MasterCard 2008 Annual Report Download - page 81

Financial Statement Caption/
Critical Accounting Estimate Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Pensions and Postretirement
Benefit Plans
The Company maintains a
noncontributory defined benefit
pension plan with a cash balance
feature covering substantially all of
its U.S. employees hired before
July 1, 2007. This pension plan
credits participants annually with an
amount equal to a fixed percentage
of eligible pay based on age and
service, as well as providing
earnings credits based on each
participant’s account balance.
Additionally, the Company has an
unfunded nonqualified supplemental
executive retirement plan that
provides certain key employees with
supplemental retirement benefits in
excess of limits imposed on
qualified plans by U.S. tax laws.
The Company also maintains a
postretirement plan providing health
coverage and life insurance benefits
for most of its U.S. employees and
retirees.
Company management representing
the functional areas of
compensation, benefits, treasury and
finance review and approve on an
annual basis assumptions used in
the determination of the annual
costs for our pension and
postretirement plans and the
disclosure of the funded position of
our plans. Key assumptions include
the discount rate used to measure
each of the plans’ projected benefit
obligations for pension and
postretirement, the expected rate of
return on pension plan assets and
the health care cost trend rate for
our postretirement plan.
The discount rates for the
Company’s pension and
postretirement plans are subject to
change each year, consistent with
changes in high-quality, long-term
corporate bond markets. To select
a discount rate for each plan, we
performed an analysis which
matched the plans expected cash
flows (determined on PBO basis)
with spot rates developed from a
yield curve comprised of high-
grade non-callable corporate bonds
and arithmetically rounded this
result. For the pension plan, our
discount rate of 6.00% as of
December 31, 2008 is equal to the
6.00% rate used in calculating the
projected benefit obligation for
2007. For the postretirement plan,
our discount rate of 6.00% as of
December 31, 2008 is 25 basis
points less than the 6.25% rate
used in calculating the projected
benefit obligation for 2007.
Net actuarial gains and/or losses in
our benefit plans are amortized on
straight-line basis over the
expected average remaining
service of active participants
expected to benefit under the
plans.
We determine the expected return
on plan assets primarily based on
long-term historical returns in
equity and fixed income markets.
The expected rate of return on our
pension plan assets is 8.00% for
the year ended December 31, 2008
and 8.50% for the years ended
December 31, 2007 and 2006.
The Company reviews external
data and its own historical trends
to determine the health care trend
rates for postretirement medical
costs.
A quarter of a percentage point
decrease in our discount rate would
increase our pension projected
benefit obligation by $0.9 million,
and increase our postretirement
projected benefit obligation by $2.3
million. These decreases would
have a negligible effect on our
annual pension and postretirement
expense. An approximately equal,
but opposite effect would be
experienced for a quarter of a
percentage point increase in the
discount rate.
A quarter of a percentage point
increase or decrease in the expected
rate of return on plan assets would
decrease or increase the annual
pension costs by $0.4 million.
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