JP Morgan Chase 2008 Annual Report Download - page 168

Notes to consolidated financial statements
166 JPMorgan Chase & Co./ 2008 Annual Report
At December 31, 2008, the Firm increased the discount rates used to
determine 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 $1.6 million for
2009. The 2009 expected long-term rate of return on U.S. pension
plan assets and U.S. OPEB plan assets remained at 7.5% and 7.0%,
respectively. The health care benefit obligation trend assumption
declined from 9.25% in 2008 to 8.5% in 2009, declining to a rate of
5% in 2014. As of December 31, 2008, the interest crediting rate
assumption and the assumed rate of compensation increase
remained at 5.25% and 4.0%, respectively.
JPMorgan Chase’s U.S. defined benefit pension and OPEB plan
expense is sensitive to the expected long-term rate of return on plan
assets and the discount rate. With all other assumptions held con-
stant, a 25-basis point decline in the expected long-term rate of
return on U.S. plan assets would result in an increase of approxi-
mately $23 million in 2009 U.S. defined benefit pension and OPEB
plan expense. A 25-basis point decline in the discount rate for the
U.S. plans would result in an increase in 2009 U.S. defined benefit
pension and OPEB plan expense of approximately $9 million and an
increase in the related projected benefit obligations of approximately
$159 million. A 25-basis point decline in the discount rates for the
non-U.S. plans would result in an increase in the 2009 non-U.S.
defined benefit pension and OPEB plan expense of approximately
$10 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 2009 U.S. defined benefit pension expense of approximately $16
million and an increase in the related projected benefit obligations of
approximately $66 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 are rebalanced within approved ranges on
a continued basis. The Firm reviews the allocation daily and all fac-
tors that impact portfolio changes to ensure the Plan stays within
these ranges, rebalancing when deemed necessary.
The Firm’s U.S. defined benefit pension plan assets are held in trust
and 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 infla-
tion-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 similarly invested in well-diversi-
fied portfolios of equity, fixed income and other securities. 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. As of
December 31, 2008, assets held by 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 investments in
third-party stock-index funds.
The following table presents the weighted-average asset allocation of the fair values of total plan assets at December 31 for the years indicated, as
well as 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. OPEB plans(a)
Target % of plan assets Target % of plan assets Target % of plan assets
December 31, Allocation 2008 2007 Allocation 2008 2007 Allocation 2008 2007
Asset category
Debt securities 10-30% 25% 28% 68% 73% 70% 50% 50% 50%
Equity securities 25-60 36 45 27 21 25 50 50 50
Real estate 5-20 79111———
Alternatives 15-50 32 18 4 54———
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
(a) Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded.