3M 2005 Annual Report Download - page 87

61
Qualified and Non-qualified Postretirement
Pension Benefits Pension Benefits
Weighted average assumptions used United States International
to determine benefit obligations 2005 2004 2003 2005 2004 2003 2005 2004 2003
Discount rate 5.50% 5.75% 6.00% 4.50% 4.88% 4.95% 5.50% 5.75% 6.00%
Compensation rate increase 4.30% 4.30% 4.30% 3.52% 3.55% 3.46% 4.30% 4.30% 4.30%
Weighted average assumptions used
to determine net cost for years ended 2005 2004 2003 2005 2004 2003 2005 2004 2003
Discount rate 5.75% 6.00% 6.75% 4.88% 4.95% 4.78% 5.75% 6.00% 6.75%
Expected return on assets 8.75% 9.00% 9.00% 7.08% 7.09% 7.27% 8.60% 9.39% 9.42%
Compensation rate increase 4.30% 4.30% 4.60% 3.55% 3.46% 3.58% 4.30% 4.30% 4.60%
As of December 31, 2005, the Company converted to the RP (Retirement Plans) 2000 Mortality Table for
calculating the year-end 2005 U.S. pension and postretirement obligations and 2006 expense. The impact of this
change increased the year-end 2005 U.S. Projected Benefit Obligations for pension by $385 million, the year-end
2005 U.S. Accumulated Benefit Obligations for pension by $349 million and the 2005 U.S. Accumulated
Postretirement Benefit Obligation by $93 million. This change will also increase pension expenses for 2006 by
$64 million and postretirement expenses by $17 million.
Assumed health care trend rates 2005 2004
Health care cost trend rate used to determine expense 9.0% 10.0%
Rate that the cost trend rate is assumed to 5.0% 5.0%
decline to (ultimate trend rate)
Years to Ultimate Trend Rate 45
The Company reviews external data and its own historical trends for health care costs to determine the health
care trend rates for the postretirement medical plans. In 2006, the assumed health care trend rate will continue on
the current trend to a rate of 8.0% declining to an ultimate trend rate of 5.0% in 3 years. 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 $ 22 $ (18)
Effect on postretirement benefit obligation 235 (196)
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 8.75% in 2005.
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