Kroger 2013 Annual Report Download - page 92

A-19
Post-Retirement Benefit Plans
We account for our defined benefit pension plans using the recognition and disclosure provisions of
GAAP, which require the recognition of the funded status of retirement plans on the Consolidated Balance
Sheet. We record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or
losses, prior service costs or credits and transition obligations that have not yet been recognized.
The determination of our obligation and expense for Company-sponsored pension plans and other post-
retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those
amounts. Those assumptions are described in Note 15 to the Consolidated Financial Statements and include,
among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy
and the rate of increases in compensation and health care costs. Actual results that differ from our assumptions
are accumulated and amortized over future periods and, therefore, generally affect our recognized expense
and recorded obligation in future periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions, including the discount rate
used and the expected return on plan assets, may materially affect our pension and other post-retirement
obligations and our future expense. Note 15 to the Consolidated Financial Statements discusses the effect
of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the
related liability.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension
benefits could be effectively settled. In making this determination, we take into account the timing and
amount of benefits that would be available under the plans. Our methodology for selecting the discount
rates as of year-end 2013 and 2012 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. We utilized a discount rate of 4.29% and 4.11% as of year-end 2012 for pension and other
benefits, respectively. 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 Kroger for 2013, we 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 cost in
2013. For 2013 and 2012, we assumed a pension plan investment return rate of 8.5%. Our 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 our Company-sponsored defined benefit
pension plans, excluding pension plan assets acquired in the Harris Teeter merger, during the calendar year
ending December 31, 2013, net of investment management fees and expenses, increased 8.0%. For the past
20 years, our 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 our target allocations, we believe an
8.5% rate of return assumption was reasonable for 2013 and 2012. See Note 15 to the Consolidated Financial
Statements for more information on the asset allocations of pension plan assets.
Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities
is illustrated below (in millions).
Percentage
Point Change
Projected Benefit
Obligation
Decrease/(Increase)
Expense
Decrease/(Increase)
Discount Rate............................. +/- 1.0% $395/(477) $31/($36)
Expected Return on Assets .................. +/- 1.0% — $28/($28)