Raytheon 2014 Annual Report Download - page 47

38
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.
In September 2013, the Actuarial Standards Board issued a revision to the Actuarial Standard of Practice No. 27, Selection
of Economic Assumptions for Measuring Pension Obligations (ASOP 27), that replaced the explicit reference to the best
estimate range concept with the selection of a reasonable assumption that considers multiple criteria including the purposes
of measurement, the actuary’s professional judgment, historical and current economic data and estimates of future experience
and has no significant bias. The revised standard is effective for assumptions established on or after September 30, 2014. As
a result of the revised standard, we continue to evaluate our long-term ROA assumption against a reasonable range of possible
outcomes but have modified that range to be between the 35th to 65th percentile likelihood of achieving a long-term return
over future years. We believe that continuing to validate our ROA assumption within a reasonable range that is narrowed to
the 35th to 65th percentiles ensures an unbiased result while also ensuring that the ROA assumption is not solely reactive to
short-term market conditions that may not persist, and is consistent with external actuarial practices.
In the fourth quarter of 2014, we reduced our long-term target allocation for equities and increased our target allocation for
fixed income within the investment policy allocations established by our Investment Committee in order to reduce the overall
exposure to equity volatility. This change in asset allocation reduced the range of reasonable outcomes that we use to evaluate
our long-term ROA assumption and we determined that the historical assumption of 8.75% no longer fell within this range.
To develop our 2015 long-term ROA assumption, we employed a building block approach. Under this building block method,
the overall expected investment return equals the weighted average of the individual expected return for each asset class based
on the target asset allocation and the long-term capital market assumptions. The expected return for each asset class is composed
of inflation plus a risk-free rate of return, plus an expected risk premium for that asset class. The resulting return is then
adjusted for administrative, investment management and trading expenses as well as recognition of alpha for active
management. The building block approach resulted in a long-term ROA assumption of 8.0% for 2015. To validate this
assumption we compared the result against the reasonable range of outcomes and confirmed that the 8.0% result falls between
the 55th and 60th percentile of the reasonable range for 2015 with the 50th percentile at 7.37%. We also assessed this result
against an approximation of what our historical asset performance may have been since 1986 using the updated target allocation
and have concluded that the average return would likely have been equal to or greater than 8.0% for that time period. Based
upon our application of the building block approach and our review of the resulting assumption against the 35th to 65th
reasonable range, and an analysis of our historical results, we have established a 2015 long-term ROA assumption of 8.0%
and have determined that the new assumption is reasonable and consistent with the provisions of ASOP 27. If we significantly
change our long-term investment allocation or strategy, or if there is a significant change in the economic assumptions, then
our long-term ROA assumption could change in the future.
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.