Northrop Grumman 2013 Annual Report Download - page 81

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NORTHROP GRUMMAN CORPORATION
-71-
Amounts for pension plans with accumulated benefit obligations in excess of fair value of plan assets are as follows:
December 31
$ in millions 2013 2012
Projected benefit obligation $24,129 $27,645
Accumulated benefit obligation 23,830 27,146
Fair value of plan assets 22,138 22,853
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
2013 2012 2013 2012
Assumptions used to determine benefit obligation at December 31
Discount rate 4.99% 4.12% 4.90% 4.02%
Initial cash balance crediting rate assumed for the next year 3.90% 3.00%
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate) 4.70% 4.25%
Year that the cash balance crediting rate reaches the ultimate rate 2019 2018
Rate of compensation increase 3.00% 2.75%
Initial health care cost trend rate assumed for the next year 6.50% 7.00%
Rate to which the health care cost trend rate is assumed to decline
(the ultimate trend rate) 5.00% 5.00%
Year that the health care cost trend rate reaches the ultimate trend
rate 2017 2017
Assumptions used to determine benefit cost for the year ended
December 31
Discount rate 4.12% 5.03% 4.02% 5.02%
Initial cash balance crediting rate assumed for the next year 3.00% 3.25%
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate) 4.25% 4.50%
Year that the cash balance crediting rate reaches the ultimate rate 2018 2017
Expected long-term return on plan assets 8.00% 8.25% 7.33% 7.44%
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 health care cost trend rate is assumed to decline
(the ultimate trend rate) 5.00% 5.00%
Year that the health care cost trend rate reaches the ultimate trend
rate 2017 2017
The discount rate is generally based on the yield of 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 current market data such as yields/price-earnings
ratios, historical market returns over long periods and periodic surveys of investment managers’ expectations. 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 medical and life benefits is reduced to allow for the
impact of tax on expected returns as the earnings of certain Voluntary Employee Beneficiary Association (VEBA)
trusts are taxable, unlike the pension trust.