Alcoa 2015 Annual Report Download - page 110

exceed the cash flows needed to satisfy the Company’s plans’ obligations multiple times. In 2015, 2014, and 2013, the
discount rate used to determine benefit obligations for U.S. pension and other postretirement benefit plans was 4.29%,
4.00%, and 4.80%, respectively. The impact on the liabilities of a change in the discount rate of 1/4 of 1% would be
approximately $430 and either a charge or credit of approximately $15 to after-tax earnings in the following year.
In conjunction with the annual measurement of the funded status of Alcoa’s pension and other postretirement benefit
plans at December 31, 2015, management elected to change the manner in which the interest cost component of net
periodic benefit cost will be determined in 2016 and beyond. Previously, the interest cost component was determined
by multiplying the single equivalent rate described above and the aggregate discounted cash flows of the plans’
projected benefit obligations. Under the new methodology, the interest cost component will be determined by
aggregating the product of the discounted cash flows of the plans’ projected benefit obligations for each year and an
individual spot rate (referred to as the “spot rate” approach). This change will result in a lower interest cost component
of net periodic benefit cost under the new methodology compared to the previous methodology of approximately $100
($65 after-tax) in 2016. Management believes this new methodology, which represents a change in an accounting
estimate, is a better measure of the interest cost as each year’s cash flows are specifically linked to the interest rates of
bond payments in the same respective year.
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 2015, 2014, and 2013, management used 7.75%, 8.00%, and 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.
These rates fell within the respective range of the 20-year moving average of actual performance and the expected
future return developed by asset class. In 2015, the decrease of 25 basis points in the expected long-term rate of return
was due to a decrease in the 20-year moving average of actual performance. For 2016, management anticipates that
7.75% will be the expected long-term rate of return.
A change in the assumption for the expected long-term rate of return on plan assets of 1/4 of 1% would impact after-tax
earnings by approximately $20 for 2015.
During 2014, an independent U.S. organization that publishes standard mortality rates based on statistical analysis and
studies issued updated mortality tables. The rates within these standard tables are used by actuaries as one of the many
assumptions when measuring a company’s projected benefit obligation for pension and other postretirement benefit
plans. The funded status of all of Alcoa’s pension and other postretirement benefit plans are measured as of
December 31 each calendar year. During the measurement process at the end of 2014, Alcoa, with the assistance of an
external actuary, considered the rates in the new mortality tables, along with specific data related to Alcoa’s retiree
population, to develop the mortality-related assumptions used to measure the benefit obligation of various U.S. benefit
plans. As a result, Alcoa recognized a charge of approximately $100 ($65 after-tax) in other comprehensive loss related
to the updated mortality assumptions.
In 2015, a net charge of $10 (after-tax and noncontrolling interest) was recorded in other comprehensive loss, primarily
due to the unfavorable performance of the plan assets, which was mostly offset by the amortization of actuarial losses
and a 30 basis point increase in the discount rate. In 2014, a net charge of $69 (after-tax and noncontrolling interest)
was recorded in other comprehensive loss, primarily due to an 80 basis point decrease in the discount rate and a change
in the mortality assumption (see above), which was mostly offset by the favorable performance of the plan assets and
the amortization of actuarial losses. In 2013, a net benefit of $531 (after-tax and noncontrolling interest) was recorded
in other comprehensive loss, primarily due to a 65 basis point increase in the discount rate and the amortization of
actuarial losses.
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