3M 2009 Annual Report Download - page 91

85
Other supplemental information for the years ended December 31 follows:
Weighted-average assumptions used to determine benefit obligations
Qualified and Non-qualified Pension Benefits Postretirement
United States International Benefits
2009 2008 2007 2009 2008 2007 2009 2008 2007
Discount rate ....................... 5.77% 6.14% 6.00% 5.30% 5.53% 5.39% 5.62% 6.14% 6.00%
Compensation rate increase 4.30% 4.30% 4.30% 3.72% 3.50% 3.82% N/A N/A N/A
Weighted-average assumptions used to determine net cost for years ended
2009 2008 2007 2009 2008 2007 2009 2008 2007
Discount rate ....................... 6.14 % 6.00% 5.75% 5.53%5.39% 4.88% 6.14 % 6.00% 5.75%
Expected return on assets .. 8.50 % 8.50% 8.75% 6.86%7.19% 7.19% 7.24 % 8.60% 8.60%
Compensation rate increase 4.30 % 4.30% 4.30% 3.50%3.82% 3.67% N/A N/A N/A
The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement
date for the U.S. pension and postretirement benefit plans, 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 5.77% for pension and 5.62% for
postretirement benefits to be appropriate as of December 31, 2009, which is a decrease of 0.37 of a percentage
point and 0.52 of a percentage point, respectively, from the rate used as of December 31, 2008. For the international
pension and postretirement plans the discount rates also reflect the current rate at which the associated liabilities
could be effectively settled at the end of the year. If the country has a deep market in corporate bonds the Company
matches the expected cash flows from the plan either to a portfolio of bonds that generate sufficient cash flow or a
notional yield curve generated from available bond information. In countries that do not have a deep market in
corporate bonds, government bonds are considered with a risk premium to approximate corporate bond yields.
For the U.S. qualified pension plans, the Company’s assumption for the expected return on plan assets was 8.50% in
2009. 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, 2009, the Company’s 2010
expected long-term rate of return on U.S. plan assets is based on an asset allocation assumption of 40% global
equities, with an expected long-term rate of return of 8.7%, 13% private equities with an expected long-term rate of
return of 12.7%; 26% fixed-income securities with an expected long-term rate of return of 4.6%; 16% absolute return
investments independent of traditional performance benchmarks, with an expected long term return of 6.5%; and 5%
commodities with an expected long-term rate of return of 6.4%. 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 in 2010. The actual rate of return on plan assets in 2009 was 12.6%. In 2008 the plan experienced a loss of
13.6% and in 2007 earned a rate of return in excess of 14%. The average annual actual return on the plan assets
over the past 10 and 25 years has been 5.6% and 11.2%, respectively. Return on assets assumptions for
international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset
allocations and expected long-term rate of return assumptions.
During 2009, the Company made discretionary contributions totaling $710 million to its principal U.S. qualified
pension plan. Of the $710 million, $600 million was contributed in shares of the Company’s common stock, which is
considered a non-cash financing activity. In 2010, the Company expects to contribute an amount in the range of $500
million to $700 million to its U.S. and international retirement plans. The Company does not have a required minimum
pension contribution obligation for its U.S. plans in 2010. Therefore, the amount of the anticipated discretionary
contribution could vary significantly depending on the U.S. plans’ funded status and the anticipated tax deductibility of
the contribution.
Assumed Health Care Trend Rates
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. As of December 31, 2006, the Company modified its health care
trend rates assumption by raising the rate and separating 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