Foot Locker 2010 Annual Report Download - page 76

The expected long-term rate of return on invested plan assets is based on the plans’ weighted-average target
asset allocation, as well as historical and future expected performance of those assets. The target asset allocation
is selected to obtain an investment return that is sufficient to cover the expected benefit payments and to
reduce future contributions by the Company.
The components of net benefit expense (income) are:
Pension Benefits Postretirement Benefits
2010 2009 2008 2010 2009 2008
(in millions)
Service cost ................... $13 $11 $10 $— $— $—
Interest cost .................. 33 36 36 — 1 1
Expected return on plan assets....... (40) (43) (53) — — —
Amortization of prior service cost..... — 1 1 — — —
Amortization of net loss (gain) ...... 17 13 11 (6) (7) (8)
Net benefit expense (income) ....... $23 $18 $ 5 $(6) $(6) $(7)
Beginning with 2001, new retirees were charged the expected full cost of the medical plan and then-existing
retirees will incur 100 percent of the expected future increases in medical plan costs. Any changes in the health
care cost trend rates assumed would not affect the accumulated benefit obligation or net benefit income, since
retirees will incur 100 percent of such expected future increase.
In addition, the Company maintains a Supplemental Executive Retirement Plan (‘‘SERP’’), which is an
unfunded plan that includes provisions for the continuation of medical and dental insurance benefits to certain
executive officers and certain other key employees of the Company (‘‘SERP Medical Plan’’). The SERP Medical
Plan’s accumulated projected benefit obligation at January 29, 2011 was approximately $6 million. The assumed
health care cost trend rates related to the measurement of the Company’s SERP Medical Plan obligations for the
year ended January 29, 2011 are as follows:
Initial medical care cost trend rate ................................... 8.50%
Ultimate medical care cost trend rate.................................. 5.00%
Year that the ultimate medical care cost trend rate is reached ................. 2016
Initial dental care cost trend rate .................................... 5.50%
Ultimate dental care cost trend rate .................................. 5.00%
Year that the ultimate dental care cost trend rate is reached .................. 2012
A one percentage-point change in the assumed health care cost trend rates would have the following
effects:
1% Increase 1% (Decrease)
(in millions)
Effect on total service and interest cost components ............. $— $—
Effect on accumulated postretirement benefit obligation .......... 1 (1)
Plan Assets
During 2010, the target composition of the Company’s U.S. plan assets remained at 50 percent equity and
50 percent fixed income securities. The Company may alter the targets from time to time depending on market
conditions and the funding requirements of the pension plan. This current asset allocation will limit volatility
with regard to the funded status of the plan, but will result in higher pension expense due to the lower long-term
rate of return associated with fixed income securities. Due to market conditions and other factors, actual asset
allocations may vary from the target allocation outlined above. The Company believes that plan assets are
invested in a prudent manner with an objective of providing a total return that, over the long term, provides
sufficient assets to fund benefit obligations, taking into account the Company’s expected contributions and the
level of risk deemed appropriate. The Company’s investment strategy seeks to utilize asset classes with differing
rates of return, volatility, and correlation in order to reduce risk by providing diversification relative to equities.
Diversification within asset classes is also utilized to ensure that there are no significant concentrations of risk
in plan assets and to reduce the effect that the return on any single investment may have on the entire portfolio.
57