JP Morgan Chase 2009 Annual Report Download - page 191

JPMorgan Chase & Co./2009 Annual Report
189
plan expense. A 25-basis point decline in the discount rate for the
U.S. plans would result in an increase in 2010 U.S. defined benefit
pension and OPEB plan expense of approximately $12 million and
an increase in the related benefit obligations of approximately $170
million. A 25-basis point decline in the discount rates for the non-
U.S. plans would result in an increase in the 2010 non-U.S. defined
benefit pension and OPEB plan expense of approximately $10
million. A 25-basis point increase in the interest crediting rate for
the U.S. defined benefit pension plan would result in an increase in
2010 U.S. defined benefit pension expense of approximately $16
million and an increase in the related projected benefit obligations
of approximately $67 million.
Investment strategy and asset allocation
The Firm’s U.S. defined benefit pension plan assets are held in trust
and are invested in a well-diversified portfolio of equities (including
U.S. large and small capitalization and international equities), fixed
income (e.g., corporate and government bonds, including U.S. Treas-
ury inflation-indexed and high-yield securities), real estate, cash and
cash equivalents, and alternative investments (e.g., hedge funds,
private equity funds, and real estate funds). Non-U.S. defined benefit
pension plan assets are held in various trusts and are also invested in
well-diversified portfolios of equity, fixed income and other securities.
Assets of the Firm’s COLI policies, which are used to fund partially the
U.S. OPEB plan, are held in separate accounts with an insurance
company and are invested in equity and fixed income index funds. As
of December 31, 2009, assets held by the Firm’s U.S. and non-U.S.
defined benefit pension and OPEB plans do not include JPMorgan
Chase common stock, except in connection with investments in third-
party stock-index funds. In addition, the plans hold investments in
funds that are sponsored or managed by affiliates of JPMorgan Chase
in the amount of $1.6 billion and $1.1 billion for U.S. plans and $474
million and $354 million for non-U.S. plans, as of December 31, 2009
and 2008, respectively.
The investment policy for the Firm’s U.S. postretirement employee
benefit plan assets is to optimize the risk-return relationship as
appropriate to the plan’s needs and goals using a global portfolio
of various asset classes diversified by market segment, economic
sector, and issuer. Periodically the Firm performs a comprehensive
analysis on the plan’s asset allocations, incorporating projected
asset and liability data, which focuses on the short-and long-term
impact of the plan’s asset allocation on cumulative pension ex-
pense, economic cost, present value of contributions and funded
status. Currently, approved asset allocation ranges are: U.S. equity
15 – 35%, international equity 15 – 25%, debt securities 10 –
30%, hedge funds 10 – 30%, real estate 5 – 20%, and private
equity 5 – 20%. The plan does not manage to a specific target
asset allocation, but seeks to shift asset class allocations within
these stated ranges. Plan assets are managed by a combination of
internal and external investment managers. Asset allocation deci-
sions also incorporate the economic outlook and anticipated impli-
cations of the macroeconomic environment on the plan’s various
asset classes and managers. Maintaining an appropriate level of
liquidity, which takes into consideration forecasted requirements for
cash is a major consideration in the asset allocation process. The
Firm regularly reviews the asset allocations and all factors that
continuously impact portfolio changes to ensure the plan stays
within these asset allocation ranges. The asset allocations are
rebalanced when deemed necessary.
The plan’s investments include financial instruments which are
exposed to various risks such as interest rate, market and credit
risks. The plan’s exposure to a concentration of credit risk is miti-
gated by the broad diversification of both U.S. and non-U.S. in-
vestment instruments. Additionally, the investments in each of the
common/collective trust funds and registered investment companies
are further diversified into various financial instruments.
For the U.K. defined benefit pension plans, which represent the
most significant of the non-U.S. defined benefit pension plans, the
assets are invested to maximize returns subject to an appropriate
level of risk relative to the plan’s liabilities. In order to reduce the
volatility in returns relative to the plan’s liability profiles, the U.K.
defined benefit pension plan’s largest asset allocations are to debt
securities of appropriate durations. Other assets are then invested
for capital appreciation, mainly equity securities, to provide long-
term investment growth. The plan’s asset allocations are reviewed
on a regular basis.
The following table presents the weighted-average asset allocation of the fair values of total plan assets at December 31 for the years indi-
cated, as well as the respective approved range/target allocation by asset category, for the Firm’s U.S. and non-U.S. defined benefit pension
and OPEB plans.
Defined benefit pension plans
U.S. Non-U.S. OPEB plans(c)
Target % of plan assets Target % of plan assets Target % of plan assets
December 31, Allocation 2009 2008 Allocation 2009 2008 Allocation 2009 2008
Asset category
Debt securities(a) 10-30% 29% 25% 72% 75% 73% 50% 50% 50 %
Equity securities 25-60 40 36 26 23 21 50 50 50
Real estate 5-20 4 7 1 1 1 — — —
Alternatives(b) 15-50 27 32 1 1 5 — — —
Total 100% 100% 100% 100% 100% 100% 100% 100% 100
%
(a) Debt securities primarily include corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities.
(b) Alternatives primarily include limited partnerships.
(c) Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded.