Northrop Grumman 2009 Annual Report Download - page 105

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The assumptions used for pension benefits are consistent with those used for retiree medical and life insurance
benefits. The long-term rate of return on plan assets used for the medical and life benefits are reduced to allow
for the impact of tax on expected returns as, unlike the pension trust, the earnings of certain Voluntary
Employee Beneficiary Association (VEBA) trusts are taxable.
Through consultation with investment advisors, expected long-term returns for each of the plans’ strategic asset
classes were developed. Several factors were considered, including survey of investment managers’ expectations,
current market data such as yields/price-earnings ratios, and historical market returns over long periods. Using
policy target allocation percentages and the asset class expected returns, a weighted-average expected return was
calculated.
A one-percentage-point change in the initial through the ultimate health care cost trend rates would have the
following effects:
$ in millions
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Increase (Decrease) From Change In Health Care Cost Trend Rates To
Post-retirement benefit expense $ 7 $ (8)
Post-retirement benefit liability 81 (91)
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and
investment return over the long term. The investment goal is to exceed the assumed actuarial rate of return over
the long term within reasonable and prudent levels of risk. Liability studies are conducted on a regular basis to
provide guidance in setting investment goals with an objective to balance risk. Risk targets are established and
monitored against acceptable ranges.
All investment policies and procedures are designed to ensure that the plans’ investments are in compliance with
ERISA. Guidelines are established defining permitted investments within each asset class. Derivatives are used for
transitioning assets, asset class rebalancing, managing currency risk, and for management of fixed income and
alternative investments. For the majority of the plans’ assets, the investment policies require that the asset
allocation be maintained within the following ranges as of December 31, 2009:
Asset Allocation Ranges
Domestic equities 10 – 30%
International equities 5 – 25%
Fixed income securities 35 – 50%
Real estate and other 20 – 30%
The table below provides the fair values of the company’s pension and VEBA trust plan assets at December 31,
2009, by asset category. The table also identifies the level of inputs used to determine the fair value of assets in
each category (see Note 1 for definition of levels). The significant amount of Level 2 investments in the table
results from including in this category investments in pooled funds that contain investments with values based on
-95-
NORTHROP GRUMMAN CORPORATION
eBP - v54508-i003_a.pdf - Page 99 of 124 - March 11, 2010 - 20:02:40