Fannie Mae 2006 Annual Report Download - page 295

We review our pension and postretirement benefit plan assumptions on an annual basis. We calculate the net
periodic benefit expense each year based on assumptions established at the end of the previous calendar year.
In determining our net periodic benefit costs, we assess the discount rate to be used in the annual actuarial
valuation of our pension and postretirement benefit obligations at year-end. We consider the current yields on
high-quality, corporate fixed-income debt instruments with maturities corresponding to the expected duration
of our benefit obligations and supported by cash flow matching analysis based on expected cash flows specific
to the characteristics of our plan participants, such as age and gender. As of December 31, 2006, the discount
rate used to determine our obligation increased 25 basis points, reflecting a corresponding rate increase in
corporate-fixed income debt instruments during 2006. We also assess the long-term rate of return on plan
assets for our qualified pension plan. The return on asset assumption reflects our expectations for plan-level
returns over a term of approximately seven to ten years. Given the longer-term nature of the assumption and a
stable investment policy, it may or may not change from year to year. However, if longer-term market cycles
or other economic developments impact the global investment environment, or asset allocation changes are
made, we may adjust our assumption accordingly. The expected long-term rate of return on plan assets for
2006 remained unchanged from the 2005 rate of 7.5% because of the stability of the investment market and
our asset allocations. Changes in assumptions used in determining pension and postretirement benefit plan
expense did not have a material effect on the consolidated statements of income for the years ended
December 31, 2006, 2005 or 2004.
The fair value allocation of our qualified pension plan assets on a weighted-average basis as of December 31,
2006 and 2005, and the target allocation, by asset category, are displayed below.
Investment Type
Target
Allocation 2006 2005
Asset
Allocation
as of
December31,
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75-85% 84% 83%
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20% 15 14
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-2% 1 3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100%
Given the diversity of our average employee age, gender and other characteristics, our investment strategy is
to diversify our plan assets across a number of investments to reduce our concentration risk and maintain an
asset allocation that allows us to meet current and future benefit obligations. With the goal of diversification,
the assets of the qualified pension plan consist primarily of exchange-listed stocks, the majority of which are
held in a passively managed index fund. We also invest in actively managed equity portfolios, which are
restricted from investing in shares of our common or preferred stock, and in an enhanced-index intermediate
duration fixed income account. In addition, the plan holds liquid short-term investments that provide for
monthly pension payments, plan expenses and, from time to time, may represent uninvested contributions or
reallocation of plan assets. Our asset allocation policy provides for a larger equity weighting than many
companies because our active employee base is relatively young, and we have a relatively small number of
retirees currently receiving benefits, both of which suggest a longer investment horizon and consequently a
higher risk tolerance level. Management periodically assesses our asset allocation to assure it is consistent with
our plan objectives.
The table below displays the benefits we expect to pay in each of the next five years and subsequent five years
for our pension plans and postretirement plan. The expected benefits are based on the same assumptions used
to measure our benefit obligation as of December 31, 2006. In December 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care plans that provides a benefit that is at least actuarially equivalent to Medicare Part D. We are
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)