Unum 2009 Annual Report Download - page 38

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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum
2009
Pension and Postretirement Benefit Plans
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified
pension plans. The U.S. pension plans comprise the majority of our total benefit obligation and pension expense. Our U.K. operation
maintains a separate defined benefit plan for eligible employees. The U.K. defined benefit pension plan was closed to new entrants on
December 31, 2002.
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 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 2010 and 2009 net periodic benefit costs for our U.S. pension plans was 6.40 percent for
both years. The discount rate used for the net periodic benefit costs for 2010 and 2009 for our U.K. pension plan was 5.70 percent and
6.40 percent, respectively. The discount rate used in the net periodic benefit cost for our OPEB plan for 2010 and 2009 was 5.90 percent
and 6.10 percent, respectively.
Reducing the discount rate assumption by 50 basis points would have resulted in an increase in our 2009 pension expense of
approximately $11.1 million, before tax, and an increase in our benefit obligation of approximately $122.3 million as of December 31,
2009, resulting in an after-tax decrease in stockholders’ equity of approximately $81.1 million as of December 31, 2009. 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 2009 pension expense of
approximately $8.9 million, before tax, and a decrease in our benefit obligation of approximately $107.9 million as of December 31, 2009,
resulting in an after-tax increase in stockholders’ equity of approximately $71.5 million as of December 31, 2009. 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, U.S. government and corporate 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, such as global equities, hedge funds, commodities, below-investment-
grade fixed income securities, and currencies, as well as a fixed-interest U.K. corporate bond fund and an index-linked U.K. government
bond fund. Assets for our OPEB plan are invested primarily in life insurance contracts. We believe our investment portfolios are well
diversified by asset class and sector, with no potential risk concentrations in any one category.