Question

2. International Paper Company’s 2013 annual report disclosed the following pension information:
	Year	Return
	2013	14.10%
	2012	14.10%
	2011	2.50%
	2010	15.10%
	2009	10.08%
	2008	-23.60%
	2007	9.60%
	2006	14.90%
	2005	11.70%
	2004	14.10%
The footnote also reports that International Paper’s expected long-term rate of return on plan assets is 8%.
a.	Calculate the actual (long-term) rate of return over the past 10 years.
b.	Does the company’s expected rate of return seem reasonable? Why or why not?

Answer 1

a. Tha actual long-term rate of return is 8.33%.

Working:

Year	Return
2013	14.1
2012	14.1
2011	2.5
2010	15.1
2009	10.8
2008	-23.6
2007	9.6
2006	14.9
2005	11.7
2004	14.1
	83.3
Average	8.33

b. The company's expected rate of returndoes not seem to be reasonable. This is because, although the long-term actual rate of return is 8.33% which is closer to the expected rate, the actual rate is higher than the expected rate for 8 of the 10 years, with 2008 and 2001 being exceptions, wherein the return was much lower .

It may be possible, that in these two years the conditions were not in control of the company. the average for the remaining eight years is 13.04%.

Therefore we may say that the expected rate of return needs an upward revision, so as to set a realisitc target.