Prudential 2005 Annual Report Download - page 139

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
15. STOCK-BASED COMPENSATION (continued)
Deferred Compensation Program
Prior to the contribution of the Company’s retail securities brokerage and clearing operations into the joint venture with
Wachovia on July 1, 2003, the Company maintained a deferred compensation program for Financial Advisors and certain other
employees (the “participants”) of the contributed operations, under which participants elected to defer a portion of their
compensation. Amounts deposited to participant accounts, including matching contributions as well as other amounts based on the
attainment of specific performance goals, vest in three to eight years. Nonvested balances are forfeited if the participant is
terminated for cause or voluntarily terminates prior to the vesting date. In 2002, participants were permitted to elect to redeem all or
a portion of their existing nonvested account balances and invest the proceeds in Prudential Financial Common Stock. Accordingly,
the Company acquired, on behalf of the participants electing to participate, 1,696,929 shares of Common Stock at a total cost of $56
million. On the date the account balances were converted to Common Stock, related remaining deferred compensation expense of
$29 million, which is being amortized over the vesting period, was recorded as a reduction in stockholders’ equity. The deferred
compensation expense of $14 million, as of July 1, 2003, was included in the net assets of the Company’s retail securities brokerage
and clearing operations contributed to the joint venture with that of Wachovia. The results of operations of the joint venture, of
which the Company owns a 38% interest, will include the amortization of the deferred compensation expense. As of December 31,
2005, there were 183,135 nonvested shares in participants accounts. The Company continues to repurchase forfeited shares from the
joint venture, which are reflected as Common Stock held in treasury as of the date of forfeiture.
16. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded and non-funded contributory and non-contributory defined benefit pension plans, which cover
substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while
benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their
career.
The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered
dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory.
Substantially all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after
age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service. The
Company has elected to amortize its transition obligation for other postretirement benefits over 20 years.
On December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(“the Act”) into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) beginning in 2006. Under the
Act, employers who sponsor postretirement plans that provide prescription drug benefits that are actuarially equivalent to Medicare
qualify to receive subsidy payments.
On May 19, 2004, the FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003.” In accordance with FSP 106-2, the Company remeasured its
plan assets and Accumulated Postretirement Benefit Obligation (“APBO”) as of January 1, 2004 to account for the subsidy and
other effects of the Act. This remeasurement resulted in a $39 million reduction in postretirement benefit costs in 2004. The $39
million reduction in postretirement benefit costs reflects $33 million as a result of the subsidy and is comprised of an $18 million
reduction in the amortization of actuarial loss, a $15 million reduction in interest costs, and no reduction in service cost. The
reduction in the APBO for the subsidy related to past service was $337 million.
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