KeyBank 2006 Annual Report Download - page 93

93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
At December 31, 2006, Key’s qualified plans were sufficiently funded under
the requirements of the Employee Retirement Income Security Act of 1974.
Consequently, Key is not required to make minimum contributions to the
plans in 2007. If Key makes any discretionary contributions during
2007, those contributions are not expected to be significant.
Benefits from all funded and unfunded pension plans at December 31,
2006, are expected to be paid as follows: 2007 — $98 million; 2008 —
$102 million; 2009 — $105 million; 2010 — $107 million; 2011 — $114
million; and $604 million in the aggregate from 2012 through 2016.
The accumulated benefit obligation (“ABO”) for all of Key’s pension plans
was $1.1 billion at December 31, 2006 and 2005. Information for those
pension plans that had an ABO in excess of plan assets is as follows:
Key’s primary qualified Cash Balance Pension Plan is excluded from the
preceding table because that plan was overfunded (i.e., the fair value of
plan assets exceeded the projected benefit obligation) by $185 million
at December 31, 2006, and $184 million at December 31, 2005.
Prior to December 31, 2006, SFAS No. 87, “Employers’ Accounting for
Pensions,” required employers to recognize an additional minimum
liability (“AML”) to the extent of any excess of the unfunded ABO over
the liability already recognized as unfunded accrued pension cost. Key’s
AML, which excluded the overfunded Cash Balance Pension Plan
mentioned above, was $55 million at December 31, 2005. In accordance
with SFAS No. 158, this balance and the amount of any subsequent
change in the AML were reversed during 2006. The after-tax change in
AML included in “accumulated other comprehensive loss” for 2006,
2005 and 2004 is shown in the Consolidated Statements of Changes in
Shareholders’ Equity on page 65.
To determine the actuarial present value of benefit obligations,
management assumed the following weighted-average rates:
To determine net pension cost, management assumed the following
weighted-average rates:
Management estimates that Key’s net pension cost will be $50 million
for 2007, compared to $45 million for 2006 and $33 million for 2005.
The estimated increase in cost for 2007 is attributable primarily to
increased amortization of unrecognized actuarial obligation losses,
which represent the difference between expected and actual participant
census data experience.
The increase in 2006 cost was attributable primarily to increased
amortization of unrecognized losses and a 25 basis point reduction in
the expected rate of return on plan assets discussed below. The
unrecognized losses amortized in 2006 resulted primarily from asset
losses, representing the difference between expected and actual returns
on plan assets in 2002 and 2001. Asset and obligation losses and gains
are not recognized in the year they occur; rather they are combined with
any other cumulative asset- and obligation-related unrecognized gains
and losses. These unrecognized gains and losses are subject to expense
amortization gradually and systematically over future years, subject to
certain constraints and recognition rules. Key determines the expected
return on plan assets using a calculated market-related value of plan
assets that smoothes what otherwise might be significant year-to-year
volatility in net pension cost. Asset gains and losses are reflected evenly
in the market-related value over the following five years, so long as the
market-related value does not vary more than 10% from the plan’s FVA.
As asset gains and losses are reflected in the market-related value, they
are included in the cumulative unrecognized gains and losses subject to
expense amortization.
Management estimates that a 25 basis point decrease in the expected
return on plan assets would increase Key’s net pension cost for 2007 by
approximately $3 million. Conversely, management estimates that a 25
basis point increase in the expected return on plan assets would decrease
Key’s net pension cost for 2007 by the same amount. In addition,
pension cost is affected by an assumed discount rate and an assumed
compensation increase rate. Management estimates that a 25 basis
point change in either or both of these assumed rates would change net
pension cost for 2007 by less than $1 million.
Management determines the assumed discount rate based on the rate of
return on a hypothetical portfolio of high quality corporate bonds
with interest rates and maturities that provide the necessary cash flows
to pay benefits when due. The expected return on plan assets is
determined by considering a number of factors, but the most significant
factors are:
• Management’s expectations for returns on plan assets over the long
term, weighted for the investment mix of the assets. These expectations
consider, among other factors, historical capital market returns of
equity and fixed income securities and forecasted returns that are
modeled under various economic scenarios.
• Historical returns on Key’s plan assets. Management’s expected
return on plan assets for 2006 was reduced to 8.75% from the 9%
assumption used in 2005 and 2004. The 9% assumption is consistent
with actual returns since 1991. However, an annual reassessment of
current and expected future capital market returns suggested that
8.75% is a more appropriate rate.
December 31,
in millions 2006 2005
Projected benefit obligation $230 $234
Accumulated benefit obligation 228 230
Fair value of plan assets 52 52
Year ended December 31, 2006 2005 2004
Discount rate 5.25% 5.75% 6.00%
Compensation increase rate 4.00 4.00 4.00
Expected return on plan assets 8.75 9.00 9.00
December 31, 2006 2005
Discount rate 5.50% 5.25%
Compensation increase rate 4.00 4.00
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