Prudential 2006 Annual Report Download - page 157

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
16. EMPLOYEE BENEFIT PLANS (continued)
Certain employees in 2006 and 2005 were provided special termination benefits under non-qualified plans in the form of
unreduced early retirement benefits as a result of their involuntary termination.
The amounts included in “Accumulated other comprehensive income” expected to be recognized as components of net
periodic (benefit) cost in 2007 are as follows:
Pension Benefits
Other Postretirement
Benefits
(in millions)
Amortization of transition obligation .............................................. $— $ 1
Amortization of prior service cost ................................................. 29 (6)
Amortization of actuarial (gain) loss, net ........................................... 29 15
Total ....................................................................... $ 58 $10
The pre-tax change in the additional minimum liability included in “Accumulated other comprehensive income” as of
September 30, 2006 and September 30, 2005 is as follows:
Pension Benefits
Other Postretirement
Benefits
2006 2005 2006 2005
(in millions)
Increase (decrease) in minimum liability included in other comprehensive income ........... $ (61) $168 $— $—
Impact of adopting SFAS No. 158 ................................................. (335) — — —
Total ........................................................................ $(396) $168 $— $—
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
2006 2005 2004 2006 2005 2004
Weighted-average assumptions
Discount rate (beginning of period) ............................ 5.50% 5.75% 5.75% 5.50% 5.50% 5.75%
Discount rate (end of period) ................................. 5.75% 5.50% 5.75% 5.75% 5.50% 5.50%
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) .............. 8.00% 8.50% 8.75% 9.25% 8.25% 7.75%
Health care cost trend rates (beginning of period) ................. — — — 5.09–9.06% 5.44–10.00% 6.05–10.00%
Health care cost trend rates (end of period) ...................... — — — 5.00-8.75% 5.09–9.06% 5.44–10.00%
For 2006, 2005 and 2004, the ultimate health care cost trend rate after
gradual decrease until: 2009, 2009, 2007 (beginning of period) .... — — — 5.00% 5.00% 5.00%
For 2006, 2005 and 2004, 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-rated bonds across the full range of maturities. Since yields can vary widely at each maturity point,
the Company generally avoids using the highest and lowest yielding bonds at the maturity points, so as to avoid relying on bonds
that might be mispriced or misrated. 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 on plan assets for 2006 were determined based upon an
approach that considered an expectation of the allocation of plan assets during the measurement period of 2006. Expected returns
are estimated by asset class as noted in the discussion of investment policies and strategies below. The expected returns by asset
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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