General Dynamics 2013 Annual Report Download - page 62

A 25-basis-point change in these assumed rates would not have
had a measurable impact on the benefit cost for our other post-
retirement plans in 2013. For our healthcare plans, the effect of a 1
percentage point increase or decrease in the assumed healthcare cost
trend rate on the net periodic benefit cost is $8 and ($6), respectively,
and the effect on the accumulated post-retirement benefit obligation is
$102 and ($83), respectively.
Plan Assets
A committee of our board of directors is responsible for the strategic
oversight of our defined-benefit retirement plan assets held in trust.
Management reports to the committee on a regular basis and is
responsible for making all investment decisions related to retirement
plan assets in compliance with the company’s policies.
Our investment policy endeavors to strike the appropriate balance
among capital preservation, asset growth and current income. The
objective of our investment policy is to generate future returns
consistent with our assumed long-term rate of return used to
determine our benefit obligations and net periodic benefit costs. Target
allocation percentages vary over time depending on the perceived risk
and return potential of various asset classes and market conditions. At
the end of 2013, our asset allocation policy ranges were:
Equities 25 - 75%
Fixed income 10 - 50%
Cash 0 - 15%
Other asset classes 0 - 20%
More than 90 percent of our pension plan assets are held in a single
trust for our primary domestic government and commercial pension
plans. On December 31, 2013, the trust was invested largely in
publicly traded equities and fixed-income securities, but may invest in
other asset classes in the future consistent with our investment policy.
Our investments in equity assets include U.S. and international
securities and equity funds as well as futures contracts on U.S. equity
indices. Our investments in fixed-income assets include U.S. Treasury
and U.S. agency securities, corporate bonds, mortgage-backed
securities, futures contracts and international securities. Our
investment policy allows the use of derivative instruments when
appropriate to reduce anticipated asset volatility, to gain exposure to an
asset class or to adjust the duration of fixed-income assets.
Assets for our international pension plans are held in trusts in the
countries in which the related operations reside. Our international
operations maintain investment policies for their individual plans based
on country-specific regulations. The international plan assets are
primarily invested in commingled funds comprised of international and
U.S. equities and fixed-income securities.
We hold assets in VEBA trusts for some of our other post-retirement
plans. These assets are generally invested in equities, corporate bonds
and equity-based mutual funds. Our asset allocation strategy for the
VEBA trusts considers potential fluctuations in our post-retirement
liability, the taxable nature of certain VEBA trusts, tax deduction limits
on contributions and the regulatory environment.
Our retirement plan assets are reported at fair value. See Note D for
a discussion of the hierarchy for determining fair value. Our Level 1
assets include investments in publicly traded equity securities and
commingled funds. These securities (and the underlying investments of
the funds) are actively traded and valued using quoted prices for
identical securities from the market exchanges. Our Level 2 assets
consist of fixed-income securities and commingled funds that are not
actively traded or whose underlying investments are valued using
observable marketplace inputs. The fair value of plan assets invested in
fixed-income securities is generally determined using valuation models
that use observable inputs such as interest rates, bond yields, low-
volume market quotes and quoted prices for similar assets. Our plan
assets that are invested in commingled funds are valued using a unit
price or net asset value (NAV) that is based on the underlying
investments of the fund. We had minimal Level 3 plan assets on
December 31, 2013. These investments include real estate and hedge
funds, insurance deposit contracts and direct private equity investments.
58 General Dynamics Annual Report 2013