American Express 2006 Annual Report Download - page 105

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[ 103 ]
notes to consolidated fi nancial statements
american express company
on plan assets as well as benchmark information
including projections of asset class returns and long-
term inflation.
The discount rate assumptions for the Company’s
material plans (U.S. and U.K.) are determined by using a
model consisting of bond portfolios that match the cash
flows of the plan’s projected benefit payments. Use of
the rate produced by this model generates a projected
obligation that equals the current market value of a
portfolio of high-quality zero coupon bonds whose
maturity dates and amounts match the timing and
amount of expected future benefit payments.
Asset Allocation
The asset allocation for the Company’s pension plans at
September 30, 2006 and 2005, and the target allocation
for 2007, by asset category, are below. Actual allocations
generally will be within 5 percent of these targets.
Target
Allocation
Percentage of
Plan assets at
2007 2006 2005
Equity securities 67% 67% 68%
Debt securities 27% 27% 26%
Other 6% 6% 6%
Tota l 100% 100% 100%
The Company invests in a diversified portfolio 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,
risk characteristics and concentration of investments.
Asset classes and ranges considered appropriate for
investment of each plan’s assets are determined by the
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.
Benefit Payments
The Company’s retirement plans expect to make benefit
payments to retirees as follows:
(Millions) 2007 2008 2009 2010 2011
2012-
2016
Expected payments $142 $144 $151 $157 $168 $1,116
In addition, the Company expects to contribute $40
million to its pension plans in 2007.
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 feature. The ISP is a qualified plan
under ERISA and 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 each qualifying employee’s base salary.
These contributions are invested automatically in the
American Express Company Stock Fund and can be
directed at any time into other ISP investment options.
Compensation expense related to the Company’s
contribution to the ISP was $14 million in 2006, and
$15 million in each of 2005 and 2004; this amount is
included in defined contribution plan expense discussed
below. The ISP held 16 million and 17 million shares
of American Express Common Stock at December 31,
2006 and 2005, respectively, beneficially for employees.
In 2006, as part of the amendment to the U.K.
pension plan, the Company established a defined
contribution plan in the U.K. As a result, expense and
contributions related to defined contribution plans have
increased in the current year as compared to previous
periods.
The total expense for all defined contribution plans
globally was $114 million, $116 million, and $117
million in 2006, 2005, and 2004, respectively.
OTHER POSTRETIREMENT BENEFITS PLANS
The Company sponsors unfunded defined
postretirement benefit plans that provide health care
and life insurance to certain retired U.S. employees.
Adoption of SFAS No. 158
The following table provides the cumulative effect
of the change in accounting principle with respect to
recognizing the funded status of the other postretirement
benefit plans in the Consolidated Balance Sheet as of
December 31, 2006:
(Millions)
Pre-SFAS
No. 158
SFAS
No. 158
impact
Post-
SFAS
No. 158
Accrued benefit liability (a) $(229) $ (140) $ (369)
Accumulated other
comprehensive loss, net of
tax (b) $ — $ 86 $ 86
(a) The accrued benefit liability represents the projected benefit
obligation for all plans as these plans are unfunded.
(b) The $86 million adjustment to accumulated other comprehensive
loss represents the recognition of the previously unrecognized
actuarial losses and prior service credit of $140 million, net of $54
million of deferred taxes.