Sunoco 2003 Annual Report Download - page 37

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The long-term rate of return on plan assets was assumed to be 8.75 percent for 2003 and 9
percent for both 2002 and 2001, while the rate of compensation increase was assumed to
be 4 percent for each of the last three years. A rate of return of 8.75 percent on plan assets
and a rate of compensation increase of 4 percent will be used to determine Sunoco’s pen-
sion expense for 2004. The expected rate of return on plan assets is estimated utilizing a
variety of factors including the historical investment return achieved over a long-term
period, the targeted allocation of plan assets and expectations concerning future returns in
the marketplace for both equity and debt securities. In determining pension expense, the
Company applies the expected rate of return to the market-related value of plan assets at
the beginning of the year, which is determined using a quarterly average of plan assets from
the preceding year. The expected return on plan assets is designed to be a long-term as-
sumption. It generally will differ from the actual annual return which is subject to consid-
erable year-to-year variability. As permitted by existing accounting rules, the Company
does not recognize currently in pension expense the difference between the expected and
actual return on assets. Rather, the difference is deferred along with other actuarial gains or
losses resulting from differences between actuarial assumptions used in accounting for the
plans and changes in these assumptions (primarily the discount rate) and actual experi-
ence. If such unrecognized gains and losses on a cumulative basis exceed 10 percent of the
projected benefit obligation, the excess is amortized into income as a component of pen-
sion or postretirement benefits expense over the remaining service period of plan partic-
ipants still employed with the Company, which currently is approximately 12 years. At
December 31, 2003, the unrecognized net loss for defined benefit and postretirement bene-
fit plans was $433 and $83 million, respectively. For 2003, the pension plan assets gen-
erated a positive return of 24.1 percent, compared to a negative return of 8.2 percent in
2002 and a negative return of 2.9 percent in 2001. For the fifteen-year period ended De-
cember 31, 2003, the compounded annual investment return on Sunoco’s pension plan
assets was 10.0 percent.
The asset allocation for Sunoco’s pension plans at December 31, 2003 and 2002 and the
target allocation of plan assets for 2004, by asset category, are as follows:
December 31
(In Percentages) 2004 Target* 2003 2002
Asset category:
Equity securities 60% 62% 57%
Debt securities 35 33 37
Other 55 6
Total 100% 100% 100%
* The target allocation has been in effect since 1999.
The rate of compensation increase assumption has been indicative of actual increases dur-
ing the 2001-2003 period.
The initial health care cost trend assumptions used to compute the accumulated postretire-
ment benefit obligation were increases of 11.4 percent, 12.2 percent and 8.3 percent at
December 31, 2003, 2002 and 2001, respectively. These trend rates were assumed to de-
cline gradually to 5.5 percent in 2008 and to remain at that level thereafter.
35