Ford 2007 Annual Report Download - page 42

Management’s Discussion and Analysis of Financial Condition and Results of Operations
40 Ford Motor Company | 2007 Annual Report
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
• Discount rates. We base the discount rate assumption primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each plan to a yield curve comprised of high quality bonds specific to the
country of the plan. Benefit payments are discounted at the rates on the curve and a single discount rate specific to
the plan is determined.
• Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the
near-term outlook, anticipated efficiencies and other cost-mitigation actions (including eligibility management,
employee education and wellness, competitive sourcing and appropriate employee cost sharing) and an assessment
of likely long-term trends.
• Expected return on short-duration plan assets. The expected return on short-duration plan assets assumption
reflects external investment managers' expectations of likely returns on short-duration VEBA assets over the next
several years.
• Expected return on long-duration plan assets. The expected return on long-duration plan assets assumption reflects
historical returns and long-run inputs from a range of advisors for capital market returns, inflation, bond yields, and
other variables, adjusted for specific aspects of our investment strategy. The assumption is based on consideration
of all inputs, with a focus on long-term trends to avoid short-term market influences. Assumptions are not changed
unless structural trends in the underlying economy are identified, our asset strategy changes, or there are significant
changes in other inputs.
• Salary growth. The salary growth assumptions reflect our long-term actual experience, outlook and assumed inflation.
• Expected VEBA drawdowns. The expected amount and timing of VEBA drawdowns is based on an assessment of
hourly retiree benefit payments to be reimbursed, tax efficiency, cash availability, and our previously-discussed MOU
with the UAW.
• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.
Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any
potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor
contracts).
The effects of actual results differing from our assumptions and the effects of changing assumptions are included in
unamortized net gains and losses. Unamortized gains and losses are amortized over future periods and, therefore,
generally affect our recognized expense in future periods. In 2007, the U.S. actual health care trend was 3%, which was
less than the expected trend of 6%. The year-end 2007 weighted average discount rate for the U.S. increased by 47 basis
points. These differences, as well as updates related to employee separation programs, resulted in an unamortized gain of
about $4 billion. This amount is expected to be recognized as a component of net expense over the expected future years
of service (approximately 14 years).
See Note 24 of the Notes to the Financial Statements for more information regarding costs and assumptions for
employee retirement benefits.
Sensitivity Analysis. The December 31, 2007 OPEB funded status and 2008 expense are affected by year-end 2007
assumptions. These sensitivities may be asymmetric and are specific to the time periods noted. They are not additive, so
the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities
shown. The effect of the indicated increase/(decrease) in selected assumptions is shown below (in millions):
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