Macy's 2014 Annual Report Download - page 75

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-28
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. As of February 2, 2013, the Company
lowered the assumed annual long-term rate of return for the Pension Plan's assets from 8.00% to 7.50% based on then-
expected future returns on the portfolio. As of January 31, 2015, the Company further lowered the assumed annual long-
term rate of return for the Pension Plan's assets from 7.50% to 7.00% based on expected future returns on the portfolio of
assets.
The Company develops its rate of compensation increase assumption 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.
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 asset diversification and the use of multiple investment
managers. The target allocation for plan assets is currently 50% equity securities, 40% debt securities, 5% 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.