KeyBank 2007 Annual Report Download - page 95

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Rather, they are combined with any other cumulative unrecognized
asset- and obligation-related gains and losses, and are reflected evenly
in the market-related value during the five years after they occur so long
as the market-related value does not vary more than 10% from the
plan’s FVA. Asset gains and losses reflected in the market-related
value are amortized gradually and systematically over future years,
subject to certain constraints and recognition rules.
Management estimates that a 25 basis point decrease in the expected
return on plan assets would increase Key’s net pension cost for 2008 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 2008 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 2008 by less than $2 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 of which 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 2007 was 8.75%, unchanged from the rate
assumed for 2006. The 9.0% assumption used in 2005 was 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.
The investment objectives of the pension funds are developed to reflect
the characteristics of the plans, such as the plans’ pension formulas and
cash lump sum distribution features, and the liability profiles created by
the plans’ participants. An executive oversight committee reviews the
plans’ investment performance at least quarterly, and compares
performance against appropriate market indices. The following table
shows the asset allocation ranges prescribed by the pension funds’
investment policies, as well as the actual weighted-average asset
allocations for Key’s pension funds.
Although the pension funds’ investment policies conditionally permit the
use of derivative contracts, no such contracts have been entered into, and
management does not expect to employ such contracts in the future.
OTHER POSTRETIREMENT BENEFIT PLANS
Key sponsors a contributory postretirement healthcare plan that covers
substantially all active and retired employees hired before 2001 who meet
certain eligibility criteria. Retirees’ contributions are adjusted annually
to reflect certain cost-sharing provisions and benefit limitations. Key also
sponsors life insurance plans covering certain grandfathered employees.
These plans are principally noncontributory. Separate Voluntary
Employee Beneficiary Association (“VEBA”) trusts are used to fund the
healthcare plan and one of the life insurance plans.
The components of pre-tax accumulated other comprehensive loss not
yet recognized as net postretirement benefit cost are shown below:
During 2008, Key expects to recognize $3 million of pre-tax accumulated
other comprehensive gain as a reduction of other postretirement benefit
cost. The components of this credit consist of amortization of net
unrecognized gains of $2 million and unrecognized prior service benefits
of $1 million.
The components of net postretirement benefit cost and the amount
recognized in comprehensive income for all funded and unfunded plans
are as follows:
Investment Percentage of Plan Assets
Range at December 31,
Asset Class 2007 2007 2006
Equity securities 55% — 80% 67% 73%
Fixed income securities 15 — 25 20 17
Convertible securities 0 — 10 98
Cash equivalents
and other assets 0 — 10 42
Total 100% 100%
December 31,
in millions 2007 2006
Transition obligation $20 $24
Net unrecognized (gains) losses (28) 15
Net unrecognized prior service cost 11
Total unrecognized accumulated
other comprehensive (gain) loss $ (7) $40
Year ended December 31,
in millions 2007 2006 2005
Service cost of benefits earned $8 $6 $4
Interest cost on accumulated
postretirement benefit obligation 788
Expected return on plan assets (4) (4) (3)
Amortization of unrecognized
transition obligation 444
Amortization of losses —22
Net postretirement benefit cost $15 $16 $15
Other changes in plan assets and
benefit obligations recognized
in other comprehensive income:
Net gain $(43) ——
Amortization of unrecognized
transition obligation (4) ——
Total recognized in
comprehensive income $(47) ——
Total recognized in net
postretirement benefit cost
and comprehensive income $(32) $16 $15