Raytheon 2010 Annual Report Download - page 111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 validating the 2010 long-term ROA assumption, we 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 2010 was 8.75%, consistent with our 2009 assumption. Our domestic pension plans’ actual rates of return were
approximately 11%, 17% and (26%) for 2010, 2009 and 2008, 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.
Plan Assets
Substantially all our domestic Pension Benefit Plan (plan) assets, which consists of investments in equity securities, fixed-
income securities, cash and cash equivalents, public real estate securities, private real estate funds and hedge funds and
other assets such as investments in private equity funds, are held in a master trust, which was established for the
investment of assets of our Company sponsored retirement plans. The assets of the master trust are overseen by the
Company’s Investment Committee comprised of members of senior management drawn from appropriate diversified
levels of the executive management team.
The Investment Committee is responsible for setting the policy that provides the framework for management of the Plan
assets. In accordance with its responsibilities and charter, the Investment Committee meets on a regular basis to review
the performance of the Plan assets and compliance with the investment policy. The policy sets forth an investment
structure for managing Plan assets, including setting the asset allocation ranges, which are expected to provide an
appropriate level of overall diversification and total investment return over the long term while maintaining sufficient
liquidity to pay the benefits of the Plan. Asset allocation ranges are set to produce the highest return on investment taking
into account investment risks that are prudent and reasonable given prevailing market conditions. In developing the asset
allocation ranges, third party asset allocation studies are periodically performed that consider the current and expected
positions of the plan assets and funded status. Based on this study and other appropriate information, the Investment
Committee establishes asset allocation ranges taking into account acceptable risk targets and associated returns.
The investment policy asset allocation ranges for the Plan, as set by the Investment Committee, for the year ended
December 31, 2010 were as follows:
Asset Category
U.S. equities 25% - 40%
International equities 15% - 30%
Fixed-income securities 25% - 40%
Cash and cash equivalents 3% - 15%
Other (including private equity and real estate) 0% - 20%
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