American Express 2005 Annual Report Download - page 94

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The accumulated benefit obligation for pension plans,
primarily unfunded plans, where the accumulated
benefit obligation exceeds the fair value of plan assets was
$221 million and $214 million as of September 30, 2005
and 2004, respectively. The fair value of the related plan
assets was $17 million and $15 million at these dates.
The weighted average assumptions used to determine
benefit obligations were:
2005 2004
Discount rates 5.1% 5.5%
Rates of increase in compensation
levels 4.2% 4.0%
The weighted average assumptions used to determine
net periodic benefit cost were:
2005 2004 2003
Discount rates 5.5% 5.7% 6.2%
Rates of increase in
compensation levels 4.0% 3.9% 3.9%
Expected long-term rates
of return on assets 7.8% 7.8% 8.0%
For 2005, the Company assumed on a weighted average
basis a long-term rate of return on assets of 7.8 percent.
In developing the 7.8 percent expected long-term rate
assumption, management evaluated input from an
external consulting firm, including its projection of asset
class return expectations and long-term inflation
assumptions. The Company also considered the
historical returns on the plan assets. The discount rate
assumption for the Company’s material plans (U.S. and
U.K.) was determined by using a model consisting of
bond portfolios that match the cash flows of the plan’s
projected benefit payments. The use of the rate pro-
duced by this model will result in a projected obligation
that would equal the current market value of a portfolio
of high-quality zero coupon bonds whose maturity
dates and amounts would be the same as the timing and
amount of expected future benefit payments.
The asset allocation for the Company’s pension plans at
September 30, 2005 and 2004, and the target allocation
for 2006, by asset category, are below. Actual allocations
will generally be within 5 percent of these targets.
Target
Allocation
Percentage of
Plan assets at
2006 2005 2004
Equity securities 67% 68% 67%
Debt securities 27% 26% 28%
Other 6% 6% 5%
Total 100% 100% 100%
The Company invests in an aggregate diversified port-
folio to ensure that adverse or unexpected results
from a security class will not have a detrimental impact
on the entire portfolio. The portfolio is diversified by
asset type, performance and risk characteristics and
number of investments. Asset classes and ranges consid-
ered appropriate for investment of the plan’s assets are
determined by each plan’s investment committee. The
asset classes typically include domestic and foreign
equities, emerging market equities, domestic and
foreign investment grade and high-yield bonds and
domestic real estate.
The Company’s retirement plans expect to make benefit
payments to retirees as follows (millions): 2006, $142;
2007, $128; 2008, $137; 2009, $148; 2010, $151; and
2011−2015, $1,002. In addition, the Company expects
to contribute $44 million to its pension plans in 2006.
Defined Contribution Retirement Plans
The Company sponsors defined contribution retirement
plans, the principal plan being the Incentive Savings
Plan (“ISP”), a 401(k) savings plan with a profit sharing
and stock bonus plan feature which is a qualified plan
under ERISA and which covers most employees in the
United States. Under the terms of the ISP, employees
have the option of investing in the American Express
Company Stock Fund, which invests primarily in the
Company’s common stock, through accumulated
payroll deductions. In addition, at least quarterly the
Company makes automatic cash contributions equal to
1 percent per annum of a qualifying employee’s base
salary. Such contributions are invested automatically in
the American Express Company Stock Fund and,
effective August 2, 2004, can be directed at any time into
other ISP investment options. Compensation expense
related to the Company’s contribution was $15 million
in 2005, 2004 and 2003, which is included in defined
contribution plan expense discussed below. The ISP
held 17 million and 22 million shares of American
Express Common Stock at December 31, 2005 and
2004, respectively, beneficially for employees.
Notes to Consolidated
Financial Statements
AXP / AR.2005
[92 ]