Red Lobster 2012 Annual Report Download - page 62

Notes to Consolidated Financial Statements
Darden
58 Darden Restaurants, Inc. 2012 Annual Report
We set the discount rate assumption annually for each of the plans at their
valuation dates to reflect the yield of high-quality fixed-income debt instruments,
with lives that approximate the maturity of the plan benefits. The expected long-
term rate of return on plan assets and health care cost trend rates are based
upon several factors, including our historical assumptions compared with actual
results, an analysis of current market conditions, asset fund allocations and the
views of leading financial advisers and economists.
For fiscal 2012, 2011 and 2010, we have used an expected long-term rate
of return on plan assets for our defined benefit plan of 9.0 percent. In developing
our expected rate of return assumption, we have evaluated the actual historical
performance and long-term return projections of the plan assets, which give
consideration to the asset mix and the anticipated timing of the pension plan
outflows. We employ a total return investment approach whereby a mix of equity
and fixed-income investments are used to maximize the long-term return of plan
assets for what we consider a prudent level of risk. Our historical 10-year, 15-year
and 20-year rates of return on plan assets, calculated using the geometric method
average of returns, are approximately 7.8 percent, 8.0 percent and 9.4 percent,
respectively, as of May 27, 2012. Our Benefit Plans Committee sets the investment
policy for the Defined Benefit Plans and oversees the investment allocation, which
includes setting long-term strategic targets. Our overall investment strategy is
to achieve appropriate diversification through a mix of equity investments, which
may include U.S., International, and private equities, as well as long duration
bonds and real estate investments. Our target asset fund allocation is 40 percent
U.S. equities, 35 percent high-quality, long-duration fixed-income securities,
20 percent international equities, 5 percent real estate securities. The investment
policy establishes a re-balancing band around the established targets within which
the asset class weight is allowed to vary. Equity securities, international equities
and fixed-income securities include investments in various industry sectors.
Investments in real estate securities follow different strategies designed to
maximize returns, allow for diversification and provide a hedge against inflation.
Our current positioning is neutral on investment style between value and growth
companies and large and small cap companies. We monitor our actual asset fund
allocation to ensure that it approximates our target allocation and believe that our
long-term asset fund allocation will continue to approximate our target allocation.
Investments held in the U.S. commingled fund, an international commingled fund,
U.S. government fixed-income securities and an emerging markets commingled
fund represented approximately 39.6 percent, 13.2 percent, 10.5 percent and
5.5 percent, respectively, of total plan assets and represents the only significant
concentrations of risk related to a single entity, sector, country, commodity
or investment fund. No other single sector concentration of assets exceeded
5.0 percent of total plan assets, which is consistent with the overall investment
strategy to achieve appropriate diversification.
The discount rate and expected return on plan assets assumptions have
a significant effect on amounts reported for defined benefit pension plans.
A quarter percentage point change in the defined benefit plans’ discount rate and
the expected long-term rate of return on plan assets would increase or decrease
earnings before income taxes by $0.7 million and $0.5 million, respectively.
The assumed health care cost trend rate increase in the per-capita charges
for postretirement benefits was 7.7 percent for fiscal 2013. The rate gradually
decreases to 5.0 percent through fiscal 2022 and remains at that level thereafter.
The assumed health care cost trend rate has a significant effect on amounts
reported for retiree health care plans. A one percentage point increase or decrease
in the assumed health care cost trend rate would affect the service and interest
cost components of net periodic postretirement benefit cost by $0.5 million and
$0.4 million, respectively, and would increase or decrease the accumulated post-
retirement benefit obligation by $6.5 million and $5.1 million, respectively.