Raytheon 2009 Annual Report Download - page 50

Pension Costs
We have pension plans covering the majority of our employees, including certain employees in foreign countries. We
must calculate our pension costs under both CAS and FAS requirements under GAAP. The calculations under CAS and
FAS require judgment. CAS prescribes the allocation to and recovery of pension costs on U.S. Government contracts
through the pricing of products and services and the methodology to determine such costs. GAAP outlines the
methodology used to determine pension expense or income for financial reporting purposes. The CAS requirements for
pension costs and its calculation methodology differ from the FAS requirements and calculation methodology. As a
result, while both CAS and FAS use long-term assumptions in their calculation methodologies, each method results in
different calculated amounts of pension cost. In addition, the cash funding requirements for our pension plans are
determined under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA funding requirements use a
third and different method to determine funding requirements, which are primarily based on the year’s expected service
cost and amortization of other previously unfunded liabilities. The ERISA funding requirements will be replaced by the
requirements under the Pension Protection Act of 2006. Under the Pension Protection Act, companies will be required to
fully fund their pension plans over a seven-year period. For certain defense contractors, the new funding rules become
effective when the Cost Accounting Standards Pension Harmonization Rule (Harmonization Rule) goes into effect or no
later than 2011. It is expected that the final Harmonization Rule will provide a framework to make more similar the CAS
requirements and the ERISA requirements, as revised by the Pension Protection Act. Due to the foregoing differences in
requirements and calculation methodologies, our FAS pension expense or income is not necessarily indicative of the
funding requirements or amount of government recovery.
We record CAS expense in the results of our business segments. Due to the differences between FAS and CAS amounts,
we also present the difference between FAS and CAS expense, referred to as our FAS/CAS Pension Adjustment, as a
separate line item in our segment results. This effectively increases or decreases the amount of total pension expense in
our results of operations so such amount is equal to the FAS expense amount under GAAP.
The assumptions in the calculations of our FAS expense and CAS expense, which involve significant judgment, are
discussed below.
FAS Expense—Our long-term return on plan assets (ROA) and discount rate assumptions are the key variables in
determining pension expense or income and the funded status of our pension plans under GAAP.
The long-term 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.
The investment policy asset allocation ranges for our domestic pension plans were as follows as of December 31:
Asset Category 2009 2008
U.S. equities 15% - 40% 20% - 55%
International equities 10% - 25% 15% - 35%
Fixed income securities 20% - 45% 20% - 40%
Cash 0% - 15% 0% - 20%
Real estate 2% - 10% 2% - 10%
Other (including private equity) 2% - 7% 2% - 7%
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 market. 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
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