and increase the allocation to fixed income
investments over time, we expect the funded status sensitivity to changes in interest rates will be significantly reduced.
Any change in interest rates should result in offsetting effects in the value of our pension obligation and the value of the
fixed income asset portfolio.
Sensitivity Analysis. The December 31, 2014 pension funded status and 2015 expense are affected by year-end
2014 assumptions. Sensitivities to these assumptions may be asymmetric and are specific to the time periods noted.
The effects of changes in the factors which generally have the largest impact on year-end funded status and pension
expense are discussed below.
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