Morgan Stanley 2015 Annual Report Download - page 238

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The discount rates used to determine the benefit obligations for the U.S. pension and the U.S. postretirement plans were
selected by the Company, in consultation with its independent actuaries, using a pension discount yield curve based on the
characteristics of the plans, each determined independently. The pension discount yield curve represents spot discount yields
based on duration implicit in a representative broad-based Aa rated corporate bond universe of high-quality fixed income
investments. For all non-U.S. pension plans, the Company set the assumed discount rates based on the nature of liabilities,
local economic environments and available bond indices.
Assumed Health Care Cost Trend Rates Used to Determine the U.S. Postretirement Benefit Obligations.
At December 31,
2015
At December 31,
2014
Health care cost trend rate assumed for next year:
Medical ................................................................ 6.25% 6.88-7.23%
Prescription ............................................................. 11.00% 7.87%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) .............. 4.50% 4.50%
Year that the rate reaches the ultimate trend rate .................................... 2038 2029
Assumed health care cost trend rates can have a significant effect on the amounts reported for the Company’s postretirement
benefit plan.
Effect of Changes in Assumed Health Care Cost Trend Rates.
One-Percentage
Point Increase
One-Percentage
Point (Decrease)
(dollars in millions)
Total 2015 postretirement service and interest cost ................................ N/M N/M
December 31, 2015 postretirement benefit obligation .............................. $ 3 $ (3)
N/M—Not Meaningful.
No impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has been reflected in the
consolidated statements of income as Medicare prescription drug coverage was deemed to have no material effect on the
Company’s postretirement benefit plan.
Plan Assets.
The U.S. Qualified Plan assets represent 89% of the Company’s total pension plan assets. The U.S. Qualified Plan uses a
combination of active and risk-controlled fixed income investment strategies. The fixed income asset allocation consists
primarily of fixed income securities and related derivative instruments designed to approximate the expected cash flows of
the plan’s liabilities in order to help reduce plan exposure to interest rate variation and to better align assets with obligations.
The longer duration fixed income allocation is expected to help protect the plan’s funded status and maintain the stability of
plan contributions over the long run.
Derivative instruments are permitted in the U.S. Qualified Plan’s investment portfolio only to the extent that they comply
with all of the plan’s investment policy guidelines and are consistent with the plan’s risk and return objectives. In addition,
any investment in derivatives must meet the following conditions:
• Derivatives may be used only if they are deemed by the investment manager to be more attractive than a similar
direct investment in the underlying cash market or if the vehicle is being used to manage risk of the portfolio.
• Derivatives may not be used in a speculative manner or to leverage the portfolio under any circumstances.
• Derivatives may not be used as short-term trading vehicles. The investment philosophy of the U.S. Qualified Plan is
that investment activity is undertaken for long-term investment rather than short-term trading.
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