Honeywell 2011 Annual Report Download - page 54

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 sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans covering the majority of our
employees and retirees.
We recognize changes in the fair value of plan assets and net actuarial gains or losses in excess of 10 percent of the greater of the market-related value
of plan assets or the plans' projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment). Net actuarial gains and
losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change as they may
each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the
measurement date each year and the differences between expected and actual returns on plan assets. This accounting method also results in the potential for
volatile and difficult to forecast MTM adjustments. MTM adjustments were $1,802, $471 and $741 million in 2011, 2010 and 2009, respectively. The
remaining components of pension expense, primarily service and interest costs and assumed return on plan assets, are recorded on a quarterly basis (On-going
Pension Expense).
For financial reporting purposes, net periodic pension expense is calculated based upon a number of actuarial assumptions, including a discount rate for
plan obligations and an expected long-term rate of return on plan assets. We determine the expected long-term rate of return on plan assets utilizing historical
plan asset returns over varying long-term periods combined with our expectations on future market conditions and asset mix considerations (see Note 22 to
the financial statements for details on the actual various asset classes 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 assumptions is included in Note 22 to the financial statements.
The key assumptions used in developing our 2011, 2010 and 2009 net periodic pension expense for our U.S. plans included the following:
2011 2010 2009
Discount rate 5.25% 5.75% 6.95%
Assets:
Expected rate of return 8% 9% 9%
Actual rate of return 0% 19% 20%
Actual 10 year average annual compounded rate of return 6% 6% 4%
The discount rate can be volatile from year to year because it is determined based upon prevailing interest rates as of the measurement date. We will use
a 4.89 percent discount rate in 2012, reflecting the decrease in the market interest rate environment since December 31, 2010. We plan to continue to use an
expected rate of return on plan assets of 8 percent for 2012 as this is a long-term rate based on historical plan asset returns over varying long-term periods
combined with our expectations on future market conditions and the asset mix of the plan's investments.
In addition to the potential for MTM adjustments, changes in our expected rate of return on plan assets and discount rate resulting from economic
events also affects future on-going pension expense. The following table highlights the sensitivity of our U.S. pension obligations and on-going expense to
changes in these assumptions, assuming all other assumptions remain constant. These estimates exclude any potential MTM adjustment:
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