PNC Bank 2015 Annual Report Download - page 191

The Administrative 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 Administrative 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 investment strategies permit 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 to be 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. Compensation for such services is paid by PNC and
was not significant for 2015, 2014 or 2013. Non-affiliate
service providers for the Trust are compensated from Plan
assets.
Fair Value Measurements
As further described in Note 7 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 at both December 31, 2015 and
December 31, 2014 follows:
• Money market and mutual funds are valued at the net
asset value of the shares held by the pension plan at
year end.
• U.S. government and agency 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. Certain collective trust
fund investments based on net asset value are not
classified as part of fair value hierarchy, in
accordance with ASU 2015-07.
• 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. In accordance
with ASC 820-10, these investments are not
classified in the fair value hierarchy.
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.
The PNC Financial Services Group, Inc. – Form 10-K 173