Red Lobster 2015 Annual Report Download - page 56

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
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.
Additionally, for our mortality assumption as of fiscal year end, we selected
the most recent RP-2014 mortality tables and MP-2014 mortality improve-
ment scale to measure the benefit obligations. The expected long-term rate
of return on plan assets is 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.
We reduced our expected long-term rate of return on plan assets for our
defined benefit plan from 9.0 percent used in fiscal 2013 to 8.0 percent used
in fiscal 2014 and then to 7.0 percent for fiscal 2015 in connection with our
current expectations for long-term returns and target asset fund allocation.
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
8.3 percent, 7.8 percent and 9.6 percent, respectively, as of May 31, 2015.
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. Currently, our target asset fund allocation is 41.0 percent
U.S. equities, 40.0 percent high-quality, long-duration fixed-income securities,
16.0 percent international equities and 3.0 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, U.S. corporate securities, an international commingled fund,
U.S. government fixed-income securities, a global fixed-income commingled
fund, public sector utility securities, and an emerging markets commingled
fund represented approximately 32.0 percent, 17.5 percent, 10.8 percent,
10.6 percent, 10.2 percent, 6.1 percent and 5.6 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.
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 $0.0 million and $0.5 million,
respectively.
Due to the fiscal 2015 postretirement benefit plan changes, health care
cost trend rates no longer significantly affects the amounts reported for the
plan. As a result, the only assumption that has a significant effect on the
amounts reported for the postretirement benefit plan is the discount rate.
A quarter percentage point change in the postretirement benefit plan’s
discount rate would increase or decrease earnings before income taxes
by $0.1 million.