Lockheed Martin 2004 Annual Report Download - page 63

Lockheed Martin Corporation
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The long-term rate of return assumption represents the
expected average rate of earnings on the funds invested or to be
invested to provide for the benefits included in the benefit obli-
gations. The long-term rate of return assumption is determined
based on a number of factors, including historical market index
returns, the anticipated long-term asset allocation of the plans,
historical plan return data, plan expenses and the potential to
outperform market index returns.
The decrease in the discount rate from 6.25% at December
31, 2003 to 5.75% at December 31, 2004 resulted in a $1.5 bil-
lion increase in the benefit obligations of the Corporation’s
defined benefit pension plans at December 31, 2004.
The medical trend rates used in measuring the post-retire-
ment benefit obligation were 11.0% in 2004 and 10.0% in
2003, and were assumed to ultimately decrease to 5.0% by the
year 2011. An increase or decrease of one percentage point in
the assumed medical trend rates would result in a change in the
benefit obligation of approximately 5% and (5)%, respectively,
at December 31, 2004, and a change in the 2004 post-retirement
service cost plus interest cost of approximately 5% and (4)%,
respectively. The medical trend rate for 2005 is 10.1%.
The asset allocations of the Corporation’s plans at December 31,
2004 and 2003, by asset category, were as follows:
Defined Retiree Medical
Benefit and Life
Pension Plans Insurance Plans
2004 2003 2004 2003
Asset category:
Equity securities 64% 63% 58% 64%
Debt securities 32 33 41 34
Other 4412
100% 100% 100% 100%
Lockheed Martin Investment Management Company
(LMIMCO), a wholly-owned subsidiary of the Corporation, has
the fiduciary responsibility for making investment decisions
related to the assets of the Corporation’s defined benefit pen-
sion plans and retiree medical and life insurance plans.
LMIMCO’s investment objectives for the assets of the defined
benefit pension plans are to minimize the net present value of
expected funding contributions and to meet or exceed the rate
of return assumed for plan funding purposes over the long term.
The investment objective for the assets of the retiree medical
and life insurance plans is to meet or exceed the rate of return
assumed for the plans for funding purposes over the long term.
The nature and duration of benefit obligations, along with
assumptions concerning asset class returns and return correla-
tions, are considered when determining an appropriate asset
allocation to achieve the investment objectives.
Investment policies and strategies governing the assets of
the plans are designed to achieve investment objectives within
prudent risk parameters. Risk management practices include
the use of external investment managers and the maintenance of
a portfolio diversified by asset class, investment approach and
security holdings, and the maintenance of sufficient liquidity to
meet benefit obligations as they come due.
LMIMCO’s investment policies require that asset alloca-
tions of defined benefit pension plans be maintained within the
following ranges:
Investment Groups Asset Allocation Ranges
Equity securities 35–70%
Non-U.S. equity securities 0–25%
Debt securities 10–60%
Cash 0–35%
Other 0–15%
Current policies for the plans target an asset mix of 65% in
total equity securities and 35% in debt and other securities.
Investment policies for all plans limit the use of alternative
investments and derivatives. Investments in alternative asset
classes or structures (e.g., real estate, private equity, hedge
funds and commodities) are limited to 15% of plan assets.
Investments in derivatives are subject to additional limitations
and constraints, including a maximum notional value of futures
of no more than 5% of plan assets. Use of derivatives to create
leverage is prohibited.
Equity securities purchased by external investment man-
agers and included in the assets of the defined benefit pension
plans included the Corporation’s common stock in the amounts
of $16 million (less than 0.08% of total plan assets) and $14 mil-
lion (less than 0.07% of total plan assets) at December 31, 2004
and 2003, respectively. Equity securities included in the assets of
the retiree medical and life insurance plans included less than $1
million (less than 0.03% of total plan assets) of the Corporation’s
common stock at both December 31, 2004 and 2003.