Fannie Mae 2008 Annual Report Download - page 367

We review our pension and other postretirement benefit plan assumptions on an annual basis. We calculate the
net periodic benefit cost each year based on assumptions established at the end of the previous calendar year,
unless we remeasure as a result of a curtailment. In determining our net periodic benefit costs, we assess the
discount rate to be used in the annual actuarial valuation of our pension and other 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, 2008, the discount rate used to determine our
obligation decreased by 25 basis points, reflecting a corresponding rate decrease in corporate-fixed income
debt instruments during 2008. 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 2008 remained
unchanged from the 2007 rate of 7.5%. Changes in assumptions used in determining pension and other
postretirement benefit plan expense resulted in a decrease in expense of $15 million and $10 million in our
consolidated statements of operations for the years ended December 31, 2008 and 2007, respectively. There
was no material effect on our consolidated statements of operations as a result of changes in assumptions for
the year ended December 31, 2006.
Diversification of Plan Assets
The following table displays the allocation of our qualified pension plan assets based on their fair value as of
December 31, 2008 and 2007, and the target allocation by asset category:
Investment Type
Target
Allocation 2008 2007
Asset
Allocation
as of
December 31,
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75-85% 75% 84%
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-20% 19 14
Other
(1)
...................................................... 0-2% 6 2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100%
(1)
Actual asset allocation of 6% as of December 31, 2008 reflects the fact that the contribution to the qualified pension
plan made in November 2008 was invested over a three-month period of time, whereby the last portion was not
invested until January 2009.
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. 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 indexed
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
F-89
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)