KeyBank 2005 Annual Report Download - page 82

81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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The funded status of the postretirement plans, reconciled to the amounts
recognized in the consolidated balance sheets at December 31, 2005 and
2004, is as follows:
There are no regulatory provisions that require contributions to the
VEBAs. Consequently, there is no minimum funding requirement.
Discretionary contributions to the VEBAs are permitted, subject to
certain Internal Revenue Service (“IRS”) restrictions and limitations.
Management anticipates that Key will make discretionary contributions
into the VEBA trusts of approximately $6 million in 2006.
Benefits from all funded and unfunded other postretirement plans at
December 31, 2005, are expected to be paid as follows: 2006 — $9
million; 2007 — $9 million; 2008 — $10 million; 2009 — $10 million;
2010 — $10 million; and $56 million in the aggregate from 2011 through
2015. Federal subsidies related to prescription drug coverage under the
“Medicare Prescription Drug, Improvement and Modernization Act of
2003” are expected to be $2 million in 2006 and $3 million in the
aggregate from 2007 through 2015.
To determine the accumulated postretirement benefit obligation,
management assumed weighted-average discount rates of 5.25% at
December 31, 2005, 5.75% at December 31, 2004, and 6.00% at
December 31, 2003.
To determine net postretirement benefit cost, management assumed
the following weighted-average rates:
The realized net investment income for the postretirement healthcare plan
VEBA is subject to federal income taxes. Consequently, the weighted-
average expected return on plan assets shown above reflects the effect of
income taxes. Management assumptions regarding healthcare cost trend
rates are as follows:
Increasing or decreasing the assumed healthcare cost trend rate by one
percentage point each future year would not have a material impact on
net postretirement benefit cost or obligations since the postretirement
plans have cost-sharing provisions and benefit limitations.
Management estimates the expected returns on plan assets for VEBAs
much the same way it estimates returns on Key’s pension funds. The
primary investment objectives of the VEBAs also are similar. In
accordance with Key’s current investment policies, weighted-average
target allocation ranges for the VEBAs’ assets are as follows:
Key’s weighted-average asset allocations for its postretirement VEBAs
are summarized as follows:
Although the investment policy conditionally permits the use of derivative
contracts, no such contracts have been entered into, and management
does not foresee employing such contracts in the future.
On December 8, 2003, the “Medicare Prescription Drug, Improvement
and Modernization Act of 2003” was signed into law. The Act, which
becomes effective in 2006, introduces a prescription drug benefit under
Medicare, as well as a federal subsidy to sponsors of retiree healthcare
benefit plans that offer “actuarially equivalent” prescription drug
coverage to retirees.
Based on regulations regarding the manner in which actuarial equivalence
must be determined, management has determined that the prescription
drug coverage related to Key’s retiree healthcare benefit plan is actuarially
equivalent, and that the subsidy will not have a material effect on
Key’s APBO and net postretirement benefit cost.
EMPLOYEE 401(K) SAVINGS PLAN
A substantial majority of Key’s employees are covered under a savings
plan that is qualified under Section 401(k) of the Internal Revenue
Code. Key’s plan permits employees to contribute from 1% to 16% of
eligible compensation, with up to 6% being eligible for matching
contributions in the form of Key common shares. The plan also permits
Key to distribute a discretionary profit-sharing component. Key also
maintains nonqualified excess 401(k) savings plans that provide certain
employees with benefits that they otherwise would not have been
eligible to receive under the qualified plan because of contribution
limits imposed by the IRS. Total expense associated with all plans was
$61 million in 2005, $60 million in 2004 and $54 million in 2003.
December 31,
in millions 2005 2004
Funded status
a
$(74) $(77)
Unrecognized net loss 33 36
Unrecognized prior service cost 22
Unrecognized transition obligation 27 32
Contributions/benefits paid subsequent
to measurement date 45
Accrued postretirement
benefit cost recognized $ (8) $ (2)
a
The excess of the accumulated postretirement benefit obligation over the fair value
of plan assets.
Year ended December 31, 2005 2004 2003
Discount rate 5.75% 6.00% 6.50%
Expected return on plan assets 5.79 5.78 5.73
December 31, 2005 2004
Healthcare cost trend rate assumed
for next year 9.50% 10.00%
Rate to which the cost trend rate
is assumed to decline 5.00 5.00
Year that the rate reaches the
ultimate trend rate 2015 2015
December 31, 2005 2004
Equity securities 85% 78%
Cash equivalents 15 22
Total 100% 100%
Asset Class Investment Range
Equity securities 70% — 90%
Fixed income securities 0 — 10
Convertible securities 0 — 10
Cash equivalents and other assets 10 — 30