Red Lobster 2014 Annual Report Download - page 48

Notes to Consolidated Financial Statements
Darden
46 Darden Restaurants, Inc.
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.
We reduced our expected long-term rate of return on plan assets for
our defined benefit plan from 9.0 percent, used in fiscal 2013 and 2012,
to 8.0 percent for fiscal 2014 in connection with our current expectations
for long-term returns and target asset fund allocation. 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 histori-
cal 10-year, 15-year and 20-year rates of return on plan assets, calculated
using the geometric method average of returns, are approximately 9.3 percent,
8.4 percent and 9.9 percent, respectively, as of May 25, 2014. 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. Currently, our target asset fund allocation is 37.0 percent
U.S. equities, 40.0 percent high-quality, long-duration fixed-income securities,
18.5 percent international equities and 4.5 percent real estate securities.
Prior to fiscal 2014, our target asset fund allocation was 40.0 percent U.S.
equities, 35.0 percent high-quality, long-duration fixed-income securities,
20.0 percent international equities and 5.0 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 com-
mingled fund and public sector utility securities represented approximately
35.9 percent, 19.7 percent, 12.8 percent, 11.3 percent, 5.5 percent and
5.4 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 6.8 percent for fiscal 2015. 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 postretirement benefit obligation by
$7.4 million and $5.9 million, respectively.