Freeport-McMoRan 2012 Annual Report Download - page 85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. EMPLOYEE BENEFITS
Pension Plans. Following is a discussion of FCX’s pension plans.
FMC Plans. FMC has trusteed, non-contributory pension plans
covering substantially all of its U.S. employees and some
employees of its international subsidiaries hired before 2007. The
applicable FMC plan design determines the manner in which
benefits are calculated for any particular group of employees. For
certain of these plans, benefits are calculated based on final
average monthly compensation and years of service. In the case
of other plans, benefits are calculated based on a fixed amount for
each year of service. Participants in the FMC plans generally vest
in their accrued benefits after five years of service. Non-bargained
FMC employees hired after December 31, 2006, are not eligible to
participate in the FMC U.S. pension plan.
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 Freeport-
McMoRan Corporation Defined Benefit Master Trust (Master
Trust) includes the periodic development of asset and liability
studies to determine expected long-term rates of return and
expected risk for various investment portfolios. FCX’s retirement
plan administration and investment committee considers these
studies in the formal establishment of asset-mix targets. FCX’s
investment objective emphasizes the need to maintain a well-
diversified investment program through both the allocation of the
Master Trust assets among asset classes and the selection of
investment managers whose various styles are fundamentally
complementary to one another and serve to achieve satisfactory
rates of return. Diversification, by asset class and by investment
manager, is FCX’s principal means of reducing volatility and
exercising prudent investment judgment. FCX’s present target
asset allocation approximates 49 percent equity investments
(39 percent global equities, 6 percent emerging markets equities
and 4 percent U.S. equities), 40 percent fixed income (16 percent
long-term treasury STRIPS or “separate trading or registered
interest and principal securities,” 5 percent international fixed
income, 5 percent high yield, 4 percent treasury inflation-
protection securities, 4 percent long-term U.S. treasury/agency
bonds, 3 percent long-term high-credit quality corporate bonds
and 3 percent emerging markets fixed income) and 11 percent
alternative investments (5 percent real estate investment trusts,
3 percent private equity and 3 percent private real estate).
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. Based on these factors, FCX
expects the pension assets will earn an average of 7.5 percent
per annum beginning January 1, 2013. The 7.5 percent
estimation was based on a passive return on a compound basis of
6.7 percent and a premium for active management of 0.8 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 — Above Mean Yield.
The Mercer Pension Discount Curve — Above Mean Yield is
constructed from the bonds in the Mercer Pension Discount Curve
that have a yield higher than the regression mean yield 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, 2012,
FCX determined its discount rate using the Mercer 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.
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