Raytheon 2011 Annual Report Download - page 45

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Other FAS and CAS Considerations—On an annual basis, at December 31, 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 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 beginning of the year, and are based
on actual and projected plan experience. On a periodic basis, generally planned annually in the third quarter, we update our
actuarial estimate of the unfunded projected benefit obligation for both FAS and CAS with final census data from the end of
the prior year.
The components of the FAS/CAS Pension Adjustment were as follows:
(In millions)
FAS expense
CAS expense
FAS/CAS Pension Adjustment
2011
$(1,073)
733
$(340)
2010
$(896)
666
$(230)
2009
$(646)
673
$ 27
In accordance with both FAS and CAS, a “market-related value” of our plan assets is used to calculate the amount of deferred
asset gains or losses to be amortized. The market-related value of assets is determined using actual asset gains or losses over
a certain prior period (three years for FAS and five years for CAS, subject to certain limitations under CAS on the difference
between the market-related value and actual market value of assets). Because of this difference in the number of years over
which actual asset gains or losses are recognized and subsequently amortized, FAS expense generally tends to reflect the
recent gains or losses faster than CAS. Another driver of CAS expense (but not FAS expense) is the funded status of our
pension plans under CAS. As noted above, CAS expense is only recognized for plans that are not fully funded; consequently,
if plans become or cease to be fully funded under CAS due to our asset or liability experience, our CAS expense will change
accordingly.
The change in the FAS/CAS Pension Adjustment of $110 million in 2011 compared to 2010 was driven by a $177 million
increase in our FAS expense. The $177 million increase in our FAS expense was driven primarily by the continued recognition
of the 2008 losses in the market related value of assets, which had an impact of approximately $200 million. Our CAS expense
increased $67 million as a result of actual versus expected asset and liability experience.
The change in the FAS/CAS Pension Adjustment of $257 million in 2010 compared to 2009 was primarily driven by a $250
million increase in our FAS expense. The $250 million increase in our FAS expense was driven primarily by the continued
recognition of losses in the market-related value of assets in 2008, which had an impact of approximately $260 million. Our
CAS expense decreased $7 million as a result of actual versus expected asset and liability experience.
For 2012 compared to 2011, we currently expect our FAS expense will increase less than our CAS expense, which will decrease
the FAS/CAS Pension Adjustment. We expect the FAS/CAS Pension Adjustment to be approximately $283 million of expense
driven by the lower discount rate environment and the difference in amortization periods under FAS and CAS, described
above, of the net unrecognized liability, principally due to the negative 2008 asset returns, partially offset by the expected
return on our contributions. This expected decrease in FAS expense in excess of CAS expense is subject to our annual update,
generally planned in the third quarter, of our actuarial estimate of the unfunded benefit obligation for both FAS and CAS for
final 2011 census data. After 2012, the FAS/CAS Pension Adjustment is more difficult to predict because future FAS and CAS
expense is based on a number of key assumptions for future periods. Differences between those assumptions and future actual
results could significantly change both FAS and CAS expense in future periods. However, based solely on our current
assumptions at December 31, 2011 and taking into account CAS Harmonization which increases CAS expense in 2013 and
beyond, we would expect our FAS/CAS Pension Adjustment expense to decline and ultimately result in the FAS/CAS Pension
Adjustment income.
The pension and other postretirement plans’ investments are stated at fair value. Investments in equity securities (common
and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income securities
are generally valued using methods based upon market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Investments in private equity funds, hedge funds and private
real estate funds are estimated at fair market value which primarily utilizes net asset values reported by the investment manager
or fund administrator. The pension investment team reviews independently appraised values, audited financial statements and