Freeport-McMoRan 2014 Annual Report Download - page 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Pension Plans. Following is a discussion of FCX’s pension plans.
FMC Plans. FMC has U.S. 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.
Benefits are calculated based on final average monthly
compensation and years of service or 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 FMC plan
assets held in a 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 45 percent equity
investments (primarily global equities), 45 percent fixed income
(primarily long-term treasury STRIPS or “separate trading or
registered interest and principal securities“; long-term U.S.
treasury/agency bonds; global fixed income securities; long-term,
high-credit quality corporate bonds; high-yield and emerging
markets fixed income securities; and fixed income debt
securities) and 10 percent alternative investments (private real
estate, real estate investment trusts and private equity).
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 7.25 percent
per annum beginning January 1, 2015. The 7.25 percent estimation
was based on a passive return on a compound basis of 6.75 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 — 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. 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 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.
PT-FI Plan. PT-FI has a defined benefit pension plan
denominated in Indonesian rupiah covering substantially all of its
Indonesian national employees. PT-FI funds the plan and invests
the assets in accordance with Indonesian pension guidelines.
The pension obligation was valued at an exchange rate of 12,378
rupiah to one U.S. dollar on December 31, 2014, and 12,128 rupiah
to one U.S. dollar on December 31, 2013. 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-FI’s pension benefit disclosures include benefits related to this