IBM 2011 Annual Report Download - page 131

Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies 129
Market liquidity risks are tightly controlled, with only a modest
percentage of the Qualified PPP portfolio invested in private
market assets consisting of private equities and private real estate
investments, which are less liquid than publicly traded securities. As
of December 31, 2011, the Qualified PPP portfolio had $2,663 million
in commitments for future investments in private markets to be made
over a number of years. These commitments are expected to be
funded from plan assets.
Derivatives are used on a limited basis as an effective means to
achieve investment objectives and/or as a component of the plan’s
risk management strategy. The primary reasons for the use of
derivatives are fixed income management, including duration, interest
rate management and credit exposure, cash equitization and to
manage currency and commodity strategies.
Outside the U.S., the investment objectives are similar to those
described above, subject to local regulations. The weighted average
target allocation for the non-U.S. plans is 37 percent equity securities,
51 percent fixed income securities, 3 percent real estate and
9 percent other investments, which is consistent with the allocation
decisions made by the company’s management. The table on page
130 details the actual equity, fixed income, real estate and other types
of investments for non-U.S. plans. In some countries, a higher
percentage allocation to fixed income securities is required. In others,
the responsibility for managing the investments typically lies with a
board that may include up to 50 percent of members elected by
employees and retirees. This can result in slight differences compared
with the strategies previously described. Generally, these non-U.S.
plans do not invest in illiquid assets and their use of derivatives is
usually limited to currency hedging, adjusting portfolio durations
and reducing specific market risks. The target allocation for equity
securities decreased from 47 percent to 37 percent in the current
year, offset by an increase in the target allocation for fixed income
securities and other investments.
The company’s defined benefit pension plans include
investments in certain European government securities. At
December 31, 2011, the U.S. plan held approximately $1 billion
and the non-U.S. plans held approximately $11 billion in European
sovereign debt investments, respectively. Investments in government
debt securities in Italy, Spain and Ireland were de minimis in the U.S.
plan and represented less than 1 percent of total non-U.S. plan assets.
The plans hold no direct investments in government debt securities
of Greece and Portugal.
The company’s nonpension postretirement benefit plans are
underfunded or unfunded. For some plans, the company maintains
a nominal, highly liquid trust fund balance to ensure timely benefit
payments.
Plan Assets
Retirement-related benefit plan assets are recognized and measured
at fair value as described in note A, “Significant Accounting Policies,”
on page 84. Because of the inherent uncertainty of valuations, these
fair value measurements may not necessarily reflect the amounts
the company could realize in current market transactions.
Investment Policies and Strategies
The investment objectives of the Qualified PPP portfolio are designed
to generate returns that will enable the plan to meet its future
obligations. The precise amount for which these obligations will
be settled depends on future events, including the retirement
dates and life expectancy of the plans’ participants. The obligations
are estimated using actuarial assumptions, based on the current
economic environment and other pertinent factors described on
pages 126 to 128. The Qualified PPP portfolio’s investment strategy
balances the requirement to generate returns, using potentially higher
yielding assets such as equity securities, with the need to control
risk in the portfolio with less volatile assets, such as fixed-income
securities. Risks include, among others, inflation, volatility in equity
values and changes in interest rates that could cause the plan to
become underfunded, thereby increasing its dependence on
contributions from the company. To mitigate any potential concen-
tration risk, careful consideration is given to balancing the portfolio
among industry sectors, companies and geographies, taking into
account interest rate sensitivity, dependence on economic growth,
currency and other factors that affect investment returns. As a result,
the Qualified PPP portfolio’s target allocation is 43 percent equity
securities, 46 percent fixed income securities, 6 percent real estate
and 5 percent other investments, which is consistent with the
allocation decisions made by the company’s management and is
similar to the prior year target allocation. The table on page 130
details the actual equity, fixed income, real estate and other types
of investments in the Qualified PPP portfolio.
The assets are managed by professional investment firms and
investment professionals who are employees of the company. They
are bound by investment mandates determined by the company’s
management and are measured against specific benchmarks. Among
these managers, consideration is given, but not limited to, balancing
security concentration, issuer concentration, investment style and
reliance on particular active and passive investment strategies.