International Paper 2014 Annual Report Download - page 113

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Major actuarial assumptions used in determining the benefit obligations and net periodic pension cost for our defined
benefit plans are presented in the following table:
2014 2013 2012
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Actuarial assumptions used to determine benefit obligations as of December 31:
Discount rate 4.10%4.72%4.90%5.07%4.10%4.96%
Rate of compensation increase 3.75%4.03%3.75%4.13%3.75%3.17%
Actuarial assumptions used to determine net periodic pension cost for years
ended December 31:
Discount rate 4.65%(a) 5.07%4.10%4.96%5.10%5.98%
Expected long-term rate of return on plan assets (b) 7.75%7.53%8.00%7.04%8.00%7.62%
Rate of compensation increase 3.75%4.13%3.75%3.17%3.75%3.12%
(a) Represents the weighted average rate for 2014 due to the remeasurement in the first quarter of 2014.
(b) Represents the expected rate of return for International Paper's qualified pension plan for 2014 and 2013. The weighted average rate for the
Temple-Inland Retirement Plan was 7.00%, 6.16% and 5.70% for 2014, 2013 and 2012, respectively.
The expected long-term rate of return on plan assets is
based on projected rates of return for current and
planned asset classes in the plan’s investment portfolio.
Projected rates of return are developed through an
asset/liability study in which projected returns for each
of the plan’s asset classes are determined after
analyzing historical experience and future expectations
of returns and volatility of the various asset classes.
Based on the target asset allocation for each asset
class, the overall expected rate of return for the portfolio
is developed considering the effects of active portfolio
management and expenses paid from plan assets. The
discount rate assumption was determined from a
universe of high quality corporate bonds. A settlement
portfolio is selected and matched to the present value
of the plan’s projected benefit payments. To calculate
pension expense for 2015, the Company will use an
expected long-term rate of return on plan assets of
7.75% for the Retirement Plan of International Paper,
a discount rate of 4.10% and an assumed rate of
compensation increase of 3.75%. The Company
estimates that it will record net pension expense of
approximately $488 million for its U.S. defined benefit
plans in 2015, with the increase from expense of $387
million in 2014 reflecting a decrease in the discount
rate to 4.10% in 2015 from 4.65% in 2014, updated
mortality assumptions, and higher amortization of
unrecognized losses.
For non-U.S. pension plans, assumptions reflect
economic assumptions applicable to each country.
The following illustrates the effect on pension expense
for 2015 of a 25 basis point decrease in the above
assumptions:
In millions 2015
Expense/(Income):
Discount rate $ 36
Expected long-term rate of return on plan assets 25
Rate of compensation increase (1)
PLAN ASSETS
International Paper’s Board of Directors has appointed
a Fiduciary Review Committee that is responsible for
fiduciary oversight of the U.S. Pension Plan, approving
investment policy and reviewing the management and
control of plan assets. Pension Plan assets are invested
to maximize returns within prudent levels of risk.
The Pension Plan maintains a strategic asset allocation
policy that designates target allocations by asset class.
Investments are diversified across classes and within
each class to minimize the risk of large losses.
Derivatives, including swaps, forward and futures
contracts, may be used as asset class substitutes or
for hedging or other risk management purposes.
Periodic reviews are made of investment policy
objectives and investment manager performance. For
non-U.S. plans, assets consist principally of common
stock and fixed income securities.