Xerox 2006 Annual Report Download - page 33

Pension and Post-retirement Benefit Plan
Assumptions: We sponsor pension plans in various forms
in several countries covering substantially all employees
who meet eligibility requirements. Post-retirement
benefit plans cover primarily U.S. employees for
retirement medical costs. Several statistical and other
factors that attempt to anticipate future events are used in
calculating the expense, liability and asset values related
to our pension and post-retirement benefit plans. These
factors include assumptions we make about the discount
rate, expected return on plan assets, rate of increase in
healthcare costs, the rate of future compensation
increases and mortality, among others. For purposes of
determining the expected return on plan assets, we utilize
a calculated value approach in determining the value of
the pension plan assets, as opposed to a fair market value
approach. The primary difference between the two
methods relates to a systematic recognition of changes in
fair value over time (generally two years) versus
immediate recognition of changes in fair value. Our
expected rate of return on plan assets is then applied to
the calculated asset value to determine the amount of the
expected return on plan assets to be used in the
determination of the net periodic pension cost. The
calculated value approach reduces the volatility in net
periodic pension cost that can result from using the fair
market value approach. The difference between the actual
return on plan assets and the expected return on plan
assets is added to, or subtracted from, any cumulative
differences that arose in prior years. This amount is a
component of the net actuarial (gain) loss and is subject
to amortization to net periodic pension cost over the
average remaining service lives of the employees
participating in the pension plan.
Total actuarial losses as of December 31, 2006 were
$1.6 billion, as compared to $1.9 billion at December 31,
2005. The change from December 31, 2005 relates to
improved asset returns as compared to expected returns
and an increase in the discount rate. The total actuarial
loss will be amortized in the future, subject to offsetting
gains or losses that will change the future amortization
amount. We have utilized a weighted average expected
rate of return on plan assets of 7.8% for 2006 expense,
8.0% for 2005 expense and 8.1% for 2004 expense, on a
worldwide basis. In estimating this rate, we considered
the historical returns earned by the plan assets, the rates
of return expected in the future and our investment
strategy and asset mix with respect to the plans’ funds.
The weighted average expected rate of return on plan
assets we will utilize to calculate our 2007 expense will
be 7.6%.
Another significant assumption affecting our
pension and post-retirement benefit obligations and the
net periodic pension and other post-retirement benefit
cost is the rate that we use to discount our future
anticipated benefit obligations. The discount rate reflects
the current rate at which the pension liabilities could be
effectively settled considering the timing of expected
payments for plan participants. In estimating this rate, we
consider rates of return on high quality fixed-income
investments included in various published bond indexes,
adjusted to eliminate the effects of call provisions and
differences in the timing and amounts of cash outflows
related to the bonds. In the U.S. and the U.K., which
comprise approximately 80% of our projected benefit
obligations, we consider the Moody’s Aa Corporate Bond
Index and the International Index Company’s iBoxx
Sterling Corporate AA Cash Bond Index, respectively in
the determination of the appropriate discount rate
assumptions. The weighted average rate we will utilize to
measure our pension obligation as of December 31, 2006
and calculate our 2007 expense will be 5.3%, which is an
increase from 5.2% used in determining 2006 expense.
Assuming settlement losses in 2007 are consistent with
2006; our 2007 net periodic pension cost is expected to
be approximately $50 million lower than 2006 primarily
as a result of plan design changes and an increase in the
discount rate.
On a consolidated basis, we recognized net periodic
pension cost of $425 million, $414 million, and $421
million for the years ended December 31, 2006, 2005 and
2004, respectively. The costs associated with our defined
contribution plans, which are included in net periodic
pension cost, were $70 million, $71 million and $69
million for the years ended December 31, 2006, 2005 and
2004, respectively. Pension cost is included in several
income statement components based on the related
underlying employee costs. Pension and post-retirement
benefit plan assumptions are included in Note 14 –
Employee Benefit Plans to the Consolidated Financial
Statements. Holding all other assumptions constant, a
0.25% increase or decrease in the discount rate would
change the 2007 projected net periodic pension cost by
approximately $33 million. Likewise, a 0.25% increase
or decrease in the expected return on plan assets would
change the 2007 projected net periodic pension cost by
approximately $19 million.
Refer to Note 1 – “New Accounting Standards and
Accounting Changes” to the Consolidated Financial
Statements for further information regarding adoption of
SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, on
amendment of FASB Statements No. 87, 88, 106 and
132(R).”
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