United Airlines 2011 Annual Report Download - page 62

Table of Contents
approximately one year. As a result of this testing, UAL recorded impairment charges of $19 million to record the regional aircraft at estimated fair value as of
December 31, 2009.
Benefit Accounting. UAL’s pension plans’ under-funded status was $1.8 billion at December 31, 2011, nearly all of which is attributable to Continental’s
plans. Funding requirements for tax-qualified defined benefit pension plans are determined by government regulations. We estimate that our minimum funding
requirements for the Continental plans during calendar year 2012 is approximately $184 million. The fair value of the plans’ assets was $1.9 billion at
December 31, 2011, of which $1.7 billion is attributed to assets of Continental’s plans.
The following discussion relates only to the Continental plans, as the United plans are not material.
When calculating pension expense for 2012, Continental assumed that its plans’ assets would generate a long-term rate of return of 7.75%. The expected long-
term rate of return assumption was developed based on historical experience and input from the trustee managing the plans’ assets. The expected long-term rate
of return on plan assets is based on a target allocation of assets, which is based on a goal of earning the highest rate of return while maintaining risk at
acceptable levels. Our projected long-term rate of return is slightly higher than some market indices due to the active management of our plans’ assets, and is
supported by the historical returns on our plans’ assets. The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one
security class will not have an unduly detrimental impact on the entire portfolio. We regularly review actual asset allocation and the pension plans’ investments
are periodically rebalanced to the targeted allocation when considered appropriate.
The combined UAL defined benefit pension plans’ assets consist of return generating investments and risk mitigating investments which are held through
direct ownership or through interests in common collective trusts. Return generating investments include primarily equity securities, fixed-income securities
and alternative investments (e.g. private equity and hedge funds). Risk mitigating investments include primarily U.S. government and investment grade
corporate fixed-income securities. The allocation of assets was as follows at December 31, 2011:
Percent of
Total
Expected Long-
Term
Rate of Return
Equity securities 46% 10%
Fixed-income securities 29 6
Alternatives 20 7
Other 5 4
Pension expense increases as the expected rate of return on plan assets decreases. When calculating pension expense for 2012, we assume that our plans’ assets
will generate a weighted-average long-term rate of return of 7.75%. Lowering the expected long-term rate of return on plan assets by an additional 50 basis
points (from 7.75% to 7.25%) would increase estimated 2012 pension expense by approximately $8 million.
Future pension obligations for the Continental plans were discounted using a weighted average rate of 5.13% at December 31, 2011. UAL selected the 2011
discount rate for each of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2011 that would provide the necessary cash flows
to match the projected benefit payments.
UAL selected the 2011 discount rate for each of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2011, that would provide
the necessary cash flows to match projected benefit payments. Prior to 2011, the discount rate was selected using a cash flow matching technique where
projected benefit payments were matched to a yield curve based on high quality bond yields as of the measurement date. This change increased the discount
rate which lowered the present value of the liability by approximately $325 million.
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