3M 2004 Annual Report Download - page 92

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Assumed health care trend rates 2004 2003
Health care cost trend rate assumed for next year 10.00% 10.00%
Rate that the cost trend rate is assumed to 5.00% 5.00%
decline to (ultimate trend rate)
Year that the rate reaches the ultimate trend 2009 2008
Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A one
percentage point change in assumed health cost trend rates would have the following effects:
Health Care Cost One Percentage One Percentage
(Millions) Point Increase Point Decrease
Effect on total of service and interest cost $ 21 $ (18)
Effect on postretirement benefit obligation 201 (169)
3M’s investment strategy for its pension and postretirement plans is to manage the plans on a going-concern
basis. The primary goal of the funds is to meet the obligations as required. The secondary goal is to earn the
highest rate of return possible, without jeopardizing its primary goal, and without subjecting the Company to an
undue amount of contribution rate volatility. Fund returns are used to help finance present and future obligations to
the extent possible within actuarially determined funding limits and tax-determined asset limits, thus reducing the
level of contributions 3M must make.
3M does not buy or sell any of its own stock as a direct investment for its pension and other postretirement benefit
funds. However, due to external investment management of the funds, the plans may indirectly buy, sell or hold
3M stock. The aggregate amount of the shares would not be considered to be material relative to the aggregate
fund percentages.
For the U.S. pension plan, the Company’s assumption for the expected return on plan assets was 9.0% in 2004. In
developing the expected long-term rate of return assumption, the Company is provided projected returns by asset
class from its pension investment advisors. Projected returns are based primarily on broad, publicly traded equity
and fixed-income indices and forward-looking estimates of active investment management. The Company’s
expected long-term rate of return on U.S. plan assets is based on an asset allocation assumption of 44% U.S. and
15% international equities, with an expected long-term rate of return of 7.5% for both U.S. and international
equities; 13% private equities with an expected long-term rate of return of 12.5%; 28% fixed-income securities with
an expected long-term rate of return of 5.0%; and an additional rate of return of 1.5% from active investment
management. These assumptions result in a 9.0% weighted average rate of return on an annualized basis. The
plan assets earned a rate of return in excess of 13% and 18% in 2004 and 2003, respectively, and substantially
less than 9% in 2002. The average annual actual return on the plan assets over the past 10 and 25 years has
been 11.7% and 12.5%, respectively. The Company is lowering the 2005 expected return on plan assets by 0.25
percentage points to 8.75%.
The U.S. plan’s asset allocation by asset category as of plan measurement dates follows:
Target Percentage
Allocation of Plan Assets
Asset Category 2005 2004 2003
U.S. qualified pension plan
Domestic equity 44% 46% 42%
International equity 15 17 16
Fixed income 28 27 28
Private equity 13 9 9
Cash – 1 5
Total 100% 100% 100%
Postretirement benefits measurement
Domestic equity 69% 79% 79%
International equity 2 3 3
Fixed income 11 10 9
Private equity 18 8 7
Cash – – 2
Total 100% 100% 100%