Northrop Grumman 2014 Annual Report Download - page 75

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NORTHROP GRUMMAN CORPORATION
-66-
Plan Assumptions
On a weighted-average basis, the following assumptions were used to determine benefit obligations and net periodic
benefit cost:
Pension Benefits Medical and
Life Benefits
2014 2013 2014 2013
Assumptions used to determine benefit obligation at December 31
Discount rate 4.12% 4.99% 4.04% 4.90%
Initial cash balance crediting rate assumed for the next year 2.75% 3.90%
Rate to which the cash balance crediting rate is assumed to increase
(the ultimate rate) 3.50% 4.70%
Year that the cash balance crediting rate reaches the ultimate rate 2020 2019
Rate of compensation increase 3.00% 3.00%
Initial health care cost trend rate assumed for the next year 6.50% 6.50%
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 2019 2017
Assumptions used to determine benefit cost for the year ended
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
Expected long-term return on plan assets 8.00% 8.00% 7.45% 7.33%
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
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 rate of return over the long term
within reasonable and prudent levels of risk. Through consultation with our investment management team and
outside investment advisers, management develops expected long-term returns for each of the plans’ strategic asset
classes. In addition to our historical investment performance, we consider several factors, 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 is calculated. Liability studies are conducted on a regular basis to provide
guidance in setting investment goals with an objective to balance risk. Risk targets are established and monitored
against acceptable ranges.
Our investment policies and procedures are designed to ensure the plans’ investments are in compliance with ERISA
(Employee Retirement Income Security Act). Guidelines are established defining permitted investments within each
asset class. Derivatives are used for transitioning assets, asset class rebalancing, managing currency risk and for
management of fixed income and alternative investments.