UPS 2013 Annual Report Download - page 87

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
75
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
2013 2012 2013 2012 2013 2012
Discount rate 5.32% 4.42% 5.14% 4.21% 4.40% 4.00%
Rate of compensation increase 4.29% 4.16% N/A N/A 3.30% 3.03%
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 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. These assumptions are updated each measurement date, which is typically
annually.
As of December 31, 2013, the impact of each basis point change in the discount rate on the projected benefit obligation of
the pension and postretirement medical benefit plans are as follows (in millions):
Increase (Decrease) in the Projected Benefit Obligation
Pension Benefits Postretirement Medical Benefits
One basis point increase in discount rate $ (46) $ (4)
One basis point decrease in discount rate $ 49 $ 4
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 plan, 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 2013 U.S.
plan obligations, future postretirement medical benefit costs were forecasted assuming an initial annual increase of 7.0%,
decreasing to 5.0% by the year 2018 and with consistent annual increases at those ultimate levels thereafter.
Assumed health care cost trends can have a significant effect on the amounts reported for our postretirement medical
plans. A one-percent change in assumed health care cost trend rates would have had the following effects on 2013 results (in
millions):
1% Increase 1% Decrease
Effect on total of service cost and interest cost $ 3 $ (3)
Effect on postretirement benefit obligation $ 50 $ (64)