American Airlines 2008 Annual Report Download - page 82

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79
10. Retirement Benefits (Continued)
Pension Benefits
Retiree Medical and Other
Benefits
2008
2007
2008
2007
Weighted-average assumptions used to
determine net periodic benefit cost for
the years ended December 31
Discount rate
6.50%
6.00%
6.00%
6.00%
Salary scale (ultimate)
3.78
3.78
-
-
Expected return on plan assets
8.75
8.75
8.75
8.75
As of December 31, 2008, the Company’s estimate of the long-term rate of return on plan assets was 8.75 percent
based on the target asset allocation. Expected returns on longer duration bonds are based on yields to maturity of
the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical
returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions,
and expected value to be generated through active management, currency overlay and securities lending
programs. The Company’s annualized ten-year rate of return on plan assets as of December 31, 2008, was
approximately 6.81 percent.
The Company’s pension plan weighted-average asset allocations at December 31, by asset category, are as
follows:
2008
2007
Long duration bonds
48%
41%
U.S. stocks
22
26
International stocks
15
21
Emerging markets stocks and bonds
4
5
Alternative (private) investments
11
7
Total
100%
100%
The Company’s target asset allocation is 35 percent longer duration corporate and U.S. government/agency
bonds, 25 percent U.S. value stocks, 20 percent developed international stocks, five percent emerging markets
stocks and bonds, and 15 percent alternative (private) investments. Each asset class is actively managed and,
historically, the plans’ assets have produced returns, net of management fees, in excess of the expected rate of
return over the last ten years. Stocks and emerging market bonds are used to provide diversification and are
expected to generate higher returns over the long-term than longer duration U.S. bonds. Public stocks are
managed using a value investment approach in order to participate in the returns generated by stocks in the long-
term, while reducing year-over-year volatility. Longer duration U.S. bonds are used to partially hedge the assets
from declines in interest rates. Alternative (private) investments are used to provide expected returns in excess of
the public markets over the long-term. Additionally, the Company engages currency overlay managers in an
attempt to increase returns by protecting non-U.S. dollar denominated assets from a rise in the relative value of
the U.S. dollar. The Company also participates in securities lending programs to generate additional income by
loaning plan assets to borrowers on a fully collateralized basis. These programs are subject to market risk.
Pre-65 Individuals
Post-65 Individuals
2008
2007
2008
2007
Assumed health care trend rates at
December 31
Health care cost trend rate assumed for
next year
7.5%
7.0%
7.5%
7.0%
Rate to which the cost trend rate is
assumed to decline (the ultimate
trend rate)
4.5%
4.5%
4.5%
4.5%
Year that the rate reaches the ultimate
trend rate
2015
2010
2015
2010