Canon 2014 Annual Report Download - page 68

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Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Years ended December 31 Japanese plans Foreign plans
2014 2013 2012 2014 2013 2012
Discount rate 1.6% 1.8% 1.9% 3.9% 3.6% 4.6%
Assumed rate of increase in future compensation levels 3.0% 3.0% 3.0% 2.3% 2.2% 2.4%
Expected long-term rate of return on plan assets 3.1% 3.1% 3.1% 4.9% 5.2% 5.4%
Canon determines the expected long-term rate of return
based on the expected long-term return of the various asset
categories in which it invests. Canon considers the current
expectations for future returns and the actual historical
returns of each plan asset category.
Plan assets
Canon’s investment policies are designed to ensure ade-
quate plan assets are available to provide future payments
of pension benefits to eligible participants. Taking into
account the expected long-term rate of return on plan
assets, Canon formulates a “model” portfolio comprised of
the optimal combination of equity securities and debt secu-
rities. Plan assets are invested in individual equity and debt
securities using the guidelines of the “model” portfolio in
order to produce a total return that will match the expect-
ed return on a mid-term to long-term basis. Canon evalu-
ates the gap between expected return and actual return
of invested plan assets on an annual basis to determine if
such differences necessitate a revision in the formulation of
the “model” portfolio. Canon revises the “model” portfolio
when and to the extent considered necessary to achieve the
expected long-term rate of return on plan assets.
Canon’s model portfolio for Japanese plans consists
of three major components: approximately 20% is invest-
ed in equity securities, approximately 55% is invested in
debt securities, and approximately 25% is invested in other
investment vehicles, primarily consisting of investments in
life insurance company general accounts.
Outside Japan, investment policies vary by country, but
the long-term investment objectives and strategies remain
consistent. Canon’s model portfolio for foreign plans has
been developed as follows: approximately 30% is invest-
ed in equity securities, approximately 50% is invested in
debt securities, and approximately 20% is invested in other
investment vehicles, primarily consisting of investments in
real estate assets.
The equity securities are selected primarily from stocks
that are listed on the securities exchanges. Prior to invest-
ing, Canon has investigated the business condition of the
investee companies, and appropriately diversified invest-
ments by type of industry and other relevant factors. The
debt securities are selected primarily from government
bonds, public debt instruments, and corporate bonds. Prior
to investing, Canon has investigated the quality of the issue,
including rating, interest rate, and repayment dates, and
has appropriately diversified the investments. Pooled funds
are selected using strategies consistent with the equity and
debt securities described above. As for investments in life
insurance company general accounts, the contracts with
the insurance companies include a guaranteed interest rate
and return of capital. With respect to investments in foreign
investment vehicles, Canon has investigated the stability
of the underlying governments and economies, the market
characteristics such as settlement systems and the taxation
systems. For each such investment, Canon has selected the
appropriate investment country and currency.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS