General Dynamics 2011 Annual Report Download - page 69

General Dynamics Annual Report 2011 57
A 25-basis-point change in these assumed rates would not have had
a measurable impact on the benefit cost for our other commercial post-
retirement plans in 2011. Assumed healthcare cost trend rates have a
significant effect on the amounts reported for our healthcare plans. The
effect of a one-percentage-point increase or decrease in the assumed
healthcare cost trend rate on the net periodic benefit cost is $7 and ($6),
respectively, and the effect on the accumulated post-retirement benefit
obligation is $94 and ($78), respectively.
Plan Assets
A committee of our board of directors is responsible for the strategic
oversight of our defined-benefit retirement plan assets held in trust.
Management reports to the committee on a regular basis and is respon-
sible for making all investment decisions related to retirement plan assets
in compliance with the company’s policies.
Our investment policy endeavors to strike the appropriate balance
among capital preservation, asset growth and current income. The
objective of our investment policy is to generate future returns consistent
with our assumed long-term rate of return used to determine our benefit
obligations and net periodic benefit costs. Target allocation percentages
vary over time depending on the perceived risk and return potential of
various asset classes and market conditions. At the end of 2011, our asset
allocation policy ranges were:
Over 90 percent of our pension plan assets are held in a single trust
for our primary domestic government and commercial pension plans.
On December 31, 2011, the trust was invested largely in publicly traded
equities and fixed-income securities, but may invest in other asset classes
in the future consistent with our investment policy. Our investments in
equity assets include U.S. and international securities and equity funds
as well as futures contracts on U.S. equity indices. Our investments in
fixed-income assets include U.S. Treasury and U.S. agency securities,
corporate bonds, mortgage-backed securities, futures contracts on U.S.
Treasury securities for duration management purposes and international
securities. Our investment policy allows the use of derivative instruments
when appropriate to reduce anticipated asset volatility, to gain exposure to
an asset class or to adjust the duration of fixed-income assets.
Assets for our international pension plans are held in trusts in the coun-
tries in which the related operations reside. Our international operations
maintain investment policies for their individual plans based on country-
specific regulations. The international plan assets are primarily invested
in commingled funds comprised of international and U.S. equities and
fixed-income securities.
We hold assets in VEBA trusts for some of our other post-retirement
plans. These assets are generally invested in equities, corporate bonds
and equity-based mutual funds. Our asset allocation strategy for the VEBA
trusts considers potential fluctuations in our post-retirement liability, the
taxable nature of certain VEBA trusts, tax deduction limits on contributions
and the regulatory environment.
Our retirement plan assets are reported at fair value. See Note D for a
discussion of the hierarchy for determining fair value. Our Level 1 assets
include investments in publicly traded equity securities and commingled
funds. These securities (and the underlying investments of the funds) are
actively traded and valued using quoted prices for identical securities
from the market exchanges. Our Level 2 assets consist of fixed-income
securities and commingled funds that are not actively traded or whose
underlying investments are valued using observable marketplace inputs.
The fair value of plan assets invested in fixed-income securities is gener-
ally determined using valuation models that use observable inputs such as
interest rates, bond yields, low-volume market quotes and quoted prices
for similar assets. Our plan assets that are invested in commingled funds
are valued using a unit price or net asset value (NAV) that is based on the
underlying investments of the fund. We had minimal Level 3 plan assets
on December 31, 2011. These investments include real estate funds,
insurance deposit contracts and direct private equity investments.
2006
Equities 25 - 75%
Fixed income 10 - 50%
Cash 0 - 15%
Other asset classes 0 - 20%