Union Pacific 2010 Annual Report Download - page 65

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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 7.5%. We reduced our expected rate of return
on plan assets to 7.5% in 2011 from 8% in 2010 to reflect our expected future returns on plan assets
based on our current asset allocation strategy. While we believe we can achieve a long-term average
rate of return of 7.5%, we cannot be certain that the portfolio will perform to our expectations. Assets are
strategically allocated among equity, debt, and other investments in order to achieve a diversification level
that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other
portfolios are evaluated at least every three years with the assistance of an independent external
consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at
least quarterly, if needed.
The pension plan investments are held in a Master Trust, with The Northern Trust Company. The majority
of pension plan 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. Equity risks are balanced by investing a significant portion of the plans’ assets in high
quality debt securities. The average credit rating of the debt portfolio exceeded A+ as of December 31,
2010 and 2009. The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury,
mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 12 years at
both December 31, 2010 and 2009.
The investment of pension plan assets in securities issued by Union Pacific is specifically prohibited by
the plan for both the equity and debt portfolios, other than through index fund holdings.
Fair Value Measurements
The pension plan assets are valued at fair value. The following is a description of the valuation
methodologies used for the investments measured at fair value, including the general classification of
such instruments pursuant to the valuation hierarchy.
Temporary Cash Investments – These investments consist of U.S. dollars and foreign currencies held
in master trust accounts at The Northern Trust Company. Foreign currencies held are reported in terms
of U.S. dollars based on currency exchange rates readily available in active markets. These temporary
cash investments are classified as Level 1 investments.
Registered Investment Companies – Registered Investment Companies are mutual funds, unit trusts,
and other commingled funds registered with the Securities and Exchange Commission. Mutual fund and
unit trust shares are traded actively on public exchanges. The share prices for mutual funds and unit
trusts are published at the close of each business day. Holdings of mutual funds and unit trusts are
classified as Level 1 investments. Other registered commingled funds are not traded publicly, but the
underlying assets (stocks and bonds) held in these funds are traded on active markets and the prices for
these assets are readily observable. Holdings in other registered commingled funds are classified as
Level 2 investments.
U.S. Government Securities – U.S. Government Securities consist of bills, notes, bonds, and other fixed
income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These
assets are valued using a bid evaluation process with bid data provided by independent pricing sources.
U.S. Government Securities are classified as Level 2 investments.
Corporate Bonds & Debentures – Corporate bonds and debentures consist of fixed income securities
issued by U.S. and non-U.S. corporations. These assets are valued using a bid evaluation process with
bid data provided by independent pricing sources. Corporate bonds & debentures are classified as Level
2 investments.
Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and
non-U.S. corporations. Common and preferred shares are traded actively on exchanges and price
quotes for these shares are readily available. Holdings of corporate stock are classified as Level 1
investments.
Venture Capital and Buyout Partnerships – This investment category is comprised of interests in
limited partnerships that invest in privately-held companies. Due to the private nature of the partnership