The differences in funding ratios, however, proved significant. According to the final 10-K filings of the separate companies, UTC and Raytheon's global DB plans had funding ratios of 94.9% and 73.5%, respectively, as of Dec. 31, 2019.
Complicating matters more is that Raytheon has more government contract work as opposed to UTC, she said. The government owes Raytheon cash flows for employee benefits as part of its contracts, so its contributions need to be taken into account for future liabilities as well.
The result was that Ms. Diamonte and her staff launched two entirely separate asset-liability studies for the UTC and Raytheon DB plans.
Because of its findings, "we decided to keep them separate and manage them as two completely different trusts with two different asset allocations, two different glidepaths and two different hedge ratios," she said.
"We would then place the assets into one pool, one master trust, and then we were going to unitize this so Raytheon would own units of every asset class, and UTC would own units of every asset class," Ms. Diamonte said.
Differences in investment philosophies also had to be reconciled.
Raytheon's low funding ratio necessitated a growth-oriented portfolio, and the firm didn't employ any liability-driven investing strategy. "Their fixed income looked more like a diversifier for equity," Ms. Diamonte said. She and staff ended up either terminating fixed-income managers in Raytheon's portfolio or changing their mandates to become LDI-based.
The result was six asset classes common to both the UTC and Raytheon trusts, with unique target allocations, with the greatest differences coming in hedging assets and global equities.
In UTC's plans, hedging assets and global equities have targets of 54% and 22%, respectively, while the Raytheon plan's targets to those asset classes are 39% and 32%, respectively. The other asset classes and targets are: multiasset class (UTC 8%, Raytheon 9%); private investments (UTC 6%, Raytheon 8%); real estate (UTC 5%, Raytheon 7%); and structured equity (5% each).
Ms. Diamonte said the merging of the assets into the unitized master trust was completed on Dec. 1. As of Dec. 31, the UTC plans had $33.4 billion in assets and $33.1 billion in projected benefit obligations, for a funding ratio of 100.9%, and the Raytheon plans had $21.8 billion in assets and $27.7 billion in PBO, for a funding ratio of 78.8%, according to the plans' most recent performance report.
For the year ended Dec. 31, the UTC plans returned a net 14.1%, 102 basis points above their policy benchmarks, and the Raytheon plans returned a net 13.9%, surpassing their policy benchmark by 174 basis points, the report said.
Ms. Diamonte noted that both UTC and Raytheon already had Bank of New York Mellon in place as the custodian, which was very helpful.
"When we unitized the portfolio, it was definitely the biggest unitization that they've done," Ms. Diamonte said. "Since we're all under one roof, that really helped a lot."
There were differences in vendors, however. Raytheon had both Callan and Wilshire Associates as DB consultants, Ms. Diamonte said, but UTC doesn't use traditional DB plan consultants.
"We do our strategy ourselves and we look at investment policy ourselves," she said. "They did a good job, but that's just not what we do."
For alternatives-specific consultants, UTC used Hamilton Lane for its illiquid portfolio, while Raytheon used Cambridge Associates as a private equity consultant. UTC stuck with Hamilton Lane.
UTC had no hedge fund consultant, but Raytheon used Albourne Partners, and Ms. Diamonte and her staff decided to retain Albourne.
In real estate, meanwhile, UTC has been directly investing in individual properties with the assistance of AEW Capital Management, while Raytheon made commitments to real estate funds. Ms. Diamonte and staff retained AEW.