Kroger 2013 Annual Report Download - page 138

A-65
NO T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S , CO N T I N U E D
The Company’s discount rate assumptions were intended to reflect the rates at which the pension
benefits could be effectively settled. They take into account the timing and amount of benefits that would be
available under the plans. The Company’s policy for selecting the discount rates as of year-end 2013 and 2012
changed from the policy as of year-end 2011. In 2013 and 2012, the Company’s policy was to match the plan’s
cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the
plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value
of cash flows. The selection of the 4.99% and 4.68% discount rates as of year-end 2013 for pension and other
benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating
constructed with the assistance of an outside consultant. In 2011, the Company’s policy was to match the
plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds
for each maturity. Benefit cash flows due in a particular year can theoretically be “settled” by “investing” them
in the zero-coupon bond that matures in the same year. The discount rates are the single rates that produce
the same present value of cash flows. The selection of the 4.55% and 4.40% discount rates as of year-end
2011 for pension and other benefits, respectively, represents the equivalent single rates constructed under
a broad-market AA yield curve constructed with the assistance of an outside consultant. A 100 basis point
increase in the discount rate would decrease the projected pension benefit obligation as of February 1, 2014,
by approximately $395.
To determine the expected rate of return on pension plan assets held by the Company for 2013, the
Company considered current and forecasted plan asset allocations as well as historical and forecasted rates of
return on various asset categories. Due to the Harris Teeter merger occurring close to year end, the expected
rate of return on pension plan assets acquired in the Harris Teeter merger did not affect our net periodic benefit
costs in 2013. For 2013, 2012 and 2011, the Company assumed a pension plan investment return rate of 8.5%.
The Company pension plan’s average rate of return was 8.1% for the 10 calendar years ended December 31,
2013, net of all investment management fees and expenses. The value of all investments in the Company-
sponsored defined benefit pension plans, excluding pension plan assets acquired in the Harris Teeter merger,
during the calendar year ending December 31, 2013 increased 8.0%, net of investment management fees and
expenses. For the past 20 years, the Company’s average annual rate of return has been 9.2%. Based on the
above information and forward looking assumptions for investments made in a manner consistent with the
Company’s target allocations, the Company believes an 8.5% rate of return assumption was reasonable for
2013, 2012 and 2011.
The Company calculates its expected return on plan assets by using the market-related value of plan
assets. The market-related value of plan assets is determined by adjusting the actual fair value of plan assets for
gains or losses on plan assets. Gains or losses represent the difference between actual and expected returns
on plan investments for each plan year. Gains or losses on plan assets are recognized evenly over a five year
period. Using a different method to calculate the market-related value of plan assets would provide a different
expected return on plan assets.
The funded status increased in 2013, compared to 2012, due primarily to the increase in the discount rate,
return on plan assets and contributions to the plan, offset slightly by the update in the mortality assumption.