Macy's 2009 Annual Report Download - page 82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate
yield curve rate, thereby generating the overall discount rate for the projected benefit obligation.
The Company develops its expected long-term rate of return on plan asset assumption by evaluating input
from several professional advisors taking into account the asset allocation of the portfolio and long-term asset
class return expectations, as well as long-term inflation assumptions. Expected returns for each major asset class
are considered along with their volatility and the expected correlations among them. These expectations are
based upon historical relationships as well as forecasts of how future returns may vary from historical returns.
Returns by asset class and correlations among asset classes are combined using the target asset allocation to
derive an expected return for the portfolio as a whole. Long-term historical returns of the portfolio are also
considered. Portfolio returns are calculated net of all expenses, therefore, the Company also analyzes expected
costs and expenses, including investment management fees, administrative expenses, Pension Benefit Guaranty
Corporation premiums and other costs and expenses.
The Company develops its rate of compensation increase assumption on an age-graded basis based on recent
experience and reflects an estimate of future compensation levels taking into account general increase levels,
seniority, promotions and other factors. The salary increase assumption is used to project employees’ pay in
future years and its impact on the projected benefit obligation for the Pension Plan. This assumption was revised
during 2009 based on the completion of a third-party assumption study reflecting more recent experience.
The assets of the Pension Plan are managed by investment specialists with the primary objectives of
payment of benefit obligations to Plan participants and an ultimate realization of investment returns over longer
periods in excess of inflation. The Company employs a total return investment approach whereby a mix of
domestic and foreign equity securities, fixed income securities and other investments is used to maximize the
long-term return on the assets of the Pension Plan for a prudent level of risk. Risks are mitigated through the
asset diversification and the use of multiple investment managers. The target allocation for plan assets is
currently 60% equity securities, 25% debt securities, 10% real estate and 5% private equities.
The Company generally employs investment managers to specialize in a specific asset class. These
managers are chosen and monitored with the assistance of professional advisors, using criteria that include
organizational structure, investment philosophy, investment process, performance compared to market
benchmarks and peer groups.
The Company periodically conducts an analysis of the behavior of the Pension Plan’s assets and liabilities
under various economic and interest rate scenarios to ensure that the long-term target asset allocation is
appropriate given the liabilities.
F-34