Sunoco 2004 Annual Report Download - page 39

December 31, 2004 and 6.00 and 6.00 percent, respectively, at December 31, 2003. Suno-
co’s expense under these plans is determined using the discount rate as of the beginning of
the year, which was 6.00 percent for 2004, 6.75 percent for 2003, 7.25 percent for 2002,
and for 2005 is 5.75 percent for pension plans and 5.50 percent for postretirement benefit
plans.
The long-term expected rate of return on plan assets was assumed to be 8.75 percent for
2004 and 2003 and 9.00 percent for 2002, while the rate of compensation increase was as-
sumed to be 4.00 percent for each of the last three years. A long-term expected rate of re-
turn of 8.50 percent on plan assets and a rate of compensation increase of 4.00 percent will
be used to determine Sunoco’s pension expense for 2005. The expected rate of return on
plan assets is estimated utilizing a variety of factors including the historical investment re-
turn achieved over a long-term period, the targeted allocation of plan assets and expect-
ations 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 rate of return on
plan assets is designed to be a long-term assumption. It generally will differ from the actual
annual return which is subject to considerable year-to-year variability. As permitted by ex-
isting 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 de-
ferred along with other actuarial gains or losses resulting from changes in actuarial assump-
tions used in accounting for the plans (primarily the discount rate) and differences
between actuarial assumptions and actual experience. 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 pension or postretirement benefits expense over
the remaining service period of plan participants still employed with the Company, which
currently is approximately 12 years. At December 31, 2004, the unrecognized net loss for
defined benefit and postretirement benefit plans was $431 and $84 million, respectively.
For 2004, the pension plan assets generated a positive return of 12.2 percent, compared to
a positive return of 24.1 percent in 2003 and a negative return of 8.2 percent in 2002. For
the fifteen-year period ended December 31, 2004, the compounded annual investment re-
turn on Sunoco’s pension plan assets was 9.5 percent.
The asset allocation for Sunoco’s pension plans at December 31, 2004 and 2003 and the
target allocation of plan assets for 2005, by asset category, are as follows:
December 31
(In Percentages) 2005 Target* 2004 2003
Asset category:
Equity securities 60% 64% 62%
Debt securities 35 32 33
Other 545
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 2002-2004 period.
The initial health care cost trend assumptions used to compute the accumulated postretire-
ment benefit obligation were increases of 10.3 percent, 11.4 percent and 12.2 percent at
December 31, 2004, 2003 and 2002, respectively. These trend rates were assumed to de-
cline gradually to 5.5 percent in 2008 and to remain at that level thereafter.
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