Raytheon 2015 Annual Report Download - page 45

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and calculation methodologies, our FAS pension expense or income is not indicative of the funding requirements or amount
of government recovery.
On December 27, 2011, the CAS Pension Harmonization Rule (CAS Harmonization) was published in the Federal Register.
The rule intends to improve the alignment of the pension cost recovered through contract pricing under CAS and the pension
funding requirements under the PPA. The rule shortened the CAS amortization period for gains and losses from 15 to 10 years
and requires the use of a discount rate based on high quality corporate bonds, consistent with PPA, to measure liabilities in
determining the CAS pension expense. CAS Harmonization increases pension costs under CAS and the related FAS/CAS
Pension Adjustment results in an increase to income in 2014 and beyond, primarily due to the liability measurement transition
period of 0% in 2013, 25% in 2014, 50% in 2015, 75% in 2016 and 100% in 2017 included in the rule. Because CAS
Harmonization is a mandatory change in cost accounting for 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 (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 phased out this
interest rate provision beginning in 2013. Subsequent to the STE Act, the Highway and Transportation Funding Act of 2014
(HATFA) and the Bipartisan Budget Act of 2015 (BBA) further extended this interest rate provision until 2020, at which time
the provision is gradually phased out. The STE, HATFA and BBA impact CAS expense as well because CAS Harmonization
incorporates the PPA interest rate into CAS calculations.
The BBA also increases the insurance premiums that we are required to pay the Pension Benefit Guarantee Corporation
(PBGC). However, we do not expect the increases to have a material effect on our financial position, results of operations or
liquidity.
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 U.S. 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 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