Raytheon 2012 Annual Report Download - page 45

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contract pricing under CAS and the pension funding requirements under the PPA. The rule shortens the CAS amortization
period for gains and losses from 15 to 10 years and requires the use of a discount rate based on high quality corporate bonds
to measure liabilities in determining the CAS pension expense. While the change in amortization period is applicable in 2013,
there is a transition period for the impact of the change in liability measurement method of 0% in 2013, 25% in 2014, 50%
in 2015, 75% in 2016 and 100% in 2017. CAS Harmonization is currently expected to increase pension costs under CAS and
is also expected to decrease our FAS/CAS expense primarily in 2014 and beyond due to the liability measurement transition
period included in the rule. Since the pension cost increases occur primarily in 2014 and beyond, the impact to our contracts
in existence prior to February 27, 2012 was not material. Furthermore, since CAS Harmonization is a mandatory change in
cost accounting for government contractors, we may be entitled to an equitable adjustment for some portion of the increase
in costs on contracts.
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, which is a
component of our total FAS/CAS Adjustment disclosed 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. Due to the foregoing differences in requirements and calculation methodologies, our FAS pension
expense or income is not indicative of the funding requirements or amount of government recovery.
The assumptions in the calculations of our pension FAS expense and CAS expense, which involve significant judgment, are
described 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. We employ 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. Also, historical returns are reviewed to assess reasonableness and appropriateness.
The investment policy asset allocation ranges for our domestic pension plans, as set by the Company’s Investment Committee,
for the year ended December 31, 2012 were as follows:
Asset Category
U.S. equities 25% - 35%
International equities 15% - 25%
Fixed-income securities 25% - 40%
Cash and cash equivalents 1% - 10%
Private equity and private real estate 3% - 10%
Other (including absolute return funds) 5% - 20%
In validating the 2012 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 2012 was 8.75%,
consistent with our 2011 assumption. Our domestic pension plans’ actual rates of return were approximately 12%, (1)% and
11% for 2012, 2011 and 2010, 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.