Safeway 2012 Annual Report Download - page 38

SAFEWAY INC. AND SUBSIDIARIES
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The determination of Safeway’s obligation and expense for pension benefits is dependent, in part, on the
Company’s selection of certain assumptions used by its actuaries in calculating these amounts. These
assumptions are disclosed in Note K to the consolidated financial statements and include, among other
things, the discount rate, the expected long-term rate of return on plan assets and the rate of compensation
increases. Actual results in any given year will often differ from actuarial assumptions because of economic
and other factors. In accordance with generally accepted accounting principles (“GAAP”), the amount by
which actual results differ from the actuarial assumptions is accumulated and amortized over future periods
and, therefore, affects recognized expense in such future periods. While Safeway believes its assumptions
are appropriate, significant differences in actual results or significant changes in the Company’s assumptions
may materially affect Safeway’s pension and other postretirement obligations and its future expense.
Safeway bases the discount rate on current investment yields on high-quality fixed-income investments. The
discount rate assumption used to determine the year-end projected benefit obligation is increased or
decreased to be consistent with the change in yield rates for high-quality fixed-income investments for the
expected period to maturity of the pension benefits. The discount rate used to determine 2012 pension
expense was 4.8%. A lower discount rate increases the present value of benefit obligations and increases
pension expense. Expected return on pension plan assets is based on historical experience of the Company’s
portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income
indices, as well as target asset allocation. Safeway’s target asset allocation mix is designed to meet the
Company’s long-term pension requirements. For 2012, the Company’s assumed rate of return was 7.75%
on U.S. pension assets and 6.50% on Canadian pension assets. For 2013, the Company's assumed rate
of return is 7.50% on U.S pension assets and 6.25% on Canadian pension assets. Over the 10-year period
ended December 29, 2012, the average rate of return was approximately 7% for U.S. and 6% for Canadian
pension assets, slightly below the Company's assumed rate of return. The deteriorating conditions in the
global financial markets during 2008 led to a substantial reduction in the 10-year average rate of return on
pension assets. We expect that the markets will eventually recover to our assumed long-term rate of return.
The following table summarizes actual allocations for Safeway’s plans at year-end:
Plan assets
Asset category Target 2012 2011
Equity 65% 64.3% 65.5%
Fixed income 35 33.0 33.3
Cash and other —2.7 1.2
Total 100% 100.0% 100.0%
The investment policy with regard to Safeway’s pension plans 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 investment management while establishing investment guidelines and monitoring procedures
for each investment manager to ensure the characteristics of the portfolio are consistent with the original
investment mandate; and (4) maintain adequate controls over administrative costs.