Travelers 2004 Annual Report Download - page 190

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS, Continued
The pretax minimum liability included in other comprehensive income was $10 million at both
December 31, 2004 and 2003.
The Company does not have a best estimate of contributions expected to be paid to the qualified pension
plan during the next fiscal year at this time.
Assumptions and Health Care Cost Trend Rate Sensitivity
(at and for the year ended December 31,) 2004 2003
Assumptions used to determine benefit obligations
Discount rate .......................................................... 6.00% 6.25%
Future compensation increase rate .......................................... 4.00% 4.00%
Assumptions used to determine net periodic benefit cost
Discount rate .......................................................... 6.00% to 6.25% 6.75%
Expected long-term rate of return on assets ................................... 8.00% 8.00%
Assumed health care cost trend rates
Following year ......................................................... 10.0% 10.0%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) ......... 5.0% 5.0%
Year that the rate reaches the ultimate trend rate ............................... 2010 2009
In choosing the expected long-term rate of return, the Company’s Pension Plan Investment Committee
considered the historical returns of equity and fixed income markets in conjunction with today’s economic and
financial market conditions.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have
increased the accumulated postretirement benefit obligation by $39 million at December 31, 2004, and the
aggregate of the service and interest cost components of net postretirement benefit expense by $4 million for the
year ended December 31, 2004. Decreasing the assumed health care cost trend rate by 1% would have decreased
the accumulated postretirement benefit obligation at December 31, 2004 by $32 million and the aggregate of the
service and interest cost components of net postretirement benefit expense by $3 million for the year ended
December 31, 2004. The sensitivity of the foregoing hypothetical changes in the assumed health care cost trend
rates to the accumulated postretirement benefit obligation at December 31, 2003, and the aggregate of the service
and interest cost components of net postretirement benefit expense for the year ended December 31, 2003 was
negligible.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (2003
Medicare Act) was enacted. The 2003 Medicare Act introduces a prescription drug benefit under Medicare Part
D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. The Company has concluded that prescription drug benefits available
under the SPC postretirement benefit plan are actuarially equivalent to Medicare Part D and thus qualify for the
federal subsidy under the 2003 Medicare Act. The Company also expects that the Federal subsidy will offset or
reduce the Company’s share of the cost of the underlying postretirement prescription drug coverage on which the
subsidy is based. As a result, the estimated effect of the 2003 Medicare Act was reflected in the purchase
accounting remeasurement of the SPC postretirement benefit plan on April 1, 2004. The effect of this adjustment
was a $29 million reduction (with no tax effect) in the accumulated postretirement benefit obligation as of
178