Unum 2009 Annual Report Download - page 39

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Unum 2009 Annual Report
Our expectations for the future investment returns of the asset categories are based on a combination of historical market performance
and evaluations of investment forecasts obtained from external consultants and economists. The methodology underlying the return
assumption included the various elements of the expected return for each asset class such as long-term rates of return, volatility of returns,
and the correlation of returns between various asset classes. The expected return for the total portfolio is calculated based on the plan’s
strategic asset allocation. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic
asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities,
plan funded status, and corporate financial condition.
The long-term rate of return on assets used in the net periodic pension costs for our U.S. qualified defined benefit pension plan for
2010 and 2009 was 7.50 percent for both years. The long-term rate of return on asset assumption used for 2010 and 2009 for our U.K.
pension plan was 6.90 percent and 7.20 percent, respectively, and for our OPEB plan, 5.75 percent for both years. The actual rate of return
on plan assets is determined based on the fair value of the plan assets at the beginning and the end of the period, adjusted for contributions
and benefit payments.
Changing the expected long-term rate of return on the plan assets by +/-50 basis points would have changed our 2009 pension plan
expense by approximately $4.6 million before tax, but our OPEB plan expense would not change. A lower rate of return on plan assets
increases our expense.
Benefit Obligation and Fair Value of Plan Assets
The market-related value equals the fair value of assets, determined as of the measurement date. The expected return on assets
fully recognizes all asset gains and losses, including changes in fair value, through the measurement date.
During 2009, the fair value of our plan assets in our U.S. qualified defined benefit pension plan increased $230.4 million, or approximately
35.0 percent. The fair value of plan assets for our U.K. pension plan increased £17.4 million, or approximately 21.1 percent, during 2009.
Although the effect of these increases had no impact on our 2009 net periodic pension costs, the favorable rate of return on plan assets
in 2009 has a favorable impact on our net periodic pension costs for 2010. We expect that our 2010 pension costs will be lower than our
pension costs in 2009. We believe our assumptions appropriately reflect the impact of the current economic environment.
Our pension and OPEB plans have an aggregate unrecognized net actuarial loss of $514.9 million and an unrecognized prior service
credit of $10.7 million, which together represent the cumulative liability and asset gains and losses as well as the portion of prior service
credits that have not been recognized in pension expense. As of December 31, 2009, the unrecognized net loss for these two items combined
was approximately $504.2 million. The decrease relative to 2008 is primarily due to the favorable rate of return on plan assets in 2009.
The unrecognized gains or losses are amortized as a component of the net benefit cost. Our 2009, 2008, and 2007 pension and OPEB
expense includes $40.2 million, $10.6 million, and $15.3 million, respectively, of amortization of the unrecognized net actuarial loss and
prior service credit. The higher amortization in 2009 resulted primarily from the increase in the unrecognized net actuarial loss during
2008 due to the unfavorable rate of return on plan assets for our U.S. pension plans. The unrecognized net actuarial loss for our pension
plans, which is $509.3 million at December 31, 2009, will be amortized over the average future working life of pension plan participants,
currently estimated at 11 years for U.S. participants and 15 years for U.K. participants. The unrecognized net actuarial loss of $5.6 million
for our OPEB plan will be amortized over the average future working life of OPEB plan participants, currently estimated at 8 years, to the
extent the loss is outside of a corridor established in accordance with GAAP. The corridor for the pension and OPEB plans is established
based on the greater of 10 percent of the plan assets or 10 percent of the benefit obligation. At December 31, 2009, none of the actuarial
loss was outside of the corridor for the OPEB plan.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $888.5 million at December 31, 2009, compared
to $658.1 million at year end 2008. This increase in fair value of plan assets and the effect of the plan contribution during 2009 lowered
our year end deficit funding level in the plan to $143.3 million as of December 31, 2009, compared to a deficit of $266.9 million as of
December 31, 2008. During February 2010, we made a voluntary contribution of $67.0 million to our U.S. qualified defined benefit
pension plan, thereby further reducing the deficit funding level.