Unum 2014 Annual Report Download - page 38

36 UNUM • 2014 ANNUAL REPORT
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The assumptions chosen for our pension and OPEB plans are reviewed annually, using a December 31 measurement date for each of
our plans unless we are required to perform an interim remeasurement. The discount rate, expected long-term rate of return, and mortality
rate assumptions have the most significant effect on our net periodic benefit costs associated with these plans. In addition to the effect of
changes in our assumptions, the net periodic cost or benefit obligation under our pension and OPEB plans may change due to factors such
as plan amendments, actual experience being different from our assumptions, special benefits to terminated employees, and/or changes
in benefits provided under the plans.
• Discount rate — This interest assumption is based on the yield derived from a portfolio of high quality fixed income corporate debt
instruments that reasonably match the timing and amounts of projected future benefits for each of our retirement-related benefit
plans. The rate is determined at the measurement date. A lower discount rate increases the present value of benefit obligations and
increases our net periodic benefit cost.
• Long-term rate of return — This assumption is our best estimate of the average annual assumed return on plan assets until
current benefits are paid. The market-related value as it relates to our estimate of long-term rate of return equals the fair value of plan
assets, determined as of the measurement date. The return on plan assets recognizes all asset gains and losses, including changes
in fair value, through the measurement date. Our expectations for the future investment returns of the asset categories are based
on a combination of historical market performance, evaluations of investment forecasts obtained from external consultants and
economists, and current market yields. The expected return for the total portfolio is calculated based on the plan’s current asset
holdings. 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. A lower long-term rate of return on plan assets increases our
net periodic benefit cost.
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. We believe our investment portfolios are well diversified by asset class and sector, with no
potential risk concentrations in any one category. See Note 9 of the “Notes to Consolidated Financial Statements” contained herein for
further discussion of the investment portfolios for our plans.
• Mortality rate — This assumption reflects our best estimate, as of the measurement date, of the life expectancies of plan participants
in order to determine the expected length of time for benefit payments. We derive our assumptions from industry mortality tables.
The Society of Actuaries released updated mortality tables during the fourth quarter of 2014 which show that longevity in the United
States is increasing, thereby establishing a new benchmark for mortality rates of private pension plan participants in the United
States. Our mortality assumptions, which reflect the updated mortality tables, increased the benefit obligation of our U.S. defined
benefit pension plans by approximately $125 million and of our OPEB plan by approximately $14 million. These updated tables do not
impact the calculation of the benefit obligation for our U.K. defined benefit pension plan.