JP Morgan Chase 2003 Annual Report Download - page 94

Notes to consolidated financial statements
J.P. M organ Chase & Co.
92 J.P. Morgan Chase & Co. / 2003 Annual Report
At December 31, 2003, the Firm reduced the discount rate used
to determine its U.S. benefit obligations to 6.00% . The Firm also
reduced the 2004 expected long-term rate of return on U.S. plan
assets to 7.75% and 7.00% , respectively, for its pension and
other postretirement benefit expenses. The impact of the
changes as of December 31, 2003, to the expected long-term
rate of return on plan assets and the discount rate is expected to
increase 2004 U.S. pension and other postretirement benefit
expenses by approximately $35 million. The impact of the
changes to the expected long-term rate of return on plan assets
and the discount rate on non-U.S. pension and other postretire-
ment benefit expenses is not expected to be material.
JPM organ Chase’s U.S. pension and other postretirement benefit
expenses are most sensitive to the expected long-term rate of
return on plan assets. With all other assumptions held constant, a
25–basis point decline in the expected long-term rate of return
on U.S. plan assets w ould result in an increase of approximately
$15 million in 2004 U.S. pension and other postretirement bene-
fit expenses. Additionally, a 25–basis point decline in the discount
rate for the U.S. plans w ould result in an increase in 2004 U.S.
pension and other postretirement benefit expenses of approxima-
tely $12 million and an increase in the related benefit obligation
of approximately $143 million. The impact of a decline in the
discount rate related to the U.S. pension plan w ould be signifi-
cantly offset by the effect of a similar reduction in the assumed
interest rate used for crediting participant balances.
Investment strategy and asset allocation
The investment policy for postretirement employee benefit plan
assets is to optimize the risk-return relationship as appropriate
to the respective plan’s needs and goals, using a global portfolio
of various asset classes diversified by market segment, economic
sector and issuer. Specifically, the goal is to optimize the asset
mix for future benefit obligations, w hile managing various risk
factors and each plan’s investment return objectives. For exam-
ple, long-duration fixed income securities are included in the
U.S. qualified pension plan’s asset allocation, in recognition of
its long-duration obligations. Plan assets are managed by a com-
bination of internal and external investment managers and, on a
quarterly basis, are rebalanced to target, to the extent economi-
cally practical.
The Firm’s U.S. pension plan assets are held in various trusts and
are invested in w ell diversified portfolios of equity (including
U.S. large and small capitalization and international equities),
fixed income (including corporate and government bonds),
Treasury inflation-indexed and high-yield securities, cash equiva-
lents and other securities. Non-U.S. pension plan assets are
similarly invested in w ell-diversified portfolios of equity, fixed
income and other securities. Assets of the Firm’s COLI policies,
w hich are used to fund partially the U.S. postretirement benefit
plan, are held in separate accounts w ith an insurance company
and are invested in equity and fixed income index funds. Assets
used to fund the Firm’s U.S. and non-U.S. defined benefit pen-
sion and postretirement benefit plans do not include JPM organ
Chase common stock, except in connection w ith investments in
third-party stock-index funds.
The follow ing tables present JPM organ Chase’s assumed w eighted-average medical benefits cost trend rate, w hich is used to measure the
expected cost of benefits at year-end, and the effect of a one-percentage-point change in the assumed medical benefits cost trend rate:
December 31, 2003 2002 2001
Health care cost trend rate assumed for next year 10% 9% 8%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 555
Year that the rate reaches the ultimate trend rate 2010 2008 2005
1-Percentage- 1-Percentage-
(in millions) point increase point decrease
Effect on total service and interest costs $4 $(3)
Effect on postretirement benefit obligation 51 (44)
U.S. Non-U.S.
For the year ended December 31, 2003 2002 2001 2003 2002 2001
Weighted-average assumptions used to determine net periodic benefit costs
Discount rate 6.50% 7.25% 7.50-7.75% 1.50-5.60% 2.50-6.00% 2.75-6.25%
Expected long-term rate of return on plan assets:
Pension 8.00 9.25 9.00-9.50 2.70-6.50 3.25-7.25 3.25-8.00
Postretirement benefit 8.00 9.00 9.00-9.50 NA NA NA
Rate of compensation increase 4.50 4.50 3.00-4.50 1.25-3.00 2.00-4.00 2.00-4.00