Avon 2005 Annual Report Download - page 40

NOTES฀TO฀CONSOLIDATED฀FINANCIAL฀STATEMENTS
In determining the net cost for the year ended December 31,
2005, the assumed rate of return on assets globally was 7.70%,
which represents the weighted-average rate of return on all plan
assets, including the U.S. and non-U.S. plans.
The majority of our pension plan assets relate to the U.S. pension
plan. The assumed rate of return for determining 2005 net costs
for the U.S. plan was 8.00%. Historical rates of return for the U.S.
plan for the most recent 10-year and 20-year periods were 7.6%
and 9.9%, respectively. In the U.S. plan, our asset allocation policy
has favored U.S. equity securities, which have returned 8.6% and
11.9%, respectively, over the 10-year and 20-year period. The
assumed rate of return for determining future pension obligations
at December 31, 2005 and 2006 pension cost was lowered from
8.75% to 8.00%.
In addition, the current rate of return assumption for the U.S.
plan was based on an asset allocation of approximately 35% in
corporate and government bonds and mortgage-backed securities
(which are expected to earn approximately 5% to 7% in the long
term) and 65% in equity securities (which are expected to earn
approximately 8% to 10% in the long term). Similar assessments
were performed in determining rates of return on non-U.S. pen-
sion plan assets, to arrive at our weighted-average rate of return
of 7.70% for determining 2005 net cost.
Weighted-average assumptions used to determine net cost recorded in the Consolidated Statements of Income for the years ended December 31
were as follows:
Pension Benefits Postretirement
U.S. Plans Non-U.S. Plans Benefits
2005 2004 2003 2005 2004 2003 2005 2004 2003
Discount rate 5.80% 6.25% 6.75% 5.48% 5.77% 5.68% 5.65% 6.25% 6.75%
Rate of compensation increase 6.00 4.50 4.50 2.80 3.01 2.96 N/A N/A N/A
Rate of return on assets 8.00 8.75 8.75 7.14 7.18 7.16 N/A N/A N/A
Plan Assets
Our U.S. and non-U.S. pension plans target and weighted-average asset allocations at December 31, 2005 and 2004, by asset category were
as follows:
U.S. Plans Non-U.S. Plans
% of Plan Assets % of Plan Assets
Target at Year End Target at Year End
Asset Category 2006 2005 2004 2006 2005 2004
Equity securities 65% 65% 65% 61% 65% 65%
Debt securities 35 35 35 32 30 30
Other – – – 7 5 5
Total 100% 100% 100% 100% 100% 100%
The overall objective of our U.S. pension plan is to provide the
means to pay benefits to participants and their beneficiaries in the
amounts and at the times called for by the plan. This is expected
to be achieved through the investment of our contributions and
other trust assets and by utilizing investment policies designed to
achieve adequate funding over a reasonable period of time.
Pension trust assets are invested so as to achieve a return on invest-
ment, based on levels of liquidity and investment risk, that is prudent
and reasonable as circumstances change from time to time. While
we recognize the importance of the preservation of capital, we also
adhere to the theory of capital market pricing which maintains that
varying degrees of investment risk should be rewarded with com-
pensating returns. Consequently, prudent risk-taking is justifiable.
The asset allocation decision includes consideration of the
non-investment aspects of the Avon Products, Inc. Personal
Retirement Account Plan, including future retirements, lump-
sum elections, growth in the number of participants, company
contributions, and cash flow. These actual characteristics of the
plan place certain demands upon the level, risk, and required
growth of trust assets. We regularly conduct analyses of the
plan’s current and likely future financial status by forecasting
assets, liabilities, benefits and company contributions over time.
In so doing, the impact of alternative investment policies upon
the plan’s financial status is measured and an asset mix which
balances asset returns and risk is selected.