Albertsons 2010 Annual Report Download - page 66

interest rate specifically applicable to the timing of each respective cash flow. The model totals the present
values of all cash flows and calculates the equivalent weighted average discount rate by imputing the sin-
gular interest rate that equates the total present value with the stream of future cash flows. This resulting
weighted average discount rate is then used in evaluating the final discount rate to be used by the
Company.
(3) Expected long-term return on plan assets is estimated by asset class and is generally based on widely-
accepted capital market principles, long-term return analysis for global fixed income and equity markets,
the active total return-oriented portfolio management style as well as the diversification needs and rebal-
ancing characteristics of the plan. Long-term trends are evaluated relative to market factors such as infla-
tion, interest rates and fiscal and monetary policies in order to assess the capital market assumptions.
For those retirees whose health plans provide for variable employer contributions, the assumed healthcare cost
trend rate used in measuring the accumulated postretirement benefit obligation before and after age 65 was
8.0 percent and 8.5 percent, respectively, as of February 27, 2010. The assumed healthcare cost trend rate for
retirees before and after age 65 will decrease by 0.5 percent each year for the next six and seven years,
respectively, until it reaches the ultimate trend rate of five percent. For those retirees whose health plans
provide for a fixed employer contribution rate, a healthcare cost trend is not applicable. The healthcare cost
trend rate assumption has a significant impact on the amounts reported. For example, a 100 basis point change
in the trend rate would impact the Company’s accumulated postretirement benefit obligation as of the end of
fiscal 2010 by approximately $10 and the service and interest cost by approximately $1 for fiscal 2011.
Pension Plan Assets
Plan assets are held in trust and invested in separately managed accounts and other commingled investment
vehicles holding domestic and international equity securities, domestic fixed income securities and other
investment classes. The Company employs a total return 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. Alternative
investments may also be used to enhance risk-adjusted long-term returns while improving portfolio diversifi-
cation. Risk management is accomplished through diversification across asset classes, multiple investment
manager portfolios and both general and portfolio-specific investment guidelines. Risk tolerance is established
through careful consideration of the plan liabilities, plan funded status and the Company’s financial condition.
This asset allocation policy mix is reviewed annually and actual versus target allocations are monitored
regularly and rebalanced on an as-needed basis. Plan assets are invested using a combination of active and
passive investment strategies. Passive, or “indexed” strategies, attempt to mimic rather than exceed the
investment performance of a market benchmark. The plan’s active investment strategies employ multiple
investment management firms. Managers within each asset class cover a range of investment styles and
approaches and are combined in a way that controls for capitalization, and style biases (equities) and interest
rate exposures (fixed income) versus benchmark indices while focusing primarily on security selection as a
means to add value. Monitoring activities to evaluate performance against targets and measure investment risk
take place on an ongoing basis through annual liability measurements, periodic asset/liability studies and
quarterly investment portfolio reviews.
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