Northrop Grumman 2012 Annual Report Download - page 79

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NORTHROP GRUMMAN CORPORATION
-69-
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
December 31
$ in millions 2012 2011
Projected benefit obligation $27,645 $22,451
Accumulated benefit obligation 27,146 21,949
Fair value of plan assets 22,853 19,550
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
2012 2011 2012 2011
Assumptions used to determine benefit obligation at December 31
Discount rate 4.12% 5.03% 4.02% 5.02%
Rate of compensation increase 2.75% 2.75%
Initial health care cost trend rate assumed for the next year 7.00% 7.50%
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 5.03% 5.75% 5.02% 5.62%
Expected long-term return on plan assets 8.25% 8.50% 7.44% 6.86%
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
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.
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.
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.
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 Decrease 1-Percentage-
Point Increase
Increase (decrease) from change in health care cost trend rates to
Post-retirement benefit expense $ (6) $ 5
Post-retirement benefit liability (88) 73