UPS 2006 Annual Report Download - page 79

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UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below provides the weighted-average actuarial assumptions used to determine the benefit
obligations of our plans.
Pension Benefits
Postretirement
Medical Benefits
International
Pension Benefits
2006 2005 2006 2005 2006 2005
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00% 5.75% 6.00% 5.75% 4.96% 4.93%
Rate of compensation increase ................ 4.50% 4.00% N/A N/A 3.79% 3.94%
Our pension and other postretirement benefit costs are calculated using various actuarial assumptions and
methodologies as prescribed by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting
for Pensions” and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions.” These assumptions include discount rates, expected return on plan
assets, health care cost trend rates, inflation, rate of compensation increases, mortality rates, and other factors.
Actuarial assumptions are reviewed on an annual basis.
A discount rate is used to determine the present value of our future benefit obligations. For U.S. plans, the
discount rate is determined by matching the expected cash flows to a yield curve based on long-term, high
quality fixed income debt instruments available as of the measurement date. For international plans, the discount
rate is selected based on high quality fixed income indices available in the country in which the plan is
domiciled. These assumptions are updated each year.
An assumption for return on plan assets is used to determine the expected return on asset component of net
periodic benefit cost for the fiscal year. This assumption for our U.S. plans was evaluated using input from third-
party consultants and various pension plan asset managers, including their long-term projection of returns for
each asset class and our target allocation. For our U.S. plans, the 10-year U.S. Treasury yield is the foundation
for all other asset class returns, and various risk premiums are added to determine the expected return for each
allocation.
For plans outside the U.S., consideration is given to local market expectations of long-term returns.
Strategic asset allocations are determined by country, based on the nature of liabilities and considering the
demographic composition of the plan participants.
Health care cost trends are used to project future postretirement benefits payable from our plans. For
year-end 2006 obligations, future postretirement medical benefit costs were forecasted assuming an initial annual
increase of 9.0%, decreasing to 5.0% by the year 2011 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 U.S.
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 total of service cost and interest cost ...................... $ 7 $ (4)
Effect on postretirement benefit obligation ......................... 70 (65)
F-19