Freeport-McMoRan 2008 Annual Report Download - page 86

Notes to Consolidated Financial Statements
84 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
FCX’s funding policy for these plans provides that
contributions to pension trusts shall be at least equal to the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, as amended, for U.S. plans; or, in the
case of international plans, the minimum legal requirements that
may be applicable in the various countries. Additional
contributions also may be made from time to time.
FCX’s policy for determining asset-mix targets for the Phelps
Dodge Corporation Defined Benefit Master Trust (Master Trust)
includes the periodic development of asset/liability studies to
determine expected long-term rates of return and expected risk for
various investment portfolios. Management considers these studies
in the formal establishment of asset-mix targets that are reviewed
by FCX’s retirement plan administration and investment
committee. The expected rate of return on plan assets is evaluated
at least annually, taking into consideration its asset allocation,
historical returns on the types of assets held in the Master Trust
and the current economic environment. For U.S. plans, the
determination of the expected long-term rate of return on plan
assets is based on expected future performance of the plan asset
mix and active plan asset management. Based on these factors,
FCX expects the pension assets will earn an average of 8.5 percent
per annum during the 10 years beginning January 1, 2009, with a
standard deviation of 8.8 percent. The 8.5 percent estimation was
based on a passive return on a compound basis of 8.0 percent and a
premium for active management of 0.5 percent reflecting the target
asset allocation and current investment array. On an arithmetic
average basis, the passive return would have been 8.0 percent with
a premium for active management of 0.5 percent.
For estimation purposes, FCX assumes the long-term asset
mix for these plans generally will be consistent with the current
mix. Changes in the asset mix could impact the amount of
recorded pension income or expense, the funded status of the
plans and the need for future cash contributions. A lower-than-
expected return on assets also would decrease plan assets and
increase the amount of recorded pension expense in future years.
When calculating the expected return on plan assets, FCX uses
the market value of assets.
Among the assumptions used to estimate the benefit
obligation is a discount rate used to calculate the present value of
expected future benefit payments for service to date. The
discount rate assumption for FCX’s U.S. plans is designed to
reflect yields on high-quality, fixed-income investments for a
given duration. The determination of the discount rate for these
plans is based on expected future benefit payments for service
to date together with the Citibank Pension Discount Curve.
Changes in this assumption are reflected in FCX’s benefit
obligation and, therefore, in the liabilities and income or expense
that are recorded.
Other FCX Plans. During 2000, FCX and FM Services Company,
FCX’s wholly owned subsidiary, elected to terminate their
defined benefit pension plans covering substantially all U.S. and
certain overseas expatriate employees and replace these plans
with defined contribution programs, as further discussed below.
All participants’ account balances in the defined benefit plans
were fully vested on June 30, 2000, and interest credits continued
to accrue under the plans until the assets were liquidated and
distributed in 2008 after obtaining final approval from the Internal
Revenue Service.
In February 2004, FCX established an unfunded Supplemental
Executive Retirement Plan (SERP) for its two most senior
executive officers. The SERP provides for retirement benefits
payable in the form of a joint and survivor annuity or an
equivalent lump sum. The annuity will equal a percentage of the
executive’s highest average compensation for any consecutive
three-year period during the five years immediately preceding the
earlier of the executive’s retirement or completion of 25 years
of credited service. The SERP benefit will be reduced by the value
of all benefits paid or due under any defined benefit or defined
contribution plan sponsored by FM Services Company, FCX or its
predecessor, but not including accounts funded exclusively
by deductions from participant’s pay. FCX also has an unfunded
pension plan for its directors and an excess benefits plan for
its executives.
PT Freeport Indonesia Plan. PT Freeport Indonesia has a
defined benefit pension plan denominated in Indonesian rupiah
covering substantially all of its Indonesian national employees.
PT Freeport Indonesia funds the plan and invests the assets in
accordance with Indonesian pension guidelines. The pension
obligation was valued at an exchange rate of 10,850 rupiah to one
U.S. dollar on December 31, 2008, and 9,390 rupiah to one U.S.
dollar on December 31, 2007. Indonesian labor laws enacted in
2003 require that companies provide a minimum level of benefits
to employees upon employment termination based on the reason
for termination and the employee’s years of service. PT Freeport
Indonesia’s pension benefit disclosures include benefits related to
this law. PT Freeport Indonesia’s expected rate of return on plan
assets is evaluated at least annually, taking into consideration its
historical yield and the long range estimated return for the plan
based on the asset mix.
Atlantic Copper Plan. Atlantic Copper has a contractual
obligation denominated in euros to supplement amounts paid to
certain retired Spanish national employees. As required by
Spanish law, beginning in August 2002, Atlantic Copper began
funding 7.2 million euros ($10 million based on a December 31,
2008, exchange rate of $1.39 per euro) annually for 15 years to an
approved insurance company for its estimated 72 million euro
contractual obligation to the retired employees. The insurance
company invests the plan assets in accordance with Spanish
regulations, and Atlantic Copper has no control over these
investments. Atlantic Copper is amortizing the unrecognized net
actuarial loss over the remaining eight-year funding period.