Annual Report 2011 - Ford Motor Company

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any
potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor
contracts).
The effects of actual results differing from our assumptions and the effects of changing assumptions are included in
unamortized net gains and losses. Unamortized gains and losses are amortized over future periods and, therefore,
generally affect our recognized expense in future periods. Amounts are recognized as a component of net expense over
the expected future years of service (approximately 12 years for the major U.S. plans). In 2011, the U.S. actual return on
assets was 7.7%, which was lower than the expected return of 8%. The year-end 2011 weighted average discount rates
for the U.S. and non-U.S. plans decreased by 60 and 47 basis points, respectively. These differences resulted in
unamortized losses of about $5 billion. Unamortized gains and losses are amortized only to the extent they exceed 10%
of the higher of the market-related value of assets or the projected benefit obligation of the respective plan. For the major
U.S. plans, unamortized losses exceed this threshold and recognition is continuing in 2012.
See Note 17 of the Notes to the Financial Statements for more information regarding costs and assumptions for
employee retirement benefits.
Sensitivity Analysis. The December 31, 2011 pension funded status and 2012 expense are affected by year-end 2011
assumptions. These sensitivities may be asymmetric and are specific to the time periods noted. They also may not be
additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual
sensitivities shown. The effect of the indicated increase/(decrease) in factors which generally have the largest impact on
pension expense and obligation is shown below (in millions):
Assumption
Discount rate
Expected return on assets
Other Postretirement Employee Benefits
Percentage
Point
Change
+/- 1.0 pt.
+/- 1.0
2012 Expense
Increase/(Decrease) in:
December 31, 2011 Obligation
U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans
$(260)/$310 $(160)/$180 $(4,780)/$5,800 $(2,980)/$3,440
(380)/380
(190)/190
Nature of Estimates Required. The estimation of our obligations, costs, and liabilities associated with OPEB, primarily
retiree health care and life insurance, requires that we make use of estimates of the present value of the projected future
payments to all participants, taking into consideration the likelihood of potential future events such as health care cost
increases and demographic experience, which may have an effect on the amount and timing of future payments.
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
• Discount rates. We base the discount rate assumption primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each plan to a yield curve comprised of high quality bonds specific to the
country of the plan. Benefit payments are discounted at the rates on the curve and a single discount rate specific to
the plan is determined.
• Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the
near-term outlook, and an assessment of likely long-term trends.
• Salary growth. Salary growth assumptions reflect our long-term actual experience, our outlook, and assumed
inflation.
• Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
• Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.
Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any
potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor
contracts).
The effects of actual results differing from our assumptions and the effects of changing assumptions are included in
unamortized net gains and losses. Unamortized gains and losses are amortized over future periods and, therefore,
generally affect our recognized expense in future periods. The weighted average discount rate used to determine the
benefit obligation for U.S. plans at December 31, 2011 was 4.6%, compared with 5.2% at December 31, 2010, resulting in
an unamortized loss of about $280 million. This amount is expected to be recognized as a component of net expense
over the expected future years of service (approximately 13 years).
See Note 17 of the Notes to the Financial Statements for more information regarding OPEB costs and assumptions.
Ford Motor Company | 2011 Annual Report 73