Freeport-McMoRan 2010 Annual Report Download - page 83

FREEPORT-McMoRan COPPER & GOLD INC. 2010 Annual Report
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected rate of return on plan assets is evaluated at least
annually, taking into consideration 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 8.0 percent per annum during the
10 years beginning January 1, 2011. The 8.0 percent estimation was
based on a passive return on a compound basis of 7.5 percent and
a premium for active management of 0.5 percent reflecting the target
asset allocation and current investment array.
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 Mercer Pension
Discount Curve. The Mercer Pension Discount Curve consists of
spot (i.e., zero coupon) interest rates at one-half year increments
for each of the next 30 years and is developed based on pricing
and yield information for high-quality corporate bonds. Prior to
December 31, 2010, FCX determined its discount rate based on
expected future benefit payments for service to date together with
the Citigroup Pension Discount Curve. Changes in the discount
rate are reflected in FCX’s benefit obligation and, therefore, in future
pension costs.
Other FCX Plans. 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’s wholly owned subsidiary,
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, both of which no longer accrue benefits.
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 8,990 rupiah to one U.S. dollar
on December 31, 2010, and 9,420 rupiah to one U.S. dollar on
December 31, 2009. 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, 2010,
exchange rate of $1.34 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.
Plan Information. FCX uses a measurement date of December 31
for its plans. In some plans, the plan assets exceed the accumulated
benefit obligations, while in the remainder, the accumulated
benefit obligations exceed the plan assets. Information for those
plans where the accumulated benefit obligations exceed the plan
assets follows:
December 31, 2010 2009
Projected benefit obligation $ 1,662 $ 1,544
Accumulated benefit obligation
1,581 1,450
Fair value of plan assets
1,122 1,076