UPS 2011 Annual Report Download - page 93

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Actuarial Assumptions
The table below provides the weighted-average actuarial assumptions used to determine the net periodic
benefit cost.
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2011 2010 2009 2011 2010 2009 2011 2010 2009
Discount rate .................... 5.98% 6.58% 6.75% 5.77% 6.43% 6.66% 5.36% 5.84% 6.17%
Rate of compensation increase ...... 4.50% 4.50% 4.50% N/A N/A N/A 3.57% 3.62% 3.65%
Expected return on assets .......... 8.75% 8.75% 8.96% 8.75% 8.75% 9.00% 7.31% 7.25% 7.09%
The table below provides the weighted-average actuarial assumptions used to determine the benefit
obligations of our plans.
U.S. Pension Benefits
U.S. Postretirement
Medical Benefits
International
Pension Benefits
2011 2010 2011 2010 2011 2010
Discount rate .................................... 5.64% 5.98% 5.47% 5.77% 4.63% 5.36%
Rate of compensation increase ...................... 4.50% 4.50% N/A N/A 3.58% 3.57%
A discount rate is used to determine the present value of our future benefit obligations. To determine our
discount rate for our U.S. pension and other postretirement benefit plans, we use a bond matching approach to
select specific bonds that would satisfy our projected benefit payments. We believe the bond matching approach
reflects the process we would employ to settle our pension and postretirement benefit obligations. For our
international plans, the discount rate is determined by matching the expected cash flows of a sample plan of
similar duration to a yield curve based on long-term, high quality fixed income debt instruments available as of
the measurement date. For 2011, each basis point increase in the discount rate decreases the projected benefit
obligation by approximately $39 million and $4 million for pension and postretirement medical benefits,
respectively. These assumptions are updated each measurement date, which is typically annually.
An assumption for expected return on plan assets is used to determine a component of net periodic benefit
cost for the fiscal year. This assumption for our U.S. plans was developed using a long-term projection of returns
for each asset class, and taking into consideration our target asset allocation. The expected return for each asset
class is a function of passive, long-term capital market assumptions and excess returns generated from active
management. The capital market assumptions used are provided by independent investment advisors, while
excess return assumptions are supported by historical performance, fund mandates and investment expectations.
In addition, we compare the expected return on asset assumption with the average historical rate of return these
plans have been able to generate.
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 2011 U.S. plan obligations, future postretirement medical benefit costs were forecasted assuming an
initial annual increase of 8.0%, decreasing to 5.0% by the year 2018 and with consistent annual increases at those
ultimate levels thereafter.
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