Chevron 2011 Annual Report Download - page 62
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Note 21 Employee Benefit Plans – Continued
Notes to the Consolidated Financial Statements
Millions of dollars, except per-share amounts
Assumptions e following weighted-average assumptions were used to determine benet obligations and net periodic benet costs
for years ended December 31:
Pension Benets
2011 2010 2009 Other Benets
U.S. Int’l. U.S. Int’l. U.S. Int’l. 2011 2010 2009
Assumptions used to determine
benet obligations:
Discount rate
3.8% 5.9% 4.8% 6.5% 5.3% 6.8% 4.2% 5.2% 5.9%
Rate of compensation increase 4.5% 5.7% 4.5% 6.7% 4.5% 6.3% N/A N/A N/A
Assumptions used to determine
net periodic benet cost:
Discount rate
4.8% 6.5% 5.3% 6.8% 6.3% 7.5% 5.2% 5.9% 6.3%
Expected return on plan assets 7.8% 7.8% 7.8% 7.8% 7.8% 7.5% N/A N/A N/A
Rate of compensation increase 4.5% 6.7% 4.5% 6.3% 4.5% 6.8% N/A N/A N/A
Expected Return on Plan Assets e 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 rms and the incorporation of specic 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.
ere have been no changes in the expected long-term
rate of return on plan assets since 2002 for U.S. plans, which
account for 70 percent of the company’s pension plan assets.
At December 31, 2011, the estimated long-term rate of return
on U.S. pension plan assets was 7.8 percent.
e 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 ve years under U.S. accounting rules.
Management considers the three-month time period long
enough to minimize the eects 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 e discount rate assumptions used to deter-
mine U.S. and international pension and postretirement
benet plan obligations and expense reect the prevailing
rates available on high-quality, xed-income debt instruments.
At December 31, 2011, the company selected a 3.8 percent
discount rate for the U.S. pension plans and 4.0 percent for
the U.S. postretirement benet plan. is rate was based on
a cash ow analysis that matched estimated future benet
payments to the Citigroup Pension Discount Yield Curve as
of year-end 2011. e discount rates at the end of 2010 and
2009 were 4.8 and 5.3 percent and 5.0 and 5.8 percent for
the U.S. pension plans and the U.S. OPEB plan, respectively.
Other Benet Assumptions For the measurement of accumu-
lated postretirement benet obligation at December 31, 2011,
for the main U.S. postretirement medical plan, the assumed
health care cost-trend rates start with 8 percent in 2012 and
gradually decline to 5 percent for 2023 and beyond. For this
measurement at December 31, 2010, the assumed health care
cost-trend rates started with 8 percent in 2011 and gradually
declined to 5 percent for 2018 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 signi-
cant eect on the amounts reported for retiree health care
costs. e 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 eects:
1 Percent 1 Percent
Increase Decrease
Eect on total service and interest cost components $ 17 $ (15)
Eect on postretirement benet obligation $ 177 $ (150)
Plan Assets and Investment Strategy e fair value hierarchy of
inputs the company uses to value the pension assets is divided
into three levels:
Level 1: Fair values of these assets are measured using
unadjusted quoted prices for the assets or the prices of identical
assets in active markets that the plans have the ability toaccess.
Level 2: Fair values of these assets are measured based on
quoted prices for similar assets in active markets; quoted prices
for identical or similar assets in inactive markets; inputs other
than quoted prices that are observable for the asset; and inputs
that are derived principally from or corroborated by observ-
able market data through correlation or other means. If the
asset has a contractual term, the Level 2 input is observable
for substantially the full term of the asset. e fair values for
Level 2 assets are generally obtained from third-party broker
quotes, independent pricing services and exchanges.