US Bank 2010 Annual Report Download - page 105

The following table sets forth weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31:
(Dollars in Millions) 2010 2009 2008 2010 2009 2008
Pension Plans Postretirement Welfare Plan
Discount rate (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2% 6.4% 6.3% 5.6% 6.3% 6.1%
Expected return on plan assets (b) . . . . . . . . . . . . . . . . . . . . . . . 8.5 8.5 8.9 3.5 3.5 3.5
Rate of compensation increase (c) . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.0 3.2 * * *
Health care cost trend rate (d)
Prior to age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0% 7.0% 8.0%
After age 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 21.0 9.0
Effect on total of service cost and interest cost
One percent increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ – $ 1 $ 1
One percent decrease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (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 2010 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 2017 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, 2010 and 2009, plan assets of the
qualified pension plans included mutual funds that have
asset management arrangements with related parties totaling
$512 million and $1.1 billion, respectively.
Under a contractual agreement with U.S. Bancorp Asset
Management, 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, 2010
and 2009 totaled $232 million and $121 million,
respectively, with corresponding obligations to return the
cash collateral of $240 million and $131 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 classified within Level 1 of
the fair value hierarchy. The qualified pension plans also invest
a majority of securities purchased with cash collateral from its
securities lending arrangement in a money market mutual fund
whose fair value is determined based on quoted prices in
markets that are not active and therefore is classified as
Level 2. Additionally, the qualified pension plans have
investments in limited partnership interests and debt securities
whose fair values are determined by the Company by analyzing
the limited partnerships’ audited financial statements and by
averaging the prices obtained from independent pricing
services, respectively. These securities are categorized as
Level 3.
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