Prudential 2012 Annual Report Download - page 175

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
18. EMPLOYEE BENEFIT PLANS (continued)
Plan Assets
The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks,
bonds and other investments. The cash requirements of the pension obligation, which include a traditional formula principally representing
payments to annuitants and a cash balance formula that allows lump sum payments and annuity payments, are designed to be met by the
bonds and short term investments in the portfolio. The pension plan risk management practices include guidelines for asset concentration,
credit rating and liquidity. The pension plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to
reduce transaction costs and change asset concentration, while interest rate swaps and futures are used to adjust duration.
The investment goal of the domestic postretirement plan assets is to generate an above benchmark return on a diversified portfolio of
stocks, bonds, and other investments, while meeting the cash requirements for the postretirement obligation that includes a medical benefit
including prescription drugs, a dental benefit, and a life benefit. The postretirement plans risk management practices include guidelines for
asset concentration, credit rating, liquidity, and tax efficiency. The postretirement plan does not invest in leveraged derivatives. Derivatives
such as futures contracts are used to reduce transaction costs and change asset concentration, while interest rate swaps and futures are used
to adjust duration.
The plan fiduciaries for the Company’s pension and postretirement plans have developed guidelines for asset allocations reflecting a
percentage of total assets by asset class, which are reviewed on an annual basis. Asset allocation targets as of December 31, 2012 are as follows:
Pension Postretirement
Minimum Maximum Minimum Maximum
Asset Category
U.S. Equities ....................................................... 4% 18% 44% 58%
International Equities ................................................ 4% 18% 1% 9%
Fixed Maturities .................................................... 53% 72% 1% 45%
Short-term Investments ............................................... 0% 14% 0% 50%
Real Estate ......................................................... 2% 11% 0% 0%
Other ............................................................. 0% 13% 0% 0%
To implement the investment strategy, plan assets are invested in funds that primarily invest in securities that correspond to one of the
asset categories under the investment guidelines. However, at any point in time, some of the assets in a fund may be of a different nature
than the specified asset category.
Assets held with Prudential Insurance are in either pooled separate accounts or single client separate accounts. Pooled separate
accounts hold assets for multiple investors. Each investor owns a “unit of account.” Single client separate accounts hold assets for only one
investor, the domestic qualified pension plan and each security in the fund is treated as individually owned. Assets held with a bank are
either in common/collective trusts or single client trusts. Common or collective trusts hold assets for more than one investor. Each investor
owns a “unit of account.” Single client trusts hold assets for only one investor, the domestic qualified pension plan and each security in the
fund is treated as individually owned.
There were no investments in Prudential Financial Common Stock as of December 31, 2012 and December 31, 2011 for either the
pension or postretirement plans. Pension plan assets of $9,239 million and $8,262 million are included in the Company’s separate account
assets and liabilities as of December 31, 2012 and December 31, 2011, respectively.
The authoritative guidance around fair value established a framework for measuring fair value. Fair value is disclosed using a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as described in Note 20.
The following describes the valuation methodologies used for pension and postretirement plans assets measured at fair value.
Insurance Company Pooled Separate Accounts, Common or Collective Trusts, and United Kingdom Insurance Pooled Funds—
Insurance company pooled separate accounts are invested via group annuity contracts issued by Prudential Insurance. Assets are
represented by a “unit of account.” The redemption value of those units is based on a per unit value whose value is the result of the
accumulated values of underlying investments. The underlying investments are valued in accordance with the corresponding valuation
method for the investments held.
Equities—See Note 20 for a discussion of the valuation methodologies for equity securities.
U.S. Government Securities (both Federal and State & Other), Non–U.S. Government Securities, and Corporate Debt—See Note 20
for a discussion of the valuation methodologies for fixed maturity securities.
Interest Rate Swaps—See Note 20 for a discussion of the valuation methodologies for derivative instruments.
Guaranteed Investment Contract—The value is based on contract cash flows and available market rates for similar investments.
Registered Investment Companies (Mutual Funds)—Securities are priced at the net asset value (“NAV”) of shares.
Unrealized Gain (Loss) on Investment of Securities Lending Collateral—This value is the contractual position relative to the
investment of securities lending collateral.
Real Estate—The values are determined through an independent appraisal process. The estimate of fair value is based on three
approaches; (1) current cost of reproducing the property less deterioration and functional/economic obsolescence; (2) discounting a series
of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and
(3) value indicated by recent sales of comparable properties in the market. Each approach requires the exercise of subjective judgment.
Short-term Investments—Securities are valued initially at cost and thereafter adjusted for amortization of any discount or premium
(i.e., amortized cost). Amortized cost approximates fair value.
Prudential Financial, Inc. 2012 Annual Report 173