Raytheon 2014 Annual Report Download - page 46

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government contractors, we may be entitled to an equitable adjustment for some portion of the increase in costs on contracts
which we are currently negotiating with the government.
In July 2012, the Surface Transportation Extension Act, which is also referred to as the Moving Ahead for Progress in the 21st
Century Act (STE Act), was passed by Congress and signed by the President. The STE Act includes a provision for temporary
pension funding relief due to the low interest rate environment. The provision adjusts the 24-month average high quality
corporate bond rates used to determine the PPA funded status so that they are within a floor and cap, or “corridor,” based on
the 25-year average of corporate bond rates. The STE Act gradually phases out this interest rate provision beginning in 2013.
In August 2014, the pension provisions of the STE Act were extended as part of the Highway and Transportation Funding Act
of 2014 (HATFA). As a result, the interest rates used to determine PPA funded status will continue to be adjusted within a
“corridor” and do not begin to phase out until 2018. The HATFA impacts CAS expense as well because CAS Harmonization
incorporates the PPA interest rate into CAS calculations.
We record CAS expense in our business segment results. 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 that 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. The long-term ROA used to calculate net periodic pension cost is set annually
at the beginning of each year. Given the long-term nature of the ROA assumption, which we believe should not be solely
reactive to short-term market conditions that may not persist, we expect the long-term ROA to remain unchanged unless there
are significant changes in our investment strategy, the underlying economic assumptions, or other major factors. To establish
our long-term ROA assumption, we employ a “building block” approach. As part of our annual process for determining whether
it is appropriate to change our long-term ROA assumption, we first review the existing long-term ROA assumption against a
statistically determined reasonable range of outcomes. For purposes of determining the long-term ROA assumption for 2014
and prior, we considered this range to be between the 25th and 75th percentile likelihood of achieving a long-term return over
future years (consistent with Actuarial Standard of Practice No. 27 in effect at the time). Therefore, it is less than 25 percent
likely that the long-term return of the pension plan would fall below or above the 25th and 75th percentiles points, respectively
(i.e., it is 50 percent likely that the long-term return of the pension plan will be within the 25th and 75th percentile range).
The building block approach and the reasonable range of outcomes are based upon our asset allocation assumptions and long-
term capital market assumptions. Such assumptions incorporate the economic outlook for various asset classes over short-
and long-term periods and also take into consideration other factors, including historical market performance, inflation and
interest rates. The reasonable range of long-term returns that was used to validate the long-term ROA assumption for the
calculation of the net periodic benefit cost for 2014, 2013 and 2012, are shown below.
Percentile 2014 2013 2012
25th 5.53% 5.62% 6.15%
75th 9.65% 9.41% 9.84%
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