The Hartford 2007 Annual Report Download - page 248

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-71
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans
The Company maintains a qualified defined benefit pension plan (the “Plan”) that covers substantially all employees. Effective for all
employees who joined the Company on or after January 1, 2001, a new component or formula was applied under the Plan referred to as
the “cash balance formula”. As of January 1, 2009, the cash balance formula will be used to calculate future pension benefits for
services rendered on or after January 1, 2009 for all employees hired before January 1, 2001. These amounts are in addition to amounts
earned by those employees through December 31, 2008 under the traditional final average pay formula.
The Company also maintains non-qualified pension plans to accrue retirement benefits in excess of Internal Revenue Code limitations.
The Company provides certain health care and life insurance benefits for eligible retired employees. The Company’ s contribution for
health care benefits will depend upon the retiree’ s date of retirement and years of service. In addition, the plan has a defined dollar cap
for certain retirees which limits average Company contributions. The Hartford has prefunded a portion of the health care obligations
through a trust fund where such prefunding can be accomplished on a tax effective basis. Effective January 1, 2002, Company-
subsidized retiree medical, retiree dental and retiree life insurance benefits were eliminated for employees with original hire dates with
the Company on or after January 1, 2002.
Assumptions
Pursuant to accounting principles related to the Company’ s pension and other postretirement obligations to employees under its various
benefit plans, the Company is required to make a significant number of assumptions in order to calculate the related liabilities and
expenses each period. The two economic assumptions that have the most impact on pension and other postretirement expense are the
discount rate and the expected long-term rate of return on plan assets. In determining the discount rate assumption, the Company
utilizes a discounted cash flow analysis of the Company’ s pension and other postretirement obligations, currently available market and
industry data and consultation with its plan actuaries. The yield curve utilized in the cash flow analysis is comprised of bonds rated Aa
or higher with maturities primarily between zero and thirty years. Based on all available information, it was determined that 6.25% was
the appropriate discount rate as of December 31, 2007 to calculate the Company’s benefit liability. Accordingly, the 6.25% discount
rate will also be used to determine the Company’ s 2008 pension and other postretirement expense.
The Company determines the expected long-term rate of return assumption based on an analysis of the Plan portfolio’ s historical
compound rates of return since 1979 (the earliest date for which comparable portfolio data is available) and over rolling 5 year and 10
year periods, balanced along with future long-term return expectations that generally anticipate an investment mix of 60% fixed income
securities, 20% equity securities and 20% alternative assets. The Company selected these periods, as well as shorter durations, to
assess the portfolio’ s volatility, duration and total returns as they relate to pension obligation characteristics, which are influenced by
the Company’ s workforce demographics. In addition, the Company also applies market return assumptions utilized in Life’ s DAC
analysis to an investment mix that generally anticipates 60% fixed income securities, 20% equity securities and 20% alternative assets
to derive an expected long-term rate of return. Based upon this analysis, the portfolio’ s historical rates of return and management’ s
outlook with respect to market returns and the planned asset mix, management decreased the long-term rate of return assumption to
7.30% as of December 31, 2007, a 70 basis point reduction from the December 31, 2006 expected long-term rate of return of 8.00%.
This assumption will be used to determine the Company’ s 2008 expense.
Weighted average assumptions used in calculating the benefit obligations and the net amount recognized for the plans per year were as
follows:
As of December 31,
2007 2006
Discount rate 6.25% 5.75%
Rate of increase in compensation levels 4.25% 4.25%
Weighted average assumptions used in calculating the net periodic benefit cost for the plans were as follows:
For the year ended December 31,
2007 2006 2005
Discount rate 5.75% 5.50% 5.75%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.50%
Rate of increase in compensation levels 4.25% 4.00% 4.00%