Alcoa 2014 Annual Report Download - page 171

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):
2014 2013 2012
Health care cost trend rate assumed for next year 5.5% 5.5% 6.0%
Rate to which the cost trend rate gradually declines 4.5% 4.5% 4.5%
Year that the rate reaches the rate at which it is assumed to remain 2018 2017 2017
The assumed health care cost trend rate is used to measure the expected cost of gross eligible charges covered by
Alcoa’s other postretirement benefit plans. For 2015, a 5.5% trend rate will be used, reflecting management’s best
estimate of the change in future health care costs covered by the plans. The plans’ actual annual health care cost trend
experience over the past three years has ranged from (7.5)% to 4.0%. Management does not believe this three-year
range is indicative of expected increases for future health care costs over the long-term.
Assumed health care cost trend rates have an effect on the amounts reported for the health care plan. A one-percentage
point change in these assumed rates would have the following effects:
1%
increase
1%
decrease
Effect on other postretirement benefit obligations $115 $(125)
Effect on total of service and interest cost components 6 (6)
Plan Assets
Alcoa’s pension plans’ investment policy and weighted average asset allocations at December 31, 2014 and 2013, by
asset class, were as follows:
Plan assets
at
December 31,
Asset class Policy range 2014 2013
Equities 20–55% 33% 37%
Fixed income 25–55% 45 41
Other investments 15–35% 22 22
Total 100% 100%
The principal objectives underlying the investment of the pension plans’ assets are to ensure that Alcoa can properly
fund benefit obligations as they become due under a broad range of potential economic and financial scenarios,
maximize the long-term investment return with an acceptable level of risk based on such obligations, and broadly
diversify investments across and within the capital markets to protect asset values against adverse movements. Specific
objectives for long-term investment strategy include reducing the volatility of pension assets relative to pension
liabilities and achieving risk factor diversification across the balance of the asset portfolio. A portion of the assets are
matched to the interest rate profile of the benefit obligation through long duration fixed income investments and
exposure to broad equity risk has been decreased and diversified through investments in discretionary and systematic
macro hedge funds, long/short equity hedge funds, and global and emerging market equities. Investments are further
diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large
number of external investment managers are used to gain broad exposure to the financial markets and to mitigate
manager-concentration risk.
Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
and other applicable laws and regulations. The use of derivative instruments is permitted where appropriate and
necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not
significant when compared to the overall investment portfolio.
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