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Notes to consolidated financial statements
JPMorgan Chase & Co.
98 JPMorgan Chase & Co. /2005 Annual Report
U.S. Non-U.S.
For the year ended December 31, 2005 2004 2005 2004
Weighted-average assumptions used to determine benefit obligations
Discount rate:
Pension 5.70% 5.75% 2.00-4.70% 2.00-5.30%
Postretirement benefit 5.65 5.75 4.7 5.3
Rate of compensation increase 4.00 4.50 3.00-3.75 1.75-3.75
U.S. Non-U.S.
For the year ended December 31, 2005 2004 2003(b) 2005 2004 2003(b)
Weighted-average assumptions used to determine net
periodic benefit costs
Discount rate 5.75%(a) 6.00% 6.50% 2.00-5.30% 2.00-5.75% 1.50-5.60%
Expected long-term rate of return on plan assets:
Pension 7.50 7.50-7.75 8.00 3.25-5.75 3.00-6.50 2.70-6.50
Postretirement benefit 4.75-7.00 4.75-7.00 8.00 NA NA NA
Rate of compensation increase 4.00 4.25-4.50 4.50 1.75-3.75 1.75-3.75 1.25-3.00
(a) The postretirement plan was remeasured as of August 1, 2005, and a rate of 5.25% was used from the period of August 1, 2005, through December 31, 2005.
(b) Heritage JPMorgan Chase results only for 2003.
long-term rate of return on U.K. plan assets is an average of projected long-
term returns for each asset class, selected by reference to the yield on long-term
U.K. government bonds and AA-rated long-term corporate bonds, plus an
equity risk premium above the risk-free rate.
In 2005, the discount rate used in determining the benefit obligation under
the U.S. pension and other postretirement employee benefit plans was selected
by reference to the yield on a portfolio of bonds whose redemptions and
coupons closely match each of the plan’s projected cash flows; such portfolio
is derived from a broad-based universe of high quality corporate bonds as
of the measurement date. In years in which this hypothetical bond portfolio
generates excess cash, such excess is assumed to be reinvested at the one-
year forward rates implied by the Citigroup Pension Discount Curve published
as of the measurement date. Prior to 2005, discount rates were selected
by reference to the year-end Moody’s corporate AA rate, as well as other
high-quality indices with a duration that was similar to that of the respective
plan’s benefit obligations. The discount rate for the U.K. pension and other
postretirement employee benefit plans was determined by matching the dura-
tion of the Firm’s obligations with the corresponding duration from the yield
curve of the year-end iBoxx £ corporate AA 15-year-plus bond index.
The following tables present the weighted-average annualized actuarial
assumptions for the projected and accumulated benefit obligations, and the
components of net periodic benefit costs for the Firm’s U.S. and non-U.S.
defined benefit pension and postretirement benefit plans, as of year-end.
JPMorgan Chase has a number of other defined benefit pension plans (i.e.,
U.S. plans not subject to Title IV of the Employee Retirement Income Security
Act). The most significant of these plans is the Excess Retirement Plan, pursuant
to which certain employees earn service credits on compensation amounts
above the maximum stipulated by law. This plan is a nonqualified, noncon-
tributory U.S. pension plan with an unfunded liability at December 31, 2005
and 2004, in the amount of $273 million and $292 million, respectively.
Compensation expense related to this pension plan totaled $21 million in
2005, $28 million in 2004 and $19 million in 2003.
Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. pension and
other postretirement employee benefit plan assets is a blended average of the
investment advisor’s projected long-term (10 years or more) returns for the
various asset classes, weighted by the portfolio allocation. Asset-class returns
are developed using a forward-looking building-block approach and are not
based strictly upon historical returns. Equity returns are generally developed
as the sum of inflation, expected real earnings growth and expected long-
term dividend yield. Bond returns are generally developed as the sum of infla-
tion, real bond yield and risk spread (as appropriate), adjusted for the expected
effect on returns from changing yields. Other asset-class returns are derived
from their relationship to the equity and bond markets.
In the U.K., which represents the most significant of the non-U.S. pension
plans, procedures similar to those in the U.S. are used to develop the expected
long-term rate of return on pension plan assets, taking into consideration
local market conditions and the specific allocation of plan assets.The expected