General Dynamics 2015 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 2015. For our healthcare plans, the effect of a 1
percentage point increase or decrease in the assumed healthcare cost
trend rate on the 2015 net periodic benefit cost is $6 and ($5),
respectively, and the effect on the December 31, 2015, accumulated
post-retirement benefit obligation is $82 and ($65), 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 develops investment policies and strategies, provides
oversight of a third-party investment manager and reports to the
committee on a regular basis. An outsourced third-party investment
manager makes all day-to-day investment decisions related to defined-
benefit retirement plan assets in accordance with our investment policy
and target allocation percentages.
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 2015, our asset allocation policy ranges were:
Equities 48 - 68%
Fixed income 20 - 48%
Cash 0 - 5%
Other asset classes 0 - 16%
More than 90 percent of our pension plan assets are held in a single
trust for our primary U.S. government and commercial pension plans.
On December 31, 2015, 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 non-U.S. pension plans are held in trusts in the
countries in which the related operations reside. Our non-U.S. operations
maintain investment policies for their individual plans based on country-
specific regulations. The non-U.S. plan assets are primarily invested in
commingled funds comprised of equity and fixed-income securities.
We hold assets in VEBA trusts for some of our other post-retirement
plans. These assets are managed by a third-party investment manager
with oversight by management and 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. Our Level 3
assets include real estate and hedge funds, insurance deposit contracts
and direct private equity investments.
58 General Dynamics Annual Report 2015