Unum 2008 Annual Report Download - page 44

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We follow Statements of Financial Accounting Standards No. 87 (SFAS 87), Employers’ Accounting for Pensions, No. 106 (SFAS 106),
Employers’ Accounting for Postretirement Benefits Other Than Pensions, No. 132 (SFAS 132), Employers’ Disclosures about Pensions and
Other Postretirement Benefits, and No. 158 (SFAS 158), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,
an amendment of FASB Statements No. 87, 88, 106, and 132(R) in our financial reporting and accounting for our pension and postretirement
benefit plans. See Note 9 of the “Notes to Consolidated Financial Statements” for further discussion.
Our net periodic benefit costs and the value of our benefit obligations for these plans are determined based on a set of economic and
demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these
plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We also use, as applicable, expected
increases in compensation levels and a weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a
health care cost trend rate.
The assumptions chosen for our pension and OPEB plans generally use consistent methodology but reflect the differences in the plan
obligations. The assumptions are reviewed annually, and we use a December 31 measurement date for each of our plans. The discount rate
assumptions and expected long-term rate of return assumptions have the most significant effect on our net periodic benefit costs associated
with these plans. In addition to the effect of changes in our assumptions, the net periodic cost or benefit obligation under our pension and
OPEB plans may change due to factors such as actual experience being different from our assumptions, special benefits to terminated
employees, or changes in benefits provided under the plans.
Discount Rate Assumptions
The discount rate is an interest assumption used to convert the benefit payment stream to a present value. We set the discount rate
assumption at the measurement date for each of our retirement related benefit plans to reflect the yield of a portfolio of high quality fixed
income debt instruments matched against the timing and amounts of projected future benefits. A lower discount rate increases the present
value of benefit obligations and increases our costs.
The discount rate we used to determine our 2009 net periodic benefit costs for our U.S. pension plans was 6.40 percent, compared to
6.50 percent for 2008. The discount rate used for the net periodic benefit costs for 2009 and 2008 for our U.K. pension plan was 6.40 percent
and 5.80 percent, respectively. The discount rate used in the net periodic benefit cost for our OPEB plan for 2009 and 2008 was 6.10 percent
and 6.30 percent, respectively.
Reducing the discount rate assumption by 50 basis points would have resulted in an increase in our 2008 pension expense of
approximately $11.5 million, before tax, and an increase in our benefit obligation of approximately $101.1 million as of December 31, 2008,
resulting in an after-tax decrease in stockholders’ equity of approximately $66.9 million as of December 31, 2008. A 50 basis point reduction
in the discount rate assumption would not change our annual OPEB costs.
Increasing the discount rate assumption by 50 basis points would have resulted in a decrease in our 2008 pension expense of
approximately $10.4 million, before tax, and a decrease in our benefit obligation of approximately $89.6 million as of December 31, 2008,
resulting in an after-tax increase in stockholders’ equity of approximately $59.3 million as of December 31, 2008. A 50 basis point increase
in the discount rate assumption would not change our annual OPEB costs.
Long-Term Rate of Return Assumptions
The long-term rate of return assumption is the best estimate of the average annual assumed return that will be produced from the
pension trust assets until current benefits are paid. We use a compound interest method in computing the rate of return on pension plan
assets. The investment portfolio for our U.S. pension plans contains a diversified blend of domestic and international large cap, mid cap, and
small cap equity securities, investment-grade and below-investment-grade fixed income securities, private equity funds of funds, and
hedge funds of funds. Assets for our U.K. pension plan are invested in pooled funds, with approximately 57 percent in diversified growth
assets including global equities, hedge funds, commodities, below-investment-grade fixed income securities, and currencies. The remainder
of the assets for our U.K. plan is predominantly invested in fixed interest U.K. corporate bonds and index linked U.K. government bonds. Assets
for our OPEB plan are invested primarily within life insurance contracts issued by one of our insurance subsidiaries. The terms of these
contracts are consistent in all material respects with those the subsidiary offers to unaffiliated parties that are similarly situated. We
believe our investment portfolios are well diversified by asset class and sector, with no potential risk concentrations in any one category.