JP Morgan Chase 2006 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
104 JPMorgan Chase & Co. / 2006 Annual Report
The following table presents the effect of a one-percentage-point change in
the assumed health care cost trend rate on JPMorgan Chase’s total service
and interest cost and accumulated postretirement benefit obligation:
For the year ended December 31, 2006 1-Percentage- 1-Percentage-
(in millions) point increase point decrease
Effect on total service and interest costs $ 4 $ (3)
Effect on postretirement obligation 63 (54)
At December 31, 2006, the Firm increased the discount rates used to deter-
mine its benefit obligations for the U.S. defined benefit pension and OPEB
plans based upon current market interest rates, which will result in a decrease
in expense of approximately $23 million for 2007. The 2007 expected long-
term rate of return on U.S. pension plan assets remained at 7.50%. The 2007
expected long-term rate of return on the Firm’s U.S. OPEB plan assets
increased from 6.84% to 7.00%. The Firm maintained the health care benefit
obligation trend assumption at 10% for 2007, declining to an ultimate rate
of 5% in 2014. The interest crediting rate assumption at December 31, 2006,
used to determine pension benefits changed primarily due to changes in mar-
ket interest rates, which will result in additional expense of $10 million for
2007. The assumed rate of compensation increase remained at 4.00% as of
December 31, 2006. The most significant change to the assumptions used to
determine net periodic benefit costs in 2006 from the prior year were lower
discount rates for the Firm’s non-U.S. plans, both defined benefit pension and
OPEB, due to lower market interest rates, resulting in $23 million higher com-
pensation expense in 2006 compared with 2005.
JPMorgan Chase’s U.S. defined benefit pension and OPEB plan 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 $27 million in 2007 U.S. defined benefit pension and OPEB plan
expenses. A 25–basis point decline in the discount rate for the U.S. plans would
result in an increase in 2007 U.S. defined benefit pension and OPEB plan
expenses of approximately $3 million and an increase in the related projected
benefit obligations of approximately $217 million. A 25 – basis point decline in
the discount rates for the non-U.S. plans would result in an increase in the
2007 non-U.S. defined benefit pension and OPEB plan expenses of approxi-
mately $19 million. A 25–basis point increase in the interest crediting rate for
the U.S. defined benefit pension plan would result in an increase in 2007 U.S.
defined benefit pension expense of approximately $10 million and an increase
in the related projected benefit obligations of approximately $82 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 respec-
tive 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 manag-
ing various risk factors and each plan’s investment return objectives. For
example, long-duration fixed income securities are included in the U.S. quali-
fied pension plan’s asset allocation, in recognition of its long-duration obliga-
tions. Plan assets are managed by a combination of internal and external
investment managers and are rebalanced to within approved ranges, to the
extent economically practical.
The Firm’s U.S. defined benefit pension plan assets are held in various trusts
and are invested in a well-diversified portfolio of equities (including U.S. large
and small capitalization and international equities), fixed income (including
corporate and government bonds), Treasury inflation-indexed and high-yield
securities, real estate, cash equivalents, and alternative investments. Non-U.S.
defined benefit pension plan assets are held in various trusts and are similarly
invested in well-diversified portfolios of equity, fixed income and other securi-
ties. Assets of the Firm’s COLI policies, which are used to fund partially the
U.S. OPEB 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, were used to fund the U.S.
OPEB plan in prior periods; as of December 31, 2006, there are no remaining
assets in the trust. As of December 31, 2006, the assets used to fund the
Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans do not
include JPMorgan Chase common stock, except in connection with invest-
ments in third-party stock-index funds.
The following table presents the weighted-average asset allocation at December 31 for the years indicated, and the respective approved range/target allocation by
asset category, for the Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans:
Defined benefit pension plans
U.S. Non-U.S.(a) OPEB plans(b)
Target % of plan assets Target % of plan assets Target % of plan assets
December 31, Allocation 2006 2005 Allocation 2006 2005 Allocation 2006 2005
Asset category
Debt securities 10-30% 31% 33% 73% 70% 75% 50% 50% 54%
Equity securities 25-60 55 57 26 26 24 50 50 46
Real estate 5-20 86—11— ——
Alternatives 15-50 6413—— ——
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. OPEB plan only, as the U.K. OPEB plan is unfunded.