Prudential 2015 Annual Report Download - page 172

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
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. 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 2015 were determined based upon an approach
that considered the allocation of plan assets as of December 31, 2014. 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 2016. The expected rate
of return for 2016 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 ........................................................................ $ 7
Increase in postretirement benefit obligation ..................................................................... 153
One percentage point decrease
Decrease in total service and interest costs ....................................................................... $ 5
Decrease in postretirement benefit obligation ..................................................................... 120
Plan Assets
The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks,
bonds and other investments. The cash requirements of the pension obligation, which include a traditional formula principally representing
payments to annuitants and a cash balance formula that allows lump sum payments and annuity payments, are designed to be met by the
bonds and short-term investments in the portfolio. The pension plan risk management practices include guidelines for asset concentration,
credit rating and liquidity. The pension plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to
reduce transaction costs and change asset concentration, while interest rate swaps and futures are used to adjust duration.
The investment goal of the domestic postretirement plan assets is to generate an above benchmark return on a diversified portfolio of
stocks, bonds, and other investments, while meeting the cash requirements for the postretirement obligation that includes a medical benefit
including prescription drugs, a dental benefit and a life benefit. The postretirement plan risk management practices include guidelines for
asset concentration, credit rating, liquidity and tax efficiency. The postretirement plan does not invest in leveraged derivatives. Derivatives
such as futures contracts are used to reduce transaction costs and change asset concentration, while interest rate swaps and futures are used
to adjust duration.
The plan fiduciaries for the Company’s pension and postretirement plans have developed guidelines for asset allocations reflecting a
percentage of total assets by asset class, which are reviewed on an annual basis. Asset allocation targets as of December 31, 2015 are as
follows:
Pension Postretirement
Minimum Maximum Minimum Maximum
Asset Category
U.S. Equities ...................................................................... 2% 15% 25% 58%
International Equities ............................................................... 2% 16% 2% 22%
Fixed Maturities ................................................................... 50% 69% 3% 52%
Short-term Investments .............................................................. 0% 15% 0% 44%
Real Estate ........................................................................ 2% 15% 0% 0%
Other ............................................................................ 0% 16% 0% 0%
To implement the investment strategy, plan assets are invested in funds that primarily invest in securities that correspond to one of the
asset categories under the investment guidelines. However, at any point in time, some of the assets in a fund may be of a different nature
than the specified asset category.
170 Prudential Financial, Inc. 2015 Annual Report