PG&E 2014 Annual Report Download - page 120

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Investment Policies and Strategies
The financial position of PG&E Corporation’s and the Utility’s funded status is the difference between the fair value of
plan assets and projected benefit obligations. Volatility in funded status occurs when asset values change differently from liability
values and can result in fluctuations in costs in financial reporting, as well as the amount of minimum contributions required under
the Employee Retirement Income Security Act of 1974, as amended. PG&E Corporation’s and the Utility’s investment policies and
strategies are designed to increase the ratio of trust assets to plan liabilities at an acceptable level of funded status volatility.
The trusts asset allocations are meant to manage volatility, reduce costs, and diversify its holdings. Interest rate, credit,
and equity risk are the key determinants of PG&E Corporation’s and the Utility’s funded status volatility. In addition to affecting
the trusts’s fixed income portfolio market values, interest rate changes also influence liability valuations as discount rates move
with current bond yields. To manage volatility, PG&E Corporation’s and the Utility’s trusts hold significant allocations in long
maturity fixed-income investments. Although they contribute to funded status volatility, equity investments are held to reduce
long-term funding costs due to their higher expected return. Real assets and absolute return investments are held to diversify the
trust’s holdings in equity and fixed-income investments by exhibiting returns with low correlation to the direction of these markets.
Real assets include commodities futures, REITS, global listed infrastructure equities, and private real estate funds. Absolute return
investments include hedge fund portfolios.
Target allocations for equity investments have generally declined in favor of longer-maturity fixed-income investments
and real assets as a means of dampening future funded status volatility. Derivative instruments such as equity index futures
contracts are used to maintain existing equity exposure while adding exposure to fixed-income securities. In addition, derivative
instruments such as equity index futures and fixed income futures are used to rebalance the fixed income/equity allocation of the
pension’s portfolio. Foreign currency exchange contracts are also used to hedge a portion of the currency of the global equity
investments.
The target asset allocation percentages for major categories of trust assets for pension and other benefit plans are as
follows:
Pension Plan PBOP Plans
2015 2014 2013 2015 2014 2013
Global equity 25 % 25 % 25 % 31 % 30 % 28 %
Absolute return 5 % 5 % 5 % 3 % 3 % 4 %
Real assets 10 % 10 % 10 % 8 % 8 % 8 %
Fixed income 60 % 60 % 60 % 58 % 59 % 60 %
Total 100 % 100 % 100 % 100 % 100 % 100 %
PG&E Corporation and the Utility apply a risk management framework for managing the risks associated with employee
benefit plan trust assets. The guiding principles of this risk management framework are the clear articulation of roles and
responsibilities, appropriate delegation of authority, and proper accountability and documentation. Trust investment policies and
investment manager guidelines include provisions designed to ensure prudent diversification, manage risk through appropriate use
of physical direct asset holdings and derivative securities, and identify permitted and prohibited investments.