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Progress Energy Annual Report 2007
109
Balance’ Pension Plan.” Therefore, effective December 31,
2003, we began to use the traditional unit credit method for
purposes of measuring the benefit obligation of this plan.
Under the traditional unit credit method, no assumptions
are included about future changes in compensation, and
the accumulated benefit obligation and projected benefit
obligation are the same.
MEDICAL COST TREND RATE SENSITIVITY
The medical cost trend rates were assumed to decrease
gradually from the initial rates to the ultimate rates. The
effects of a 1 percent change in the medical cost trend
rate are shown below.
ASSETS OF BENEFIT PLANS
In the plan asset reconciliation tables that follow, our
employer contributions for 2007 include contributions
directly to pension plan assets of $63 million. Substantially
all of the remaining employer contributions represent benefit
payments made directly from our assets. The OPEB benefit
payments presented in the plan asset reconciliation tables
that follow represent the cost after participant contributions.
Participant contributions represent approximately 20 percent
of gross benefit payments for Progress Energy. The OPEB
benefits payments are also reduced by prescription drug-
related federal subsidies received, which totaled $3 million
and $2 million for 2007 and 2006, respectively.
Reconciliations of the fair value of plan assets at
December 31 follow:
The asset allocation for the benefit plans at the end of 2007
and 2006 and the target allocation for the plans, by asset
category, are presented in the tables above.
For pension plan assets and a substantial portion of OPEB
plan assets, we set target allocations among asset classes
to provide broad diversification to protect against large
investment losses and excessive volatility, while recognizing
the importance of offsetting the impacts of benefit cost
escalation. In addition, external investment managers
who have complementary investment philosophies and
approaches are employed to manage the assets. Tactical
shifts (plus or minus 5 percent) in asset allocation from the
target allocations are made based on the near-term view of
the risk and return tradeoffs of the asset classes.
CONTRIBUTION AND BENEFIT PAYMENT EXPECTATIONS
In 2008, we expect to make $34 million of contributions
directly to pension plan assets and $1 million of discretionary
contributions directly to the OPEB plan assets. The
expected benefit payments for the pension benefit plan
for 2008 through 2012 and in total for 2013 through 2017, in
millions, are approximately $149, $153, $155, $157, $164 and
$877, respectively. The expected benefit payments for the
OPEB plan for 2008 through 2012 and in total for 2013 through
2017, in millions, are approximately $37, $40, $43, $45, $47
and $247, respectively. The expected benefit payments
include benefit payments directly from plan assets and
benefit payments directly from our assets. The benefit
(in millions)
1 percent increase in medical cost trend rate
Effect on total of service and interest cost $2
Effect on postretirement benefit obligation 31
1 percent decrease in medical cost trend rate
Effect on total of service and interest cost (2)
Effect on postretirement benefit obligation (26)
Pension
Benefits
Other
Postretirement
Benefits
(in millions) 2007 2006 2007 2006
Fair value of plan assets at
January 1 $1,836 $1,770 $74 $76
Actual return on plan assets 219 222 78
Benefit payments (131) (174) (30) (29)
Employer contributions 72 18 24 19
Fair value of plan assets at
December 31 $1,996 $1,836 $75 $74
Pension Benefits
Target
Allocations
Percentage
of Plan Assets
at Year End
Asset Category 2008 2007 2006
Equity – domestic 40% 42% 44%
Equity – international 15% 25% 23%
Debt – domestic 20% 11% 12%
Debt – international 10% 12% 9%
Other 15% 10% 12%
Total 100% 100% 100%
Other Postretirement Benefits
Target
Allocations
Percentage
of Plan Assets
at Year End
Asset Category 2008 2007 2006
Equity – domestic 25% 28% 30%
Equity – international 10% 16% 15%
Debt – domestic 50% 41% 40%
Debt – international 5% 8% 7%
Other 10% 7% 8%
Total 100% 100% 100%