Honeywell 2006 Annual Report Download - page 56

our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. Projecting future events is
subject to various uncertainties that could cause the insurance recovery on asbestos related liabilities to be higher or lower than that
projected and recorded. Given the inherent uncertainty in making future projections, we reevaluate our projections concerning our
probable insurance recoveries in light of any changes to the projected liability, our recovery experience or other relevant factors that
may impact future insurance recoveries. See Note 21 to the financial statements for a discussion of management's judgments applied
in the recognition and measurement of insurance recoveries for asbestos related liabilities.
Defined Benefit Pension Plans—We maintain defined benefit pension plans covering a majority of our employees and retirees.
For financial reporting purposes, net periodic pension expense is calculated based upon a number of significant actuarial assumptions,
including a discount rate for plan obligations and an expected long-term rate of return on plan assets. We consider current market
conditions, including changes in investment returns and interest rates, in making these assumptions. We determine the expected long-
term rate of return on plan assets utilizing historic and expected plan asset returns over varying long-term periods combined with
current market conditions and broad asset mix considerations (see Note 22 to the financial statements for actual and targeted asset
allocation percentages for our pension plans). The discount rate reflects the market rate on December 31 (measurement date) for high-
quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. Further
information on all our major actuarial assumption is included in Note 22 to the financial statements.
The key assumptions used in developing our 2006, 2005 and 2004 net periodic pension expense for our U.S. plans included the
following:
2006 2005 2004
Discount rate 5.75% 5.875% 6.00%
Assets:
Expected rate of return 9% 9% 9%
Actual rate of return 14% 8% 13%
Actual 10 year average annual compounded
rate of return 10% 10% 11%
The reduction in the discount rate in both 2006 and 2005 reflects the lower market interest rate environment for high-quality fixed
income debt instruments. The discount rate is also volatile from year to year because it is determined based upon the prevailing rate as
of the measurement date. We will use a 6.00 percent discount rate in 2007, reflecting the increase in the market interest rate
environment. We plan to continue to use an expected rate of return on plan assets of 9 percent for 2007 based principally on our
historical experience of actual plan returns. The net losses for our pension plans were $2.4 billion at December 31, 2006 compared
with $3.4 billion at December 31, 2005. This decrease of $1.0 billion is due primarily to lower net losses in our U.S. plans due to a
higher discount rate at December 31, 2006, an actual plan asset return of 14% in 2006 in our U.S. plans which was higher than the
expected rate of return of 9%, and loss amortization in 2006. The net losses at December 31, 2006 principally result from the decline
each year in the discount rate for the period 2001 through 2005 and from actual plan asset returns below expected rates of return
during 2000, 2001, 2002 and 2005. Such net losses were recognized as of December 31, 2006 on our consolidated balance sheet and
as a component of other comprehensive income (loss), net of tax, in accordance with SFAS No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158) which is discussed in detail in Notes 1 and 22 to the
financial statements. In the future we will continue to systematically recognize such net losses in net periodic pension expense in
accordance with Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions' (SFAS No. 87). Under
SFAS No. 87, we use the market-related value of plan assets reflecting changes in the fair value of plan assets over a three-year
period. Further, net losses in excess of 10 percent of the greater of the market-related value of plan assets or the plans projected benefit
obligation are recognized over a six-year period.
Changes in net periodic pension expense may occur in the future due to changes in our expected rate of return on plan assets and
discount rate resulting from economic events. The following table
41