Lockheed Martin 2008 Annual Report Download - page 48

particularly true with expense or income for defined benefit pension plans and retiree medical and life insurance plans
because those calculations are sensitive to changes in several key economic assumptions and workforce demographics.
Non-union represented employees hired after January 1, 2006 do not participate in our qualified defined benefit pension
plans, but are eligible to participate in our defined contribution plan and our other retirement savings plans. They also have
the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation.
We account for our defined benefit pension plans and retiree medical and life insurance plans using Statement of
Financial Accounting Standards (FAS) 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R), FAS 87, Employers’ Accounting for Pensions, and
FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. FAS 158 requires us to recognize on a
plan-by-plan basis the funded status of our postretirement benefit plans as either an asset or liability on our Balance Sheet,
with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax, in stockholders’ equity. The
funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan.
FAS 87 and FAS 106 require that the amounts we record, including the expense or income for the plans, be computed
using actuarial valuations. These valuations include many assumptions, including assumptions we make regarding financial
market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use.
The primary year-end assumptions used to estimate postretirement benefit plan expense or income for the following calendar
year are the discount rate and the expected long-term rate of return on plan assets for all postretirement benefit plans; the
rates of increase in future compensation levels for our defined benefit pension plans; and the health care cost trend rates for
our retiree medical plans. The more subjective of these assumptions are the discount rate and the expected long-term rate of
return on plan assets. We use judgment in reassessing these assumptions each year because we have to consider past and
current market conditions, and make judgments about future market trends. We also have to consider factors like the timing
and amounts of expected contributions to the plans and benefit payments to plan participants.
The discount rate we select impacts both the calculation of the benefit obligation at the end of the year as well as the
calculation of net postretirement benefit plan cost in the subsequent year. We evaluate several data points in order to arrive at
an appropriate discount rate. These items include results from cash flow models, quoted rates from long-term bond indices,
and changes in long-term bond rates over the past year.
As part of our evaluation, we calculate the approximate average yields on securities that were selected to match our
projected postretirement benefit plan cash flows. Our postretirement benefit plan cash flows are input into actuarial models
that include data for corporate bonds rated AA or better. The available universe of bonds is adjusted to reflect call provisions,
outstanding issue amount, and bonds that are considered “outliers” (i.e. bonds with yields too far above or below the mean of
the available universe of bonds). As of December 31, 2008, three actuarial models calculated rates of 6.15%, 6.18%, and
6.72% for our qualified defined benefit pension plans. We also evaluated the annualized Merrill Lynch index for long-term
AA corporate bonds (15+ years), which was 6.03% at the close of 2008. In general, these data points were 15 to 35 basis
points lower than at December 31, 2007.
The data we collect provides important inputs into our determination of an appropriate discount rate. After reviewing all
of the above data, we determined that the most appropriate discount rate for Lockheed Martin as of December 31, 2008
would be between 6.00% and 6.375%. We selected 6.125% as the discount rate for calculating our benefit obligations at
December 31, 2008, compared to 6.375% used at the end of 2007.
The impact of the change in the discount rate, together with other factors such as the approximate (28)% actual return on
plan assets resulting from downward market conditions in 2008, was a noncash, after-tax reduction to our stockholders’
equity at December 31, 2008 of approximately $7.25 billion. The negative return on plan assets accounted for over 90% of
the decrease in stockholders’ equity. In addition, the negative return on plan assets in 2008 and the change in the discount
rate will increase 2009 pension expense to approximately $1.04 billion, as compared to $462 million in 2008, with
approximately 85% of the increase being driven by the negative return on plan assets.
The discount rate assumption we select at the end of each year is based on our best estimates and judgment. A
reasonably possible change of plus or minus 25 basis points in the 6.125% discount rate assumption at December 31, 2008,
with all other assumptions held constant, would decrease or increase the amount of the qualified pension benefit obligation
we recorded at the end of 2008 by approximately $900 million, resulting in an after-tax increase or decrease in stockholders’
equity at the end of the year of approximately $580 million. If the 6.125% discount rate at December 31, 2008 that was used
to compute 2009 expense for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all
other assumptions held constant, the amount of expense projected for 2009 would be lower or higher by approximately $90
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