Macy's 2010 Annual Report Download - page 33

The Pension Protection Act of 2006 provides the funding requirements for the Pension Plan which are
different from the employer’s accounting for the plan as outlined in ASC Topic 715. During 2010, the Company
made funding contributions to the Pension Plan totaling approximately $825 million. On March 28, 2011, the
Company made a voluntary funding contribution to the Pension Plan of $225 million. The Company does not
presently anticipate making any additional funding contributions to the Pension Plan during 2011, but may
choose to do so in its discretion. Management believes that, with respect to the Company’s current operations,
cash on hand and funds from operations, together with available borrowing under its credit facility and other
capital resources, will be sufficient to cover the Company’s Pension Plan cash requirements in both the near term
and also over the longer term.
At January 29, 2011, the Company had unrecognized actuarial losses of $1,116 million for the Pension Plan
and $113 million for the SERP. The unrecognized losses for the Pension Plan and the SERP will be recognized
as a component of pension expense in future years in accordance with ASC Topic 715, and is expected to impact
2011 Pension and SERP expense by approximately $90 million.
The calculation of pension expense and pension liabilities requires the use of a number of assumptions.
Changes in these assumptions can result in different expense and liability amounts, and future actual experience
may differ significantly from current expectations. The Company believes that the most critical assumptions
relate to the long-term rate of return on plan assets (in the case of the Pension Plan), the discount rate used to
determine the present value of projected benefit obligations and the weighted average rate of increase of future
compensation levels.
As of January 29, 2011, the Company lowered the assumed annual long-term rate of return for the Pension
Plan’s assets from 8.75% to 8.00% based on expected future returns on the portfolio. The Company develops its
expected long-term rate of return 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. Pension expense increases or decreases as the expected rate of return on the assets of the
Pension Plan decreases or increases, respectively. Lowering the expected long-term rate of return on the Pension
Plan’s assets by 0.25% (from 8.00% to 7.75%) would increase the estimated 2011 pension expense by
approximately $8 million and raising the expected long-term rate of return on the Pension Plan’s assets by 0.25%
(from 8.00% to 8.25%) would decrease the estimated 2011 pension expense by approximately $8 million.
The Company discounted its future pension obligations using a rate of 5.40% at January 29, 2011, compared
to 5.65% at January 30, 2010. The discount rate used to determine the present value of the Company’s Pension
Plan and SERP obligations is based on a yield curve constructed from a portfolio of high quality corporate debt
securities with various 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 Pension Plan and SERP
obligations. Pension liability and future pension expense both increase or decrease as the discount rate is reduced
or increased, respectively. Lowering the discount rate by 0.25% (from 5.40% to 5.15%) would increase the
projected benefit obligation at January 29, 2011 by approximately $98 million and would increase estimated
2011 pension expense by approximately $11 million. Increasing the discount rate by 0.25% (from 5.40% to
5.65%) would decrease the projected benefit obligation at January 29, 2011 by approximately $89 million and
would decrease estimated 2011 pension expense by approximately $10 million.
The assumed weighted average age-graded rate of increase in future compensation levels was 4.5% at
January 29, 2011 and January 30, 2010 for the Pension Plan, and 4.9% at January 29, 2011 and January 30, 2010
for the SERP. 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. This assumption was revised during 2009 based on the completion
of a third-party assumption study reflecting more recent experience. Pension liabilities and future pension
expense both increase or decrease as the weighted average rate of increase of future compensation levels is
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