We sponsor a number of retiree health and life insurance benefit plans (retiree benefit plans). Principal retiree benefit plans are discussed below; other such plans are not significant individually or in the aggregate.
PRINCIPAL RETIREE BENEFIT PLANS generally provide health and life insurance benefits to employees who retire under the GE Pension Plan with 10 or more years of service. See note 6. Retirees share in the cost of healthcare benefits. Certain benefit provisions are subject to collective bargaining. These plans cover approximately 250,000 retirees and dependents.
The effect on operations of principal retiree benefit plans is shown in the following table.
COST OF PRINCIPAL RETIREE BENEFIT PLANS
| (In millions) | 2004 | 2003 | 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Expected return on plan assets | $ | (149 | ) | $ | (159 | ) | $ | (170 | ) |
| Service cost for benefits earned | 210 | 307 | 277 | ||||||
| Interest cost on benefit obligation | 518 | 535 | 469 | ||||||
| Prior service cost | 298 | 191 | 96 | ||||||
| Net actuarial loss recognized | 60 | 127 | 78 | ||||||
| Retiree benefit plans cost | $ | 937 | $ | 1,001 | $ | 750 | |||
ACTUARIAL ASSUMPTIONS. The discount rates at December 31 were used to measure the year-end benefit obligations and the earnings effects for the subsequent year. Actuarial assumptions used to determine benefit obligations and earnings effects for principal retiree benefit plans follow.
ACTUARIAL ASSUMPTIONS
| December 31 | 2004 | 2003 | 2002 | 2001 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Discount rate(a) | 5.75 | % | 6.0 | % | 6.75 | % | 7.25 | % | ||||
| Compensation increases | 5 | 5 | 5 | 5 | ||||||||
| Expected return on assets | 8.5 | 8.5 | 8.5 | 9.5 | ||||||||
| Initial healthcare trend rate(b) | 10.3 | 10.5 | 13 | 12 | ||||||||
| (a) | Weighted average discount rates for determination of 2004 and 2003 costs were 5.9% and 6.4%, respectively. |
| (b) | For 2004, gradually declining to 5% for 2013 and thereafter. |
To determine the expected long-term rate of return on retiree life plan assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. We apply our expected rate of return to a market-related value of assets, which stabilizes variability in assets to which we apply that expected return.
We amortize experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, over a period no longer than the average future service of employees.
FUNDING POLICY for retiree health benefits is generally to pay covered expenses as they are incurred. We fund retiree life insurance benefits at our discretion.
Changes in the accumulated postretirement benefit obligation for retiree benefit plans follow.
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (APBO)
| (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Balance at January 1 | $ | 9,701 | $ | 7,435 | ||
| Service cost for benefits earned | 210 | 307 | ||||
| Interest cost on benefit obligation | 518 | 535 | ||||
| Participant contributions | 37 | 33 | ||||
| Plan amendments(a) | — | 2,483 | ||||
| Actuarial gain | (509 | ) | (416 | ) | ||
| Benefits paid | (797 | ) | (720 | ) | ||
| Other | 90 | 44 | ||||
| Balance at December 31(b) | $ | 9,250 | $ | 9,701 | ||
| (a) | Related to changes in retiree benefit plans resulting from collective bargaining agreements that extend through June 2007. |
| (b) | The APBO for the retiree health plans was $6,979 million and $7,514 million at year-end 2004 and 2003, respectively. |
Increasing or decreasing the healthcare cost trend rates by 1.0 percentage point would have had an insignificant effect on the December 31, 2004, accumulated postretirement benefit obligation and the annual cost of retiree health plans. Our principal retiree benefit plans are collectively bargained and have provisions that limit our per capita costs.
Changes in the fair value of assets for retiree benefit plans follow.
FAIR VALUE OF ASSETS
| (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Balance at January 1 | $ | 1,626 | $ | 1,426 | ||
| Actual gain on plan assets | 160 | 309 | ||||
| Employer contributions | 626 | 565 | ||||
| Participant contributions | 37 | 33 | ||||
| Benefits paid | (797 | ) | (720 | ) | ||
| Other | — | 13 | ||||
| Balance at December 31 | $ | 1,652 | $ | 1,626 | ||
We expect to contribute approximately $710 million in 2005 to cover unfunded healthcare benefits.
Plan assets are held in trust, as follows:
PLAN ASSET ALLOCATION
| 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31 | Target allocation | Actual allocation | Actual allocation | ||||||
| Equity securities | 62–74 | % | 71 | % | 73 | % | |||
| Debt securities | 20–26 | 19 | 20 | ||||||
| Real estate | 1–5 | 1 | 1 | ||||||
| Other | 3–9 | 9 | 6 | ||||||
| Total | 100 | % | 100 | % | |||||
Plan fiduciaries set investment policies and strategies for the trust. Long-term strategic investment objectives include preserving the funded status of the trust and balancing risk and return. The plan fiduciaries oversee the investment allocation process, which includes selecting investment managers, setting long-term strategic targets and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range.
Trust assets invested in short-term securities must be invested in securities rated A1/P1 or better. GE common stock represented 6.2% and 5.4% of trust assets at year-end 2004 and 2003, respectively, and is subject to a statutory limit when it reaches 10% of total trust assets.
Our recorded assets and liabilities for retiree benefit plans are as follows:
RETIREE BENEFIT ASSET (LIABILITY)
| December 31 (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Funded status(a) | $ | (7,598 | ) | $ | (8,075 | ) |
| Unrecognized prior service cost | 2,747 | 3,045 | ||||
| Unrecognized net actuarial loss | 1,004 | 1,584 | ||||
| Net liability recognized | $ | (3,847 | ) | $ | (3,446 | ) |
| Amounts recorded in the Statement of Financial Position: | ||||||
| Retiree life plans prepaid asset | $ | 38 | $ | 81 | ||
| Retiree health plans liability | (3,885 | ) | (3,527 | ) | ||
| Net liability recognized | $ | (3,847 | ) | $ | (3,446 | ) |
| (a) | Fair value of assets less APBO, as shown in the preceding tables. |
Estimated future benefit payments are as follows:
ESTIMATED FUTURE BENEFIT PAYMENTS
| (In millions) | 2005 | 2006 | 2007 | 2008 | 2009 | 2010–2014 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ | 875 | $ | 850 | $ | 900 | $ | 850 | $ | 800 | $ | 3,600 | ||
Effective April 1, 2004, we included the effects of the U.S. Medicare Prescription Drug, Improvement and Modernization Act of 2003 in our consolidated financial statements, reducing APBO by $583 million without a significant effect on our 2004 operations.
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