Medtronic 2016 Annual Report Download - page 115

Table of Contents
Medtronic plc
Notes to Consolidated Financial Statements (Continued)
112
The actuarial assumptions are as follows:
U.S. Pension Benefits Non-U.S. Pension Benefits
Fiscal Year Fiscal Year
2016 2015 2014 2016 2015 2014
Critical assumptions –
projected benefit obligation:
Discount rate 3.60% - 4.30% 4.20% 4.75% 0.25% - 10.20% 1.88% 3.32%
Rate of compensation increase 3.90% 3.90% 3.90% 2.83% 2.92% 2.80%
Critical assumptions – net
periodic benefit cost:
Discount rate 4.20% - 4.80% 4.75% 4.55% 0.80% - 9.00% 3.32% 3.52%
Expected return on plan assets 8.20% 8.25% 8.25% 4.35% 4.77% 4.76%
Rate of compensation increase 3.90% 3.90% 3.90% 2.92% 2.80% 2.78%
The Company changed the methodology used to estimate the service and interest cost components of net periodic pension cost
and net periodic postretirement benefit cost for the Company’s pension and other postretirement benefit plans, effective April 30,
2016. Previously, the Company estimated such cost components utilizing a single weighted-average discount rate derived from
the market-observed yield curves of high-quality fixed income securities used to measure the pension benefit obligation and
accumulated postretirement benefit obligation. The new methodology utilizes a full yield curve approach in the estimation of these
cost components by applying the specific spot rates along the yield curve to their underlying projected cash flows and provides a
more precise measurement of service and interest costs by improving the correlation between projected cash flows and their
corresponding spot rates. The current yield curves represent high quality, long-term fixed income instruments. The change does
not affect the measurement of the Company’s pension obligation or accumulated postretirement benefit obligation. The Company
has accounted for this change prospectively as a change in accounting estimate.
The expected long-term rate of return on plan assets assumptions are determined using a building block approach, considering
historical averages and real returns of each asset class. In certain countries, where historical returns are not meaningful, consideration
is given to local market expectations of long-term returns.
Retirement Benefit Plan Investment Strategy The Company has an account that holds the assets for both the U.S. pension plan
and other U.S. post-retirement benefits, primarily retiree medical benefits. For investment purposes, the plans are managed in an
identical way, as their objectives are similar.
The Company has a Qualified Plan Committee (the Plan Committee) that sets investment guidelines for U.S. pension plan and
other U.S. post-retirement benefits with the assistance of an external consultant. These guidelines are established based on market
conditions, risk tolerance, funding requirements, and expected benefit payments. The Plan Committee also oversees the investment
allocation process, selects the investment managers, and monitors asset performance. As pension liabilities are long-term in nature,
the Company employs a long-term total return approach to maximize the long-term rate of return on plan assets for a prudent level
of risk. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term
rate of return assumption.
The investment portfolio contains a diversified portfolio of investment categories, including equities, fixed income securities,
hedge funds, and private equity. Securities are also diversified in terms of domestic and international securities, short- and long-
term securities, growth and value styles, large cap and small cap stocks, active and passive management, and derivative-based
styles.
Outside the U.S., pension plan assets are typically managed by decentralized fiduciary committees. There is significant variation
in policy asset allocation from country to country. Local regulations, local funding rules, and local financial and tax considerations
are part of the funding and investment allocation process in each country.
The Plan did not hold any investments in the Company’s ordinary shares as of April 29, 2016 or April 24, 2015.