UPS 2004 Annual Report Download - page 56

54 UPS Annual Report 2004
Notes to consolidated financial statements
The accumulated benefit obligation for our pension plans as
of September 30, 2004 and 2003 was $8.113 and $7.325 billion,
respectively. We use a measurement date of September 30 for our
pension and postretirement benefit plans.
In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the “Act”) was
enacted. The Act established a prescription drug benefit under
Medicare, known as “Medicare Part D”, and a federal subsidy
to sponsors of retiree health care plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. We
believe that benefits provided to certain participants will be at
least actuarially equivalent to Medicare Part D, and, accordingly
may be entitled to a subsidy.
In May 2004, the FASB issued FSP 106-2, which requires (a)
that the effects of the federal subsidy be considered an actuarial
gain and recognized in the same manner as other actuarial gains
and losses and (b) certain disclosures for employers that sponsor
postretirement health care plans that provide prescription drug
benefits. We determined the effects of the Act were not a signifi-
cant event requiring an interim remeasurement under FAS 106.
Consequently, as permitted by FSP 106-2, net periodic benefit
cost for 2004 does not reflect the effects of the Act. The accumu-
lated postretirement benefit obligation (APBO) was remeasured
as of September 30, 2004 to reflect the effects of the Act, which
resulted in an immaterial reduction in the APBO and expected
net employer benefit payments.
Future postretirement medical benefit costs were forecasted
assuming an initial annual increase of 9.0%, decreasing to 5.0%
by the year 2009 and with consistent annual increases at those
ultimate levels thereafter.
Assumed health care cost trends have a significant effect on
the amounts reported for the postretirement medical plans. A
one-percent change in assumed health care cost trend rates
would have the following effects (in millions):
1% Increase 1% Decrease
Effect on postretirement benefit obligation $ 69 $ (75)
Because the UPS Excess Coordinating Plan is not funded, the
Company has recorded an additional minimum pension liability
for this plan of $91 and $105 million at December 31, 2004 and
2003, respectively. This liability is included in the other credits
and non-current liabilities portion of Note 9. As of December
31, 2004 and 2003, the Company has recorded an intangible
asset of $4 and $5 million, respectively, representing the net
unrecognized prior service cost for this plan. A total of $55 and
$63 million at December 31, 2004 and 2003, respectively, were
recorded as a reduction of other comprehensive income in share-
owners’ equity (net of the tax effect of $32 and $37 million,
respectively). The unfunded accumulated benefit obligation of
the UPS Excess Coordinating Benefit Plan was $160 and $154
million as of December 31, 2004 and 2003, respectively.
Additionally, we maintain several non-U.S. defined benefit
pension plans. As of December 31, 2004, we have recorded a
prepaid pension asset of $5 million, an additional minimum pen-
sion liability of $30 million, and a $20 million (net of the tax
effect of $11 million) reduction of other comprehensive income
in shareowners’ equity. The impact of these non-U.S. plans is not
material to our operating results or financial position.
Plan Assets
The following table provides a reconciliation of the changes in the plans’ assets as of September 30 (in millions):
Postretirement
Pension Benefits Medical Benefits
2004 2003 2004 2003
Fair value of plan assets at October 1, prior year $ 7,823 $ 6,494 $ 409 $ 337
Actual return on plan assets 1,140 1,143 51 47
Employer contributions 1,200 390 115 124
Plan participants’ contributions — — 96
Gross benefits paid (201) (204) (129) (105)
Fair value of plan assets at September 30 $ 9,962 $ 7,823 $ 455 $ 409
Employer contributions and benefits paid under the pension plans include $6 million and $5 million paid from employer assets in
2004 and 2003, respectively. Employer contributions and benefits paid (net of participant contributions) under the postretirement
medical benefit plans include $57 and $45 million paid from employer assets in 2004 and 2003, respectively.