PNC Bank 2011 Annual Report Download - page 177

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.
The guidelines also indicate which investments and strategies
the manager is permitted to use to achieve its performance
objectives, and which investments and strategies it is
prohibited from using.
Where public market investment strategies may include the
use of derivatives and/or currency management, language is
incorporated in the managers’ guidelines to define allowable
and prohibited transactions and/or strategies. Derivatives are
typically employed by investment managers to modify risk/
return characteristics of their portfolio(s), implement asset
allocation changes in a cost-effective manner, or reduce
transaction costs. Under the managers’ investment guidelines,
derivatives may not be used solely for speculation or leverage.
Derivatives are used only in circumstances where they offer
the most efficient economic means of improving the risk/
reward profile of the portfolio.
BlackRock receives compensation for providing investment
management services. The Asset Management Group business
segment also receives compensation for payor-related
services, and received compensation for providing trustee/
custodian services prior to July 1, 2011. Compensation for
such services is paid by PNC and was not significant for 2011,
2010 or 2009. Non-affiliate service providers for the Trust are
compensated from plan assets.
F AIR V ALUE M EASUREMENTS
As further described in Note 8 Fair Value, GAAP establishes
the framework for measuring fair value, including a hierarchy
used to classify the inputs used in measuring fair value.
A description of the valuation methodologies used for assets
measured at fair value follows. There have been no changes in
the methodologies used at December 31, 2011 compared with
those in place at December 31, 2010:
• Money market and mutual funds are valued at the net
asset value of the shares held by the pension plan at
year-end.
• US government securities, corporate debt, common
stock and preferred stock are valued at the closing
price reported on the active market on which the
individual securities are traded. If quoted market
prices are not available for the specific security, then
fair values are estimated by using pricing models or
quoted prices of securities with similar
characteristics. Such securities are generally
classified within level 2 of the valuation hierarchy
but may be a level 3 depending on the level of
liquidity and activity in the market for the security.
• The collective trust fund investments are valued
based upon the units of such collective trust fund
held by the plan at year end multiplied by the
respective unit value. The unit value of the collective
trust fund is based upon significant observable inputs,
although it is not based upon quoted marked prices in
an active market. The underlying investments of the
collective trust funds consist primarily of equity
securities, debt obligations, short-term investments,
and other marketable securities. Due to the nature of
these securities, there are no unfunded commitments
or redemption restrictions.
• Limited partnerships are valued by investment
managers based on recent financial information used
to estimate fair value. Other investments held by the
pension plan include derivative financial instruments
and real estate, which are recorded at estimated fair
value as determined by third-party appraisals and
pricing models, and group annuity contracts which
are measured at fair value by discounting the related
cash flows based on current yields of similar
instruments with comparable durations considering
the credit-worthiness of the issuer.
These methods may result in fair value calculations that may
not be indicative of net realizable values or future fair values.
Furthermore, while the pension plan believes its valuation
methods are appropriate and consistent with other market
participants, the use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement
at the reporting date.
168 The PNC Financial Services Group, Inc. – Form 10-K