JP Morgan Chase 2010 Annual Report Download - page 205

JPMorgan Chase & Co./2010 Annual Report 205
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, 2010
point
point
(in millions)
increase
decrease
Effect on total se
r
vice and interest cost
$
2
$
(2)
Effect on accumulated postretirement
benefit obligation 36 (31)
At December 31, 2010, the Firm decreased the discount rates used
to determine its benefit obligations for the U.S. defined benefit
pension and OPEB plans in light of current market interest rates,
which will result in an increase in expense of approximately $21
million for 2011. The 2011 expected long-term rate of return on
U.S. defined benefit pension plan assets and U.S. OPEB plan assets
are 7.50% and 6.25%, respectively, as compared to 7.50% and
7.00% in 2010. The initial health care benefit obligation trend
assumption declined from 7.75% in 2010 to 7.00% in 2011. The
ultimate health care trend assumption will remain at 5.00% in
2011, but the year to ultimate was adjusted from 2014 to 2017.
As of December 31, 2010, the interest crediting rate assumption
and the assumed rate of compensation increase remained at
5.25% and 4.00%, respectively.
JPMorgan Chase’s U.S. defined benefit pension and OPEB plan
expense is sensitive to the expected long-term rate of return on
plan assets and the discount rate. With all other assumptions held
constant, a 25-basis point decline in the expected long-term rate of
return on U.S. plan assets would result in an increase of approxi-
mately an aggregate $30 million in 2011 U.S. defined benefit
pension and OPEB plan expense. A 25-basis point decline in the
discount rate for the U.S. plans would result in an increase in 2011
U.S. defined benefit pension and OPEB plan expense of approxi-
mately an aggregate $11 million and an increase in the related
benefit obligations of approximately an aggregate $169 million. A
25-basis point increase in the interest crediting rate for the U.S.
defined benefit pension plan would result in an increase in 2011
U.S. defined benefit pension expense of approximately $19 million
and an increase in the related projected benefit obligations of
approximately $76 million. A 25-basis point decline in the discount
rates for the non-U.S. plans would result in an increase in the 2011
non-U.S. defined benefit pension plan expense of approximately
$11 million.
Investment strategy and asset allocation
The Firm’s U.S. defined benefit pension plan assets are held in trust
and are invested in a well-diversified portfolio of equity and fixed
income securities, real estate, cash and cash equivalents, and alterna-
tive investments (e.g., hedge funds, private equity funds, and real
estate funds). Non-U.S. defined benefit pension plan assets are held
in various trusts and are also invested in well-diversified portfolios of
equity, fixed income and other securities. Assets of the Firm’s COLI
policies, which are used to partially fund the U.S. OPEB plan, are held
in separate accounts with an insurance company and are invested in
equity and fixed income index funds.
The investment policy for the Firm’s U.S. defined benefit pension
plan assets is to optimize the risk-return relationship as appropriate
to the needs and goals using a global portfolio of various asset
classes diversified by market segment, economic sector, and issuer.
Periodically the Firm performs a comprehensive analysis on the U.S.
defined benefit pension plan asset allocations, incorporating pro-
jected asset and liability data, which focuses on the short-and long-
term impact of the asset allocation on cumulative pension expense,
economic cost, present value of contributions and funded status.
Currently, approved asset allocation ranges are: U.S. equity 15–
35%, international equity 15–25%, debt securities 10–30%,
hedge funds 10–30%, real estate 5–20%, and private equity 5–
20%. Asset allocations are not managed to a specific target but
seek to shift asset class allocations within these stated ranges.
Assets are managed by a combination of internal and external
investment managers. Asset allocation decisions also incorporate
the economic outlook and anticipated implications of the macro-
economic environment on the various asset classes and managers.
Maintaining an appropriate level of liquidity, which takes into
consideration forecasted requirements for cash is a major consid-
eration in the asset allocation process. The Firm regularly reviews
the asset allocations and all factors that continuously impact the
portfolio, which is rebalanced when deemed necessary.
For the U.K. defined benefit pension plans, which represent the
most significant of the non-U.S. defined benefit pension plans, the
assets are invested to maximize returns subject to an appropriate
level of risk relative to the plans’ liabilities. In order to reduce the
volatility in returns relative to the plan’s liability profiles, the U.K.
defined benefit pension plans’ largest asset allocations are to debt
securities of appropriate durations. Other assets, mainly equity
securities, are then invested for capital appreciation, to provide
long-term investment growth. Similar to the U.S. defined benefit
pension plan, asset allocations for the U.K. plans are reviewed and
rebalanced on a regular basis.
Investments held by the Plans include financial instruments which
are exposed to various risks such as interest rate, market and credit
risks. Exposure to a concentration of credit risk is mitigated by the
broad diversification of both U.S. and non-U.S. investment instru-
ments. Additionally, the investments in each of the common/
collective trust funds and registered investment companies are
further diversified into various financial instruments. As of Decem-
ber 31, 2010, assets held by the Firm’s U.S. and non-U.S. defined
benefit pension and OPEB plans do not include JPMorgan Chase
common stock, except in connection with investments in third-party
stock-index funds. The plans hold investments in funds that are
sponsored or managed by affiliates of JPMorgan Chase in the amount
of $1.7 billion and $1.6 billion for U.S. plans and $155 million and
$474 million for non-U.S. plans, as of December 31, 2010 and 2009,
respectively.