Raytheon 2009 Annual Report Download - page 51

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 annual 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 as discussed below. If we significantly change our long-term investment allocation or strategy, then our
long-term ROA assumption could change.
Shortly after year end, the Company’s Investment Committee modified the investment policy allocation ranges for our
domestic pension plans, based upon the most recent periodic asset allocation study and in consideration of current
market conditions. The resulting policy allocation ranges are 25% to 40% for U.S. equities, 15% to 30% for international
equities, 25% to 40% for fixed income securities, 5% to 15% for cash and 0% to 15% for other investments (including
private equity and real estate).
The long-term ROA assumptions for foreign pension benefit plans are based on the asset allocations and the economic
environment prevailing in the locations where the pension plans reside. Foreign pension assets do not make up a
significant portion of the total assets for all of our pension plans.
The discount rate represents the interest rate that should be used to determine the present value of future cash flows
currently expected to be required to settle the pension and postretirement benefit obligations. The discount rate
assumption is determined by using a theoretical bond portfolio model consisting of bonds AA rated or better by Moody’s
for which the timing and amount of cash flows approximate the estimated benefit payments of our pension plans. The
discount rate assumption for our domestic pension plans at December 31, 2009 is 6.25%, down from 6.50% in 2008.
An increase or decrease of 25 basis points in the long-term ROA and the discount rate assumptions would have had the
following approximate impacts on 2009 pension results:
(In millions)
Change in assumption used to determine net periodic benefit costs for the year ended December 31, 2009
Discount rate $43
Long-term ROA 36
Change in assumption used to determine benefit obligations for the year ended December 31, 2009
Discount rate $460
CAS Expense—In addition to providing the methodology for calculating pension costs, CAS also prescribes the method
for assigning those costs to specific periods. While the ultimate liability for pension costs under FAS and CAS is similar,
the pattern of cost recognition is different. The key drivers of CAS pension expense include the funded status and the
method used to calculate CAS reimbursement for each of our plans, and our long-term ROA assumption. Unlike FAS,
CAS requires the discount rate to be consistent with the long-term ROA assumption, which changes infrequently given its
long-term nature. As a result, changes in bond or other interest rates generally do not impact CAS. In addition, unlike
FAS, we can only allocate pension costs for a plan under CAS until such plan is fully funded as determined under CAS
requirements. When the estimated future CAS pension costs increase, which occurred at December 31, 2008, driven
mainly by the significant decline in the value of our plan assets, the estimated CAS cost to be allocated to our contracts in
the future increases.
Other FAS and CAS Considerations—On an annual basis, at December 31st, we update our estimate of future FAS and
CAS pension expense based upon actual asset returns and other actuarial factors. Other variables that can impact the
pension plans’ funded status and FAS and CAS income or expense include demographic experience such as the expected
rates of salary increase, retirement age, turnover and mortality. In addition, certain pension plans provide a lump sum
form of benefit that varies based upon externally determined interest rates. Assumptions for these variables are set at the
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