E-Z-GO 2010 Annual Report Download - page 86
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74
Assumptions
The weighted-average assumptions we use for our pension and postretirement plans are as follows:
Pension Benefits
Postretirement Benefits
Other than Pensions
2010
2009
2008
2010
2009
2008
Net periodic benefit cost
Discount rate
6.20%
6.61%
5.99%
5.50%
6.25%
6.00%
Expected long-term rate of return on assets
8.26%
8.58%
8.66%
—
—
—
Rate of compensation increase
4.00%
4.36%
4.48%
—
—
—
Benefit obligations at year-end
Discount rate
5.71%
6.19%
6.28%
5.50%
5.50%
6.25%
Rate of compensation increases
3.99%
4.00%
4.47%
—
—
—
Assumed healthcare cost trend rates are as follows:
2010 2009
Medical cost trend rate
8%
7%
Prescription drug cost trend rate
9%
10%
Rate to which medical and prescription drug cost trend rates will gradually decline
5%
5%
Year that the rates reach the rate where we assume they will remain
2020
2019
These assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement benefits other than
pensions. A one-percentage-point change in these assumed healthcare cost trend rates would have the following effects:
(In millions)
One-
Percentage-
Point
Increase
One-
Percentage-
Point
Decrease
Effect on total of service and interest cost components
$ 3
$ (3)
Effect on postretirement benefit obligations other than pensions
39
(34)
Pension Assets
The expected long-term rate of return on plan assets is determined based on a variety of considerations, including the established asset
allocation targets and expectations for those asset classes, historical returns of the plans’ assets and other market considerations. We
invest our pension assets with the objective of achieving a total rate of return, over the long term, sufficient to fund future pension
obligations and to minimize future pension contributions. We are willing to tolerate a commensurate level of risk to achieve this
objective based on the funded status of the plans and the long-term nature of our pension liability. Risk is controlled by maintaining a
portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. All of the assets are
managed by external investment managers, and the majority of the assets are actively managed. Where possible, investment managers
are prohibited from owning our stock in the portfolios that they manage on our behalf.
For U.S. plan assets, which represent the majority of our plan assets, asset allocation target ranges are established consistent with our
investment objectives, and the assets are rebalanced periodically. Our target allocation ranges are 27% to 41% for domestic equity
securities; 11% to 22% for international equity securities; 11% to 42% for debt securities; 5% to 11% for private equity partnerships;
9% to 15% for real estate; and 0% to 7% for hedge funds. For foreign plan assets, allocations are based on expected cash flow needs
and assessments of the local practices and markets. The target asset allocation ranges for our foreign plans are 25% to 65% for equity
securities; 25% to 53% for debt securities; and 0% to 17% for real estate.