Morgan Stanley 2014 Annual Report Download - page 283

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The discount rates used to determine the benefit obligations for the U.S. pension, U.S. postretirement and the
U.K. pension plans’ liabilities were selected by the Company, in consultation with its independent actuaries,
using a pension discount yield curve based on the characteristics of the plans, each determined independently.
The pension discount yield curve represents spot discount yields based on duration implicit in a representative
broad-based Aa rated corporate bond universe of high-quality fixed income investments. For all other non-U.S.
pension plans, the Company set the assumed discount rates based on the nature of liabilities, local economic
environments and available bond indices.
The following table presents assumed health care cost trend rates used to determine the U.S. postretirement
benefit obligations at period-end:
At December 31,
2014
At December 31,
2013
Health care cost trend rate assumed for next year:
Medical ..................................................... 6.88-7.23% 6.90-7.38%
Prescription .................................................. 7.87% 8.25%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) .... 4.50% 4.50%
Year that the rate reaches the ultimate trend rate ......................... 2029 2029
Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company’s
postretirement benefit plan. A one-percentage point change in the rates would not have a significant impact to the
Company’s postretirement service and interest cost for 2014, and would increase or decrease the Company’s
postretirement benefit obligation at December 31, 2014 by $3 million or $2 million, respectively.
No impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has been reflected in
the Company’s consolidated statements of income as Medicare prescription drug coverage was deemed to have
no material effect on the Company’s postretirement benefit plan.
Plan Assets. The U.S. Qualified Plan assets represent 88% of the Company’s total pension plan assets. The
U.S. Qualified Plan uses a combination of active and risk-controlled fixed income investment strategies. The
fixed income asset allocation consists primarily of fixed income securities and related derivative instruments
designed to approximate the expected cash flows of the plan’s liabilities in order to help reduce plan exposure to
interest rate variation and to better align assets with obligations. The longer duration fixed income allocation is
expected to help protect the plan’s funded status and maintain the stability of plan contributions over the long
run.
Derivative instruments are permitted in the U.S. Qualified Plan’s investment portfolio only to the extent that they
comply with all of the plan’s investment policy guidelines and are consistent with the plan’s risk and return
objectives. In addition, any investment in derivatives must meet the following conditions:
• Derivatives may be used only if they are deemed by the investment manager to be more attractive than a
similar direct investment in the underlying cash market or if the vehicle is being used to manage risk of
the portfolio.
• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.
• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the U.S. Qualified
Plan is that investment activity is undertaken for long-term investment rather than short-term trading.
• Derivatives may be used in the management of the U.S. Qualified Plan’s portfolio only when their
possible effects can be quantified, shown to enhance the risk-return profile of the portfolio, and reported
in a meaningful and understandable manner.
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