US Bank 2015 Annual Report Download - page 124

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) 2015 2014 2013 2015 2014 2013
Discount rate(a) ................................................. 4.13% 4.97% 4.07% 3.46% 3.93% 3.10%
Expected return on plan assets(b) .................................. 7.50 7.50 7.50 1.50 1.50 1.50
Rate of compensation increase(c) .................................. 4.07 4.02 4.08 * * *
Health care cost trend rate(d)
Prior to age 65 ............................................... 7.00% 7.50% 8.00%
After age 65 ................................................. 7.00 7.50 8.00
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 plan, non-qualified pension plan and postretirement welfare plan of
15.9, 12.4 and 6.8 years, respectively, for 2015, and 14.6, 11.5 and 6.4 years, respectively, for 2014.
(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 determines its expected
long-term rates of return reflecting current economic conditions and plan assets.
(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 minimize volatility, while
recognizing the long-term up-side potential of investing in
equities, the Committee has determined that a target asset
allocation of 43 percent global equities, 30 percent debt
securities, 7 percent domestic mid-small cap equities, 5
percent emerging markets equities, 5 percent real estate
equities, 5 percent hedge funds and 5 percent private equity
funds is appropriate.
At December 31, 2015 and 2014, plan assets of the
qualified pension plan included asset management
arrangements with related parties totaling $63 million and
$70 million, respectively.
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 22 for further discussion on
these levels.
The assets of the qualified pension plan 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 plan also invests in U.S.
agency, corporate and municipal debt securities, which are all
valued based on observable market prices or data by third-
party pricing services, and mutual funds which are valued
based on quoted net asset values provided by the trustee of
the fund; these assets are classified as Level 2. Additionally,
the qualified pension plan invests in certain assets that are
valued based on net asset values as a practical expedient,
including investments in collective investment funds, hedge
funds, and private equity funds; the net asset values are
provided by the fund trustee or administrator and are not
classified in the fair value hierarchy based on new accounting
guidance issued by the FASB during 2015.
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