The Hartford 2008 Annual Report Download - page 458

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans
The Company maintains a qualified defined benefit pension plan (the “Plan”) that covers substantially all employees.
Effective for all employees who joined the Company on or after January 1, 2001, a new component or formula was applied
under the Plan referred to as the “cash balance formula”. As of January 1, 2009, the cash balance formula will be used to
calculate future pension benefits for services rendered on or after January 1, 2009 for all employees hired before January 1,
2001. These amounts are in addition to amounts earned by those employees through December 31, 2008 under the
traditional final average pay formula.
The Company also maintains non-qualified pension plans to accrue retirement benefits in excess of Internal Revenue Code
limitations.
The Company provides certain health care and life insurance benefits for eligible retired employees. The Company’s
contribution for health care benefits will depend upon the retiree’s date of retirement and years of service. In addition, the
plan has a defined dollar cap for certain retirees which limits average Company contributions. The Hartford has prefunded a
portion of the health care obligations through a trust fund where such prefunding can be accomplished on a tax effective
basis. Effective January 1, 2002, Company-subsidized retiree medical, retiree dental and retiree life insurance benefits were
eliminated for employees with original hire dates with the Company on or after January 1, 2002.
Assumptions
Pursuant to accounting principles related to the Company’s pension and other postretirement obligations to employees under
its various benefit plans, the Company is required to make a significant number of assumptions in order to calculate the
related liabilities and expenses each period. The two economic assumptions that have the most impact on pension and other
postretirement expense are the discount rate and the expected long-term rate of return on plan assets. In determining the
discount rate assumption, the Company utilizes a discounted cash flow analysis of the Company’s pension and other
postretirement obligations and currently available market and industry data. The yield curve utilized in the cash flow
analysis is comprised of bonds rated Aa or higher with maturities primarily between zero and thirty years. Based on all
available information, it was determined that 6.25% was the appropriate discount rate as of December 31, 2008 to calculate
the Company’s pension and other postretirement obligations. Accordingly, the 6.25% discount rate will also be used to
determine the Company’s 2009 pension and other postretirement expense.
The Company determines the expected long-term rate of return assumption based on an analysis of the Plan portfolio’s
historical compound rates of return since 1979 (the earliest date for which comparable portfolio data is available) and over
5 year and 10 year periods. The Company selected these periods, as well as shorter durations, to assess the portfolio’s
volatility, duration and total returns as they relate to pension obligation characteristics, which are influenced by the
Company’s workforce demographics. In addition, the Company also applies long-term market return assumptions utilized in
Life’s DAC analysis to an investment mix that generally anticipates 60% fixed income securities, 20% equity securities and
20% alternative assets to derive an expected long-term rate of return. Based upon these analyses, management maintained
the long-term rate of return assumption at 7.30% as of December 31, 2008. This assumption will be used to determine the
Company’s 2009 expense.
Weighted average assumptions used in calculating the benefit obligations and the net amount recognized for the plans per
year were as follows:
As of December 31,
2008 2007
Discount rate 6.25% 6.25%
Rate of increase in compensation levels 4.25% 4.25%
Weighted average assumptions used in calculating the net periodic benefit cost for the plans were as follows:
For the year ended December 31,
2008 2007 2006
Discount rate 6.25% 5.75% 5.50%
Expected long-term rate of return on plan assets 7.30% 8.00% 8.00%
Rate of increase in compensation levels 4.25% 4.25% 4.00%
F-84
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009