AIG 2008 Annual Report Download - page 314

At December 31, Non-U.S. Plans* U.S. Plans Non-U.S. Plans* U.S. Plans
Pension Postretirement
2007
Discount rate ............................ 2.25 - 10.75% 6.00% 4.00 - 5.75% 6.00%
Rate of compensation increase ............... 1.50 - 10.00% 4.25% 3.00% 4.25%
Expected return on assets ................... 2.50 - 10.50% 8.00% N/A N/A
2006
Discount rate ............................ 1.75 - 12.00% 5.50% 4.50 - 5.50% 5.50%
Rate of compensation increase ............... 1.50 - 10.00% 4.25% 2.50 - 3.00% 4.25%
Expected return on assets ................... 2.50 - 13.50% 8.00% N/A N/A
*The benefit obligations for non-U.S. plans reflect those assumptions that were most appropriate for the local
economic environments of the subsidiaries providing such benefits.
Discount Rate Methodology
The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates
derived from the unadjusted Citigroup Pension Discount Curve at December 31, 2008 and 2007 and an equivalent
single discount rate was derived that resulted in the same liability. This single discount rate was rounded to the
nearest 25 basis points, namely 6.0 percent and 6.5 percent at December 31, 2008 and 2007, respectively. The rates
applied to other U.S. plans were not significantly different from those discussed above.
In general, the discount rate for non-U.S. pension plans are selected by reference to high quality corporate
bonds in developed markets, or local government bonds where developed markets are not as robust or nonexistent.
Both funded and unfunded plans for Japan represent over 71 percent and 62 percent of the liabilities of AIG’s
non-U.S. pension plans at December 31, 2008 and 2007, respectively. The discount rate of 2.0 percent for Japan was
selected by reference to the published Moody’s/S&P AA Corporate Bond Universe at the measurement date having
regard to the duration of the plans’ liabilities.
Plan Assets
The investment strategy with respect to assets relating to AIG’s U.S. pension plans is designed to achieve
investment returns that will fully fund the pension plans over the long term, while limiting the risk of under funding
over shorter time periods and defray plan expenses. Accordingly, the asset allocation is targeted to maximize the
investment rate of return while managing various risk factors, including the risk and rewards profile indigenous to
each asset class. Plan assets are periodically monitored by both the investment committee of AIG’s Retirement
Board and the investment managers, which can entail rebalancing the plans’ assets within pre-approved ranges, as
deemed appropriate. For example, as a result of the disruption in the financial markets, AIG opted to terminate the
pension plans’ securities lending activities in 2008, to mitigate losses.
The expected long-term rates of return for AIG’s U.S. pension plans were 7.75 and 8.00 percent for the years
ended December 31, 2008 and 2007, respectively. These rates of return are an aggregation of expected returns
within each asset category that, when combined with AIG’s contribution to the plan, are expected to maintain the
plan’s ability to meet all required benefit obligations. The return with respect to each asset class was developed
based on a building block approach that considers both historical returns, current market conditions, asset volatility
and the expectations for future market returns. While the assessment of the expected rate of return is long-term and
thus not expected to change annually, significant changes in investment strategy or economic conditions may
warrant such a change.
Non-U.S. pension plan assets are held in various trusts and are similarly invested in equity, debt and other
investments to maximize the long-term return on assets for a given level of risk. Other investments for both the
U.S. and Non-U.S. plans includes cash, insurance contracts, real estate, private equity, related party group annuity
308 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)