Xerox 2008 Annual Report Download - page 80

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
Plan Amendment
In October 2008, we amended our domestic retiree health benefit
plan to eliminate the subsidy currently paid to current and future
Medicare-eligible retirees effective January 1, 2010. The
amendment resulted in a net decrease of approximately $225 in
the benefit obligation and a corresponding after-tax increase to
shareholders equity. The amendment is also expected to decrease
pre-tax net retiree health benefit expense by approximately $50 in
2009. Retiree health expense may also be impacted by other
factors, including but not limited to changes in the discount rate
and health care costs in the future.
Plan Assets
Current Allocation and Investment Targets
As of the 2008 and 2007 measurement dates, the global pension
plan assets were $6.9 billion and $9.8 billion, respectively. These
assets were invested among several asset classes. None of the
investments include debt or equity securities of Xerox Corporation.
The amount and percentage of assets invested in each asset class
as of December 31, 2008 and 2007 is shown below:
Asset Value
Percentage of
Total Assets
2008 2007 2008 2007
Asset Category
Equity securities $3,042 $5,060 44% 52%
Debt securities 3,296 3,973 47 40
Real estate 465 720 77
Other 120 52 21
Total $6,923 $9,805 100% 100%
Our pension plan assets at December 31, 2008, were as follows:
U.S. $3.2 billion; U.K. $2.2 billion; Canada $0.4 billion and Other
$1.1 billion.
Investment strategy: The target asset allocations for our
worldwide plans for 2008 were 50% invested in equities, 42%
invested in fixed income, 7% invested in real estate and 1%
invested in Other. The target asset allocations for our worldwide
plans for 2007 were 50% invested in equities, 42% invested in
fixed income, 7% invested in real estate and 1% invested in Other.
We employ a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the
long-term return of plan assets for a prudent level of risk. The
intent of this strategy is to minimize plan expenses by exceeding
the interest growth in long-term plan liabilities. Risk tolerance is
established through careful consideration of plan liabilities, plan
funded status, and corporate financial condition. This
consideration involves the use of long-term measures that address
both return and risk. The investment portfolio contains a diversified
blend of equity and fixed income investments. Furthermore, equity
investments are diversified across U.S. and non-U.S. stocks as well
as growth, value and small and large capitalizations. Other assets
such as real estate, private equity, and hedge funds are used to
improve portfolio diversification. Derivatives may be used to hedge
market exposure in an efficient and timely manner; however,
derivatives may not be used to leverage the portfolio beyond the
market value of the underlying investments. Investment risks and
returns are measured and monitored on an ongoing basis through
annual liability measurements and quarterly investment portfolio
reviews.
Expected long-term rate of return: We employ a “building block”
approach in determining the long-term rate of return for plan
assets. Historical markets are studied and long-term relationships
between equities and fixed income are assessed. Current market
factors such as inflation and interest rates are evaluated before
long-term capital market assumptions are determined. The long-
term portfolio return is established giving consideration to
investment diversification and rebalancing. Peer data and
historical returns are reviewed periodically to assess
reasonableness and appropriateness.
Contributions: We expect to contribute approximately $108 to
our worldwide defined benefit pension plans and approximately
$105 to our retiree health benefit plans in 2009. The 2009
expected pension plan contributions do not include any planned
contribution for our domestic tax-qualified defined benefit plans
because none are required due to the availability of a credit
balance which results from funding prior to 2008 in excess of
minimum requirements. This credit balance can be utilized in lieu
of any 2009 pension contributions. However, once the January 1,
2009 actuarial valuations and projected results as of the end of the
2009 measurement year are available, the desirability of
additional contributions will be reassessed. Based on these results,
we may voluntarily decide to contribute to these plans. In 2008
and 2007, after making this assessment, we contributed $165 and
$158, respectively, to our domestic tax qualified plans to make
them 100% funded on a current liability basis under the ERISA
funding rules.
Estimated future benefit payments: The following benefit
payments, which reflect expected future service, as appropriate,
are expected to be paid during the following years:
Pension
Benefits
Retiree
Health
2009 $ 557 $105
2010 606 99
2011 603 99
2012 636 98
2013 633 97
Years 2014-2018 3,300 445
78 Xerox 2008 Annual Report