Unum 2008 Annual Report Download - page 45

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Our expectations for the future investment returns of the asset categories are based on a combination of historical market
performance and evaluations of investment forecasts obtained from external consultants and economists. The methodology underlying
the return assumption included the various elements of the expected return for each asset class such as long-term rates of return, volatility
of returns, and the correlation of returns between various asset classes. The expected return for the total portfolio is calculated based on
the plan’s strategic asset allocation. Investment risk is measured and monitored on an ongoing basis through annual liability measurements,
periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan
liabilities, plan funded status, and corporate financial condition.
The long-term rate of return on assets used in the net periodic pension costs for our U.S. qualified defined benefit pension plan for
2009 and 2008 was 7.50 percent for both years. The long-term rate of return on asset assumption used for 2009 and 2008 for our U.K.
pension plan was 7.20 percent and 6.90 percent, respectively, and for our OPEB plan, 5.75 percent for both years. The actual rate of return
on plan assets is determined based on the fair value of the plan assets at the beginning and the end of the period, adjusted for
contributions and benefit payments.
Changing the expected long-term rate of return on the plan assets by +/-50 basis points would have changed our 2008 pension plan
expense by approximately $4.9 million before tax, but our OPEB plan expense would not change. A lower rate of return on plan assets
increases our expense.
Benefit Obligation and Fair Value of Plan Assets
The market related value equals the fair value of assets, determined as of the measurement date. The assets are not smoothed for
purposes of SFAS 87. The expected return on assets, therefore, fully recognizes all asset gains and losses, including changes in fair value,
through the measurement date.
The fair value of our plan assets is determined in accordance with SFAS 157. During 2008, the fair value of our plan assets in our U.S.
qualified defined benefit pension plan declined $126.2 million, or approximately 16.1 percent. The fair value of plan assets for our U.K.
pension plan declined £11.7 million, or approximately 12.5 percent, during 2008. Although the effect of these declines had no impact on
our 2008 net periodic pension costs, the unfavorable rate of return on plan assets in 2008 increases our net periodic pension costs for 2009.
We expect that our 2009 pension costs will be approximately $42.5 million higher than our pension costs for 2008. We believe our
assumptions appropriately reflect the impact of a prolonged market decline.
Our pension and OPEB plans have an aggregate unrecognized net actuarial loss and an unrecognized prior service credit, which represent
the cumulative liability and asset gains and losses and the portion of prior service credits that have not been recognized in pension
expense. As of December 31, 2008, the unrecognized net loss for these two items combined was approximately $622.0 million compared
to $301.8 million at December 31, 2007. The increase is primarily due to the unfavorable rate of return on plan assets in 2008 and to the
decrease in the year end discount rate for our U.S. pension plans. Prior to the adoption of SFAS 158, unrecognized actuarial gains or losses
and prior service costs or credits were amortized as a component of pension expense but were not reported in companies’ balance sheets.
SFAS 158 requires that actuarial gains or losses and prior service costs or credits that have not yet been included in net periodic benefit cost
as of the adoption date of SFAS 158 be recognized as components of accumulated other comprehensive income, net of tax. The unrecognized
gains or losses will be amortized out of accumulated other comprehensive income and included as a component of the net benefit cost, as
they were prior to the adoption of SFAS 158. Our 2008, 2007, and 2006 pension and OPEB expense includes $10.6 million, $15.3 million,
and $17.8 million, respectively, of amortization of the unrecognized net actuarial loss and prior service credit. The unrecognized net actuarial
loss for our pension plans, which is $625.7 million at December 31, 2008, will be amortized over the average future working life of pension
plan participants, currently estimated at 12 years for U.S. participants and 15 years for U.K. participants. The unrecognized net actuarial loss
of $6.2 million for our OPEB plan will be amortized over the average future working life of OPEB plan participants, currently estimated at
10 years, to the extent the loss is outside of a corridor established in accordance with GAAP. The corridor is established based on the greater
of 10 percent of the plan assets or 10 percent of the accumulated postretirement benefit obligation. At December 31, 2008, none of the
actuarial loss was outside of the corridor.