GE 2009 Annual Report Download - page 58

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56 GE 2009 ANNUAL REPORT
PENSION ASSUMPTIONS are significant inputs to the actuarial
models that measure pension benefit obligations and related
effects on operations. Two assumptions — discount rate and
expected return on assets — are important elements of plan
expense and asset/liability measurement. We evaluate these
critical assumptions at least annually on a plan and country-
specific basis. We periodically evaluate other assumptions
involving demographic factors, such as retirement age, mortality
and turnover, and update them to reflect our experience and
expectations for the future. Actual results in any given year will
often differ from actuarial assumptions because of economic and
other factors.
Accumulated and projected benefit obligations are measured
as the present value of future cash payments. We discount those
cash payments using the weighted average of market-observed
yields for high quality fixed income securities with maturities that
correspond to the payment of benefits. Lower discount rates
increase present values and subsequent-year pension expense;
higher discount rates decrease present values and subsequent-
year pension expense.
Our discount rates for principal pension plans at December 31,
2009, 2008 and 2007 were 5.78%, 6.11% and 6.34%, respectively,
reflecting market interest rates.
To determine the expected long-term rate of return on
pension plan assets, we consider current and expected asset
allocations, as well as historical and expected returns on various
categories of plan assets. In developing future return expecta-
tions for our principal benefit plans’ assets, we evaluate general
market trends as well as key elements of asset class returns
such as expected earnings growth, yields and spreads across a
number of potential scenarios. Assets in our principal pension
plans earned 10.0% in 2009, and had average annual earnings
of 3.1%, 8.5% and 10.0% per year in the 10-, 15- and 25-year
periods ended December 31, 2009, respectively. Based on our
analysis of future expectations of asset performance, past return
results, and our current and expected asset allocations, we have
assumed an 8.5% long-term expected return on those assets.
Sensitivity to changes in key assumptions for our principal
pension plans follows.
• Discount rate — A 25 basis point increase in discount rate
would decrease pension cost in the following year by
$0.2 billion and would decrease the pension benefit obligation
at year end by about $1.3 billion.
• Expected return on assets — A 50 basis point decrease in the
expected return on assets would increase pension cost in the
following year by $0.3 billion.
Further information on our pension plans is provided in the
Operations — Overview section and in Note 12.
INCOME TAXES. Our annual tax rate is based on our income,
statutory tax rates and tax planning opportunities available to
us in the various jurisdictions in which we operate. Tax laws are
complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant
judgment is required in determining our tax expense and in
evaluating our tax positions, including evaluating uncertainties.
We review our tax positions quarterly and adjust the balances
as new information becomes available. Our income tax rate is
significantly affected by the tax rate on our global operations.
In addition to local country tax laws and regulations, this rate
depends on the extent earnings are indefinitely reinvested out-
side the United States. Indefinite reinvestment is determined by
management’s judgment about and intentions concerning the
future operations of the company. At December 31, 2009,
$84 billion of earnings have been indefinitely reinvested outside
the United States. Most of these earnings have been reinvested
in active non-U.S. business operations and we do not intend to
repatriate these earnings to fund U.S. operations. Deferred income
tax assets represent amounts available to reduce income taxes
payable on taxable income in future years. Such assets arise
because of temporary differences between the financial report-
ing and tax bases of assets and liabilities, as well as from net
operating loss and tax credit carryforwards. We evaluate the
recoverability of these future tax deductions and credits by
assessing the adequacy of future expected taxable income from
all sources, including reversal of taxable temporary differences,
forecasted operating earnings and available tax planning strate-
gies. These sources of income rely heavily on estimates. We use
our historical experience and our short and long-range business
forecasts to provide insight. Further, our global and diversified
business portfolio gives us the opportunity to employ various
prudent and feasible tax planning strategies to facilitate the recov-
erability of future deductions. Amounts recorded for deferred tax
assets related to non-U.S. net operating losses, net of valuation
allowances, were $3.6 billion and $3.1 billion at December 31, 2009
and 2008, respectively, including $1.2 billion and $1.3 billion at
December 31, 2009 and 2008, respectively, reported in assets of
discontinued operations, primarily related to our loss on the sale
of GE Money Japan. Such year-end 2009 amounts are expected
to be fully recoverable within the applicable statutory expiration
periods. To the extent we do not consider it more likely than not
that a deferred tax asset will be recovered, a valuation allowance
is established.
Further information on income taxes is provided in the
Operations — Overview section and in Note 14.