Alcoa 2007 Annual Report Download - page 77

For pension benefits, in 2007, a credit of $419 ($268 after-tax)
was recorded in accumulated other comprehensive loss due to a
decrease in the accumulated benefit obligations as a result of a 25
basis point increase in the discount rate, which was partially offset
by plan amendments, and the recognition of actuarial losses and
prior service costs in accordance with SFAS 158. In 2006, a net
charge of $193 ($126 after-tax) was recorded in accumulated other
comprehensive loss comprised of a charge of $481 ($310 after-tax
and minority interests) due to the adoption of SFAS 158 and a
credit of $288 ($184 after-tax) due to the reduction in the
minimum pension liability, as a result of asset returns of 11% and
a decrease to the accumulated benefit obligations resulting from a
25 basis point increase in the discount rate.
For postretirement benefits, in 2007, a credit of $240 ($158
after-tax) was recorded in accumulated other comprehensive loss
due to a decrease in the accumulated benefit obligations as a
result of a 25 basis point increase in the discount rate, plan
amendments, and the recognition of actuarial losses and prior
service costs in accordance with SFAS 158. In addition, a credit of
$80 was recorded in accumulated other comprehensive loss due to
the reclassification of deferred taxes related to the Medicare Part
D prescription drug subsidy. In 2006, a charge of $872 ($567
after-tax) was recorded in accumulated other comprehensive loss
due to the adoption of SFAS 158.
In 2007, Alcoa recorded a curtailment charge of $2 and
curtailment income of $3 as a component of net periodic benefit
cost related to its pension benefits and postretirement benefits,
respectively. The curtailment charge of $2 was due to the con-
tribution of Alcoa’s soft alloy extrusion business to a newly-formed
soft alloy extrusion joint venture (see Note I for additional
information). The curtailment income of $3 consisted of income of
$7 due to the elimination of the retiree life insurance benefit for
certain U.S. employees who retire on or after April 1, 2008 and a
charge of $4 related to the contribution of Alcoa’s soft alloy
extrusion business to a newly-formed joint venture. Also in 2007,
Alcoa recorded a settlement credit of $2 as a component of net
periodic benefit cost related to its pension benefits due to sig-
nificant lump sum benefit payments.
The projected benefit obligation for all defined benefit pension
plans was $11,601 and $11,614 at December 31, 2007 and 2006,
respectively. The accumulated benefit obligation for all defined
benefit pension plans was $11,216 and $11,187 at December 31,
2007 and 2006, respectively.
The aggregate projected benefit obligation and fair value of
plan assets for the pension plans with benefit obligations in excess
of plan assets were $9,933 and $8,771, respectively, as of
December 31, 2007, and $11,365 and $9,817, respectively, as of
December 31, 2006. The aggregate accumulated benefit obligation
and fair value of plan assets with accumulated benefit obligations
in excess of plan assets were $9,550 and $8,771, respectively, as
of December 31, 2007, and $10,413 and $9,244, respectively, as
of December 31, 2006.
The unrecognized net actuarial loss for pension benefit plans at
December 31, 2007 of $1,385 has primarily resulted from the
overall decline in interest rates over the past six years. To the
extent those losses exceed certain thresholds, the excess will
continue to be recognized as prescribed under SFAS No. 87,
“Employers’ Accounting for Pensions” (SFAS 87). Generally,
these amounts are amortized over the estimated future service of
plan participants, which is 11 years.
The benefit obligation for postretirement benefit plans and net
amount recognized were $3,260 and $3,048, respectively, as of
December 31, 2007, and $3,511 and $3,312, respectively, as of
December 31, 2006. Of the net amount recognized, the current,
noncurrent and liabilities of operations held for sale amounts were
$295, $2,753 and $0, respectively, as of December 31, 2007, and
$354, $2,956, and $2, respectively, as of December 31, 2006.
Alcoa pays a portion of the prescription drug cost for eligible
retirees under certain of its postretirement benefit plans. These
benefits were determined to be actuarially equivalent to the
Medicare Part D prescription drug benefit of the Medicare Pre-
scription Drug, Improvement and Modernization Act of 2003. As a
result, the net periodic benefit cost for postretirement benefits for
the years ended December 31, 2007, 2006 and 2005 reflected a
reduction of $58, $53 and $24, respectively, related to the recog-
nition of the federal subsidy awarded under Medicare Part D.
Future net periodic postretirement benefit costs will be adjusted to
reflect the lower interest cost due to the reduction in the accumu-
lated postretirement benefit obligation resulting from the impact of
the federal subsidy. To the extent deferred gains and losses exceed
certain thresholds, the excess will continue to be recognized as
prescribed under SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (SFAS 106).
The unrecognized net actuarial loss for postretirement benefit
plans at December 31, 2007 of $784 primarily resulted from the
overall decline in interest rates over the past six years. To the
extent those losses exceed certain thresholds, the excess will
continue to be recognized as prescribed under SFAS 106. Gen-
erally, these amounts are amortized over the estimated future
service of plan participants, which is 11 years.
The four-year labor agreement between Alcoa and the United
Steelworkers that was ratified on June 22, 2006 required a
remeasurement of certain pension and postretirement benefit plans
liabilities due to plan amendments. The discount rate was updated
from the December 31, 2005 rate of 5.7% to 6.5% at May 31,
2006. The remeasurement resulted in a decrease in the pension
and postretirement obligations of $276 and $76, respectively. The
decrease in the liabilities reduces the plans’ unrecognized net
actuarial losses. To the extent that the unrecognized net actuarial
losses exceed certain thresholds, the excess will continue to be
recognized as prescribed under SFAS 87 and SFAS 106. Gen-
erally, these amounts are amortized over the estimated future
service of plan participants. The net periodic benefit cost
increases were $4 for pension and $23 for postretirement plans.
Other comprehensive income included $94 due to the reduction in
the minimum pension liability, primarily resulting from the
remeasurement of the plan liability.
Assumptions
Weighted average assumptions used to determine benefit obliga-
tions are as follows:
December 31, 2007 2006
Discount rate 6.20% 5.95%
Rate of compensation increase 4.00 4.00
The discount rate is determined using a yield curve model
developed by the company’s external actuaries. The plans’ pro-
jected benefit obligation cash flows are discounted using yields on
high quality corporate bonds to produce a single equivalent rate.
The plans’ cash flows have an average duration of 11 years. The
rate of compensation increase is based upon actual experience.
Weighted average assumptions used to determine the net
periodic benefit cost are as follows:
2007 2006 2005
Discount rate 5.95% 5.70% 6.00%
Expected long-term return on plan
assets 9.00 9.00 9.00
Rate of compensation increase 4.00 4.00 4.50
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