Lexmark 2015 Annual Report Download - page 38

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Plan assets are invested in equity securities, government and agency securities, mortgage-backed securities, commercial mortgage-
backed securities, asset-backed securities, corporate debt, annuity contracts and other securities. The U.S. pension plan comprises a
significant portion of the assets and liabilities relating to the Company’s pension plans. The investment goal of the U.S. pension plan
is to achieve an adequate net investment return in order to provide for future benefit payments to its participants. U.S. asset allocation
percentages as of December 31, 2015 were 36% equity and 64% fixed income investments. The U.S. pension plan employs
professional investment managers to invest in U.S. equity, global equity, international developed equity, emerging market equity, U.S.
fixed income, high yield bonds and emerging market debt. Each investment manager operates under an investment management
contract that includes specific investment guidelines, requiring among other actions, adequate diversification, prudent use of
derivatives and standard risk management practices such as portfolio constraints relating to established benchmarks. The U.S. pension
plan currently uses a combination of both active management and passive index funds to achieve its investment goals.
The accounting guidance for employers’ defined benefit pension and other postretirement plans requires recognition of the funded
status of a benefit plan in the statement of financial position. The change in the fair value of plan assets and net actuarial gains and
losses are recognized in net periodic benefit cost in the fourth quarter of each year and whenever a remeasurement is triggered. The
remaining components of pension and other postretirement benefit cost are recorded on a quarterly basis. Actuarial gains and losses
may be related to actual results that differ from assumptions as well as changes in assumptions, which may occur each year. Factors
that can significantly impact the amounts of such gains and losses include differences between the actual and expected return on plan
assets, changes in discount rates used in the measurement of pension and other postretirement plan obligations each year, and changes
in actuarial assumptions, such as plan participants’ life expectancy. Prior service cost or credit continue to be accumulated in other
comprehensive earnings and amortized over the estimated future service period of active plan participants.
For the years ended December 31, 2015, 2014, and 2013, the asset and actuarial net gains and losses on pension and other
postretirement benefit plan remeasurements reflected in operating income were a loss of $9 million, a loss of $81 million, and a gain
of $83 million, respectively. The following table summarizes the components of the asset and actuarial net gain or loss on pension and
other postretirement plan measurements during each period presented:
(Dollars in millions)
2015
2014
2013
Change in discount rate and other actuarial assumptions
$
(42)
$
103
$
(66)
Actual (return) loss on plan assets
6
(66)
(60)
Expected return on plan assets
45
44
43
Total asset and actuarial net (gain) loss
$
9
$
81
$
(83)
Actual (loss) return on plan assets
(0.9)
%
9.7
%
9.3
%
Expected return on plan assets
6.6
%
6.7
%
6.9
%
Increases in discount rates resulted in actuarial gains in 2015, offset by lower than expected returns on plan assets. The actuarial
losses in 2014 were primarily due to decreases in discount rates. Also increasing the loss in 2014 was a change in mortality
assumptions to reflect a new set of mortality tables finalized by the Society of Actuaries on October 24, 2014, which included longer
life expectancies than projected by past tables. The actuarial gains in 2013 were mainly driven by increases in discount rates. For
2015, asset returns were lower than expectations resulting in a net loss of $51 million. In 2014 and 2013, asset returns exceeded
expectations resulting in net asset gains of $22 million and $17 million, respectively.
The following table illustrates the sensitivity of net periodic benefit cost and the projected benefit obligations for the Company’s U.S.
pension plans to changes in the long-term discount rate and asset return assumptions. Under the Company’s accounting policy for
pension plan asset gains and losses, changes in the actual return on plan assets are recognized as part of the annual fourth quarter plan
remeasurement, or whenever a remeasurement is triggered. The expected return on plan assets assumption sensitivity applies to
ongoing net periodic benefit cost recorded in interim periods. The impact of changing multiple factors below may not be achievable
by combining the individual sensitivities provided below and such sensitivities are specific to the below time periods.