Chrysler 2012 Annual Report Download - page 46

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Report on Operations
To the extent that Chrysler Capital is unable or unwilling to provide sufficient financing at competitive rates to Chrysler’s and Fiat’s
dealers and retail customers, and dealers and retail customers do not otherwise have sufficient access to such financing, Chrysler’s
and Fiat’s vehicle sales and market share may suffer, which would adversely affect the Group’s business prospects, earnings and
financial position.
Risks associated with Chrysler’s pension plans
Chrysler’s defined benefit pension plans are currently underfunded and its pension funding obligations may increase significantly if
investment performance of plan assets does not keep pace with any increases in benefit payment obligations and Chrysler does not
make additional contributions to offset these impacts. Mandatory funding obligations may increase based upon lower than anticipated
returns on plan assets whether as a result of overall weak market performance or particular investment decisions, changes in the level
of interest rates used to determine required funding levels, changes in the level of benefits provided for by the plans, and any changes in
applicable law related to funding requirements. Chrysler’s defined benefit pension plans currently hold significant investments in equity
and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and certain funds. Due
to the complexity and magnitude of certain investments, additional risks may exist, including significant changes in investment policy,
insufficient market capacity to complete a particular investment strategy and an inherent divergence in objectives between the ability to
manage risk in the short term and the ability to quickly rebalance illiquid and long-term investments. To determine the appropriate level
of funding and contributions to the defined benefit pension plans, as well as the investment strategy for the plans, Chrysler is required
to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations
under defined benefit pension plans. Interest rate increases generally will result in a decline in the value of investments in fixed income
securities while reducing the present value of the obligations. Conversely, interest rate decreases will increase the value of investments
in fixed income securities, partially offsetting the related increase in the present value of the obligations.
Chrysler is required to re-measure the discount rate annually and did so at 31 December 2012, resulting in an increase in the pension
obligations. Any reduction in investment returns or the value of plan assets, or any increase in the present value of obligations may
increase pension expenses and required contributions, and as a result constrain liquidity and materially adversely affect the financial
condition and results of operations. If Chrysler fails to make required minimum funding contributions, it could be subjected to reportable
event disclosure to the Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount
of any funding deficiency.
If Fiat’s ownership in Chrysler were to exceed 80%, Fiat may become subject to certain US legal requirements making it secondarily
responsible for any funding shortfall in certain of Chrysler’s pension plans in the event Chrysler were to become insolvent. Chrysler’s
organizational documents contain certain protections designed to ensure that Fiat will not inadvertently become subject to these
obligations.