JP Morgan Chase 2010 Annual Report Download - page 204

Notes to consolidated financial statements
204 JPMorgan Chase & Co./2010 Annual Report
Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. de-
fined benefit pension and OPEB plan assets is a blended average of
the investment advisor’s projected long-term (10 years or more)
returns for the various asset classes, weighted by the asset alloca-
tion. Returns on asset classes are developed using a forward-
looking building-block approach and are not strictly based on
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
inflation, real bond yield and risk spread (as appropriate), adjusted
for the expected effect on returns from changing yields. Other
asset-class returns are derived from their relationship to the equity
and bond markets. Consideration is also given to current market
conditions and the short-term portfolio mix of each plan; as a
result, in 2010 the Firm generally maintained the same expected
return on assets as in the prior year.
For the U.K. defined benefit pension plans, which represent the
most significant 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. The return on equities has been se-
lected by reference to the yield on long-term U.K. government
bonds plus an equity risk premium above the risk-free rate. The
return on “AA”-rated long-term corporate bonds has been taken as
the average yield on such bonds.
The discount rate used in determining the benefit obligation under
the U.S. defined benefit pension and OPEB plans was selected by
reference to the yields on portfolios of bonds with maturity dates
and coupons that closely match each of the plan’s projected cash
flows; such portfolios are derived from a broad-based universe of
high-quality corporate bonds as of the measurement date. In years
in which these hypothetical bond portfolios generate 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. The discount rate for the U.K. defined
benefit pension and OPEB plans represents a rate implied from the
yield curve of the year-end iBoxx £ corporate “AA” 15-year-plus
bond index.
The following tables present the weighted-average annualized actuarial assumptions for the projected and accumulated postretirement 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.
Weighted-average assumptions used to determine benefit obligations
U
.S.
Non
-
U.S.
December 31,
2010
2009
2010
2009
Discount rate:
Defined benefit pension plans
5.5
0
%
6.00%
1.60
-
5.50%
2.00-5.70%
OPEB plans
5.5
0
6.00
5.50
5.70
Rate of compensation increase
4.0
0
4.00
3.00
-
4.50
3.00-4.50
Health care cost trend rate:
Assumed for next year
7.0
0
7.75
6.50
5.40
Ultimate
5.0
0
5.00
6.00
4.50
Year when rate will reach ultimate
2017
2014
2015
2014
Weighted-average assumptions used to determine net periodic benefit costs
U.S.
Non
-
U.S.
Year ended December 31,
2010
2009 2008
2010
2009 2008
Discount rate:
Defined benefit pension plans
6.00%
6.65% 6.60%
2.00
-
5.70%
2.00-6.20% 2.25-5.80 %
OPEB plans
6.0
0
6.70 6.60
5.70
6.20 5.80
Expected long-term rate of return on plan assets:
Defined benefit pension plans
7.50
7.50 7.50
2.40
-
6.20
2.50-6.90 3.25-5.75
OPEB plans
7.00
7.00 7.00
NA
NA NA
Rate of compensation increase
4.00
4.00 4.00
3.00
-
4.50
3.00-4.00 3.00-4.25
Health care cost trend rate:
Assumed for next year
7.75
8.50 9.25
5.40
7.00 5.75
Ultimate
5.00
5.00 5.00
4.50
5.50 4.00
Year when rate will reach ultimate
2014
2014 2014
2014
2012 2010