Estee Lauder 2015 Annual Report Download - page 62

THE EST{E LAUDER COMPANIES INC. 59
statutory limitations (collectively with the U.S. Qualified
Plan, the “Domestic Plans”); a domestic contributory
defined contribution plan; international pension plans,
which vary by country, consisting of both defined benefit
and defined contribution pension plans; deferred
compensation arrangements; and certain other post-
retirement benefit plans.
The amounts needed to fund future payouts under our
defined benefit pension and post-retirement benefit plans
are subject to numerous assumptions such as an antici-
pated discount rate, expected rate of return on plan
assets, mortality rates and future compensation levels. We
evaluate these assumptions with our actuarial advisors
and select assumptions that we believe reflect the eco-
nomics underlying our pension and post-retirement
obligations. While we believe these assumptions are
within accepted industry ranges, an increase or decrease
in the assumptions or economic events outside our con-
t rol could have a direct impact on reported net earnings.
The discount rate for each plan used for determining
future net periodic benefit cost is based on a review of
highly rated long-term bonds. For fiscal 2015, net periodic
benefit cost was determined using discount rates for our
Domestic Plans of 3.60% and 4.30% and varying rates on
our international plans between .50% and 6.75%. The
discount rates for our Domestic Plans were based on a
bond portfolio that includes only long-term bonds with an
Aa rating, or equivalent, from a major rating agency. We
used an above-mean yield curve which represents an esti-
mate of the effective settlement rate of the obligation, and
the timing and amount of cash flows related to the bonds
included in this portfolio are expected to match the
estimated defined benefit payment streams of our
Domestic Plans. For our international plans, the discount
rate in a particular country was principally determined
based on a yield curve constructed from high quality cor-
porate bonds in each country, with the resulting portfolio
having a duration matching that particular plan.
For fiscal 2015, we used an expected return on plan
assets of 7.50% for our U.S. Qualified Plan and varying
rates of between 2.00% and 6.75% for our international
plans. In determining the long-term rate of return for a
plan, we consider the historical rates of return, the nature
of the plan’s investments and an expectation for the plan’s
investment strategies. See “Note 13 — Pension, Deferred
Compensation and Post-retirement Benefit Plans” of Notes
to Consolidated Financial Statements for details regarding
the nature of our pension and post-retirement plan invest-
ments. The difference between actual and expected
return on plan assets is reported as a component of accu-
mulated other comprehensive income. Those gains/losses
that are subject to amortization over future periods will be
recognized as a component of the net periodic benefit
cost in such future periods. For fiscal 2015, our pension
plans had actual return on assets of approximately $61
million as compared with expected return on assets of
approximately $72 million. The resulting net deferred loss
of approximately $11 million, when combined with gains
and losses from previous years, will be amortized over
periods ranging from approximately 7 to 18 years. The
actual return on plan assets from our global pension plans
was lower than expected, primarily due to underper-
formance of U.S. plan assets partially offset by stronger
than expected returns on international plan assets.
A 25 basis-point change in the discount rate or the
expected rate of return on plan assets would have had
the following effect on fiscal 2015 pension expense:
25 Basis-Point 25 Basis-Point
Increase Decrease
(In millions)
Discount rate $(3.9) $3.9
Expected return on assets $(2.8) $2.8
Our post-retirement plans are comprised of health care
plans that could be impacted by health care cost trend
rates, which may have a significant effect on the amounts
reported. A one-percentage-point change in assumed
health care cost trend rates for fiscal 2015 would have had
the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total service
and interest costs $ 1.3 $ (1.0)
Effect on post-retirement
benefit obligations $15.1 $(10.1)
To determine the fiscal 2016 net periodic benefit cost,
we are using discount rates of 4.40% and 3.70% for the
U.S. Qualified Plan and the non-qualified domestic non-
contributory pension plan, respectively, and varying
rates for our international plans of between .75% and
7.00%. We are using an expected return on plan assets
of 7.00% for the U.S. Qualified Plan and varying rates for
our international pension plans of between 2.00% and
7.00%. The net change in these two key assumptions from
those used in fiscal 2015 will result in an increase in pen-
sion expense of approximately $11 million in fiscal 2016.