JP Morgan Chase 2005 Annual Report Download - page 101

JPMorgan Chase & Co. /2005 Annual Report 99
JPMorgan 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 would result in an increase of
approximately $26 million in 2006 U.S. pension and other postretirement
benefit expenses. A 25–basis point decline in the discount rate for the U.S.
plans would result in an increase in 2006 U.S. pension and other postretirement
benefit expenses of approximately $20 million and an increase in the related
projected benefit obligations of approximately $233 million. A 25-basis point
decline in the discount rates for the non-U.S. plans would result in an increase
in the 2006 non-U.S. pension and other postretirement benefit expenses of
$12 million. A 25-basis point increase in the interest crediting rate would result
in an increase in 2006 U.S. pension expense of approximately $18 million.
Investment strategy and asset allocation
The investment policy for the Firm’s 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, while managing
various risk factors and each plan’s investment return objectives. For example,
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 combination of internal and external investment
managers and, on a quarterly basis, are rebalanced to target, to the extent
economically practical.
The Firm’s U.S. pension plan assets are held in various trusts and are invested
in well-diversified portfolios of equities (including U.S. large and small capital-
ization and international equities), fixed income (including corporate and
government bonds), Treasury inflation-indexed and high-yield securities, cash
equivalents, and other securities. Non-U.S. pension plan assets are held in
various trusts and are similarly invested in well-diversified portfolios of equity,
fixed income and other securities. Assets of the Firm’s COLI policies, which
are used to fund partially the U.S. postretirement benefit plan, are held in
separate accounts with an insurance company and are invested in equity and
fixed income index funds. In addition, tax-exempt municipal debt securities,
held in a trust, are used to fund the U.S. postretirement benefit plan. As of
December 31, 2005, the assets used to fund the Firm’s U.S. and non-U.S.
defined benefit pension and postretirement benefit plans do not include
JPMorgan Chase common stock, except in connection with investments in
third-party stock-index funds.
The following tables present JPMorgan Chase’s assumed weighted-average
medical benefits cost trend rate, which 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, 2005 2004(a) 2003(b)
Health care cost trend rate assumed
for next year 10% 10% 10%
Rate to which cost trend rate is assumed
to decline (ultimate trend rate) 555
Year that rate reaches ultimate trend rate 2012 2011 2010
(in millions) 1-Percentage- 1-Percentage-
For the year ended December 31,2005 point increase point decrease
Effect on total service and interest costs $4 $ (3)
Effect on postretirement benefit obligation 64 (55)
(a) Effective July 1, 2004, the Firm assumed the obligations of heritage Bank One’s pension
and postretirement plans.These plans were similar to those of JPMorgan Chase and were
merged into the Firm’s plans effective December 31, 2004.
(b) 2003 reflects the results of heritage JPMorgan Chase only.
At December 31, 2005, the Firm reduced the discount rate used to determine
its U.S. benefit obligations to 5.70% for the pension plan and to 5.65% for the
postretirement benefits plans from the prior year rate of 5.75% for both plans.
The Firm also changed the health care benefit obligation trend assumption to
10% for 2006, grading down to an ultimate rate of 5% in 2013. The 2006
expected long-term rate of return on its U.S. pension plan assets remained at
7.50%. The 2006 expected long-term rate of return on the Firm’s COLI post-
retirement plan assets remained at 7.00%; however, with the merger of Bank
One’s other postretirement plan assets, the Firm’s overall expected long-term
rate of return on U.S. postretirement employee benefit plan assets decreased
to 6.84% and 6.80% in 2005 and 2004, respectively, to reflect a weighted
average expected rate of return for the merged plan.The interest crediting rate
assumption used to determine pension benefits changed to 5.00% from 4.75%
in 2005, primarily due to changes in market interest rates which will result in
additional expense of $18 million. The changes as of December 31, 2005, to
the discount rates are expected to increase 2006 U.S. pension and other
postretirement benefit expenses by approximately $5 million and to the non-
U.S. pension and other postretirement benefit expenses by $23 million. The rate
of compensation increase assumption of 4.00% at December 31, 2005, reflects
the consolidation of the prior JPMorgan Chase and Bank One age-weighted
increase assumptions; the impact to expense is not expected to be material.
The following table presents the weighted-average asset allocation at December 31 for the years indicated, and the respective target allocation by asset category,
for the Firm’s U.S. and non-U.S. defined benefit pension and postretirement benefit plans.
Defined benefit pension plans
U.S. Non-U.S.(a) Postretirement benefit plans(b)
Target % of plan assets Target % of plan assets Target % of plan assets
December 31, Allocation 2005 2004 Allocation 2005 2004 Allocation 2005 2004
Asset category
Debt securities 30% 33% 38% 74% 75% 76% 50% 54% 54%
Equity securities 55 57 53 25 24 24 50 46 46
Real estate 5 6511—— ——
Other 10 44———— ——
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
(a) Represents the U.K. defined benefit pension plan only, as plans outside the U.K. are not significant.
(b) Represents the U.S. postretirement benefit plan only, as the U.K. plan is unfunded.