Prudential 2012 Annual Report Download - page 174

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
18. EMPLOYEE BENEFIT PLANS (continued)
The amounts included in “Accumulated other comprehensive income (loss)” expected to be recognized as components of net periodic
(benefit) cost in 2013 are as follows:
Pension
Benefits
Other
Postretirement
Benefits
(in millions)
Amortization of prior service cost ............................................................. $(12) (12)
Amortization of actuarial (gain) loss, net ........................................................ 93 58
Total ................................................................................ $81 $46
The Company’s assumptions related to the calculation of the domestic benefit obligation (end of period) and the determination of net
periodic (benefit) cost (beginning of period) are presented in the table below:
Pension Benefits Other Postretirement Benefits
2012 2011 2010 2012 2011 2010
Weighted-average assumptions
Discount rate (beginning of period) ................................... 4.85% 5.60% 5.75% 4.60% 5.35% 5.50%
Discount rate (end of period) ........................................ 4.05% 4.85% 5.60% 3.85% 4.60% 5.35%
Rate of increase in compensation levels (beginning of period) .............. 4.50% 4.50% 4.50% N/A N/A N/A
Rate of increase in compensation levels (end of period) ................... 4.50% 4.50% 4.50% N/A N/A N/A
Expected return on plan assets (beginning of period) ...................... 6.75% 7.00% 7.50% 7.00% 7.00% 7.50%
Health care cost trend rates (beginning of period) ........................ N/A N/A N/A 5.00-7.50% 5.00-7.50% 5.00-7.50%
Health care cost trend rates (end of period) ............................. N/A N/A N/A 5.00-7.50% 5.00-7.50% 5.00-7.50%
For 2012, 2011 and 2010, the ultimate health care cost trend rate after gradual
decrease until: 2017, 2017, 2015, (beginning of period) ................. N/A N/A N/A 5.00% 5.00% 5.00%
For 2012, 2011 and 2010, the ultimate health care cost trend rate after gradual
decrease until: 2019, 2017, 2017 (end of period) ....................... N/A N/A N/A 5.00% 5.00% 5.00%
The domestic discount rate used to value the pension and postretirement obligations at December 31, 2012 and December 31, 2011 is
based upon the value of a portfolio of Aa investments whose cash flows would be available to pay the benefit obligation’s cash flows when
due. The portfolio is selected from a compilation of approximately 670 Aa-rated bonds across the full range of maturities. Since yields can
vary widely at each maturity point, the Company generally avoids using the highest and lowest yielding bonds at the maturity points, so as
to avoid relying on bonds that might be mispriced or misrated. This refinement process generally results in having a distribution from the
10th to 90th percentile. The Aa portfolio is then selected and, accordingly, its value is a measure of the benefit obligation at December 31,
2012 and December 31, 2011. A single equivalent discount rate is calculated to equate the value of the Aa portfolio to the cash flows for
the benefit obligation. The result is rounded to the nearest 5 basis points and the benefit obligation is recalculated using the rounded
discount rate.
The pension and postretirement expected long-term rates of return on plan assets for 2012 were determined based upon an approach
that considered an expectation of the allocation of plan assets during the measurement period of 2012. Expected returns are estimated by
asset class as noted in the discussion of investment policies and strategies below. Expected returns on asset classes are developed using a
building-block approach that is forward looking and are not strictly based upon historical returns. The building blocks for equity returns
include inflation, real return, a term premium, an equity risk premium, capital appreciation, effect of active management, expenses and the
effect of rebalancing. The building blocks for fixed maturity returns include inflation, real return, a term premium, credit spread, capital
appreciation, effect of active management, expenses and the effect of rebalancing.
The Company applied the same approach to the determination of the expected rate of return on plan assets in 2013. The expected rate
of return for 2013 is 6.25% and 7.00% for pension and postretirement, respectively.
The assumptions for foreign pension plans are based on local markets. There are no material foreign postretirement plans.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have the following effects:
Other Postretirement
Benefits
(in millions)
One percentage point increase
Increase in total service and interest costs ............................................................ $ 9
Increase in postretirement benefit obligation .......................................................... 184
One percentage point decrease
Decrease in total service and interest costs ............................................................ $ 7
Decrease in postretirement benefit obligation ......................................................... 145
172 Prudential Financial, Inc. 2012 Annual Report