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outcomes using a broad range of possible scenarios, outperformed other investment classes but are subject to
including a mix of possible rates of inflation and economic higher volatility. While an asset allocation including bonds
growth. Some of the scenarios included are: low inflation and other assets generally has lower volatility and may
and high growth (ideal growth), low inflation and low provide protection in a declining interest rate environment,
growth (recession), high inflation and low growth it limits the pension plan’s long-term up-side potential.
(stagflation) and high inflation and high growth Given the pension plan’s investment horizon and the
(inflationary growth). Starting with current economic financial viability of the Company to meet its funding
information, the model bases its projections on past objectives, the Committee has determined that an asset
relationships between inflation, fixed income rates and allocation strategy investing in 100 percent equities
equity returns when these types of economic conditions diversified among various domestic equity categories and
have existed over the previous 30 years, both in the U.S. international equities is appropriate.
and in foreign countries.
Generally, based on historical performance of the
various investment asset classes, investments in equities have
The following unaudited table provides a summary of asset allocations adopted by the Company compared with a typical
asset allocation alternative:
2005
Asset Allocation Expected Returns
December 2005 December 2004
Typical Standard
Asset Class Asset Mix Actual Target Actual Target (a) Compound Average Deviation
Domestic equities
Large Cap********************* 30% 56% 55% 53% 55% 8.0% 9.5% 18.0%
Mid Cap ********************** 15 16 19 16 19 8.2 10.2 21.1
Small Cap ********************* 1556768.410.9 24.0
International equities ********** 10 21 20 22 20 8.2 10.3 21.9
Fixed income ******************* 30————
Other *************************** —2—2—
Total mix or weighted rates**** 100% 100% 100% 100% 100% 8.3 9.8 17.8
LTROR assumed *************** 7.6% 8.9% (b) 8.9%
Standard deviation************** 13.5% 17.8% 18.0%
Sharpe ratio (c)***************** .405 .379 .386
(a) The target asset allocation was modified in December 2003, effective January 1, 2004, to reduce the potential volatility of the portfolio without significantly reducing the expected returns.
The change in the allocation was completed by the second quarter of 2004 and the year end variations from the target allocation were a result of that change.
(b) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company including the compound expected return of
8.3 percent and the average expected return of 9.8 percent.
(c) The Sharpe ratio is a direct measure of reward-to-risk. The Sharpe ratio for these asset allocation strategies is considered to be within acceptable parameters.
In accordance with its existing practices, the independent imprecision and uncertainty, the Company considers a range
pension consultant utilized by the Company updated the of potential expected rates of return, economic conditions for
analysis of expected rates of return and evaluated peer group several scenarios, historical performance relative to assumed
data, market conditions and other factors relevant to rates of return and asset allocation and LTROR information
determining the LTROR assumptions for pension costs for for a peer group in establishing its assumptions.
2004 and 2005. The analysis performed indicated that the Post-Retirement Medical Plans In addition to providing
LTROR assumption of 8.9 percent, used in both 2004 and pension benefits, the Company provides health care and
2005, continued to be in line with expected returns based on death benefits to certain retired employees through one
current economic conditions and the Company expects to retiree medical program. Generally, all active employees
continue using this LTROR in 2006. The LTROR was first may become eligible for retiree health care benefits by
reduced to the current LTROR of 8.9 percent in 2003 to meeting defined age and service requirements. The Company
reflect the long range impact of the poor market performance may also subsidize the cost of coverage for employees
of equities in 2001 and 2002. Regardless of the extent of the meeting certain age and service requirements. The medical
Company’s analysis of alternative asset allocation strategies, plan contains other cost-sharing features such as deductibles
economic scenarios and possible outcomes, plan assumptions and coinsurance. The estimated cost of these retiree benefit
developed for the LTROR are subject to imprecision and payments is accrued during the employees’ active service.
changes in economic factors. As a result of the modeling
U.S. BANCORP 87