Annual Report - CoBank

AssumptionsWe measure plan obligations and annual expense usingassumptions designed to reflect future economic conditions.As the bulk of pension benefits will not be paid for manyyears, the computations of pension expenses and benefits arebased on assumptions about discount rates, estimates of annualincreases in compensation levels and expected rates of returnon plan assets.The weighted average rate assumptions used in themeasurement of our benefit obligations are as follows:2011 2010 2009Discount Rate 4.80 % 5.35 % 5.70 %Rate of Compensation Increase 4.75 5.00 5.00The weighted average rate assumptions used in themeasurement of our net periodic benefit cost are as follows:2011 2010 2009Discount Rate 5.35 % 5.70 % 6.35 %Expected Rate of Return on PlanAssets (Qualified Plans Only) 8.00 8.00 8.00Rate of Compensation Increase 5.00 5.00 5.00The discount rates are calculated using a spot yield curvemethod developed by an independent actuary. The approachmaps a high-quality bond yield curve to the duration of theplans’ liabilities, thus approximating each cash flow of theliability stream to be discounted at an interest rate specificallyapplicable to its respective period in time.We establish the expected rate of return on plan assetsbased on a review of past and expected future anticipatedreturns on plan assets. The expected rate of return on planassets assumption also matches the pension plans’ long-terminterest rate assumption used for funding purposes.Assumed health care cost trend rates have an effect on theamounts reported for other postretirement benefits. Formeasurement purposes, an 8 percent annual rate of increase inthe per capita cost of covered health care benefits wasassumed for 2011. The rate was assumed to decrease by0.5 percent each year through 2017 to 5.0 percent and remainat that level thereafter. A 1-percentage-point increase in theassumed health care cost trend rate would increase total annualservice and interest cost by $63 and total other postretirementbenefit obligations by $398, as of January 1, 2011.Conversely, a 1-percentage-point decrease in the assumedhealth care cost trend rate would decrease total annual serviceand interest cost by $53 and total other postretirement benefitobligations by $349.Plan AssetsThe asset allocation target ranges for the pension plansfollow the investment policy adopted by our retirement trustcommittee. This policy provides for a certain level of trusteeflexibility in selecting target allocation percentages. The actualasset allocations at December 31, 2011, 2010 and 2009 areshown in the following table, along with the adopted range fortarget allocation percentages by asset class. The actualallocation percentages reflect the quoted market values atyear-end and may vary during the course of the year. Planassets are generally rebalanced to a level within the targetrange each year at the direction of the trustees.Retirement Benefit Plan AssetsTargetAllocationRangePercentage of PlanAssets at December 31,2011 2010 2009Asset CategoryDomestic Equity 40-50 % 46 % 43 % 43 %Domestic Fixed Income 35-50 36 37 48International Equity 0-10 8 10 9Emerging Markets Equityand Fixed Income 0-10 4 4 -Real Assets 0-5 6 6 -Total 100 % 100 % 100 % 100 %The assets of the pension plans consist primarily ofinvestments in various domestic equity, international equityand bond funds. These funds do not contain any significantinvestments in a single entity, industry, country or commodity,thereby mitigating concentration risk. No CoBank stock ordebt, or that of any other System institution, is included inthese investments.CoBank 2011 Annual Report90