American Express 2007 Annual Report Download - page 106

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The components of the net periodic pension benefit cost for
all defined benefit pension plans are as follows:
(Millions) 2007 2006 2005
Service cost $ 89 $ 109 $ 104
Interest cost 126 115 109
Expected return on plan assets (155) (138) (131)
Amortization of prior service costs 11 1
Recognized net actuarial loss 35 36 25
Settlements/curtailment (gain)
loss (68) 1 4
Net periodic pension benefit cost $ 28 $ 124 $ 112
Assumptions
The weighted average assumptions used to determine benefit
obligations were:
2007 2006
Discount rates 5.8% 5.2%
Rates of increase in compensation levels 4.2% 4.1%
The weighted average assumptions used to determine net
periodic pension benefit cost were:
2007 2006 2005
Discount rates 5.2% 5.1% 5.6%
Rates of increase in compensation levels 4.1% 4.3% 4.1%
Expected long-term rates of return
on assets 7.8% 7.8% 7.9%
The Company assumes a long-term rate of return on assets
on a weighted average basis. In developing this assumption,
management evaluates historical returns 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 based on the plan participant’s
service to date and their expected future compensation. Use of
the rate produced by this model generates a projected benefit
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, 2007 and 2006, and the target allocation for
2008, by asset category, are below. Actual allocations generally
will be within 5 percent of these targets.
Target
Allocation
Percentage of
Plan assets at
2008 2007 2006
Equity securities 52% 55% 67%
Debt securities 40% 27% 27%
Other 8% 18% 6%
Total 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. Given the January 2007 plan
amendments described above, 25 percent of the assets of the
U.S. Plan were temporarily transferred from equity securities
to cash (other) and will be re-allocated to debt securities in
2008. This decreased the overall amount of assets allocated to
equities by 12 percent and increased other by the same amount
in 2007.
Benefit Payments
The Company’s retirement plans expect to make benefit
payments to retirees as follows:
(Millions) 2008 2009 2010 2011 2012 2013
–2017
Expected
payments $133 $ 145 $ 147 $152 $ 161 $942
In addition, the Company expects to contribute $18 million to
its pension plans in 2008.
DEFINED CONTRIBUTION RETIREMENT PLANS
The Company sponsors defined contribution retirement plans,
the principal plan being the Retirement Savings Plan (RSP)
(formerly the ISP), a 401(k) savings plan with a profit sharing
component. The RSP is a qualified plan under ERISA and
covers most employees in the United States. Under the terms of
the RSP, employees have the option of investing up to 10 percent
of their contributions in the American Express Company Stock
Fund, which invests primarily in the Company’s common
stock, through accumulated payroll deductions. Employees are
restricted from transferring balances into this fund if the balance
has reached 10 percent of the employees’ total account balance.
The RSP held 15 million and 16 million shares of American
Express Common Stock at December 31, 2007 and 2006,
respectively, beneficially for employees. In conjunction with the
amendments to the Plan and the SRP which occurred in 2007,
104