Union Pacific 2005 Annual Report Download - page 66

Download and view the complete annual report

Please find page 66 of the 2005 Union Pacific annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 100

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100

changes in fair value over a five-year period. This practice is intended to reduce year-to-year volatility in pension
expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and
expected returns based on long-term rate of return assumptions. The expected rate of return on assets was 8% for
both 2005 and 2004. Differences in actual experience in relation to assumptions are not recognized immediately,
but are deferred and, if necessary, amortized as pension or OPEB expense.
The components of our net periodic pension and other postretirement costs were as follows for the years
ended December 31:
Pension OPEB
Millions of Dollars 2005 2004 2003 2005 2004 2003
Service cost ................................. $ 28 $ 30 $ 27 $ 4 $ 5 $ 7
Interest cost ................................ 115 120 113 25 31 35
Expected return on plan assets ................. (134) (137) (133) - - -
Amortization of:
Transition obligation ....................... - (2) (2) - - -
Prior service cost (credit) ................... 7 8 9 (30) (24) (15)
Actuarial loss ............................. 5 3 1 14 18 16
Total net periodic benefit cost .................. $ 21 $ 22 $ 15 $ 13 $ 30 $ 43
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows for the
years ended December 31:
Pension OPEB
Percentages 2005 2004 2003 2005 2004 2003
Discount rate ................................ 6.00% 6.50% 6.75% 6.00% 6.50% 6.75%
Expected return on plan assets .................. 8.00 8.00 8.00 N/A N/A N/A
Salary increase ............................... 3.00 3.50 3.75 N/A N/A N/A
Healthcare cost trend rate:
Current .................................. N/A N/A N/A 11.00 9.00 10.00
Level in 2010 .............................. N/A N/A N/A 5.00 5.00 5.00
The discount rate is based on a hypothetical portfolio of high quality bonds with cash flows matching our
plans’ expected benefit payments. The expected return on plan assets is based on our asset allocation mix and our
historical return, taking into account current and expected market conditions. The actual return on pension plan
assets, net of fees, was approximately 7% in 2005, compared to 12% in 2004. Our historical annualized ten-year
rate of return on plan assets is approximately 9%.
Assumed healthcare cost trend rates have a significant effect on the expense and liabilities reported for
healthcare plans. The healthcare cost trend rate is based on historical rates and expected market conditions. A
one-percentage point change in the expected healthcare cost trend rates would have the following effects on
OPEB:
Millions of Dollars
One % pt.
Increase
One % pt.
Decrease
Effect on total service and interest cost components. ................ $ 6 $ (5)
Effect on accumulated benefit obligation ......................... 90 (74)
60