US Bank 2007 Annual Report Download - page 95

addition, two cash balance pension benefit plans exist and
only investment or interest credits continue to be credited to
participants’ accounts. Plan assets consist of various equities,
equity mutual funds and other miscellaneous assets.
In general, the Company’s pension plans’ objectives
include maintaining a funded status sufficient to meet
participant benefit obligations over time while reducing
long-term funding requirements and pension costs. The
Company has an established process for evaluating all the
plans, their performance and significant plan assumptions,
including the assumed discount rate and the long-term rate
of return (“LTROR”). Annually, the Company’s
Compensation Committee (“the Committee”), assisted by
outside consultants, evaluates plan objectives, funding
policies and plan investment policies considering its long-
term investment time horizon and asset allocation strategies.
The process also evaluates significant plan assumptions.
Although plan assumptions are established annually, the
Company may update its analysis on an interim basis in
order to be responsive to significant events that occur during
the year, such as plan mergers and amendments.
In addition to the funded qualified pension plans, the
Company maintains non-qualified plans that are unfunded
and the aggregate accumulated benefit obligation exceeds
the assets. The assumptions used in computing the present
value of the accumulated benefit obligation, the projected
benefit obligation and net pension expense are substantially
consistent with those assumptions used for the funded
qualified plans.
Funding Practices The Company’s funding policy is to
contribute amounts to its plans sufficient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act of 1974, plus such additional amounts
as the Company determines to be appropriate. There were
no minimum funding requirements in 2007 or 2006, and the
Company anticipates no minimum funding requirement in
2008. Any contributions made to the plans are invested in
accordance with established investment policies and asset
allocation strategies.
Investment Policies and Asset Allocation In establishing its
investment policies and asset allocation strategies, the
Company considers expected returns and the volatility
associated with different strategies. The independent
consultant performs modeling that projects numerous
outcomes using a broad range of possible scenarios,
including a mix of possible rates of inflation and economic
growth. Starting with current economic information, the
model bases its projections on past relationships between
inflation, fixed income rates and equity returns when these
types of economic conditions have existed over the previous
30 years, both in the U.S. and in foreign countries.
Generally, based on historical performance of the
various investment asset classes, investments in equities have
outperformed other investment classes but are subject to
higher volatility. While an asset allocation including bonds
and other assets generally has lower volatility and may
provide protection in a declining interest rate environment, it
limits the pension plan’s long-term up-side potential. Given
the pension plans’ investment horizon and the financial
viability of the Company to meet its funding objectives, the
Committee has determined that an asset allocation strategy
investing in 100 percent equities diversified among various
domestic equity categories and international equities is
appropriate. At December 31, 2007 and 2006, plan assets of
the qualified retirement plans included mutual funds that
have asset management arrangements with related parties
totaling $1.3 billion and $1.2 billion, respectively.
The following table, which is unaudited, except for the actual asset allocations at December 31, 2007 and 2006, provides a
summary of asset allocations adopted by the Company compared with a typical asset allocation alternative:
Asset Class
Typical
Asset Mix Actual Target Actual Target Compound
Standard
Deviation
December 2007 December 2006
Asset Allocation
2008
Expected Returns
Domestic Equities
Large Cap . . . . . . . . . . . . . . . . . . . . . 32% 55% 55% 55% 55% 9.0% 16.0%
Mid Cap . . . . . . . . . . . . . . . . . . . . . . 10 17 19 16 19 10.0 21.0
Small Cap . . . . . . . . . . . . . . . . . . . . . 5 566610.021.0
International Equities ............. 15 20 20 19 20 9.0 19.0
Fixed Income ................... 32––––
Alternative Investments ........... 62–2–
Other .......................... –1–2–
Total Mix Or Weighted Rates ....... 100% 100% 100% 100% 100% 9.5 16.5
LTROR assumed . . . . . . . . . . . . . . . . 7.9% 8.9% (a) 8.9%
Standard deviation . . . . . . . . . . . . . . . 10.8% 16.5% 16.0%
(a) The LTROR assumed for the target asset allocation strategy of 8.9 percent is based on a range of estimates evaluated by the Company which were centered around the compound
expected return of 9.5 percent reduced for estimated asset management and administrative fees.
U.S. BANCORP 93