American Express 2009 Annual Report Download - page 117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The projected benefit obligation and fair value of plan assets
for pension plans with projected benefit obligation that
exceeds the fair value of plan assets are as follows:
(Millions) 2009 2008
Projected benefit obligation $2,395 $2,134
Fair value of plan assets $1,989 $1,693
Net Periodic Pension Benefit Cost
The components of the net periodic pension benefit cost for
all defined benefit pension plans as of December 31 are as
follows:
(Millions) 2009 2008 2007
Service cost(a) $14 $23 $89
Interest cost(b) 127 136 126
Expected return on plan assets(c) (146) (169) (155)
Amortization of prior service costs(d) ——1
Recognized net actuarial loss(e) 10 17 35
Settlements losses (gains)(f) 19 5 (5)
Curtailment (gains) losses(g) (3) 1 (63)
Net periodic pension benefit cost $21 $13 $28
(a) Current value of benefits earned by employees during the period.
(b) Estimated interest incurred on the outstanding projected benefit
obligation during the period.
(c) Expected return on the market related value of plan assets.
(d) Costs that result from plan amendments, which are amortized
over the expected future service period of the employees
impacted.
(e) Amortization of the accumulated losses which exceed 10 percent
of the greater of the projected benefit obligation or the market
related value of plan assets.
(f) Recognition of the actuarial losses resulting from lump sum
settlements of the benefit obligation.
(g) Gains resulting from a reduction in the benefit obligation due to a
decrease in the expected years of future service of current plan
participants.
Assumptions
The weighted-average assumptions used to determine defined
benefit pension obligations were:
2009 2008
Discount rates 5.3% 5.9%
Rates of increase in compensation levels 3.6% 3.9%
The weighted-average assumptions used to determine net
periodic pension benefit costs were:
2009 2008 2007
Discount rates 5.9% 5.8% 5.2%
Rates of increase in compensation levels 3.9% 4.2% 4.1%
Expected long-term rates of return on assets 6.9% 7.6% 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
significant defined benefit plans are determined using a model
consisting of bond portfolios that match the cash flows of the
plan’s projected benefit payments based on the plan
participants’ 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 and Fair Value
The Benefit Plans Investment Committee (BPIC) is appointed
by the Compensation and Benefits Committee of the
Company’s Board of Directors and has the responsibility of
reviewing and approving the investment policies related to
plan assets for the Company’s defined benefit pension plans;
evaluating the performance of the investments in accordance
with the investment policy; reviewing the investment
objectives, risk, characteristics, expenses and historical
performance; and selecting and evaluating the investment
managers. The BPIC typically meets quarterly to review the
performance of the various investment managers and service
providers as well as other investment related matters. The
Company’s significant defined benefit pension plans have
investment policies, which prescribe targets for the amount of
assets that can be invested in a security class in order to
mitigate the detrimental impact of adverse or unexpected
results with respect to any individual security class on the
overall portfolio. The portfolios are diversified by asset type,
risk characteristics and concentration of investments.
Effective January 1, 2009, the Company adopted new
GAAP fair value disclosure requirements for defined benefit
pension plan assets (the new expanded disclosures are not
applicable for plan assets at December 31, 2008 when the asset
allocation was 48 percent equity securities, 43 percent fixed
income securities, and 9 percent other investments). Refer to
Note 3 for a discussion related to valuation techniques used to
measure fair value, including a description of the three-level
fair value hierarchy of inputs.
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