Union Pacific 2007 Annual Report Download - page 48

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44
standards. For additional information on the adoption of FIN 48, see note 4 to the Consolidated Financial
Statements.
Pension and Other Postretirement Benefits – We use third-party actuaries to assist us in properly measuring
the liabilities and expenses associated with providing pension and defined contribution medical and life
insurance benefits (OPEB) to eligible employees. In order to use actuarial methods to value the liabilities and
expenses we must make several assumptions. The critical assumptions used to measure pension obligations
and expenses are the discount rate and expected rate of return on pension assets. For OPEB, the critical
assumptions are the discount rate and healthcare cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the following
factors:
• Discount rate is based on a hypothetical portfolio of high quality corporate bonds (rated AA by a
recognized rating agency) for which the timing and amount of cash flows matches our plan’s expected
benefit payments.
• Expected return on plan assets is based on our asset allocation mix and our historical return, taking into
consideration current and expected market conditions.
• Healthcare cost trend rate is based on our historical rates of inflation and expected market conditions.
The following tables present the key assumptions used to measure pension and OPEB expense for 2007 and
the estimated impact on 2007 pension and OPEB expense relative to a change in those assumptions:
Assumptions Pension OPEB
Discount rate...............................................................................................................
.
6.00% 6.00%
Salary increase.............................................................................................................
.
3.00% N/A
Expected return on plan assets...................................................................................
.
8.00% N/A
Healthcare cost trend rate:
Pre-65 current ..........................................................................................................
.
N/A 9.00%
Pre-65 level in 2011..................................................................................................
.
N/A 5.00%
Post-65 current ........................................................................................................
.
N/A 11.00%
Post-65 level in 2013................................................................................................
.
N/A 5.00%
Sensitivities Increase in Expense
Millions of Dollars Pension OPEB
0.25% decrease in discount rate.................................................................................
.
$ 6 $ 2
0.25% increase in salary scale.....................................................................................
.
$ 2 N/A
0.25% decrease in expected return on plan assets ....................................................
.
$ 4 N/A
1% increase in healthcare cost trend rate..................................................................
.
N/A $ 5
CAUTIONARY INFORMATION
Certain statements in this report, and statements in other reports or information filed or to be filed with the
SEC (as well as information included in oral statements or other written statements made or to be made by
us), are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities
Exchange Act of 1934. These forward-looking statements include, without limitation, statements regarding
dividends in Item 5 and statements and information set forth under the caption “2008 Outlook” in this Item
7, and any other statements or information in this report (including information incorporated herein by
reference) regarding: expectations as to operational or service improvements; expectations regarding the
effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements,