John Deere 2009 Annual Report Download - page 33

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The benefi ts expected to be paid from the benefi t plans,
which refl ect expected future years of service, and the Medicare
subsidy expected to be received are as follows in millions of dollars:
Health Care Health Care
and Subsidy
Pensions Life Insurance Receipts*
2010 ............................... $ 70 6 $ 35 0 $ 16
2011 ............................... 670 36 9 17
2012 ............................... 6 80 3 87 18
2013 ............................... 6 8 5 4 0 4 20
2014 ............................... 6 8 9 421 21
2015 to 2019 .................. 3,434 2,281 128
* Medicare Part D subsidy.
The annual rates of increase in the per capita cost of
covered health care benefi ts (the health care cost trend rates)
used to determine benefi t obligations were based on the trends
for medical and prescription drug claims for pre- and post-65
age groups due to the effects of Medicare. At October 31, 2009,
the weighted-average composite trend rates were assumed to be
8.2 percent for 2010, 7.7 percent for 2011, 7.2 percent for 2012,
6.7 percent for 2013, 6.2 percent for 2014, 5.8 percent for 2015,
5.4 percent for 2016 and 5.0 percent for 2017 and all future
years. The obligations at October 31, 2008 assumed 7.1 percent
for 2009, 6.3 percent for 2010, 5.8 percent for 2011, 5.2
percent for 2012 and 5.0 percent for 2013 and all future years.
An increase of one percentage point in the assumed health care
cost trend rate would increase the accumulated postretirement
benefi t obligations at October 31, 2009 by $752 million and
the aggregate of service and interest cost component of net
periodic postretirement benefi ts cost for the year by $39 million.
A decrease of one percentage point would decrease the
obligations by $629 million and the cost by $33 million.
The discount rate assumptions used to determine the
postretirement obligations at October 31, 2009 and 2008 were
based on hypothetical AA yield curves represented by a series
of annualized individual discount rates.
The following is the percentage allocation for plan assets
at October 31:
Pensions Health Care
___________ ____________
2009 2008 2009 2008
Equity securities ................................. 38% 27% 51% 42%
Debt securities* .................................. 38 47 34 42
Real estate ......................................... 5 6 3 3
Other ................................................. 19 20 12 13
* The pension and health care debt securities include 11 percent and 4 percent in
2009 and 24 percent and 7 percent in 2008, respectively, of non-fi xed income
securities that have been combined with derivatives to create fi xed income exposures.
The primary investment objective is to maximize the
growth of the pension and health care plan assets to meet the
projected obligations to the benefi ciaries over a long period of
time, and to do so in a manner that is consistent with the
company’s earnings strength and risk tolerance. The asset
allocation policy is the most important decision in managing
the assets and it is reviewed regularly. The asset allocation
policy considers the company’s fi nancial strength and long-term
asset class risk/return expectations since the obligations are
long-term in nature. On an on-going basis, the target allocations
for pension assets are approximately 38 percent for equity
securities, 37 percent for debt securities (see note in previous
table), 6 percent for real estate and 19 percent for other.
The target allocations for health care assets are approximately
50 percent for equity securities, 35 percent for debt securities
(see note in previous table), 4 percent for real estate and
11 percent for other. The assets are well diversifi ed and are
managed by professional investment fi rms as well as by invest-
ment professionals who are company employees.
The expected long-term rate of return on plan assets
refl ects management’s expectations of long-term average rates
of return on funds invested to provide for benefi ts included in
the projected benefi t obligations. The expected return is based
on the outlook for infl ation and for returns in multiple asset
classes, while also considering historical returns, asset allocation
and investment strategy. The company’s approach has empha-
sized the long-term nature of the return estimate such that the
return assumption is not changed unless there are fundamental
changes in capital markets that affect the company’s expectations
for returns over an extended period of time (i.e., 10 to 20 years).
The average annual return of the company’s U.S. pension fund
was approximately 6.2 percent during the past ten years and
approximately 9.7 percent during the past 20 years. Since return
premiums over infl ation and total returns for major asset classes
vary widely even over ten-year periods, recent history is not
necessarily indicative of long-term future expected returns.
The company’s systematic methodology for determining the
long-term rate of return for the company’s investment strategies
supports the long-term expected return assumptions.
The company has created certain Voluntary Employees’
Benefi ciary Association trusts (VEBAs) for the funding of
postretirement health care benefi ts. The future expected asset
returns for these VEBAs are lower than the expected return
on the other pension and health care plan assets due to invest-
ment in a higher proportion of short-term liquid securities.
These assets are in addition to the other postretirement health
care plan assets that have been funded under Section 401(h) of
the U.S. Internal Revenue Code and maintained in a separate
account in the company’s pension plan trust.
The company has defi ned contribution plans related to
employee investment and savings plans primarily in the U.S.
The company’s contributions and costs under these plans were
$131 million in 2009, $126 million in 2008 and $114 million
in 2007.