JP Morgan Chase 2006 Annual Report Download - page 105

JPMorgan Chase & Co. / 2006 Annual Report 103
U.S. Non-U.S.
December 31, 2006 2005 2006 2005
Weighted-average assumptions used to determine benefit obligations
Discount rate:
Defined benefit pension plans 5.95% 5.70% 2.25-5.10% 2.00-4.70%
OPEB plans 5.90 5.65 5.10 4.70
Rate of compensation increase 4.00 4.00 3.00-4.00 3.00-3.75
Health care cost trend rate:
Assumed for next year 10.00 10.00 6.63 7.50
Ultimate 5.00 5.00 4.00 4.00
Year when rate will reach ultimate 2014 2013 2010 2010
Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit
pension and OPEB plan assets is a blended average of the investment advi-
sor’s projected long-term (10 years or more) returns for the various asset
classes, weighted by the portfolio allocation. Returns on asset classes are
developed using a forward-looking building-block approach and are not
strictly based 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 expect-
ed effect on returns from changing yields. Other asset-class returns are
derived from their relationship to the equity and bond markets.
For the U.K. defined benefit pension plan, which represents the most signifi-
cant of the non-U.S. defined benefit pension plans, procedures similar to
those in the U.S. are used to develop the expected long-term rate of return on
defined benefit pension plan assets, taking into consideration local market
conditions and the specific allocation of plan assets. The expected 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. gov-
ernment bonds and AA-rated long-term corporate bonds, plus an equity risk
premium above the risk-free rate.
In 2006 and 2005, the discount rate used in determining the benefit obliga-
tion under the U.S. defined benefit pension and OPEB plans was selected by
reference to the yield on a portfolio of bonds with redemption dates and
coupons that 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 rates for the U.K. defined
benefit pension and OPEB plans represent rates from the yield curve of the
year-end iBoxx £ corporate AA 15-year-plus bond index with durations corre-
sponding to those of the underlying benefit obligations.
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 OPEB plans, as of and for the periods indicated:
U.S. Non-U.S.
Year ended December 31, 2006 2005 2004 2006 2005 2004
Weighted-average assumptions used to determine net periodic benefit costs
Discount rate:
Defined benefit pension plans 5.70% 5.75% 6.00% 2.00-4.70% 2.00-5.30% 2.00-5.75%
OPEB plans 5.65 5.25-5.75(a) 6.00 4.70 5.30 5.40
Expected long-term rate of return on plan assets:
Defined benefit pension plans 7.50 7.50 7.50-7.75 3.25-5.50 3.25-5.75 3.00-6.50
OPEB plans 6.84 6.80(b) 4.75-7.00 NA NA NA
Rate of compensation increase 4.00 4.00 4.25-4.50 3.00-3.75 1.75-3.75 1.75-3.75
Health care cost trend rate:
Assumed for next year 10.00 10.00 10.00 7.50 7.50 6.50
Ultimate 5.00 5.00 5.00 4.00 4.00 4.00
Year when rate will reach ultimate 2013 2012 2011 2010 2010 2009
(a) The OPEB 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) In 2005 the expected long-term rate of return on plan assets for the Firm’s OPEB plan was revised to show the aggregate expected return for the heritage Bank One and JPMorgan Chase plans.