Kraft 2005 Annual Report Download - page 82

MERRILL CORPORATION FLANGST// 9-MAR-06 02:25 DISK126:[06CHI5.06CHI1135]EA1135A.;8
mrll.fmt Free: 15D*/1340D Foot: 0D/ 0D VJ RSeq: 7 Clr: 0
DISK024:[PAGER.PSTYLES]UNIVERSAL.BST;51
KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: EA1135A.;8
Merrill Corporation/Chicago [phone] Page Dim: 8.250 X 10.750Copy Dim: 38. X 54.3
The following weighted-average assumptions were used to determine the Company’s net pension
cost for the years ended December 31:
U.S. Plans Non-U.S. Plans
2005 2004 2003 2005 2004 2003
Discount rate ......................... 5.75% 6.25% 6.50% 5.18% 5.41% 5.56%
Expected rate of return on plan assets ....... 8.00 9.00 9.00 7.82 8.31 8.41
Rate of compensation increase ............ 4.00 4.00 4.00 3.11 3.11 3.12
The Company’s expected rate of return on plan assets is determined by the plan assets’ historical
long-term investment performance, current asset allocation and estimates of future long-term returns by
asset class.
Kraft and certain of its subsidiaries sponsor employee savings plans, to which the Company
contributes. These plans cover certain salaried, non-union and union employees. The Company’s
contributions and costs are determined by the matching of employee contributions, as defined by the
plans. Amounts charged to expense for defined contribution plans totaled $94 million, $92 million and
$84 million in 2005, 2004 and 2003, respectively.
Plan Assets
The percentage of fair value of pension plan assets at December 31, 2005 and 2004, was as follows:
U.S. Plans Non-U.S Plans
Asset Category 2005 2004 2005 2004
Equity securities ..................................... 74% 73% 60% 60%
Debt securities ...................................... 25 26 34 35
Real estate ......................................... 3 3
Other ............................................. 1132
Total .............................................. 100% 100% 100% 100%
The Company’s investment strategy is based on an expectation that equity securities will
outperform debt securities over the long term. Accordingly, the composition of the Company’s U.S. plan
assets is broadly characterized as a 70%/30% allocation between equity and debt securities. The
strategy utilizes indexed U.S. equity securities, actively managed international equity securities and
actively managed investment grade debt securities (which constitute 80% or more of debt securities)
with lesser allocations to high yield and international debt securities.
For the plans outside the U.S., the investment strategy is subject to local regulations and the asset/
liability profiles of the plans in each individual country. These specific circumstances result in a level of
equity exposure that is typically less than the U.S. plans. In aggregate, the actual asset allocations of the
non-U.S. plans are virtually identical to their respective asset policy targets.
The Company attempts to mitigate investment risk by rebalancing between equity and debt asset
classes as the Company’s contributions and monthly benefit payments are made.
The Company presently makes, and plans to make, contributions, to the extent that they do not
generate an excise tax liability, in order to maintain plan assets in excess of the accumulated benefit
obligation of its funded U.S. and non-U.S. plans. Currently, the Company anticipates making
contributions of approximately $140 million in 2006 to its U.S. plans and approximately $106 million in
2006 to its non-U.S. plans, based on current tax law. However, these estimates are subject to change as
a result of many factors, including changes in tax and other benefit laws, as well as asset performance
significantly above or below the assumed long-term rate of return on pension assets, or significant
changes in interest rates.
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