Prudential 2005 Annual Report Download - page 142

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
16. EMPLOYEE BENEFIT PLANS (continued)
The assumptions as of September 30, used by the Company to calculate the domestic benefit obligations as of that date and to
determine the benefit cost in the year are as follows:
Pension Benefits Other Postretirement Benefits
2005 2004 2003 2005 2004 2003
Weighted-average assumptions
Discount rate (beginning of period) .......................... 5.75% 5.75% 6.50% 5.50% 5.75% 6.50%
Discount rate (end of period) ............................... 5.50% 5.75% 5.75% 5.50% 5.50% 5.75%
Rate of increase in compensation levels (beginning of period) ..... 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Rate of increase in compensation levels (end of period) .......... 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets (beginning of period) ............ 8.50% 8.75% 8.75% 8.25% 7.75% 7.75%
Health care cost trend rates (beginning of period) ............... — — — 5.44–10.00% 6.05–10.00% 6.40–10.00%
Health care cost trend rates (end of period) .................... — — — 5.09–9.06% 5.44–10.00% 6.05–10.00%
For 2005, 2004 and 2003, the ultimate health care cost trend rate
after gradual decrease until: 2009, 2009, 2007 (beginning of
period) .............................................. — — — 5.00% 5.00% 5.00%
For 2005, 2004 and 2003, the ultimate health care cost trend rate
after gradual decrease until: 2009, 2009, 2007 (end of period) . . . — — — 5.00% 5.00% 5.00%
The domestic discount rate used to value the pension and postretirement benefit obligations is based upon rates commensurate
with current yields on high quality corporate bonds. The first step in determining the discount rate is the compilation of
approximately 550 to 600 Aa-graded bonds across the full range of maturities. Since yields can vary widely at each maturity point,
we generally avoid using the highest and lowest yielding bonds at the maturity points, so as to avoid relying on bonds that might be
mispriced or misgraded. This refinement process generally results in having a distribution from the 10th to 90th percentile. A spot
yield curve is developed from this data that is then used to determine the present value of the expected disbursements associated
with the pension and postretirement obligations, respectively. This results in the present value for each respective benefit obligation.
A single discount rate is calculated that results in the same present value. The rate is then rounded to the nearest 25 basis points.
The pension and postretirement expected long term rates of return for 2005 were determined based upon an approach that
considered an expectation of the allocation of plan assets during the measurement period of 2005. Expected returns are estimated by
asset class as noted in the discussion of investment policies and strategies below. The expected returns by asset class contemplate
the risk free interest rate environment as of the measurement date and then add a risk premium. The risk premium is a range of
percentages and is based upon historical information and other factors such as expected reinvestment returns and asset manager
performance.
The Company applied the same approach to the determination of the expected long term rate of return in 2006. The expected
long term rate of return for 2006 is 8.00% and 9.25%, respectively, for the pension and postretirement plans.
The Company, with respect to pension benefits, uses market related value to determine the components of net periodic benefit
cost. Market related value is a measure of asset value that reflects the difference between actual and expected return on assets over a
five year period.
The assumptions for foreign pension plans are based on local markets. There are no foreign postretirement plans.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A
one-percentage point increase and decrease in assumed health care cost trend rates would have the following effects:
Other Postretirement
Benefits
2005
(in millions)
One percentage point increase
Increase in total service and interest costs ............................................................ $ 12
Increase in postretirement benefit obligation .......................................................... 172
One percentage point decrease
Decrease in total service and interest costs ............................................................ $ 11
Decrease in postretirement benefit obligation ......................................................... 149
Prudential Financial 2005 Annual Report140