International Paper 2012 Annual Report Download - page 107

2012 2011 2010
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
U.S.
Plans
Non-
U.S.
Plans
Actuarial assumptions used to determine benefit obligations as of December 31:
Discount rate 4.10% 4.96% 5.10% 5.98% 5.60% 6.01%
Rate of compensation increase 3.75% 3.17% 3.75% 3.12% 3.75% 3.07%
Actuarial assumptions used to determine net periodic pension cost for years ended December 31:
Discount rate 5.10% 5.98% 5.60% 6.01% 5.80% 6.45%
Expected long-term rate of return on plan assets 8.00%(a) 7.62% 8.25% 7.79% 8.25% 8.20%
Rate of compensation increase 3.75% 3.12% 3.75% 3.07% 3.75% 4.06%
(a) Represents the expected rate of return for International Paper’s
qualified pension plan. The rate for the Temple-Inland Retire-
ment Plan is 5.70% .
The expected long-term rate of return on plan assets
is based on projected rates of return for current and
planned asset classes in the plan’s investment portfo-
lio. Projected rates of return are developed through
an asset/liability study in which projected returns for
each of the plan’s asset classes are determined after
analyzing historical experience and future expect-
ations of returns and volatility of the various asset
classes. Based on the target asset allocation for each
asset class, the overall expected rate of return for the
portfolio is developed considering the effects of
active portfolio management and expenses paid from
plan assets. The discount rate assumption was
determined from a universe of high quality corporate
bonds. A settlement portfolio is selected and matched
to the present value of the plan’s projected benefit
payments. To calculate pension expense for 2013 ,
the Company will use an expected long-term rate of
return on plan assets of 8.00% for the Retirement Plan
of International Paper, an expected long-term rate of
return on plan assets of 5.30% for the Temple-Inland
Retirement Plan, a discount rate of 4.10% and an
assumed rate of compensation increase of 3.75% .
The Company estimates that it will record net pen-
sion expense of approximately $561 million for its
U.S. defined benefit plans in 2013 , with the increase
from expense of $342 million in 2012 reflecting a
decrease in the discount rate to 4.10% in 2013 from
5.10% in 2012 , a lower return on asset assumption
for Temple-Inland plan assets to 5.30% in 2013 from
5.70% in 2012 , and higher amortization of unrecog-
nized losses.
For non-U.S. pension plans, assumptions reflect
economic assumptions applicable to each country.
The following illustrates the effect on pension
expense for 2013 of a 25 basis point decrease in the
above assumptions:
In millions 2013
Expense/(Income):
Discount rate $39
Expected long-term rate of return on plan assets 24
Rate of compensation increase (6)
PLAN ASSETS
International Paper’s Board of Directors has
appointed a Fiduciary Review Committee that is
responsible for fiduciary oversight of the U.S. Pension
Plan, approving investment policy and reviewing the
management and control of plan assets. Pension Plan
assets are invested to maximize returns within pru-
dent levels of risk. The Pension Plan maintains a stra-
tegic asset allocation policy that designates target
allocations by asset class. Investments are diversified
across classes and within each class to minimize the
risk of large losses. Derivatives, including swaps,
forward and futures contracts, may be used as asset
class substitutes or for hedging or other risk
management purposes. Periodic reviews are made of
investment policy objectives and investment
manager performance. For non-U.S. plans, assets
consist principally of common stock and fixed income
securities.
International Paper’s U.S. pension allocations by type
of fund at December 31, and target allocations were
as follows:
Asset Class 2012 2011
Target
Allocations
Equity accounts 41% 43% 36% -46%
Fixed income accounts 38% 34% 37% -47%
Real estate accounts 10% 11% 6% -12%
Other 11% 12% 8% -15%
Total 100% 100%
The 2012 actual and target allocations shown repre-
sent a weighted average of International Paper and
Temple-Inland plan assets.
The fair values of International Paper’s pension plan
assets at December 31, 2012 and 2011 by asset class
are shown below. Plan assets included an immaterial
amount of International Paper common stock at
December 31, 2012 and 2011 . Hedge funds disclosed
in the following table are allocated equally between
equity and fixed income accounts for target allocation
purposes. Cash and cash equivalent portfolios are
allocated to the types of account from which they
originated.
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