Pfizer 2006 Annual Report Download - page 14

12 2006 Financial Report
Financial Review
Pfizer Inc and Subsidiary Companies
Pension and Postretirement Benefit Plans and Defined
Contribution Plans
We provide defined benefit pension plans and defined
contribution plans for the majority of our employees worldwide.
In the U.S., we have both qualified and supplemental (non-
qualified) defined benefit plans and defined contribution plans,
as well as other postretirement benefit plans, consisting primarily
of healthcare and life insurance for retirees.
A U.S. qualified plan meets the requirements of certain sections of
the Internal Revenue Code and, generally, contributions to qualified
plans are tax-deductible. It typically provides benefits to a broad
group of employees and may not discriminate in favor of highly
compensated employees in its coverage, benefits or contributions.
We also provide benefits through non-qualified U.S. retirement
plans to certain employees. These supplemental plans, which
generally are not funded, will provide, out of our general assets,
an amount substantially equal to the amounts that would have
been payable under the defined benefit qualified pension plans,
in the absence of legislation limiting pension benefits and earnings
that may be considered in calculating pension benefits. In addition,
we provide medical and life insurance benefits to certain retirees
and their eligible dependents through our postretirement plans,
which, in general, are also unfunded obligations.
In 2006, we made required U.S. qualified plan contributions of $3
million and voluntary tax-deductible contributions in excess of
minimum requirements of $450 million to certain of our U.S.
qualified pension plans. In 2005, we made required U.S. qualified
plan contributions of $3 million and voluntary tax-deductible
contributions in excess of minimum requirements of $49 million
to certain of our U.S. qualified pension plans. In the aggregate,
the U.S. qualified pension plans are overfunded on a projected
benefit measurement basis as of December 31, 2006, and on an
accumulated benefit obligation measurement basis as of
December 31, 2006 and 2005.
In 2006, we made voluntary tax-deductible contributions of $90
million to certain of our U.S. postretirement plans via the
establishment of sections 401(h) accounts.
Outside the U.S., in general, we fund our defined benefit plans
to the extent that tax or other incentives exist and we have
accrued liabilities on our consolidated balance sheets to reflect
those plans that are not fully funded.
The accounting for benefit plans is highly dependent on actuarial
estimates, assumptions and calculations which result from a complex
series of judgments about future events and uncertainties (see
“Estimates and Assumptions” above). The assumptions and actuarial
estimates required to estimate the employee benefit obligations for
the defined benefit and postretirement plans, include discount
rate; expected salary increases; certain employee-related factors,
such as turnover, retirement age and mortality (life expectancy);
expected return on assets; and healthcare cost trend rates. Our
assumptions reflect our historical experiences and our best judgment
regarding future expectations that have been deemed reasonable
by management. The judgments made in determining the costs of
our benefit plans can materially impact our results of operations.
As such, we often obtain assistance from actuarial experts to aid in
developing reasonable assumptions and cost estimates.
Our assumption for the expected long-term rate of return-on-
assets in our U.S. pension plans, which impacts net periodic
benefit cost, is 9% for 2007 and 2006. The assumption for the
expected return-on-assets for our U.S. and international plans
reflects our actual historical return experience and our long-term
assessment of forward-looking return expectations by asset
classes, which is used to develop a weighted-average expected
return based on the implementation of our targeted asset
allocation in our respective plans. The expected return for our U.S.
plans and the majority of our international plans is applied to the
fair market value of plan assets at each year end. For our
international plans that use a market-related value of plan assets
to calculate net periodic benefit cost, shifting to fair market
value of plan assets would serve to decrease our 2007 international
pension plans’ pre-tax expense by approximately $58 million. As
a sensitivity measure, holding all other assumptions constant,
the effect of a one-percentage-point decline in the return-on-
assets assumption would be an increase in our 2007 U.S. qualified
pension plan pre-tax expense of approximately $74 million.
The following table shows the expected versus actual rate of
return on plan assets for the U.S. qualified pension plans:
2006 2005 2004
Expected annual rate of return 9.0% 9.0% 9.0%
Actual annual rate of return 15.2 10.1 11.5
The discount rate used in calculating our U.S. pension benefit
obligations as of December 31, 2006, is 5.9%, which represents a
0.1 percentage-point increase from our December 31, 2005, rate of
5.8%. The discount rate for our U.S. defined benefit and
postretirement plans is based on a yield curve constructed from a
portfolio of high quality corporate bonds rated AA or better for
which the timing and amount of cash flows approximate the
estimated payouts of the plans. For our international plans, the
discount rates are set by benchmarking against investment grade
corporate bonds rated AA or better. Holding all other assumptions
constant, the effect of a 0.1 percentage-point increase in the
discount rate assumption is a decrease in our 2007 U.S. qualified
pension plans’ pre-tax expense of approximately $10 million and
a decrease in the U.S. qualified pension plans’ projected benefit
obligations as of December 31, 2006, of approximately $100 million.