KeyBank 2005 Annual Report Download - page 80

79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
NEXT PAGEPREVIOUS PAGE SEARCH BACK TO CONTENTS
Changes in the fair value of pension plan assets (“FVA”) are summarized
as follows:
The funded status of the pension plans, reconciled to the amounts
recognized in the consolidated balance sheets at December 31, 2005 and
2004, is as follows:
At December 31, 2005, Key’s qualified plans were sufficiently funded
under the Employee Retirement Income Security Act of 1974, which
outlines pension-funding requirements. Consequently, no minimum
contributions to the plans are required in 2006. If Key makes any
discretionary contributions for 2006, those contributions are not expected
to be significant.
Benefits from all funded and unfunded pension plans at December 31, 2005,
are expected to be paid as follows: 2006 — $92 million; 2007 — $94
million; 2008 — $98 million; 2009 — $98 million; 2010 — $96 million;
and $521 million in the aggregate from 2011 through 2015.
The accumulated benefit obligation (“ABO”) for all of Key’s pension
plans was $1.1 billion at December 31, 2005, and $1.0 billion at
December 31, 2004. Information for those pension plans that had an
ABO in excess of plan assets is as follows:
Key’s primary qualified Cash Balance Pension Plan is excluded from the
preceding table because that plan was overfunded (i.e., the fair value of
plan assets exceeded the projected benefit obligation) by $184 million
and $168 million at December 31, 2005 and 2004, respectively.
SFAS No. 87, “Employers’ Accounting for Pensions,” requires employers
to recognize an additional minimum liability (“AML”) to the extent of
any excess of the unfunded ABO over the liability already recognized as
unfunded accrued pension cost. Key’s AML, which excludes the
overfunded Cash Balance Pension Plan mentioned above, increased to
$55 million at December 31, 2005, from $52 million at December 31,
2004. The after-tax increase in AML included in “accumulated other
comprehensive income (loss)” for 2005, 2004, and 2003 is shown in the
Statements of Changes in Shareholders’ Equity on page 55.
In order to determine the actuarial present value of benefit obligations,
management assumed the following weighted-average rates:
To determine net pension cost, management assumed the following
weighted-average rates:
Management estimates that Key’s net pension cost will be $45 million
for 2006, compared with $33 million for 2005 and $32 million for 2004.
The estimated increase in cost for 2006 is attributable primarily to
increased amortization of unrecognized losses and a 25 basis point
reduction in the expected rate of return on plan assets discussed below.
The unrecognized losses resulted primarily from asset losses, representing
the difference between expected and actual returns on plan assets in 2002
and 2001. Asset losses and gains are not immediately recognized in
the year that they occur, but rather are combined with any other
cumulative asset- and obligation-related unrecognized gains and losses.
These unrecognized gains and losses are subject to expense amortization
gradually and systematically over future years, subject to certain
constraints and recognition rules. Key determines the expected return on
plan assets using a calculated market-related value of plan assets which
smoothes what otherwise might be significant year-to-year volatility in
net pension cost. Asset gains and losses are reflected evenly in the
market-related value over the following five years, subject to the market-
related value not exceeding plus or minus 10% of the plan’s FVA. As
asset gains and losses are reflected in the market-related value, they are
included in the cumulative unrecognized gains and losses subject to
expense amortization.
Management estimates that a 25 basis point decrease in the expected
return on plan assets would increase Key’s net pension cost for 2006 by
approximately $3 million. Conversely, management estimates that a 25
basis point increase in the expected return on plan assets would decrease
Year ended December 31,
in millions 2005 2004
FVA at beginning of year $1,027 $ 966
Actual return on plan assets 141 124
Employer contributions 12 16
Benefit payments (84) (79)
FVA at end of year $1,096 $1,027
December 31,
in millions 2005 2004
Funded status
a
$2 $ (10)
Unrecognized net loss 291 325
Unrecognized prior service benefit —(1)
Benefits paid subsequent
to measurement date 33
Net prepaid pension cost recognized $ 296 $ 317
Net prepaid pension cost recognized
consists of:
Prepaid benefit cost $ 418 $ 433
Accrued benefit liability (177) (168)
Deferred tax asset 20 17
Intangible asset 12
Accumulated other comprehensive loss 34 33
Net prepaid pension cost recognized $ 296 $ 317
a
The excess/(shortfall) of the fair value of plan assets over the projected benefit obligation.
December 31,
in millions 2005 2004
Projected benefit obligation $235 $227
Accumulated benefit obligation 230 221
Fair value of plan assets 52 49
Year ended December 31, 2005 2004 2003
Discount rate 5.75% 6.00% 6.50%
Compensation increase rate 4.00 4.00 4.00
Expected return on plan assets 9.00 9.00 9.00
December 31, 2005 2004 2003
Discount rate 5.25% 5.75% 6.00%
Compensation increase rate 4.00 4.00 4.00