Sears 2011 Annual Report Download - page 47

Download and view the complete annual report

Please find page 47 of the 2011 Sears annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 122

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122

include actuarial estimates of both claims filed and carried at their expected ultimate settlement value and claims
incurred but not yet reported. Our estimated claim amounts are discounted using a rate with a duration that
approximates the duration of our self-insurance reserve portfolio. Our liability reflected on the Consolidated
Balance Sheets represents an estimate of the ultimate cost of claims incurred at the balance sheet date. In
estimating this liability, we utilize loss development factors based on Company-specific data to project the future
development of incurred losses. Loss estimates are adjusted based upon actual claims settlements and reported
claims. These projections are subject to a high degree of variability based upon future inflation rates, litigation
trends, legal interpretations, benefit level changes and claim settlement patterns. Although we do not expect the
amounts ultimately paid to differ significantly from our estimates, self-insurance reserves could be affected if
future claim experience differs significantly from the historical trends and the actuarial assumptions.
Defined Benefit Retirement Plans
The fundamental components of accounting for defined benefit retirement plans consist of the compensation
cost of the benefits earned, the interest cost from deferring payment of those benefits into the future and the
results of investing any assets set aside to fund the obligation. Such retirement benefits were earned by associates
ratably over their service careers. Therefore, the amounts reported in the income statement for these retirement
plans have historically followed the same pattern. Accordingly, changes in the obligations or the value of assets
to fund them have been recognized systematically and gradually over the associate’s estimated period of service.
The largest drivers of losses or charges in recent years have been the discount rate used to determine the present
value of the obligation and the actual return on pension assets. We recognize the changes by amortizing
experience gains/losses in excess of the 10% corridor into expense over the associate service period and by
recognizing the difference between actual and expected asset returns over a five-year period.
Holdings’ actuarial valuations utilize key assumptions including discount rates and expected returns on plan
assets. We are required to consider current market conditions, including changes in interest rates and plan asset
investment returns, in determining these assumptions. Actuarial assumptions may differ materially from actual
results due to changing market and economic conditions, changes in investment strategies, higher or lower
withdrawal rates, and longer or shorter life spans of participants.
The Investment Committee, made up of select members of senior management, has appointed a
non-affiliated third party professional to advise the Committee with respect to the SHC domestic pension plan
assets. The plan’s overall investment objective is to provide a long-term return that, along with Company
contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in
establishing investment policy such that the likelihood and duration of investment losses are carefully weighed
against the long-term potential for appreciation of assets. The plan’s investment policy requires investments to be
diversified across individual securities, industries, market capitalization and valuation characteristics. In addition,
various techniques are utilized to monitor, measure and manage risk.
For purposes of determining the periodic expense of our defined benefit plans, we use the fair value of plan
assets as the market related value. A one-percentage-point change in the assumed discount rate would have the
following effects on the pension liability:
millions
1 percentage-point
Increase
1 percentage-point
Decrease
Effect on interest cost component ........................ $ 28 $(37)
Effect on pension benefit obligation ...................... $(771) $935
47