Ford Motor Co. is lowering risk in its pension plans, a strategy that includes making an outsized discretionary contribution that could mean gaining a better return for its corporate cash than keeping it on the balance sheet.
Ford, Dearborn, Mich., is cutting its pension funds' equity exposure and raising alternatives and fixed-income allocations. The move will help the company to fully fund in the next few years its worldwide $15.4 billion pension deficit, including the $9.4 billion underfunding in its U.S. plans, Lewis W. K. Booth, vice president and chief financial officer, said in a conference call Jan. 27, according to a transcript.
Ford's U.S. plans had $39.9 billion in assets as of Dec. 31, 2010, while non-U.S. plans had $18.6 billion in assets. Todd Nissen, Ford manager, corporate and supplier communications, said Ford executives won't make available updated asset values until the company releases its 10-K report for 2011 later this month.
As part of the funding strategy, Ford plans to contribute about $3.5 billion to its worldwide plans this year, including $2 billion in non-required contributions to its U.S. plans. Last year, it contributed $1.2 billion to its non-U.S. plans and $135 million to its U.S. plans.
In the call, Mr. Booth said derisking “will reduce our balance sheet and cash flow volatility and, in turn, improve the risk profile of the company.”
“Key elements of the strategy include limiting liability growth in our funded plans by closing participation to new entrants” and reducing “plan deficits through discretionary cash contributions and progressively rebalancing assets to more fixed-income investments.”
These moves “will provide a better matching of an asset from the characteristics of the liabilities, which will reduce our net exposure.”
Mr. Booth said Ford reduced its assumed rate of return to 7.5% from 8%, based on its current asset allocation. Ford closed its U.S. salaried plan to new hires starting Jan. 1, 2004, putting new employees in a defined contribution plan.
Mr. Nissen said Ford officials won't comment further about its pension investment strategy or further potential plan closings.
Ford plans over the next several years to reach target pension asset allocations of about 30% equities, 45% fixed income and up to 25% alternative investments, including private equity, real estate and hedge funds, according to its 10-K report, filed Feb. 28, 2011.
Its actual allocation was 22% U.S. equities, 20% international equities, 46% fixed income, 7% hedge funds, 4% private equity and the rest real estate and cash, as of Dec. 31, 2010.
“Our investment objectives are to minimize the volatility of the value of our U.S. pension assets relative to U.S. pension liabilities and to ensure assets are sufficient to pay plan benefits,” the 10-K stated.
Mr. Booth said in the call that Ford expects its total global pension obligations to be “fully funded over the next few years.” Its worldwide deficit rose almost $4 billion last year, from $11.5 billion, including $6.7 billion in the U.S., in 2010.
Ari N. Jacobs, Norwalk, Conn.-based product and strategy leader in the defined benefit consulting practice of Aon Hewitt, believes Ford can reach its fully funded goal despite its huge deficit. The Pension Protection Act of 2006 requires full funding of deficits within seven years, he noted.
“Just because of the funding rules, more than half of companies will close the funding gap in five years,” Mr. Jacobs said, referring to U.S. plans. “It's a very reasonable goal.”
He added that because interest rates are so low, how to invest pension assets designed to reflect pension liabilities is a question “plan sponsors are grappling with.”
“Very few companies believe taking interest-rate risk is a rewarded risk,” he said.
Mr. Jacobs said without reducing risk, “a company would invest their assets in the same type of allocation regardless of their funded status level.”
“A plan 70% funded would have a different type of risk profile (and asset allocation) than a plan 130% funded,” he said.
Michael Schlachter, Denver-based managing director at Wilshire Associates Inc., said the problem of “derisking into a more conservative asset mix ... is you aren't getting a whole lot for it in terms of return.”
But he added, “Everyone is avoiding too much equity market risk just because of the whipsaw we've seen over the last decade.
“With rates most likely to decline in the next few years ... I would argue that putting it into very long duration could be just as risky as keeping it in other asset classes,” Mr. Schlachter said. “If you really want to derisk, put it into shorter duration, which might survive a bit better as things begin to decline.”