JP Morgan Chase 2008 Annual Report Download - page 167

JPMorgan Chase & Co./ 2008 Annual Report 165
long-term rate of return on defined benefit pension plan assets, tak-
ing into consideration local market conditions and the specific alloca-
tion of plan assets. The expected long-term rate of return on U.K.
plan assets is an average of projected long-term returns for each
asset class. The return on equities has been selected by reference to
the yield on long-term U.K. government bonds plus an equity risk
premium above the risk-free rate. The return on “AA”-rated long-term
corporate bonds has been taken as the average yield on such bonds,
adjusted for the expected downgrades and the expected narrowing
of credit spreads over the long term.
The discount rate used in determining the benefit obligation under
the U.S. defined benefit pension and OPEB plans was selected by ref-
erence to the yields on portfolios of bonds with maturity dates and
coupons that closely match each of the plan’s projected cash flows;
such portfolios are derived from a broad-based universe of high-
quality corporate bonds as of the measurement date. In years in
which these hypothetical bond portfolios generate excess cash, such
excess is assumed to be reinvested at the one-year forward rates
implied by the Citigroup Pension Discount Curve published as of the
measurement date. The discount rate for the U.K. defined benefit
pension and OPEB plans represents a rate implied from the yield
curve of the year-end iBoxx £ corporate “AA” 15-year-plus bond
index (adjusted for expected downgrades in the underlying bonds
comprising the index) with a duration corresponding to that of the
underlying benefit obligations.
The following tables present the weighted-average annualized actuarial assumptions for the projected and accumulated postretirement benefit
obligations and the components of net periodic benefit costs for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans, as of and
for the periods indicated.
Weighted-average assumptions used to determine benefit obligations
U.S. Non-U.S.
December 31, 2008 2007 2008 2007
Discount rate:
Defined benefit pension plans 6.65% 6.60% 2.00-6.20% 2.25-5.80%
OPEB plans 6.70 6.60 6.20 5.80
Rate of compensation increase 4.00 4.00 3.00-4.00 3.00-4.25
Health care cost trend rate:
Assumed for next year 8.50 9.25 7.00 5.75
Ultimate 5.00 5.00 5.50 4.00
Year when rate will reach ultimate 2014 2014 2012 2010
Weighted-average assumptions used to determine net periodic benefit costs
U.S. Non-U.S.
Year ended December 31, 2008 2007 2006 2008 2007 2006
Discount rate:
Defined benefit pension plans 6.60% 5.95% 5.70% 2.25-5.80% 2.25-5.10% 2.00-4.70%
OPEB plans 6.60 5.90 5.65 5.80 5.10 4.70
Expected long-term rate of return on plan assets:
Defined benefit pension plans 7.50 7.50 7.50 3.25-5.75 3.25-5.60 3.25-5.50
OPEB plans 7.00 7.00 6.84 NA NA NA
Rate of compensation increase 4.00 4.00 4.00 3.00-4.25 3.00-4.00 3.00-3.75
Health care cost trend rate:
Assumed for next year 9.25 10.00 10.00 5.75 6.63 7.50
Ultimate 5.00 5.00 5.00 4.00 4.00 4.00
Year when rate will reach ultimate 2014 2014 2013 2010 2010 2010
The following table presents the effect of a one-percentage-point
change in the assumed health care cost trend rate on JPMorgan
Chase’s total service and interest cost and accumulated postretire-
ment benefit obligation.
1-Percentage- 1-Percentage-
Year ended December 31, 2008 point point
(in millions) increase decrease
Effect on total service and interest cost $ 3 $ (3)
Effect on accumulated postretirement
benefit obligation 45 (40)