PNC Bank 2006 Annual Report Download - page 112

P ENSION P LAN A SSETS
Assets related to our qualified pension plan (the “Plan”) are
held in trust (the “Trust”). The trustee is PNC Bank, N.A. The
Trust is exempt from tax pursuant to section 501(a) of the
Internal Revenue Code (the “Code”). The Plan is qualified
under section 401(a) of the Code. Plan assets consist primarily
of listed domestic and international equity securities and US
government, agency, and corporate debt securities and real
estate investments. Plan assets do not include common or
preferred stock or any debt of PNC.
The Pension Plan Administrative Committee (the
“Committee”) adopted the current Pension Plan Investment
Policy Statement, including the updated target allocations and
allowable ranges shown below, on November 29, 2005.
The long-term investment strategy for pension plan assets is
to:
• Meet present and future benefit obligations to all
participants and beneficiaries,
• Cover reasonable expenses incurred to provide such
benefits, including expense incurred in the
administration of the Trust and the Plan,
• Provide sufficient liquidity to meet benefit and
expense payment requirements on a timely basis, and
• Provide a total return that, over the long term,
maximizes the ratio of trust assets to liabilities by
maximizing investment return, at an appropriate level
of risk.
The Plan’s specific investment objective is to meet or exceed
the investment policy benchmark over the long term. The
investment policy benchmark compares actual performance to
a weighted market index, and measures the contribution of
active investment management and policy implementation.
This investment objective is expected to be achieved over the
long term (one or more market cycles) and is measured over
rolling five-year periods. Total return calculations are time-
weighted and are net of investment-related fees and expenses.
The asset allocations for the Trust at the end of 2006 and
2005, and the target allocation for 2007, by asset category, are
as follows:
Target
Allocation
Allowable
Range
Percentage of Plan Assets
at December 31
2007 2006 2005
Asset Category
Domestic Equity 35% 32-38% 39.3% 39.0%
International Equity 20% 17-23% 21.3% 19.6%
Private Equity 5% 0-8% 1.5% .9%
Total Equity 60% 62.1% 59.5%
Domestic Fixed Income 30% 27-33% 28% 30.7%
High Yield Fixed
Income 5% 0-8% 4.9% 6.7%
Total Fixed Income 35% 32.9% 37.4%
Real Estate 5% 0-8% 4.8% 2.5%
Other 0% 0-1% .2% .6%
Total 100% 100% 100%
The Asset Category represents the allocation of Plan assets in
accordance with the investment objective of each of the Plan’s
investment managers. Certain domestic equity investment
managers utilize derivatives and fixed income securities as
described in their investment management agreements to
achieve their investment objective under the Investment
Policy Statement.
The slight overweight in domestic equity at year-end 2005 and
2006 was attributable to the targeted allocation in Private
Equity, which continues to be committed but which is funded
over time as suitable opportunities for private equity
investment are identified and as calls for funding are made.
The Investment Policy Statement provides that, from time to
time, domestic equity may serve as a proxy (substitute) for
private equity. Additionally, target allocation changes, which
were effective November 29, 2005, included reducing the
High Yield Fixed Income allocation from 10% to 5% and
creating a new Real Estate allocation of 5%. This transition
was completed during 2006.
We believe that, over the long term, asset allocation is the
single greatest determinant of risk. Asset allocation will
deviate from the target percentages due to market movement,
cash flows, and investment manager performance. Material
deviations from the asset allocation targets can alter the
expected return and risk of the Trust. On the other hand,
frequent rebalancing to the asset allocation targets may result
in significant transaction costs, which can impair the Trust’s
ability to meet its investment objective. Accordingly, the Trust
portfolio is periodically rebalanced to maintain asset
allocation within the target ranges described above.
In addition to being diversified across asset classes, the Trust
is diversified within each asset class. Secondary
diversification provides a reasonable basis for the expectation
that no single security or class of securities will have a
disproportionate impact on the total risk and return of the
Trust.
The Committee selects investment managers for the Trust
based on the contributions that their respective investment
styles and processes are expected to make to the investment
performance of the overall portfolio. The managers’
Investment Objectives and Guidelines, which are a part of
each manager’s Investment Management Agreement,
document performance expectations and each manager’s role
in the portfolio. The Committee uses the Investment
Objectives and Guidelines to establish, guide, control and
measure the strategy and performance for each manager.
The purpose of investment manager guidelines is to:
• Establish the investment objective and performance
standards for each manager,
• Provide the manager with the capability to evaluate
the risks of all financial instruments or other assets in
which the manager’s account is invested, and
• Prevent the manager from exposing its account to
excessive levels of risk, undesired or inappropriate
risk, or disproportionate concentration of risk.
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