Assumptions
The following table presents the weighted average actuarial assumptions that were used to determine benefit obligations and net periodic benefit costs for 2007, 2006 and 2005.
| Pension Benefits | Other Postretirement Benefits |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||
| Assumptions to determine benefit obligations: Discount rate |
6.22 | % | 5.72 | % | 5.72 | % | 6.00 | % | 5.50 | % | 5.75 | % | ||||||
| Rate of compensation increase | 7.00 | % | 7.00 | % | 4.50 | % | N/A | N/A | N/A | |||||||||
| Assumptions to determine net periodic benefit cost: Discount rate |
5.96 | % | 5.72 | % | 5.98 | % | 5.75 | % | 5.75 | % | 6.00 | % | ||||||
| Expected return on plan assets | 8.40 | % | 8.40 | % | 8.40 | % | N/A | N/A | N/A | |||||||||
| Rate of compensation increase | 7.00 | % | 4.50 | % | 4.50 | % | N/A | N/A | N/A | |||||||||
Discount rate — Future pension and postretirement obligations are discounted at the end of each year based on the rate at which obligations could be effectively settled, considering the timing of estimated future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. High quality corporate bond yield indices, such as Moody's Aa, are considered when selecting the discount rate.
Rate of compensation increase — For measurement of the 2007 benefit obligation for the pension plans, the 7% compensation increase in the table above represents the assumed increase for 2008 through 2011. The rate was assumed to decrease to 5% in the year 2012 and remain at that level thereafter. For measurement of the 2006 benefit obligation for the pension plans, the 7% compensation increase in the table above represents the assumed increase for 2007 and 2008. The rate was assumed to decrease one percent annually to 5% in the year 2010 and remain at that level thereafter. For measurement of the 2005 benefit obligation for the pension plans, the compensation increase in the table above represents the assumed increase for all future years.
Expected return on plan assets — Devon's overall investment objective for its retirement plans' assets is to achieve long-term growth of invested capital to ensure payments of retirement benefits obligations can be funded when required. To assist in achieving this objective, Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. At December 31, 2007, the target investment allocation for Devon's plan assets was 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. Derivatives or other speculative investments considered high-risk are generally prohibited.
The expected rate of return on plan assets was determined by evaluating input from external consultants and economists as well as long-term inflation assumptions. Devon expects the long-term asset allocation to approximate the targeted allocation. Therefore, the expected long-term rate of return on plan assets is based on the target allocation of investment types in such assets.
The following table presents the weighted-average asset allocation for Devon's pension plans at December 31, 2007 and 2006, and the target allocation for 2008 by asset category:
| 2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Asset category: Equity securities |
80 | % | 83 | % | 83 | % | |||
| Debt securities | 20 | % | 17 | % | 17 | % | |||
| Total | 100 | % | 100 | % | 100 | % | |||
Other assumptions — For measurement of the 2007 benefit obligation for the other postretirement medical plans, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2008. The rate was assumed to decrease annually to an ultimate rate of 5% in the year 2016 and remain at that level thereafter. Assumed health care cost-trend rates affect the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have the following effects on the December 31, 2007 other postretirement benefits obligation and the 2008 service and interest cost components of net periodic benefit cost.
| One Percent Increase |
One Percent Decrease |
|||||
|---|---|---|---|---|---|---|
| (In millions) | ||||||
| Effect on benefit obligation | $ | 4 | (4 | ) | ||
| Effect on service and interest costs | $ | — | — | |||
Expected Cash Flows
The following table presents expected cash flow information for Devon's pension and other postretirement benefit plans.
| Pension Benefits | Other Postretirement Benefits |
|||||
|---|---|---|---|---|---|---|
| (In millions) | ||||||
| Devon's 2008 contributions | $ | 8 | 6 | |||
| Benefit payments: 2008 |
$ | 33 | 6 | |||
| 2009 | $ | 34 | 6 | |||
| 2010 | $ | 36 | 6 | |||
| 2011 | $ | 39 | 6 | |||
| 2012 | $ | 43 | 6 | |||
| 2013 to 2017 | $ | 296 | 30 | |||
Expected contributions included in the table above include amounts related to Devon's Qualified Plans, Supplemental Plans and Postretirement Plans. Of the benefits expected to be paid in 2008, $8 million of pension benefits is expected to be funded from the trusts established for the Supplemental Plans and all $6 million of other postretirement benefits is expected to be funded from Devon's available cash and cash equivalents. Expected employer contributions and benefit payments for other postretirement benefits are presented net of employee contributions
Other Benefit Plans
Devon's 401(k) Plan covers all domestic employees. At its discretion, Devon may match a certain percentage of the employees' contributions to the plan. The matching percentage is determined annually by the Board of Directors. Devon's matching contributions to the plan were $18 million, $15 million and $12 million for the years ended December 31, 2007, 2006 and 2005, respectively.
As previously discussed in "Revisions to Retirement Plans" above, in 2007 Devon adopted an enhanced defined contribution structure related to its 401(k) Plan to be effective January 1, 2008. Participants who elected to participate in this enhanced defined contribution structure, as well as all employees hired on or after October 1, 2007, will continue to receive a discretionary match of a percentage of their contributions to the 401(k) Plan. These participants will also receive additional, nondiscretionary contributions by Devon calculated as a percentage of annual compensation. The percentage will vary based on the employees' years of service.
Devon has defined contribution pension plans for its Canadian employees. Devon makes a contribution to each employee that is based upon the employee's base compensation and classification. Such contributions are subject to maximum amounts allowed under the Income Tax Act (Canada). Devon also has a savings plan for its Canadian employees. Under the savings plan, Devon contributes a base percentage amount to all employees and the employee may elect to contribute an additional percentage amount (up to a maximum amount) which is matched by additional Devon contributions. During 2007, 2006 and 2005, Devon's combined contributions to the Canadian defined contribution plan and the Canadian savings plan were $14 million, $12 million and $10 million, respectively.