Northrop Grumman 2011 Annual Report Download - page 102

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NORTHROP GRUMMAN CORPORATION
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine the benefit obligations and the
net periodic benefit cost:
Pension Benefits
Medical and
Life Benefits
2011 2010 2011 2010
Assumptions Used to Determine Benefit Obligation at
December 31
Discount rate 5.03% 5.75% 5.02% 5.62%
Rate of compensation increase 2.75% 3.50%
Initial health care cost trend rate assumed for the next year 7.50% 8.00%
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2017 2017
Assumptions Used to Determine Benefit Cost for the Year
Ended December 31
Discount rate 5.75% 6.03% 5.62% 5.77%
Expected long-term return on plan assets 8.50% 8.50% 6.86% 6.90%
Rate of compensation increase 3.50% 3.75%
Initial health care cost trend rate assumed for the next year 8.00% 7.00%
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2017 2014
The discount rate is generally based on the yield on high-quality corporate fixed-income investments. At the end
of each year, the discount rate is primarily determined using a portfolio of high quality bonds matching the
notional cash inflows with the expected benefit payments for each significant benefit plan.
The assumptions used for pension benefits are consistent with those used for retiree medical and life insurance
benefits. The long-term rate of return on plan assets used for the medical and life benefits are reduced to allow for
the impact of tax on expected returns as, unlike the pension trust, the earnings of certain Voluntary Employee
Beneficiary Association (VEBA) trusts are taxable.
Through consultation with investment advisors, expected long-term returns for each of the plans’ strategic asset
classes were developed. Several factors were considered, including survey of investment managers’ expectations,
current market data such as yields/price-earnings ratios, and historical market returns over long periods. Using
policy target allocation percentages and the asset class expected returns, a weighted-average expected return was
calculated. A one-percentage-point change in the initial through the ultimate health care cost trend rates would
have the following effects:
$ in millions
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Increase (Decrease) From Change In Health Care Cost Trend Rates To
Post-retirement benefit expense $ 5 $ (6)
Post-retirement benefit liability 64 (75)
Plan Assets and Investment Policy
Plan assets are invested in various asset classes that are expected to produce a sufficient level of diversification and
investment return over the long term. The investment goal is to exceed the assumed actuarial rate of return over
-92-