Safeway 2004 Annual Report Download - page 49

SAFEWAY INC. AND SUBSIDIARIES
SAFEWAY INC. 2004 ANNUAL REPORT 47
The following table provides the components of 2004,
2003 and 2002 net pension expense for the retirement plans
(in millions):
2004 2003 2002
Estimated return on assets $ 154.0 $ 132.5 $143.7
Service cost (109.9) (95.8) (74.6)
Interest cost (107.8) (102.2) (82.9)
Amortization of prior service cost (16.6) (15.5) (14.7)
Amortization of unrecognized
losses (32.6) (49.9) (1.8)
Net pension expense $(112.9) $(130.9) $ (30.3)
Prior service costs are amortized on a straight-line basis
over the average remaining service period of active partic-
ipants. Actuarial gains and losses are amortized over the
average remaining service life of active participants when
the accumulation of such gains and losses exceeds 10% of
the greater of the projected benefit obligation and the fair
value of plan assets. The Company uses its fiscal year-end
date as the measurement date for its plans. The accumulated
benefit obligation for all Safeway plans was $1,703.4 million
at year-end 2004 and $1,545.8 million at year-end 2003.
The actuarial assumptions used to determine year-end
projected benefit obligation were as follows:
2004 2003 2002
Discount rate:
United States plans 5.8% 6.0% 6.5%
Canadian plans 5.8 6.0 6.5
Combined weighted
average rate 5.8 6.0 6.5
Rate of compensation increase:
United States plans 5.0% 5.0% 5.0%
Canadian plans 3.5 3.5 3.5
The actuarial assumptions used to determine net periodic
benefit cost were as follows:
2004 2003 2002
Discount rate:
United States plans 6.0% 6.5% 7.5%
Canadian plans 6.0 6.5 7.0
Combined weighted average rate 6.0 6.5 7.4
Expected return on plan assets:
United States plans 8.5% 8.5% 9.0%
Canadian plans 7.0 7.5 8.0
Rate of compensation increase:
United States plans 5.0% 5.0% 5.0%
Canadian plans 3.5 3.5 5.0
The Company has adopted and implemented an
investment policy for the defined benefit pension plans that
incorporates a strategic long-term asset allocation mix
designed to meet the Company’s long-term pension
requirements. This asset allocation policy is reviewed
annually and, on a regular basis, actual allocations are
rebalanced to the prevailing targets. The following table
summarizes actual allocations for Safeway’s plans at year-
end 2004 and 2003:
Plan Assets
Asset Category Target 2004 2003
Equity 65% 67.4% 69.1%
Fixed income 35 31.5 29.3
Cash and other –1.1 1.6
Total 100% 100.0% 100.0%
The investment policy also emphasizes the following key
objectives: (1) maintain a diversified portfolio among asset
classes and investment styles, (2) maintain an acceptable
level of risk in pursuit of long-term economic benefit,
(3) maximize the opportunity for value-added returns from
active management, and (4) maintain adequate controls over
administrative costs.
To meet these objectives, the Company’s investment
policy reflects the following major themes: (1) diversify
holdings to achieve broad coverage of both stock and bond
markets; and (2) use active investment managers with
disciplined, clearly defined strategies, while establishing
investment guidelines and monitoring procedures for each
investment manager to ensure the characteristics of the
portfolio is consistent with the original investment mandate.
Expected rates of return on plan assets were developed
by determining projected stock and bond returns and then
applying these returns to the target asset allocations of the
employee benefit trusts, resulting in a weighted average
rate of return on plan assets. Equity returns were based
primarily on historical returns of the S&P 500 Index. Fixed-
income projected returns were based primarily on historical
returns for the broad U.S. bond market.
Safeway expects to contribute approximately $12.0
million to its defined benefit pension plan trusts in 2005.