American Express 2008 Annual Report Download - page 109

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notes to consolidated financial statements
american express company
107
The components of the net periodic pension benefit cost
for all defined benefit pension plans as of December 31, are
as follows:
(Millions) 2008 2007 2006
Service cost $ 23 $ 89 $ 109
Interest cost 136 126 115
Expected return on plan assets (169) (155) (138)
Amortization of prior service costs —1 1
Recognized net actuarial loss 17 35 36
Settlements/curtailment loss (gain) 6(68) 1
Net periodic pension benefit cost $ 13 $ 28 $ 124
Assumptions
The weighted-average assumptions used to determine benefit
obligations were (as of December 31st and September 30th,
respectively):
2008 2007
Discount rates 5.9% 5.8%
Rates of increase in compensation levels 3.9% 4.2%
The weighted-average assumptions used to determine yearly
net periodic pension benefit costs were (as of September 30th
for all years presented):
2008 2007 2006
Discount rates 5.8% 5.2% 5.1%
Rates of increase in compensation levels 4.2% 4.1% 4.3%
Expected long-term rates of return
on assets 7.6% 7.8% 7.8%
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 by asset category for the Company’s
pension plans are presented below as of December 31, 2008 and
September 30, 2007, as well as the 2009 target allocation. Actual
allocations generally are within 5 percent of these targets:
Target
Allocation
Percentage of
Plan assets at
2009 2008 2007
Equity securities 54% 48% 55%
Debt securities 40% 43% 27%
Other 6% 9% 18%
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.
Benefit Payments
The Company’s retirement plans expect to make benefit
payments to retirees as follows:
(Millions) 2009 2010 2011 2012 2013 2014
–2018
Expected
payments $134 $137 $141 $148 $146 $870
In addition, the Company expects to contribute $65 million to
its pension plans in 2009.
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 U. S. 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 employee’s total account
balance. The RSP held 13 million and 15 million shares of
American Express Common Stock at December 31, 2008 and
2007, respectively, beneficially for employees. In conjunction
with the amendments to the Plan and the SRP that occurred