SunTrust 2006 Annual Report Download - page 78

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Pension Accounting
Several variables affect the annual pension cost and the annual variability of cost for the SunTrust
retirement programs. The main variables are: (1) size and characteristics of the employee population,
(2) discount rate, (3) expected long-term rate of return on plan assets, (4) recognition of actual asset
returns and (5) other actuarial assumptions. Below is a brief description of these variables and the effect
they have on SunTrust’s pension costs.
Size and Characteristics of the Employee Population
Pension cost is directly related to the number of employees covered by the plans, and other factors
including salary, age, and years of employment. The number of employees eligible for pension benefits
has increased over prior years, especially with the addition of NCF employees at the end of 2004.
Discount Rate
The discount rate is used to determine the present value of future benefit obligations. The discount rate
for each plan is determined by matching the expected cash flows of each plan to a yield curve based on
long term, high quality fixed income debt instruments available as of the measurement date,
December 31. This assumption is updated every year for each plan. The discount rate for each plan is
reset annually on the measurement date to reflect current market conditions.
If the Company were to assume a 0.25% increase/decrease in the discount rate for all retirement and
other postretirement plans, and keep all other assumptions constant, the benefit cost would decrease/
increase by approximately $14 million.
Expected Long-term Rate of Return on Plan Assets
Based on historical experience and market projection of the target asset allocation set forth in the
investment policy for the SunTrust and NCF Retirement Plans, the pre-tax expected rate of return on
plan assets was 8.50% and 8.50% in 2006 and 2005, respectively. This expected rate of return is not
expected to change significantly each year.
Annual differences, if any, between expected and actual returns are included in the unrecognized net
actuarial gain or loss amount. The Company generally amortizes any unrecognized net actuarial gain or
loss in excess of a 10% corridor, as defined in SFAS No. 87, “Employers’ Accounting for Pensions,”
(“SFAS No. 87”) in net periodic pension expense over the average future service of active employees,
which is approximately eight years. See Note 16, “Employee Benefit Plans,” to the Consolidated
Financial Statements for details on changes in the pension benefit obligation and the fair value of plan
assets.
If the Company were to assume a 0.25% increase/decrease in the expected long-term rate of return for
the retirement and other postretirement plans, holding all other actuarial assumptions constant, the
benefit cost would decrease/increase by approximately $6 million.
Recognition of Actual Asset Returns
SFAS No. 87 allows for the use of an asset value that smoothes investment gains and losses over a
period up to five years. However, SunTrust has elected to use a preferable method in determining
pension expense. This method uses the actual market value of the plan assets, and therefore,
immediately recognizes prior gains and losses. Therefore, SunTrust will have more variability in the
annual pension cost, as the asset values will be more volatile than companies who elected to “smooth”
their investment experience.
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