Raytheon 2009 Annual Report Download - page 118

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted-Average Net Periodic Benefit Cost Assumptions Other Benefits
2009 2008 2007
Discount rate 6.75% 6.50% 5.75%
Expected Long-term rate of return on plan assets 8.75% 8.75% 8.75%
Rate of compensation increase 4.50% 4.50% 4.50%
Health care trend rate in the next year 7.40% 8.50% 9.00%
Gradually declining to an ultimate trend rate 4.00% 5.00% 5.00%
Year that the rate reaches ultimate trend rate 2029 2015 2015
The long-term rate of return on plan assets (ROA) represents the average rate of earnings expected over the long term on
the assets invested to provide for anticipated future benefit payment obligations.The Company employs a “building
block” approach in determining the long-term ROA assumption. Historical markets are studied and long-term
relationships between equities and fixed income are assessed. Current market factors such as inflation and interest rates
are evaluated before long-term capital market assumptions are determined. The long-term ROA assumption is also
established giving consideration to investment diversification, rebalancing and active management of the investment
portfolio. Peer data and historical returns are reviewed periodically to assess reasonableness and appropriateness.
In 2008, we evaluated our asset allocation strategy and determined that our higher allocations of fixed income securities
and cash at December 31, 2008, compared to our long-term asset allocation strategy, had been driven by recent market
conditions and we expected to return to our long-term investment allocations once normal volatility levels returned to
the markets. During 2009, as market conditions normalized, we increased our investments in equities and decreased our
investments in fixed income securities to be in line with our long term investment strategy. We evaluated the changes in
our actual asset allocations as well as the recent modifications to our investment policy allocation ranges and confirmed
that they continue to support the long-term ROA assumption. In validating the 2009 long-term ROA assumption, we
also reviewed our pension plan asset performance since 1986. Our average actual annual rate of return since 1986 has
exceeded our estimated 8.75% assumed return. Based upon these analyses and our internal investing targets, we
determined our long-term ROA assumption for our domestic pension plans in 2009 was 8.75%, consistent with our 2008
assumption. Our domestic pension plans’ actual rates of return were approximately 17%, (26%) and 8% for 2009, 2008
and 2007, respectively. The difference between the actual rate of return and our long-term ROA assumption is included
in deferred losses. If we significantly change our long-term investment allocation or strategy, then our long-term ROA
assumption could change.
The long-term ROA assumptions for foreign Pension Benefits plans are based on the asset allocations and the economic
environment prevailing in the locations where the Pension Benefits plans reside. Foreign pension assets do not make up a
significant portion of the total assets for all of our Pension Benefits plans.
The effect of a 1% increase or (decrease) in the assumed health care trend rate for each future year for the aggregate of
service cost and interest cost is $1 million or ($1) million, respectively, and for the accumulated postretirement benefit
obligation is $11 million or ($10) million, respectively.
The PBO and fair value of plan assets for Pension Benefits plans with PBO in excess of plan assets were $16,270 million
and $11,558 million, respectively, at December 31, 2009, and $15,599 million and $10,089 million, respectively, at
December 31, 2008.
The ABO and fair value of plan assets for Pension Benefits plans with ABOs in excess of plan assets were $14,511 million
and $11,525 million, respectively, at December 31, 2009 and $13,203 million and $9,387 million, respectively, at
December 31, 2008. The ABO for all Pension Benefits plans was $15,675 million and $14,630 million at December 31,
2009 and December 31, 2008, respectively.
We make both discretionary and required contributions to our pension plans. Required contributions are primarily
determined by ERISA rules and are affected by the actual return on plan assets and plan funded status. As discretionary
104