United Airlines 2012 Annual Report Download - page 61

Table of Contents
Future pension obligations for the Continental plans were discounted using a weighted average rate of 4.25% at December 31, 2012. UAL selected the 2012
discount rate for each of its plans by using a hypothetical portfolio of high quality bonds at December 31, 2012 that would provide the necessary cash flows
to match the projected benefit payments.
The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 50 basis points (from 4.25% to
3.75%) would increase the pension liability at December 31, 2012 by approximately $457 million and increase the estimated 2013 pension expense by
approximately $55 million.
Future changes in plan asset returns, plan provisions, assumed discount rates, pension funding law and various other factors related to the participants in our
pension plans will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.
Actuarial gains or losses are triggered by changes in assumptions or experience that differ from the original assumptions. Under the applicable accounting
standards for defined benefit pension plans, those gains and losses are not required to be recognized currently as pension benefit expense, but instead may be
deferred as part of accumulated other comprehensive income and amortized into expense over the average remaining service life of the covered active employees.
All gains and losses in accumulated other comprehensive income are amortized to expense over the remaining years of service of the covered active employees.
At December 31, 2012 and 2011, UAL had unrecognized actuarial losses for pension benefit plans of $826 million and $231 million, respectively, recorded
in accumulated other comprehensive income.
Other Postretirement Benefit Plan Accounting. United’s postretirement plan provides certain health care benefits, primarily in the U.S., to retirees and
eligible dependents, as well as certain life insurance benefits to certain retirees reflected as “Other Benefits.” Continental’s retiree medical programs permit
retirees who meet certain age and service requirements to continue medical coverage between retirement and Medicare eligibility. Eligible employees are required
to pay a portion of the costs of their retiree medical benefits, which in some cases may be offset by accumulated unused sick time at the time of their
retirement. Plan benefits are subject to co-payments, deductibles, and other limits as described in the plans.
The Company accounts for other postretirement benefits by recognizing the difference between plan assets and obligations, or the plan’s funded status, in its
financial statements. Other postretirement benefit expense is recognized on an accrual basis over employees’ approximate service periods and is generally
calculated independently of funding decisions or requirements. The Company has not been required to pre-fund its plan obligations, which has resulted in a
significant net obligation, as discussed below.
UAL’s benefit obligation was $2.7 billion and $2.5 billion for the other postretirement benefit plans at December 31, 2012 and 2011, respectively. The year-
over-year increase is due to changes in the assumptions used to value the obligation for UAL’s plan, such as the decrease in the discount rate.
The calculation of other postretirement benefit expense and obligations requires the use of a number of assumptions, including the assumed discount rate for
measuring future payment obligations and the health care cost trend rate. UAL determines the appropriate discount rate for each of its plans based on current
rates on high quality corporate bonds that would generate the cash flow necessary to pay plan benefits when due. United’s weighted average discount rate to
determine its benefit obligations as of December 31, 2012 was 4.13%, as compared to 4.93% for December 31, 2011. Continental’s weighted average discount
rate to determine its benefit obligations as of December 31, 2012 was 3.97%, as compared to 4.78% for December 31, 2011. The health care cost trend rate
assumed by United and Continental for 2012 was 7%, as compared to assumed trend rate for 2013 of 6.8%, declining to 5% in 2020. A 1% increase in
assumed health care trend rates would increase UAL’s total service and interest cost for the year ended December 31, 2012 by $22 million; whereas, a 1%
decrease in assumed health care trend rates would decrease UAL’s total service and interest cost for the year ended December 31, 2012 by $18 million,
respectively. A one percentage point decrease in the weighted average discount rate would increase UAL’s postretirement benefit liability by approximately $336
million and increase the estimated 2012 benefits expense by approximately $23 million.
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