2010 actuarial assumption review
A pension plan must take a long-term view because its obligations to individual members can extend decades into the future. Economic or demographic changes have the potential to seriously affect the Plan’s ability to meet those obligations.
As such, our funding policy calls for periodic reviews of the actuarial assumptions used in the Plan’s valuations. In 2010 we conducted a full review of all economic and demographic assumptions that are contemplated in our policy and made some adjustments to better reflect the Plan’s current situation and future factors that may affect its liabilities.
Economic assumption changes
The inflation assumption was decreased by 0.25% to 2.50%. Changes to the underlying inflation assumption changes the nominal rates for other assumptions to maintain assumption integrity based on current real rates of return and wage rates.
Demographic assumption changes
The mortality assumption was strengthened to reflect the increased life expectancy of our current and future retirees. In addition we modified the Plan’s retirement assumptions to reflect the fact that our members typically defer retirement past their earliest unreduced retirement age. Finally, we adjusted the proportion assumed to take a lump sum commuted value transfer payment upon termination of plan membership.
The total impact of all of these changes in assumptions is to increase the Plan’s liability by $452 million. While this increases the Plan’s funding deficit in the short term, strengthening the valuation assumptions is a prudent strategy that will help to ensure the Plan can meet its future obligations. It also puts the Plan in a stronger position to deal with any future funding issues.
Funding Valuation Assumptions
|Investment return (real)||4.00%||4.00%|
|Investment return (nominal)||6.50%||6.75%|
|Salary increases (nominal)2||3.25%||3.50%|
|1 As of December 31, 2010.|
|2 Plus an amount for promotion. Based on a long-term scale.|