Chevron 2009 Annual Report Download - page 64

62 Chevron Corporation 2009 Annual Report
FS-PB
Assumptions The following weighted-average assumptions were used to determine benefit obligations and net periodic benefit costs
for years ended December 31:
Pension Benefits
2009 2008 2007 Other Benefits
U.S. Int’l. U.S. Int’l. U.S. Int’l. 2009 2008 2007
Assumptions used to determine
benefit obligations
Discount rate 5.3% 6.8% 6.3% 7.5 % 6.3% 6.7% 5.9% 6.3% 6.3%
Rate of compensation increase
4.5% 6.3% 4.5% 6.8% 4.5% 6.4% N/A 4.0% 4.5%
Assumptions used to determine
net periodic benefit cost
Discount rate 6.3% 7.5% 6.3% 6.7% 5.8% 6.0% 6.3% 6.3% 5.8%
Expected return on plan assets
7.8% 7.5% 7.8% 7. 4 % 7.8% 7.5% N/A N/A N/A
Rate of compensation increase
4.5% 6.8% 4.5% 6.4% 4.5% 6.1% N/A 4.5% 4.5%
Expected Return on Plan Assets The company’s estimated
long-term rates of return on pension assets are driven pri-
marily by actual historical asset-class returns, an assessment
of expected future performance, advice from external actu-
arial firms and the incorporation of specific asset-class risk
factors. Asset allocations are periodically updated using pen-
sion plan asset/liability studies, and the company’s estimated
long-term rates of return are consistent with these studies.
There have been no changes in the expected long-term
rate of return on plan assets since 2002 for U.S. plans, which
account for 69 percent of the company’s pension plan assets.
At December 31, 2009, the estimated long-term rate of
return on U.S. pension plan assets was 7.8 percent.
The market-related value of assets of the major U.S. pen-
sion plan used in the determination of pension expense was
based on the market values in the three months preceding
the year-end measurement date, as opposed to the maximum
allowable period of five years under U.S. accounting rules.
Management considers the three-month time period long
enough to minimize the effects of distortions from day-to-
day market volatility and still be contemporaneous to the
end of the year. For other plans, market value of assets as of
year-end is used in calculating the pension expense.
Discount Rate The discount rate assumptions used to deter-
mine U.S. and international pension and postretirement
benefit plan obligations and expense reflect the prevailing
rates available on high-quality, fixed-income debt instruments.
At December 31, 2009, the company selected a 5.3 percent
discount rate for the U.S. pension plan and 5.8 percent for
the U.S. postretirement benefit plan. This rate was based on
a cash flow analysis that matched estimated future benefit
payments to the Citigroup Pension Discount Yield Curve
as of year-end 2009. The discount rates at the end of 2008
and 2007 were 6.3 percent for the U.S. pension plan and the
OPEB plan.
Note 21 Employee Benefit Plans – Continued
Other Benefit Assumptions For the measurement of accumu-
lated postretirement benefit obligation at December 31, 2009,
for the main U.S. postretirement medical plan, the assumed
health care cost-trend rates start with 7 percent in 2010 and
gradually decline to 5 percent for 2018 and beyond. For this
measurement at December 31, 2008, the assumed health care
cost-trend rates started with 7 percent in 2009 and gradually
declined to 5 percent for 2017 and beyond. In both measure-
ments, the annual increase to company contributions was
capped at 4 percent.
Assumed health care cost-trend rates can have a signifi-
cant effect on the amounts reported for retiree health care
costs. The impact is mitigated by the 4 percent cap on the
company’s medical contributions for the primary U.S. plan.
A one-percentage-point change in the assumed health care
cost-trend rates would have the following effects:
1 Percent 1 Percent
Increase Decrease
Effect on total service and interest cost components $ 10 $ (9)
Effect on postretirement benefit obligation $ 102 $ (87)
Plan Assets and Investment Strategy Effective December 31,
2009, the company implemented the expanded disclosure
requirements for the plan assets of defined benefit pension
and OPEB plans (ASC 715) to provide users of financial state-
ments with an understanding of: how investment allocation
decisions are made; the major categories of plan assets; the
inputs and valuation techniques used to measure the fair value
of plan assets; the effect of fair-value measurements using
unobservable inputs on changes in plan assets for the period;
and significant concentrations of risk within plan assets.
The fair-value hierarchy of inputs the company uses to
value the pension assets is divided into three levels:
Notes to the Consolidated Financial Statements
Millions of dollars, except per-share amounts