Neiman Marcus 2006 Annual Report Download - page 137

Discount rate. The assumed discount rate utilized is based on a broad sample of Moody's high quality corporate bond yields as
of the measurement date. The projected benefit payments are matched with the yields on these bonds to determine an appropriate discount
rate for the plan. The discount rate is utilized principally in calculating the present value of our pension obligation and net pension
expense. At August 1, 2007 and August 1, 2006, the discount rate was 6.25%. As a result of the increase in the discount rate from 5.75%
at the Acquisition date to 6.25% at August 1, 2006, the projected benefit obligations related to our employee benefit plans decreased
$37.4 million.
The estimated effect of a 0.25% decrease in the discount rate would increase the Pension Plan obligation by $16.4 million,
increase the SERP Plan obligation by $3.0 million and increase the Postretirement Plan obligation by $0.1 million. The estimated effect
of a 0.25% decrease in the discount rate would increase the annual Pension Plan expense by $1.0 million, increase the SERP Plan annual
expense by $0.1 million and increase the Postretirement Plan annual expense by an immaterial amount.
Expected long-term rate of return on plan assets. The assumed expected long-term rate of return on assets is the weighted
average rate of earnings expected on the funds invested or to be invested to provide for the pension obligation. During fiscal year 2007,
we utilized 8.0% as the expected long-term rate of return on plan assets. We periodically evaluate the allocation between investment
categories of the assets held by the Pension Plan. We estimate the expected average long-term rate of return on assets based on our future
asset performance expectations using currently available market and other data and the counsel of our outside actuaries and advisors. This
rate is utilized primarily in calculating the expected return on plan assets component of the annual pension expense. To the extent the
actual rate of return on assets realized over the course of a year is greater than the assumed rate, that year's annual pension expense is not
affected. Rather this gain reduces future pension expense over a period of approximately 10 to 16 years. To the extent the actual rate of
return on assets is less than the assumed rate, that year's annual pension expense is likewise not affected. Rather this loss increases
pension expense over approximately 10 to 16 years.
Rate of future compensation increase. The assumed average rate of compensation increase is the average annual compensation
increase expected over the remaining employment periods for the participating employees. We utilized a rate of 4.5% for the periods
beginning July 28, 2007. This rate is utilized principally in calculating the obligation and annual expense for the Pension and SERP Plans.
The estimated effect of a 0.25% increase in the assumed rate of compensation increase would increase the projected benefit obligation for
the Pension Plan by $2.4 million and increase the SERP Plan projected benefit obligation by $1.1 million. The estimated effect of a
0.25% increase in the assumed rate of compensation increase would increase annual pension expense by $0.4 million and increase the
SERP Plan annual expense by $0.1 million.
Health care cost trend rate. The assumed health care cost trend rate represents our estimate of the annual rates of change in the
costs of the health care benefits currently provided by the Postretirement Plan. The health care cost trend rate implicitly considers
estimates of health care inflation, changes in health care utilization and delivery patterns, technological advances and changes in the
health status of the plan participants. We utilized a health care cost trend rate of 8% as of August 1, 2007, remaining constant over time to
yield an ultimate health care cost trend rate of 8%. If the assumed health care cost trend rate were increased one percentage point,
Postretirement Plan costs for 2007 would have been $0.2 million higher and the accumulated postretirement benefit obligation as of
July 28, 2007 would have been $2.9 million higher. If the assumed health care trend rate were decreased one percentage point,
Postretirement Plan costs for 2007 would have been $0.2 million lower and the accumulated postretirement benefit obligation as of
July 28, 2007 would have been $2.4 million lower.
Effect of Medicare Subsidy on Postretirement Plan. In December 2003, the U.S. Congress enacted the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (Act) that provides a prescription drug subsidy, beginning in January 2006, to
companies that sponsor postretirement health care plans that provide drug benefits. Based upon the provisions of the legislation enacted in
January 2005, we reviewed the provisions of our Postretirement Plan to determine whether the benefits offered by our plan met the
statutory definition of "actuarially equivalent" prescription drug benefits that qualify for the federal subsidy. Based upon this review, we
believe that our benefits qualify for the subsidy.
In accordance with the provisions of the FASB Staff Position 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," we revalued our projected benefit obligation as of
January 31, 2005 1) to incorporate the benefit associated with the federal subsidy we expect to receive and 2) to reduce the discount rate
to 5.75%. The revised obligation as of January 31, 2005 was approximately $19.1 million, reflecting a reduction of approximately
$2.6 million for the impact of the federal subsidy, offset by an increase of approximately $0.8 million for the change in discount rate.
Effective August 1, 2006, we moved to an Enhanced Part D arrangement and will no longer directly receive the federal
subsidy. The move to an Enhanced Part D plan is expected to result in additional savings which reduced our obligation at August 1,
2006 by $2.2 million and is estimated to reduce the net periodic cost for fiscal years 2007 and 2008 by $0.2 million.
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