US Bank 2009 Annual Report Download - page 104

The following table sets forth weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31:
(Dollars in Millions) 2009 2008 2007 2009 2008 2007
Pension Plans Postretirement Welfare Plan
Discount rate (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4% 6.3% 6.0% 6.3% 6.1% 6.0%
Expected return on plan assets (b) . . . . . . . . . . . . . . . . . . . . . . 8.5 8.9 8.9 3.5 3.5 3.5
Rate of compensation increase (c) . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.2 2.2 * * *
Health care cost trend rate (d)
Prior to age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0% 8.0% 8.0%
After age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0 9.0 10.0
Effect on total of service cost and interest cost
One percent increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 1 $ 1
One percent decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (1)
(a) See footnote (a) in previous table (weighted average assumptions used to determine the projected benefit obligations).
(b) With the help of an independent pension consultant, a range of potential expected rates of return, economic conditions, historical performance relative to assumed rates of return and
asset allocation, and peer group LTROR information are used in developing the plan assumptions for its expected long-term rates of return on plan assets. The Company determined its
2009 expected long-term rates of return reflect current economic conditions and plan assets.
(c) Determined on a liability weighted basis.
(d) The pre-65 and post-65 rates are assumed to decrease gradually to 5.5 percent by 2012 and 6.0 percent by 2015, respectively, and remain at these levels thereafter.
* Not applicable
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. An 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 debt
securities and other assets generally has lower volatility and
may provide protection in a declining interest rate
environment, it limits the pension plans’ 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 principally in equities diversified
among various domestic equity categories and international
equities is appropriate. The target asset allocation for the
Company’s qualified pension plans is 55 percent domestic
large cap equities, 19 percent domestic mid cap equities,
6 percent domestic small cap equities and 20 percent
international equities.
At December 31, 2009 and 2008, plan assets of the
qualified pension plans included mutual funds that have
asset management arrangements with related parties totaling
$1.1 billion and $791 million, respectively.
Under a contractual agreement with FAF Advisors, Inc.,
an affiliate of the Company, certain plan assets are lent to
qualified borrowers on a short-term basis in exchange for
investment fee income. These borrowers collateralize the
loaned securities with either cash or non-cash securities.
Cash collateral held at December 31, 2009 and 2008 totaled
$121 million and $151 million, respectively, with
corresponding obligations to return the cash collateral of
$131 million and $165 million, respectively.
Per authoritative accounting guidance, the Company
groups plan assets into a three-level hierarchy for valuation
techniques used to measure their fair value based on whether
the valuation inputs are observable or unobservable. Refer
to Note 21 for further discussion on these levels.
The assets of the qualified pension plans and
postretirement welfare plan include investments in equity
securities and mutual funds whose fair values are determined
based on quoted market prices and such items are classified
within Level 1 of the fair value hierarchy. The qualified
pension plan also has investments in limited partnership
interests whose fair value is determined by the Company by
analyzing the limited partnerships’ audited financial
statements and other related investment activity. These
securities are categorized as Level 3.
102 U.S. BANCORP