US Bank 2014 Annual Report Download - page 123

The following table sets forth weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31:
Pension Plans Postretirement Welfare Plan
(Dollars in Millions) 2014 2013 2012 2014 2013 2012
Discount rate(a) ........................................................... 4.97% 4.07% 5.07% 3.93% 3.10% 4.30%
Expected return on plan assets(b) ......................................... 7.50 7.50 8.00 1.50 1.50 2.25
Rate of compensation increase(c) ......................................... 4.02 4.08 4.05 * * *
Health care cost trend rate(d)
Prior to age 65 ......................................................... 7.50% 8.00% 8.00%
After age 65 ............................................................ 7.50 8.00 12.00
Effect on total of service cost and interest cost
One percent increase .................................................. $– $– $ –
One percent decrease .................................................. –– –
(a) The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plans, non-qualified pension plans and postretirement welfare plan
of 14.6, 11.5 and 6.4 years, respectively, for 2014, and 15.9, 12.2 and 7.2 years, respectively, for 2013.
(b) With the help of an independent pension consultant, the Company considers several sources when developing its expected long-term rates of return on plan assets assumptions, including, but
not limited to, past returns and estimates of future returns given the plans’ asset allocation, economic conditions, and peer group LTROR information. The Company determines its expected
long-term rates of return reflecting current economic conditions and plan assets.
(c) Determined on an active liability weighted basis.
(d) The pre-65 and post-65 rates are both assumed to decrease gradually to 5.00 percent by 2019 and remain at that level thereafter.
* Not applicable
Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. An independent
consultant performs modeling that projects numerous
outcomes using a broad range of possible scenarios, including
a mix of possible rates of inflation and economic growth.
Starting with current economic information, the model bases
its projections on past relationships between inflation, fixed
income rates and equity returns when these types of
economic conditions have existed over the previous 30 years,
both in the U.S. and in foreign countries. Estimated future
returns and other actuarially determined adjustments are also
considered in calculating the estimated return on assets.
Generally, based on historical performance of the
various investment asset classes, investments in equities
have outperformed other investment classes but are subject
to higher volatility. In an effort to minimize volatility, while
recognizing the long-term up-side potential of investing in
equities, the Committee has determined that a target asset
allocation of 30 percent debt securities, 35 percent passively
managed global equities, 8 percent actively managed global
equities, 7 percent mid-small cap equities, 5 percent
emerging markets equities, 5 percent real estate equities, 5
percent hedge funds and 5 percent private equity is
appropriate.
At December 31, 2014 and 2013, plan assets of the
qualified pension plans included asset management
arrangements with related parties totaling $70 million and
$119 million, respectively.
In accordance with authoritative accounting guidance,
the Company groups plan assets into a three-level hierarchy
for valuation techniques used to measure their fair value
based on whether the valuation inputs are observable or
unobservable. Refer to Note 22 for further discussion on
these levels.
The assets of the qualified pension plans include
investments in equity and U.S. Treasury securities whose fair
values are determined based on quoted prices in active
markets and are classified within Level 1 of the fair value
hierarchy. The qualified pension plans also invest in
collective investment and mutual funds whose fair values
are determined using the net asset value provided by the
administrator of the fund and are classified as Level 2. In
addition, the qualified pension plans invest in debt securities
and foreign currency transactions that are valued using third
party pricing services and are classified as Level 2. The
qualified pension plans invest in hedge funds and private
equity funds whose fair values are determined using the net
asset value provided by the fund administrators. The
Company’s ability to redeem at net asset value is restricted,
and accordingly, the investments in hedge and private equity
funds are classified as Level 3. Additionally, the qualified
pension plans invest in limited partnership interests, and in
debt securities whose fair values are determined by the
Company by analyzing the limited partnerships’ audited
financial statements and by averaging the prices obtained
from independent pricing services, respectively. These
securities are classified as Level 3.
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