Ford 2006 Annual Report Download - page 39

Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Assumptions and Approach Used. The assumptions used in developing the required estimates include the following
key factors:
xDiscount rates. We base the discount rate assumption primarily on the results of a cash flow matching analysis,
which matches the future cash outflows for each plan to a yield curve comprised of high quality bonds specific to
the country of the plan. Benefit payments are discounted at the rates on the curve and a single discount rate
specific to the plan is determined.
xHealth care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the
near-term outlook, anticipated efficiencies and other cost-mitigation actions (including eligibility management,
employee education and wellness, competitive sourcing and appropriate employee cost sharing) and an
assessment of likely long-term trends.
xExpected return on plan assets. The expected return on plan assets assumption reflects external investment
managers' expectations of likely returns on short-duration VEBA assets over the next several years.
xSalary growth. The salary growth assumptions reflect our long-term actual experience, outlook and assumed
inflation.
xExpected VEBA contributions/drawdowns. The expected amount and timing of contributions/drawdowns is based
on an assessment of hourly retiree benefit payments to be reimbursed, tax efficiency, and cash availability.
xRetirement rates. Retirement rates are developed to reflect actual and projected plan experience.
xMortality rates. Mortality rates are developed to reflect actual and projected plan experience.
Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any
potential future changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor
contracts).
The effects of actual results differing from our assumptions and the effects of changing assumptions are included in
unamortized net gains and losses. Unamortized gains and losses are amortized over future periods and, therefore,
generally affect our recognized expense in future periods. In 2006, the U.S. actual health care trend was 5%, which was
less than the expected trend of 7%. The year-end 2006 weighted average discount rate for the U.S. increased by
25 basis points. These differences, as well as updates for employee separation programs, resulted in an unamortized
gain of about $3 billion. This amount is expected to be recognized as a component of net expense over the expected
future years of service (approximately 11 years).
See Note 23 of the Notes to the Financial Statements for more information regarding costs and assumptions for
employee retirement benefits.
Sensitivity Analysis. The December 31, 2006 OPEB funded status and 2007 expense are affected by
December 31, 2006 assumptions. Note that these sensitivities may be asymmetric and are specific to the time periods
noted. They are not additive, so the impact of changing multiple factors simultaneously cannot be calculated by
combining the individual sensitivities shown. The effect of the indicated increase/(decrease) in selected assumptions is
shown below (in millions):
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