Alcoa 2013 Annual Report Download - page 162

Assumptions
Weighted average assumptions used to determine benefit obligations for U.S. pension and other postretirement benefit
plans were as follows (assumptions for non-U.S plans did not differ materially):
December 31, 2013 2012
Discount rate 4.80% 4.15%
Rate of compensation increase 3.5 3.5
The discount rate is determined using a Company-specific yield curve model (above-median) developed with the
assistance of an external actuary. The cash flows of the plans’ projected benefit obligations are discounted using a
single equivalent rate derived from yields on high quality corporate bonds, which represent a broad diversification of
issuers in various sectors, including finance and banking, consumer products, transportation, insurance, and
pharmaceutical, among others. The yield curve model parallels the plans’ projected cash flows, which have an average
duration of 10 years, and the underlying cash flows of the bonds included in the model exceed the cash flows needed to
satisfy the Company’s plans’ obligations multiple times.
The rate of compensation increase is based upon actual experience. For 2014, the rate of compensation increase will be
3.5%, which approximates the five-year average.
Weighted average assumptions used to determine net periodic benefit cost for U.S. pension and other postretirement
benefit plans were as follows (assumptions for non-U.S plans did not differ materially):
2013 2012 2011
Discount rate* 4.15% 4.90% 5.75%
Expected long-term rate of return on plan assets 8.50 8.50 8.50
Rate of compensation increase 3.50 3.50 3.50
* In all periods presented, the respective discount rates were used to determine net periodic benefit cost for most U.S.
pension plans for the full annual period. However, the discount rates for a limited number of plans were updated
during 2013 and 2011 to reflect the remeasurement of these plans due to new union labor agreements, settlements,
and/or curtailments. The updated discount rates used were not significantly different from the discount rates
presented.
The expected long-term rate of return on plan assets is generally applied to a five-year market-related value of plan
assets (a four-year average or the fair value at the plan measurement date is used for certain non-U.S. plans). The
process used by management to develop this assumption is one that relies on a combination of historical asset return
information and forward-looking returns by asset class. As it relates to historical asset return information, management
focuses on the annual, 10-year moving, and 20-year moving averages when developing this assumption. Management
also incorporates expected future returns on current and planned asset allocations using information from various
external investment managers and consultants, as well as management’s own judgment.
For 2013, 2012, and 2011, management used 8.50% as its expected long-term rate of return, which was based on the
prevailing and planned strategic asset allocations, as well as estimates of future returns by asset class. This rate falls
within the respective range of the 20-year moving average of actual performance and the expected future return
developed by asset class. For 2014, management determined that 8.00% will be the expected long-term rate of return.
The decrease of 50 basis points in the expected long-term rate of return is due to a combination of a decrease in the 20-
year moving average of actual performance and lower future expected market returns.
Assumed health care cost trend rates for U.S. other postretirement benefit plans were as follows (assumptions for non-
U.S plans did not differ materially):
2013 2012 2011
Health care cost trend rate assumed for next year 5.5% 6.0% 6.5%
Rate to which the cost trend rate gradually declines 4.5% 4.5% 5.0%
Year that the rate reaches the rate at which it is assumed to remain 2017 2017 2016
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