Unum 2011 Annual Report Download - page 37

Unum 2011 Annual Report
Unum
2011
35
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 2012 and 2011 net periodic benefit costs for our U.S. pension plans was 5.40 percent
and 5.80 percent, respectively. The discount rate used for the net periodic benefit costs for 2012 and 2011 for our U.K. pension plan was
4.90 percent and 5.60 percent, respectively. The discount rate used in the net periodic benefit cost for our OPEB plan for 2012 and 2011 was
5.20 percent and 5.60 percent, respectively.
Reducing the discount rate assumption by 50 basis points would have resulted in an increase in our 2011 pension expense of
approximately $15.9 million, before tax, and an increase in our benefit obligation of approximately $161.9 million as of December 31, 2011,
resulting in an after-tax decrease in stockholders’ equity of approximately $107.0 million as of December 31, 2011. 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 2011 pension expense of
approximately $13.8 million, before tax, and a decrease in our benefit obligation of approximately $144.2 million as of December 31, 2011,
resulting in an after-tax increase in stockholders’ equity of approximately $95.3 million as of December 31, 2011. 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. The U.S. pension plans use a compound interest method in computing the rate of return
on their pension plan assets. The investment portfolio for our U.S. qualified pension plan contains a diversified blend of domestic and
international large cap, mid cap, and small cap equity securities, U.S. government and agency 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, including a diversified
growth fund, which invests in assets such as global equities, hedge funds, commodities, below-investment-grade fixed income securities,
and currencies, as well as leveraged, interest rate, and inflation swap funds intended to broadly match part of the interest rate and inflation
sensitivities of the plan’s liabilities. 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.
Our expectations for the future investment returns of the asset categories are based on a combination of historical market
performance, evaluations of investment forecasts obtained from external consultants and economists, and current market yields. For the
U.S. pension plans, 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 current 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.
In 2011, we changed the investment strategy for our U.K. pension plan, which resulted in new investment classes as well as a new
target allocation for the plan’s assets. At December 31, 2010, the U.K. pension plan’s target allocation was 60 percent equity securities and
40 percent fixed income securities. In 2011, we changed the plan’s target allocation for the assets to 75 percent diversified growth assets
and 25 percent interest rate and inflation swap funds. The new investment classes and new target allocation resulted in lower yields and
lower expected returns on the plan’s assets. We expect that our 2012 pension costs will be higher than our pension costs in 2011 due
primarily to the lower yields on the U.K. plan’s investments. This change in investment strategy will not have an impact on our ability to
fund this plan.
The long-term rate of return on asset assumption used in the net periodic pension costs for our U.S. qualified defined benefit pension
plan for 2012 and 2011 was 7.50 percent for both years. The long-term rate of return on asset assumption used for 2012 and 2011 for our
U.K. pension plan was 5.80 percent and 6.70 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.