Sunoco 2007 Annual Report Download - page 35

ations concerning future returns in the marketplace for both equity and debt securities. In
determining pension expense, the Company applies the expected rate of return to the
market-related value of plan assets at the beginning of the year, which is determined using
a quarterly average of plan assets from the preceding year. The expected rate of return on
plan assets is designed to be a long-term assumption. It generally will differ from the actual
annual return which is subject to considerable year-to-year variability. As permitted by ex-
isting accounting rules, the Company does not recognize currently in pension expense the
difference between the expected and actual return on assets. Rather, the difference along
with other actuarial gains or losses resulting from changes in actuarial assumptions used in
accounting for the plans (primarily the discount rate) and differences between actuarial
assumptions and actual experience are fully recognized in the consolidated balance sheets
as a reduction in prepaid retirement costs or an increase in the retirement liability with a
corresponding charge initially to the accumulated other comprehensive loss component of
shareholders’ equity. If such actuarial gains and losses on a cumulative basis exceed 10 per-
cent of the projected benefit obligation, the excess is amortized into income as a compo-
nent of pension or postretirement benefits expense over the average remaining service
period of plan participants still employed with the Company, which currently is approx-
imately 9 years. At December 31, 2007, the accumulated net actuarial loss for defined
benefit and postretirement benefit plans was $253 and $56 million, respectively. For 2007,
the pension plan assets generated a return of 6.3 percent, compared to 13.3 percent in
2006 and 8.7 percent in 2005. For the 15-year period ended December 31, 2007, the com-
pounded annual investment return on Sunoco’s pension plan assets was 9.7 percent.
The asset allocation for Sunoco’s pension plans at December 31, 2007 and 2006 and the
target allocation of plan assets for 2008, by asset category, are as follows:
December 31
(In Percentages) 2008 Target 2007 2006
Asset category:
Equity securities 60% 61% 65%
Debt securities 35 35 32
Other 543
Total 100% 100% 100%
The rate of compensation increase assumption has been indicative of actual increases dur-
ing the 2005-2007 period.
The initial health care cost trend assumptions used to compute the accumulated postretire-
ment benefit obligation were increases of 10.0 percent, 10.0 percent and 11.0 percent at
December 31, 2007, 2006 and 2005, respectively. These trend rates were assumed to de-
cline gradually to 5.5 percent in 2017 and to remain at that level thereafter.
Set forth below are the estimated increases in pension and postretirement benefits expense and
benefit obligations that would occur in 2008 from a change in the indicated assumptions:
(Dollars in Millions)
Change
in Rate Expense
Benefit
Obligations*
Pension benefits:
Decrease in the discount rate .25% $5 $34
Decrease in the long-term expected rate of return on plan
assets .25% $3 $—
Increase in rate of compensation .25% $1 $ 4
Postretirement benefits:
Decrease in the discount rate .25% $1 $ 9
Increase in the annual health care cost trend rates 1.00% $1 $10
*Represents the projected benefit obligations for defined benefit plans and the accumulated postretirement benefit obligations for
postretirement benefit plans.
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