Prudential 2015 Annual Report Download - page 28

In addition to the impact of mortality experience relative to our assumptions, other factors may also drive variability in the change in
reserves, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations
of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time. In 2015,
updates to mortality assumptions drove the most significant changes to our URR reserve. For a discussion of the drivers of URR
adjustments related to our Individual Life segment for the years ended December 31, 2015, 2014 and 2013, see “—Results of Operations
by Segment—U.S. Individual Life and Group Insurance Division—Individual Life.”
Pension and Other Postretirement Benefits
We sponsor pension and other postretirement benefit plans covering employees who meet specific eligibility requirements. Our net
periodic costs for these plans consider an assumed discount (interest) rate, an expected rate of return on plan assets, expected increases in
compensation levels, mortality and trends in health care costs. Of these assumptions, our expected rate of return assumptions and our
discount rate assumptions have historically had the most significant effect on our net period costs associated with these plans.
We determine our expected rate of return on plan assets based upon a building block approach that considers inflation, real return,
term premium, credit spreads, equity risk premium and capital appreciation as well as expenses, expected asset manager performance and
the effect of rebalancing for the equity, debt and real estate asset mix applied on a weighted average basis to our pension asset portfolio.
See Note 18 to our Consolidated Financial Statements for our actual asset allocations by asset category and the asset allocation ranges
prescribed by our investment policy guidelines for both our pension and other postretirement benefit plans. Our assumed long-term rate of
return for 2015 was 6.25% for our domestic pension plans and 7.00% for our other postretirement benefit plans. Given the amount of plan
assets as of December 31, 2014, the beginning of the measurement year, if we had assumed an expected rate of return for both our domestic
pension and other domestic postretirement benefit plans that was 100 bps higher or 100 bps lower than the rates we assumed, the change in
our net periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in
our assumed long-term rate of return given the level and mix of invested assets at the beginning of the measurement year, without
consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our
assumed long-term rate of return.
For the year ended December 31, 2015
Increase/(Decrease) in Net
Periodic Pension Cost
Increase/(Decrease) in Net
Periodic Other Postretirement
Cost
(in millions)
Increase in expected rate of return by 100 bps .................................... $(121) $(16)
Decrease in expected rate of return by 100 bps ................................... $121 $16
Foreign pension plans represent 5% of plan assets at the beginning of 2015. An increase in expected rate of return by 100 bps would
result in a decrease in net periodic pension costs of $6 million; conversely, a decrease in expected rate of return by 100 bps would result in
an increase in net periodic pension costs of $6 million.
We determine our discount rate, used to value the pension and postretirement benefit obligations, based upon rates commensurate with
current yields on high quality corporate bonds. See Note 18 to our Consolidated Financial Statements for information regarding the
December 31, 2014 methodology we employed to determine our discount rate for 2015. Our assumed discount rate for 2015 was 4.10% for
our domestic pension plans and 3.95% for our other domestic postretirement benefit plans. Given the amount of pension and postretirement
obligations as of December 31, 2014, the beginning of the measurement year, if we had assumed a discount rate for both our domestic
pension and other postretirement benefit plans that was 100 bps higher or 100 bps lower than the rates we assumed, the change in our net
periodic costs would have been as shown in the table below. The information provided in the table below considers only changes in our
assumed discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately
accompany any changes in our assumed discount rate.
For the year ended December 31, 2015
Increase/(Decrease) in Net
Periodic Pension Cost
Increase/(Decrease) in Net
Periodic Other Postretirement
Cost
(in millions)
Increase in discount rate by 100 bps .......................................... $(98) $(6)
Decrease in discount rate by 100 bps .......................................... $142 $ 4
Foreign pension plans represent 13% of plan obligations at the beginning of 2015. An increase in discount rate by 100 bps would
result in a decrease in net periodic pension costs of $1 million; conversely, a decrease in discount rate by 100 bps would result in an
increase in net periodic pension costs of $4 million.
Given the application of the authoritative guidance for accounting for pensions, and the deferral and amortization of actuarial gains
and losses arising from changes in our assumed discount rate, the change in net periodic pension cost arising from an increase in the
assumed discount rate by 100 bps would not be expected to equal the change in net periodic pension cost arising from a decrease in the
assumed discount rate by 100 bps.
For a discussion of our expected rate of return on plan assets and discount rate for our qualified pension plan in 2015, see “—Results
of Operations by Segment—Corporate and Other.”
26 Prudential Financial, Inc. 2015 Annual Report