Red Lobster 2013 Annual Report Download - page 62

Notes to Consolidated Financial Statements
Darden
58 Darden Restaurants, Inc. 2013 Annual Report
We set the discount rate assumption annually for each of the plans at their
valuation dates to reflect the yield of high-quality fixed-income debt instruments,
with lives that approximate the maturity of the plan benefits. The expected
long-term rate of return on plan assets and health care cost trend rates are based
upon several factors, including our historical assumptions compared with actual
results, an analysis of current market conditions, asset fund allocations and the
views of leading financial advisers and economists.
For fiscal 2013, 2012 and 2011, we have used an expected long-term rate of
return on plan assets for our defined benefit plan of 9.0 percent. In developing
our expected rate of return assumption, we have evaluated the actual historical
performance and long-term return projections of the plan assets, which give
consideration to the asset mix and the anticipated timing of the pension plan
outflows. We employ a total return investment approach whereby a mix of equity
and fixed-income investments are used to maximize the long-term return of
plan assets for what we consider a prudent level of risk. Our historical 10-year,
15-year and 20-year rates of return on plan assets, calculated using the geomet-
ric method average of returns, are approximately 9.5 percent, 8.0 percent and
9.4 percent, respectively, as of May 26, 2013. Our Benefit Plans Committee sets
the investment policy for the Defined Benefit Plans and oversees the investment
allocation, which includes setting long-term strategic targets. Our overall
investment strategy is to achieve appropriate diversification through a mix of
equity investments, which may include U.S., International, and private equities,
as well as long-duration bonds and real estate investments. Our target asset fund
allocation is 40 percent U.S. equities, 35 percent high-quality, long-duration
fixed-income securities, 20 percent international equities, 5 percent real estate
securities. The investment policy establishes a re-balancing band around the
established targets within which the asset class weight is allowed to vary. Equity
securities, international equities and fixed-income securities include investments
in various industry sectors. Investments in real estate securities follow different
strategies designed to maximize returns, allow for diversification and provide a
hedge against inflation. Our current positioning is neutral on investment style
between value and growth companies and large and small cap companies. We
monitor our actual asset fund allocation to ensure that it approximates our target
allocation and believe that our long-term asset fund allocation will continue to
approximate our target allocation. Investments held in the U.S. commingled fund,
U.S. corporate securities, an international commingled fund, U.S. government
fixed-income securities, an emerging markets commingled fund and a real
estate commingled fund represented approximately 41.5 percent, 18.1 percent,
14.3 percent, 7.1 percent, 5.9 percent and 4.9 percent, respectively, of total plan
assets and represents the only significant concentrations of risk related to a single
entity, sector, country, commodity or investment fund. No other single sector
concentration of assets exceeded 5.0 percent of total plan assets.
The discount rate and expected return on plan assets assumptions have a
significant effect on amounts reported for defined benefit pension plans. A
quarter percentage point change in the defined benefit plans’ discount rate and
the expected long-term rate of return on plan assets would increase or decrease
earnings before income taxes by $0.6 million and $0.5 million, respectively.
The assumed health care cost trend rate increase in the per-capita charges
for postretirement benefits was 7.1 percent for fiscal 2014. The rate gradually
decreases to 5.0 percent through fiscal 2021 and remains at that level thereafter.
The assumed health care cost trend rate has a significant effect on amounts
reported for retiree health care plans. A one percentage point increase or decrease
in the assumed health care cost trend rate would affect the service and interest
cost components of net periodic postretirement benefit cost by $0.5 million and
$0.4 million, respectively, and would increase or decrease the accumulated post-
retirement benefit obligation by $6.6 million and $5.2 million, respectively.