Raytheon 2015 Annual Report Download - page 120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
110
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 the Actuarial Standard of Practice No.
27, Selection of Economic Assumptions for Measuring Pension Obligations (ASOP 27) in effect at the time. Therefore, it is
less than 25% 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% likely that the long-term return of the pension plan will be within the 25th and 75th percentile
range). In September 2013, the Actuarial Standards Board issued a revision to 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, effective for our 2015 and future years assumptions, we 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. 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 2015, 2014 and 2013, are shown below.
Percentile 2015 2014 2013
25th N/A 5.53% 5.62%
35th 6.37% N/A N/A
65th 8.37% N/A N/A
75th N/A 9.65% 9.41%
The long-term domestic ROA of 8.75% for 2014 and 2013 fell between the 60th–65th percentile and 65th–70th percentile of
the applicable reasonable range for 2014 and 2013, respectively. The 50th percentile of the reasonable range used to develop
the 2014 and 2013 long-term ROA was 7.59% and 7.51%, respectively.
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–60th percentile of the reasonable range for 2015 with the 50th percentile at 7.37%. In addition, when we updated
our target asset allocation and our long-term ROA assumption changed from 8.75% to 8.0%, we assessed what our historical
asset performance may have been since 1986 using the updated target allocation and concluded the average return would
likely have been equal to or greater than 8.0% for the time period from 1986 through 2014.