Ford Motor Co., Dearborn, Mich., will sharply turn its $39.4 billion U.S. pension plans' allocation to lower risk, shifting to 80% fixed income and 20% growth-seeking equity and alternatives assets over the next few years, Neil Schloss, vice president and treasurer, said Friday in a conference call with investment analysts.
As of Dec. 31, the pension plans' allocation was 52.3% fixed income, 31.4% equity, 7% hedge funds, 4.9% private equity, 3.5% cash and 0.9% real estate.
The automaker last month revealed it would lower the risk in its pension plans, a strategy that includes making an outsized discretionary contribution that pension consultants said could mean gaining a better return for its corporate cash than keeping it on the balance sheet.
Ford is making the moves to lower both its funding volatility and the risk of external factors such as interest rate and market movements, Mr. Schloss said.
“Our objective is to derisk and fully fund our global pension plans over the next few years,” Mr. Schloss said.
Ford's global pension plans were underfunded by $15.4 billion, including $9.4 billion for its U.S. plans as of Dec. 31. Ford had $19.1 billion in non-U.S. pension assets as of Dec. 31.
Mr. Schloss did not say when full funding would be reached, saying the timeframe was dependent on market conditions.
“We will better match the plan assets to the characteristics of liabilities by progressively rebalancing plan assets to more fixed-income-like investments over the next several years as funded status improves,” Mr. Schloss said.
In addition, Ford has other pension strategy plans under development that it is not yet ready to reveal, he added. “We have a long list of things we are looking at, and when we get them far enough we will let everybody know,” Mr. Schloss said.
The reason for the strong tilt to fixed income is that “pension liabilities and bonds have similar exposure to interest rates,” Mr. Schloss said. “As interest rates rise, values fall and the opposite is true: as interest rates fall, values rise.”
“Our prior target asset allocation of 45% bonds and 55% growth assets provided an insufficient match and allocation didn't vary much with funded status,” Mr. Schloss said.
“Growth assets — which include hedge funds, real estate, private equity and public equity — do not move in tandem with the (pension) liabilities,” Mr. Schloss said. “Bonds do.”
“Under derisking, the assets will become better matched as a result of increasing the bond allocation to 80% as funded status improves and contributions … help achieve full funding,” Mr. Schloss said, suggesting Ford’s big tilt to liability-driven investing.
"The 20% growth asset allocation allows us to retain some diversity and growth potential and reflects the best risk-return trade-off under unpredictable conditions,” he said.
“A 100% bond portfolio (allocation) would not eliminate risk fully because there is no perfect asset-liability match.”
“Derisking makes the plans more secure for both the participants and the company,” Mr. Schloss said.
“(W)e have no plans to freeze or terminate our plans at this time,” although Ford continually monitors the competiveness of its benefits for potential change, Mr. Schloss said.
“I’m not sure I would go a step further, if we freeze the plans everybody is better off,.” Mr. Schloss said.
Ford has closed two plans to new entrants — its U.S. hourly plan, effective last Oct. 24, and its salaried plan, effective Dec. 31, 2003 — and is looking at similar moves as a key element of its derisking to limit pension liability growth, Mr. Schloss said, noting changes that Ford announced and Pensions and Investments reported Feb. 6. The new hourly and salaried employees were moved into a defined contribution plan.
Mr. Schloss did not estimate pension contributions beyond 2012. As P&I reported Jan. 27, Ford this year plans to contribute $3.5 billion to its pension plans worldwide, including $2 billion to its U.S. plans.
Explaining the corporate rationale for derisking, Mr. Schloss said, “An underfunded pension plan results in high pension expense and requires cash contributions, which draw on capital that otherwise would be used to support our core automotive business.”
“In addition, because an underfunded pension plan is viewed as debt, this could impact our ability to borrow at competitive rates, (our) progress toward improving our credit rating and the company’s market valuation.”
Illustrating pension funding volatility, Mr. Schloss pointed out Ford’s U.S. pension plans were $9 billion overfunded in 1999, then after the burst of the technology bubble funding fell to $7.2 billion underfunded in 2002, then because of the market recovery rose to $1.3 billion overfunded in 2007, and after the 2008-2009 financial market downturn plans are $9.4 billion underfunded as of Dec. 31.