Union Pacific 2005 Annual Report Download - page 68

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Asset Allocation Strategy
Our pension plan asset allocation at December 31, 2005 and 2004, and target allocation for 2006, are as follows:
Target Allocation
Percentage of Plan Assets
December 31,
Asset Category 2006 2005 2004
Equity securities .................................... 65%to75% 75% 73%
Debt securities ...................................... 20%to30% 24 27
Real estate ......................................... 2%to8% 1 -
Total ............................................. 100% 100% 100%
The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to
achieve our target of an average long-term rate of return of 8%. While we believe we can achieve a long-term
average rate of return of 8%, we cannot be certain that the portfolio will perform to our expectations. Assets are
strategically allocated between equity and debt securities in order to achieve a diversification level that mitigates
wide swings in investment returns. To further improve diversification, a target allocation to real estate
investments has been established for future time periods. Asset allocation target ranges for equity, debt, and other
portfolios are evaluated at least every three years with the assistance of an external consulting firm. Actual asset
allocations are monitored monthly, and rebalancing actions are executed at least quarterly, if needed.
The majority of the plan’s assets are invested in equity securities, because equity portfolios have historically
provided higher returns than debt and other asset classes over extended time horizons, and are expected to do so
in the future. Correspondingly, equity investments also entail greater risks than other investments. The risk of loss
in the plan’s equity portfolio is mitigated by investing in a broad range of equity types. Equity diversification
includes large-capitalization and small-capitalization companies, growth-oriented and value-oriented
investments, and U.S. and non-U.S. securities.
Equity risks are further balanced by investing a significant portion of the plan’s assets in high quality debt
securities. The average quality rating of the debt portfolio exceeded AA as of December 31, 2005 and 2004. The
debt portfolio is also broadly diversified and invested primarily in U.S. Treasury, mortgage, and corporate
securities with an intermediate average maturity. The weighted-average maturity of the debt portfolio was 6.5
years and 6.3 years at December 31, 2005 and 2004, respectively.
The investment of pension plan assets in our securities is specifically prohibited for both the equity and debt
portfolios, other than through index fund holdings.
Other Retirement Programs
Thrift Plan – We provide a defined contribution plan (thrift plan) to eligible non-union employees and make
matching contributions to the thrift plan. We match 50 cents for each dollar contributed by employees up to the
first six percent of compensation contributed. Our thrift plan contributions were $12 million per year in 2005,
2004, and 2003.
Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System (the System).
Contributions made to the System are expensed as incurred and amounted to approximately $595 million in
2005, $569 million in 2004, and $562 million in 2003.
Collective Bargaining Agreements – Under collective bargaining agreements, we provide certain postretirement
healthcare and life insurance benefits for eligible union employees. Premiums under the plans are expensed as
incurred and amounted to $41 million in 2005, $30 million in 2004, and $27 million in 2003.
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