Raytheon 2012 Annual Report Download - page 46

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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 for each of our pension plans. The discount rate assumption
for our domestic pension plans at December 31, 2012 is 4.15%, which represents a weighted-average discount rate across our
plans, compared to the December 31, 2011 discount rate of 5.00% as a result of the bond environment at December 31, 2012.
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 2012 pension results:
(In millions)
Change in assumption used to determine net periodic benefit cost for the year ended December 31, 2012
Discount rate $ 60
Long-term ROA 40
Change in assumption used to determine benefit obligations for the year ended December 31, 2012
Discount rate $ 645
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. Under the existing CAS rules, which continue to apply through
2012, the discount rate used to measure liabilities is required to be consistent with the long-term ROA assumption, which
changes infrequently given its long-term nature. In addition to certain other changes, CAS Harmonization will require
contractors to compare the liability under the current CAS methodology and assumptions to a liability using a discount rate
based on high quality corporate bonds and use the greater of the two liability calculations in developing CAS expense. 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, 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 31, we update our estimate of future FAS and CAS
pension expense based upon actual discount rates, 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 benefit that
varies based on 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. In addition, 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) 2012 2011 2010
FAS expense $(1,093)$(1,073)$
(896)
CAS expense 838 733 666
FAS/CAS Pension Adjustment $(255)$(340)$
(230)
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 recent
asset 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.