3M 2008 Annual Report Download - page 83

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3M’s annual measurement date for pension and postretirement assets and liabilities is December 31 each year,
which is also the date used for the related annual measurement assumptions. The discount rate reflects the current
rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to
reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in
timing and amount to settle projected future benefits. Using this methodology, the Company determined a discount
rate of 6.14% to be appropriate as of December 31, 2008, which is an increase from the 6.00% rate used as of
December 31, 2007.
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. The Company separates the trend rates used for plan participants
less than 65 years of age and plan participants 65 years of age or older. The separation of the trend rates reflects the
higher costs associated with prescription drugs in the 65 or older age group. The assumed health care trend rates as
of December 31 are as follows:
Assumed health care trend rates
2008 2007
Pre-65 Post-65 Pre-65 Post-65
Health care cost trend rate used to determine
benefit obligations .................... 8.00 % 9.25 % 8.50 % 9.75 %
Rate that the cost trend rate is assumed to
decline to (ultimate trend rate) .......... 5.00 % 5.00 % 5.00 % 5.00 %
Years to Ultimate Trend Rate............. 7 7 8 8
The assumed health care trend rates shown above reflect 3M’s expected medical and drug claims experience. The
Company has developed certain long-term strategies to help offset trend rates through care management, strategic
sourcing activities and plan design. A one percentage point change in assumed health cost trend rates would have
the following effects:
Health Care Cost
(Millions)
One Percentage
Point Increase
One Percentage
Point Decrease
Effect on total of service and interest cost .... $ 21 $ (17 )
Effect on postretirement benefit obligation.... 128 (110 )
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 8.50% in 2008.
Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking
estimates of active portfolio and investment management. As of December 31, 2008, the Company’s 2009 expected
long-term rate of return on U.S. plan assets is based on an asset allocation assumption of 40 percent global equities,
with an expected long-term rate of return of 8.7%; 13 percent private equities with an expected long-term rate of
return of 10.7%; 26 percent fixed-income securities with an expected long-term rate of return of 4.7%; 16 percent
absolute return investments independent of traditional performance benchmarks, with an expected long term return
of 7%; and 5 percent commodities with an expected long-term rate of return of 6.8%. The Company expects
additional positive return from active investment management. These assumptions result in an 8.50% expected rate
of return on an annualized basis for 2009. The actual rate of return on U.S. plan assets in 2008 was a loss of 13.6%.
In 2007 and 2006, these U.S. plan assets earned a rate of return in excess of 14% and 12%, respectively. Since
2007, the investment strategy has used long duration cash and derivative instruments to achieve interest rate
sensitivity that offsets approximately 50 percent of the interest rate sensitivity of U.S. pension liabilities. The 2008