US Bank 2013 Annual Report Download - page 117

The following table sets forth weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31:
Pension Plans Postretirement Welfare Plan
(Dollars in Millions) 2013 2012 2011 2013 2012 2011
Discount rate (a) ...................................................... 4.07% 5.07% 5.66% 3.10% 4.30% 4.90%
Expected return on plan assets (b) .................................... 7.50 8.00 8.25 1.50 2.25 3.50
Rate of compensation increase (c) .................................... 4.08 4.05 4.02 * * *
Health care cost trend rate (d)
Prior to age 65 ...................................................... 8.00% 8.00% 8.00%
After age 65 ........................................................ 8.00 12.00 14.00
Effect on total of service cost and interest cost
One percent increase .............................................. $– $ – $ –
One percent decrease .............................................. –––
(a) The discount rates were developed using a cash flow matching bond model with a modified duration for the qualified pension plans, non-qualified pension plans and postretirement
welfare plan of 15.9, 12.2 and 7.2 years, respectively, for 2013, and 14.8, 11.4 and 7.7 years, respectively, for 2012.
(b) With the help of an independent pension consultant, the Company considers several sources when developing its expected long-term rates of return on plan assets assumptions,
including, but not limited to, past returns and estimates of future returns given the plans’ asset allocation, economic conditions, and peer group LTROR information.
The Company determined its 2013 expected long-term rates of return reflecting current economic conditions and plan assets. The decrease in the pension plans’ LTROR is primarily
due to an increase in the debt securities target asset allocation from 10 percent as of December 31, 2011, to 30 percent as of December 31, 2013.
(c) Determined on an active liability weighted basis.
(d) The pre-65 and post-65 rates are both assumed to decrease gradually to 5.00 percent by 2019 and remain at that level 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. Estimated
future returns and other actuarially determined adjustments
are also considered in calculating the estimated return on
assets.
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. In an effort to reduce volatility, while
recognizing the long-term up-side potential of investing in
equities, the Committee increased the target asset allocation
to 30 percent debt securities for the Company’s qualified
pension plans at December 31, 2013. The remaining target
asset allocation at December 31, 2013 was 35 percent
passively managed global equities, 8 percent actively
managed global equities, 7 percent mid-small cap equities,
5 percent emerging markets equities, 5 percent real estate
equities, 5 percent hedge funds and 5 percent private
equity. The target asset allocation at December 31, 2012
was 35 percent passively managed global equities, 25
percent actively managed global equities, 10 percent mid-
small cap equities, 5 percent emerging markets equities,
5 percent real estate equities, and 20 percent debt
securities.
At December 31, 2013 and 2012, plan assets of the
qualified pension plans included asset management
arrangements with related parties totaling $119 million and
$168 million, respectively.
Under a contractual agreement with U.S. Bancorp Asset
Management, Inc., an affiliate of the Company, certain plan
assets were lent to qualified borrowers on a short-term basis
in exchange for investment fee income. These borrowers
collateralized the loaned securities with either cash or non-
cash securities. In 2013, the qualified pension plan
discontinued its participation in the securities lending
program. Cash collateral held at December 31, 2012 totaled
$14 million, with an obligation to return the cash collateral of
$20 million.
In accordance with 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 include
investments in equity and U.S. Treasury securities whose fair
values are determined based on quoted prices in active
markets and are classified within Level 1 of the fair value
hierarchy. The qualified pension plans also invest in
collective investment and mutual funds whose fair values are
determined using the net asset value provided by the
administrator of the fund and are classified as Level 2. In
addition, the qualified pension plans invest in debt securities
and foreign currency transactions that are valued using third
party pricing services and are classified as Level 2. In 2012,
the qualified pension plan invested in a money market
mutual fund with cash collateral from its securities lending
arrangement, whose fair value was determined based on
U.S. BANCORP 115