Kraft Foods Group Inc., Northfield, Ill., is adopting a liability-driven investing strategy, moving to an 80% fixed-income allocation for its $5.46 billion in U.S. defined benefit assets.
The move is one piece of a four-part strategy to “manage and reduce the volatility of expenses and cash outlays” related to the company's pension plans, according to a fourth-quarter earnings guidance release. The remaining three parts are: adopting mark-to-market accounting; adjusting actuarial assumptions; and “executing a level funding strategy,” according to the release.
Kraft also announced it would freeze its U.S. pension plans for current salaried and non-union hourly employees effective Dec. 31, 2019, according to the company's 10-K, released March 21.
Under the new LDI strategy, the asset mix will be approximately 80% fixed income and 20% equity.
In an e-mailed response to questions, Christopher Jakubik, Kraft's vice president, investor relations, said the allocation shift will occur “over the next few years.”
The new investment strategy significantly reduces expected return on assets to 5.5% from 7.75%. (At the end of 2012, U.S. plan assets were invested 61% in equities, 36% in fixed income and 3% in real estate.)
Kraft joins the likes of General Motors Co., International Business Machines Corp., Boeing Co., Ford Motor Co. and Verizon Communications Inc. in implementing an LDI approach for their pension plans.
The company is less than 6 months old. It is the North American grocery business that last October was spun off from Kraft Foods Inc. (Kraft Foods Inc. subsequently changed its name to Mondelez International Inc.).
As part of the spinoff, the new entity assumed $7.99 billion of worldwide pension benefit obligations and $6.04 billion of plan assets, which included benefit obligations for Mondelez retirees in the U.S. The U.S. plan was 76.6% funded at the end of 2012.
Kraft announced its plans during the firm's fourth-quarter guidance call in February, but asset details were not available until its 10-K was released.