Raytheon 2014 Annual Report Download - page 118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Our long-term domestic ROA of 8.75% fell between the 60th–65th percentile, 65th–70th percentile and 60th–65th percentile
of the reasonable range for 2014, 2013 and 2012 respectively. The 50th percentile of the reasonable range used to develop
each of the 2014, 2013 and 2012 long-term ROA was 7.59%, 7.51% and 7.99%, respectively.
Once our long-term ROA has been determined, we review historical averages and patterns of returns to confirm reasonability
of our long-term ROA assumption compared to past results. While history is not solely indicative of future market expectations,
it does provide insight into general historical trends and long-term asset performance. In validating the 2014 long-term ROA
assumption, we reviewed our pension plan asset performance since 1986. Our average annual actual rate of return since 1986
of 9.19%, determined on an arithmetic basis, exceeds our estimated 8.75% assumed return. Arithmetic annual averages
represent the simple average returns over independent annual periods, whereas geometric returns reflect the compound average
returns of dependent annual periods. The average annual actual return on a geometric basis for the same period was 8.50%.
In addition, the actual annual returns have exceeded our long-term ROA assumption of 8.75% in six of the past ten years.
Because our 2014 long-term ROA assumption of 8.75% for our domestic pension plans was within the reasonable range and
our historical trends and averages did not indicate a trend or pattern of returns significantly above or below our existing
assumption, we determined our long-term ROA assumption for our domestic pension plans in 2014 would remain at 8.75%,
consistent with our 2013 assumption.
Our domestic pension plans’ actual rates of return were approximately 6%, 15% and 12% for 2014, 2013 and 2012, respectively.
The difference between the actual rate of return and our long-term ROA assumption is included in deferred losses.
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.
For purposes of determining pension expense under GAAP, a “corridor” approach may be elected and applied in the recognition
of asset and liability gains or losses which limits expense recognition to the net outstanding gains and losses in excess of the
greater of 10 percent of the projected benefit obligation or the calculated "market-related value" of assets. We do not use a
“corridor” approach in the calculation of FAS expense.
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 less than $1 million and for the accumulated postretirement benefit obligation is a $7 million increase
or decrease.
Plan Assets
Substantially all our domestic Pension Benefits Plan (Plan) assets, which consist of investments in cash and cash equivalents,
publicly traded U.S. and international equity securities, private equity funds, private real estate funds, fixed-income securities,
commingled funds and other investments such as insurance contracts and derivatives, 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 our 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 these studies and other appropriate information, the Investment Committee establishes asset allocation ranges
taking into account acceptable risk targets and associated returns.