KeyBank 2006 Annual Report Download - page 95

95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
There are no regulatory provisions that require contributions to the
VEBA trusts. Consequently, there is no minimum funding requirement.
Key is permitted to make discretionary contributions to the VEBAs,
subject to certain Internal Revenue Service restrictions and limitations.
Management anticipates that Key will make $4 million in such
discretionary contributions in 2007.
Benefits from all funded and unfunded other postretirement plans at
December 31, 2006, are expected to be paid as follows: 2007 — $8
million; 2008 — $8 million; 2009 — $9 million; 2010 — $9 million;
2011 — $9 million; and $45 million in the aggregate from 2012 through
2016. Federal subsidies related to prescription drug coverage under the
“Medicare Prescription Drug, Improvement and Modernization Act of
2003” discussed below are expected to be $1 million in 2007 and $2
million in the aggregate from 2008 through 2016.
To determine the APBO, management assumed weighted-average
discount rates of 5.50% at December 31, 2006, and 5.25% at December
31, 2005.
To determine net postretirement benefit cost, management assumed
the following weighted-average rates:
The realized net investment income for the postretirement healthcare plan
VEBA trust 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 VEBA
trusts much the same way it estimates returns on Key’s pension funds.
The primary investment objectives of the VEBA trusts also are similar.
In accordance with Key’s current investment policies, weighted-average
target allocation ranges for the trust’s assets are as follows:
Key’s weighted-average asset allocations for its postretirement VEBA
trusts 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 expect to employ such contracts in the future.
The “Medicare Prescription Drug, Improvement and Modernization Act
of 2003,” which became effective in 2006, introduced 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. The subsidy did 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 25% 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. Effective December 29, 2006, Key discontinued the excess
401(k) savings plan, and balances were merged into a new deferred
savings plan that went into effect January 1, 2007. Total expense
associated with the above plans was $59 million in 2006, $61 million in
2005 and $60 million in 2004.
Year ended December 31, 2006 2005 2004
Discount rate 5.25% 5.75% 6.00%
Expected return on plan assets 5.64 5.79 5.78
December 31, 2006 2005
Healthcare cost trend rate assumed for 2007:
Under age 65 11.00% 9.50%
Age 65 and over 10.50 9.50
Rate to which the cost trend rate
is assumed to decline 5.00 5.00
Year that the rate reaches the
ultimate trend rate 2016 2015
December 31, 2006 2005
Equity securities 85% 85%
Cash equivalents 15 15
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
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