Sunoco 2008 Annual Report Download - page 60

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these plans is determined using the discount rate as of the beginning of the year, which for pension plans was
6.25 percent for 2008, 5.85 percent for 2007, 5.60 percent for 2006, and will be 6.00 percent for 2009, and for
postretirement plans was 6.10 percent for 2008, 5.80 percent for 2007, 5.50 percent for 2006, and will be 5.95
percent for 2009.
The long-term expected rate of return on plan assets was assumed to be 8.25 percent while the rate of
compensation increase was assumed to be 4.00 percent for each of the last three years. A long-term expected rate
of return of 8.25 percent on plan assets and a rate of compensation increase of 4.00 percent will be used to
determine Sunoco’s pension expense for 2009. The expected rate of return on plan assets is estimated utilizing 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. 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 existing 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 percent of the projected benefit
obligation, the excess is amortized into income as a component of pension or postretirement benefits expense
over the average remaining service period of plan participants still employed with the Company, which currently
is approximately 9 years. Sunoco could also be required to accelerate the recognition of a portion of its
cumulative actuarial losses into income if the amount of pension liabilities settled in a given year is greater than
the service and interest cost components of its defined benefit plans expense. If this were to occur with respect to
the Company’s principal defined benefit plan, the minimum charge to earnings for 2009 would be approximately
$40 million after tax, based on the plan’s cumulative actuarial losses at December 31, 2008. At December 31,
2008, the accumulated net actuarial loss for defined benefit and postretirement benefit plans was $745 and $44
million, respectively. For 2008, the pension plan assets generated a negative return of 28.8 percent, compared to
positive returns of 6.3 percent in 2007 and 13.3 percent in 2006. For the 15-year period ended December 31,
2008, the compounded annual investment return on Sunoco’s pension plan assets was a positive return of 6.3
percent.
The asset allocation for Sunoco’s pension plans at December 31, 2008 and 2007 and the target allocation of
plan assets for 2009, by asset category, are as follows (in percentages):
2009 Target
December 31
2008 2007
Asset category:
Equity securities ....................................... 60 53 61
Debt securities ........................................ 35 40 35
Other ................................................ 5 7 4
Total ............................................... 100 100 100
The rate of compensation increase assumption has been indicative of actual increases during the 2006-2008
period.
The initial health care cost trend assumptions used to compute the accumulated postretirement benefit
obligation were increases of 9.5 percent, 10.0 percent and 10.0 percent at December 31, 2008, 2007 and 2006,
respectively. These trend rates were assumed to decline gradually to 5.5 percent in 2017 and to remain at that
level thereafter.
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