Ford 2012 Annual Report Download - page 112

110 Ford Motor Company | 2012 Annual Report
FORD MOTOR COMPANY AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16. RETIREMENT BENEFITS (Continued)
In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to growth assets (equity
investments and alternative investments) that are expected over time to earn higher returns with more volatility than fixed
income investments which more closely match pension liabilities. Within equities, risk is mitigated by constructing a
portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and
process. Within alternative investments, risk is similarly mitigated by constructing a portfolio that is broadly diversified by
asset class, investment strategy, manager, style and process.
Operating risks include the risks of inadequate diversification and weak controls. To mitigate these risks, investments
are diversified across and within asset classes in support of investment objectives. Policies and practices to address
operating risks include ongoing manager oversight (e.g., style adherence, team strength, firm health, and internal risk
controls), plan and asset class investment guidelines and instructions that are communicated to managers, and periodic
compliance and audit reviews to ensure adherence.
At year-end 2012, within the total fair value of our assets in major worldwide plans, we held less than 2% of fixed
income investments in the obligations of Greece, Ireland, Italy, Portugal, and Spain. Also at year-end 2012, we held less
than 2% in Ford securities.
Expected Long-Term Rate of Return on Assets. The long-term return assumption at year-end 2012 is 7.38% for the
U.S. plans, 7.25% for the U.K. plans, and 6.75% for the Canadian plans, and averages 6.74% for all non-U.S. plans. A
generally consistent approach is used worldwide to develop this assumption. This approach considers various sources,
primarily inputs from a range of advisors for long-term capital market returns, inflation, bond yields, and other variables,
adjusted for specific aspects of our investment strategy by plan. Historical returns also are considered where appropriate.
At December 31, 2012, our actual 10-year annual rate of return on pension plan assets was 11.1% for the U.S. plans,
8.7% for the U.K. plans, and 6.4% for the Canadian plans. At December 31, 2011, our actual 10-year annual rate of
return on pension plan assets was 8.6% for the U.S. plans, 6.0% for the U.K. plans, and 4.6% for the Canadian plans.
Fair Value of Plan Assets. Pension assets are recorded at fair value, and include primarily fixed income and equity
securities, derivatives, and alternative investments, which include hedge funds, private equity, and real estate. Fixed
income and equity securities may each be combined into commingled fund investments. Commingled funds are valued to
reflect the pension fund's interest in the fund based on the reported year-end net asset value ("NAV"). Alternative
investments are valued based on year-end reported NAV, with adjustments as appropriate for lagged reporting of 1 month
- 6 months.
Fixed Income - Government and Agency Debt Securities and Corporate Debt Securities. U.S. government and
government agency obligations, non-U.S. government and government agency obligations, municipal securities,
supranational obligations, corporate bonds, bank notes, floating rate notes, and preferred securities are valued based on
quotes received from independent pricing services or from dealers who make markets in such securities. Pricing services
utilize matrix pricing, which considers readily available inputs such as the yield or price of bonds of comparable quality,
coupon, maturity, and type, as well as dealer-supplied prices, and generally are categorized as Level 2 inputs in the fair
value hierarchy. Securities categorized as Level 3 typically are priced by dealers and pricing services that use proprietary
pricing models which incorporate unobservable inputs. These inputs primarily consist of yield and credit spread
assumptions.
Fixed Income - Agency and Non-Agency Mortgage and Other Asset-Backed Securities. U.S. and non-U.S.
government agency mortgage and asset-backed securities, non-agency collateralized mortgage obligations, commercial
mortgage securities, residential mortgage securities, and other asset-backed securities are valued based on quotes
received from independent pricing services or from dealers who make markets in such securities. Pricing services utilize
matrix pricing, which considers prepayment speed assumptions, attributes of the collateral, yield or price of bonds of
comparable quality, coupon, maturity and type, as well as dealer-supplied prices, and generally are categorized as Level 2
inputs in the fair value hierarchy. Securities categorized as Level 3 typically are priced by dealers and pricing services
that use proprietary pricing models which incorporate unobservable inputs. These inputs primarily consist of prepayment
curves, discount rates, default assumptions, and recovery rates.