PG&E 2015 Annual Report Download - page 110

102
PART II
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Investment Policies and Strategies
The financial position of PG&E Corporation’s and the
Utility’s funded status is the dierence between the fair
value of plan assets and projected benefit obligations.
Volatility in funded status occurs when asset values
change dierently 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 aecting the trusts’ 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 are used to meet target
equity exposure. In addition, derivative instruments such
as equity index futures and U.S. treasury 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 non U.S. dollar
exposure of 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
     
Globalequity      
Absolutereturn 
Realassets   
Fixedincome      
TOTAL      
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.