SunTrust 2013 Annual Report Download - page 91

75
Size and Characteristics of the Employee Population
Pension cost is directly related to the number of employees eligible to participate in the plan and other factors including
historical compensation, age, years of employment, and benefit terms. A curtailment of all pension benefit accruals was
effective December 31, 2011. Prior to the pension curtailment, most participants who had 20 or more years of service as of
December 31, 2007 received benefits based on a traditional pension formula with benefits linked to their final average pay
and years of service. Most other participants received a traditional pension for periods through December 31, 2007. Beginning
in 2008, a cash balance benefit based on annual compensation and interest credits was earned. Continued changes in the size
and characteristics of the workforce could result in a partial settlement of the pension plan. If lump sum payments in a year
exceed the total of interest cost and service cost, then settlement accounting requires immediate recognition through earnings
of any net actuarial gain or loss recorded in AOCI based on the fair value of plan assets and plan obligations prior to settlement,
and recognition of any settlement related costs. We estimate the financial impact of a partial settlement in 2014 would be
recognition of approximately $40 million in additional benefit cost; however, additional lump sum payments could cause the
amount of benefit cost recognized to be higher.
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. The discount rate for each plan is reset annually or upon occurrence
of an event that triggers a measurement to reflect current market conditions. If we 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 change by less than $1 million.
Expected Long-term Rate of Return on Plan Assets
Expected returns on plan assets are computed using long-term rate of return assumptions which are selected after considering
plan investments, historical returns, and potential future returns. Our 2013 pension costs reflect an assumed long-term rate
of return on plan assets of 7%.
Any differences between expected and actual returns are included in the unrecognized net actuarial gain or loss amount. We
amortize gains/losses in pension expense when the total unamortized amount exceeds 10% of plan assets or the projected
benefit obligations, whichever is greater. All pension gains or losses are being amortized over participants' average expected
future lifetime, which is approximately 34 years. See Note 15, “Employee Benefit Plans,” to the Consolidated Financial
Statements in this Form 10-K for details on changes in the pension benefit obligation and the fair value of plan assets.
If we 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 $7 million.
Recognition of Actual Asset Returns
Accounting guidance allows for the use of an asset value that smooths investment gains and losses over a period up to five
years. However, we have elected to use a preferable method in determining pension cost. This method uses the actual market
value of the plan assets. Therefore, we will experience more variability in the annual pension cost, as the asset values will be
more volatile than companies who elected to “smooth” their investment experience.
Other Actuarial Assumptions
To estimate the projected benefit obligation, actuarial assumptions are required about factors such as mortality rate, retirement
rate, and disability rate. These factors do not tend to change significantly over time, so the range of assumptions, and their
impact on pension cost, is generally limited. We annually review the assumptions used based on historical and expected future
experience. We updated the mortality assumption in 2013 to reflect interim improvement factors published by the Society of
Actuaries, which are subject to a subsequent update in 2014. Our adoption of updated mortality rates in 2013 increased our
projected benefit obligation by approximately 4%.
Postretirement Healthcare Cost
Assumed healthcare cost trend rates also have an impact on the amounts reported for the other postretirement benefit plans.
Due to changing medical inflation, it is important to understand the effect of a one percent change in assumed healthcare cost
trend rates. If we were to assume a one percent increase in healthcare cost trend rates, the effect would be an increase of less
than $1 million on both the other postretirement benefit obligation and total interest and service cost at December 31, 2013.