JP Morgan Chase 2006 Annual Report Download - page 102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
100 JPMorgan Chase & Co. / 2006 Annual Report
Note 7 – Pension and other postretirement
employee benefit plans
The Firm’s defined benefit pension plans are accounted for in accordance with
SFAS 87 and SFAS 88, and its other postretirement employee benefit (“OPEB”)
plans are accounted for in accordance with SFAS 106. In September 2006,
the FASB issued SFAS 158, which requires companies to recognize on their
Consolidated balance sheets the overfunded or underfunded status of their
defined benefit postretirement plans, measured as the difference between the
fair value of plan assets and the benefit obligation. SFAS 158 requires unrecog-
nized amounts (e.g., net actuarial loss and prior service costs) to be recognized
in Accumulated other comprehensive income (“AOCI”) and that these amounts
be adjusted as they are subsequently recognized as components of net periodic
benefit cost based upon the current amortization and recognition requirements
of SFAS 87 and SFAS 106. The Firm prospectively adopted SFAS 158 as required
on December 31, 2006, which resulted in a charge to AOCI of $1.1 billion.
SFAS 158 also eliminates the provisions of SFAS 87 and SFAS 106 that allow
plan assets and obligations to be measured as of a date not more than three
months prior to the reporting entity’s balance sheet date. The Firm uses a
measurement date of December 31 for its defined benefit pension and OPEB
plans; therefore, this provision of SFAS 158 will have no effect on the Firm’s
financial statements.
For the Firm’s defined benefit pension plans, fair value is used to determine the
expected return on plan assets. For the Firm’s OPEB plans, a calculated value
that recognizes changes in fair value over a five-year period is used to deter-
mine the expected return on plan assets. Amortization of net actuarial gains
and losses is included in annual net periodic benefit cost if, as of the beginning
of the year, the net actuarial gain or loss exceeds 10 percent of the greater of
the projected benefit obligation or the fair value of the plan assets. Any excess,
as well as prior service costs, are amortized over the average future service
period of defined benefit pension plan participants, which for the U.S. defined
benefit pension plan is currently 10 years. For OPEB plans, any excess net actu-
arial gains and losses also are amortized over the average future service peri-
od, which is currently seven years; however, prior service costs are amortized
over the average years of service remaining to full eligibility age, which is cur-
rently five years.
Defined benefit pension plans
The Firm has a qualified noncontributory U.S. defined benefit pension plan
that provides benefits to substantially all U.S. employees. The U.S. plan
employs a cash balance formula, in the form of pay and interest credits, to
determine the benefits to be provided at retirement, based upon eligible com-
pensation and years of service. Employees begin to accrue plan benefits after
completing one year of service, and benefits generally vest after five years of
service. The Firm also offers benefits through defined benefit pension plans to
qualifying employees in certain non-U.S. locations based upon factors such as
eligible compensation, age and/or years of service.
It is the Firm’s policy to fund the pension plans in amounts sufficient to meet
the requirements under applicable employee benefit and local tax laws. As a
result of the enactment of the Pension Protection Act in August 2006, which
increased the maximum amount allowable for tax deduction, the Firm is
reviewing 2007 U.S. and non-U.S. defined benefit pension plan contribution
alternatives. The amount of potential 2007 contributions, if any, is not reason-
ably estimable at this time.
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 pay and interest credits on compensation
amounts above the maximum stipulated by law under a qualified plan. The
Excess Retirement Plan is a nonqualified, noncontributory U.S. pension plan
with an unfunded projected benefit obligation at December 31, 2006 and 2005,
in the amount of $301 million and $273 million, respectively. In the current
year, this plan has been incorporated into certain of this Note’s tables for which
it had not been included in prior years.
Defined contribution plans
JPMorgan Chase offers several defined contribution plans in the U.S. and in
certain non-U.S. locations, all of which are administered in accordance with
applicable local laws and regulations. The most significant of these plans is The
JPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”), which cov-
ers substantially all U.S. employees. The 401(k) Savings Plan allows employees
to make pretax contributions to tax-deferred investment portfolios. The
JPMorgan Chase Common Stock Fund, which is an investment option under
the 401(k) Savings Plan, is a nonleveraged employee stock ownership plan.
The Firm matches eligible employee contributions up to a certain percentage of
benefits-eligible compensation per pay period, subject to plan and legal limits.
Employees begin to receive matching contributions after completing a one-year
service requirement and are immediately vested in the Firm’s contributions
when made. Employees with total annual cash compensation of $250,000 or
more are not eligible for matching contributions. The 401(k) Savings Plan also
permits discretionary profit-sharing contributions by participating companies
for certain employees, subject to a specified vesting schedule.
OPEB plans
JPMorgan Chase offers postretirement medical and life insurance benefits to
certain retirees and qualifying U.S. employees. These benefits vary with length
of service and date of hire and provide for limits on the Firm’s share of cov-
ered medical benefits. The medical benefits are contributory, while the life
insurance benefits are noncontributory. As of August 1, 2005, the eligibility
requirements for U.S. employees to qualify for subsidized retiree medical cov-
erage were revised, and life insurance coverage was eliminated for active
employees retiring after 2005. Postretirement medical benefits also are
offered to qualifying U.K. employees.
JPMorgan Chase’s U.S. OPEB obligation is funded with corporate-owned life
insurance (“COLI”) purchased on the lives of eligible employees and retirees.
While the Firm owns the COLI policies, COLI proceeds (death benefits, with-
drawals and other distributions) may be used only to reimburse the Firm for
its net postretirement benefit claim payments and related administrative
expenses. The U.K. OPEB plan is unfunded.
The following tables present the funded status, changes in the benefit obliga-
tions and plan assets, accumulated benefit obligations, and AOCI amounts
reported on the Consolidated balance sheets for the Firm’s U.S. and non-U.S.
defined benefit pension and OPEB plans: