Verizon Wireless 2012 Annual Report Download - page 74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
72
The assumed health care cost trend rates follow:
Health Care and Life
At December 31, 2012 2011 2010
Healthcare cost trend rate assumed for
next year 7.00 % 7.50 % 7.75 %
Rate to which cost trend rate gradually
declines 5.00 5.00 5.00
Year the rate reaches the level it is assumed
to remain thereafter 2016 2016 2016
A one percentage point change in the assumed health care cost trend
rate would have the following effects:
(dollars in millions)
One-Percentage Point Increase Decrease
Effect on 2012 service and interest cost $ 232 $ (187)
Effect on postretirement benefit obligation as of
December 31, 2012 3,251 (2,669)
Plan Assets
Historically, our portfolio strategy emphasized a long-term equity ori-
entation, significant global diversification, and the use of both public
and private investments. In an effort to reduce the risk of our portfolio
strategy and better align assets with liabilities, we have shifted our
strategy to one that is more liability driven, where cash flows from invest-
ments better match projected benefit payments but result in lower asset
returns. We intend to reduce the likelihood that assets will decline at a
time when liabilities increase (referred to as liability hedging), with the
goal to reduce the risk of underfunding to the plan and its participants
and beneficiaries. Both active and passive management approaches are
used depending on perceived market efficiencies and various other fac-
tors. Our diversification and risk control processes serve to minimize the
concentration of risk.
While target allocation percentages will vary over time, the company’s
overall investment strategy is to achieve a mix of assets, which allows
us to meet projected benefits payments while taking into consideration
risk and return. The current target allocation for plan assets is designed
so that 70% of the assets have the objective of achieving a return in
excess of the growth in liabilities (comprised of public equities, private
equities, real estate, hedge funds and emerging debt) and 30% of the
assets are invested as liability hedging assets (typically longer duration
fixed income). This allocation will shift as funded status improves to a
higher allocation to liability hedging assets. Target policies will be revis-
ited periodically to ensure they are in line with fund objectives. Due to
our diversification and risks control processes, there are no significant
concentrations of risk, in terms of sector, industry, geography or com-
pany names.
Pension and healthcare and life plans assets do not include significant
amounts of Verizon common stock.
Pension Plans
The fair values for the pension plans by asset category at December 31,
2012 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 1,618 $ 1,586 $ 32 $ –
Equity securities 2,944 2,469 475 –
Fixed income securities
U.S. Treasuries and agencies 1,589 1,125 464 –
Corporate bonds 2,456 35 2,225 196
International bonds 601 140 461 –
Other 210 – 210 –
Real estate 2,018 – – 2,018
Other
Private equity 5,039 – – 5,039
Hedge funds 1,807 – 1,249 558
Total $ 18,282 $ 5,355 $ 5,116 $ 7,811
The fair values for the pension plans by asset category at December 31,
2011 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 1,215 $ 1,184 $ 31 $ –
Equity securities 6,829 5,704 1,125 –
Fixed income securities
U.S. Treasuries and agencies 1,796 1,239 557 –
Corporate bonds 2,140 65 1,886 189
International bonds 1,163 158 1,005 –
Other 359 – 359 –
Real estate 2,158 – – 2,158
Other
Private equity 6,109 – 54 6,055
Hedge funds 2,341 – 1,679 662
Total $ 24,110 $ 8,350 $ 6,696 $ 9,064