Sunoco 2004 Annual Report Download - page 60

9. Retirement Benefit Plans
Defined Benefit Pension Plans and Postretirement Health Care Plans
Sunoco has noncontributory defined benefit pension plans (“defined benefit plans”) which provide retirement benefits
for approximately one-half of its employees. Sunoco also has plans which provide health care benefits for substantially
all of its retirees (“postretirement benefit plans”). The postretirement benefit plans are unfunded and the costs are
shared by Sunoco and its retirees. The levels of required retiree contributions to postretirement benefit plans are ad-
justed periodically, and the plans contain other cost-sharing features, such as deductibles and coinsurance. In addition,
in 1993, Sunoco implemented a dollar cap on its future contributions for its principal postretirement health care bene-
fits plan.
In the fourth quarter of 2003, Congress passed the Medicare Prescription Drug Act of 2003, which authorized Medi-
care to provide prescription drug benefits to retirees. To encourage employers to retain or provide postretirement drug
benefits for their Medicare-eligible employees, beginning in 2006, the federal government will begin to make subsidy
payments to employers who sponsor postretirement benefit plans under which retirees receive prescription drug bene-
fits that are “actuarially equivalent” to the prescription drug benefits provided under Medicare. In May 2004, FASB
Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Im-
provement and Modernization Act of 2003” (“FSP No. 106-2”), was issued which provides guidance on accounting for
the effects of the new Medicare legislation. Adoption of FSP No. 106-2, which became effective in the third quarter of
2004, did not materially impact Sunoco’s consolidated financial statements.
Defined benefit plans and postretirement benefit plans expense consisted of the following components:
Defined Benefit Plans Postretirement Benefit Plans
(Millions of Dollars) 2004 2003 2002 2004 2003 2002
Service cost (cost of benefits earned during the year) $46 $38 $ 33 $8 $6 $7
Interest cost on benefit obligations 86 89 89 24 25 28
Expected return on plan assets (84) (85) (100) ———
Amortization of:
Prior service cost (benefit) 332(7) (12) (10)
Unrecognized losses 33 21 2 332
Net curtailment gains ——— —(1) —
$84 $66 $ 26 $28 $21 $27
Defined benefit plans and postretirement benefit plans expense is determined using actuarial assumptions as of the
beginning of the year. The following weighted-average assumptions were used to determine defined benefit plans and
postretirement benefit plans expense:
Defined Benefit Plans Postretirement Benefit Plans
(In Percentages) 2004 2003 2002 2004 2003 2002
Discount rate 6.00% 6.75% 7.25% 6.00% 6.75% 7.25%
Long-term expected rate of return on plan assets 8.75% 8.75% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
The expected rate of return on plan assets was estimated based on a variety of factors including the historical
investment return achieved over a long-term period, the targeted allocation of plan assets and expectations
concerning future returns in the marketplace for both equity and debt securities.
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