Meritor Acquisition and 2022 Financial Results
Table of Contents
U.K. Plan Assets
The methodology used to determine the rate of return on the Cummins and Meritor pension plan assets in the U.K. was based on establishing an equity-risk premium over
current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of
return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and
return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives, we established the following targets:
Cummins Plan
Target
Asset Class
Meritor Plan Target Range
Minimum
Maximum
Equities
8 %
15 %
30 %
Private markets/secure income assets
19 %
%
%
Credit/bank loans
4 %
%
15 %
Diversified strategies
4 %
25 %
50 %
Real estate
― %
%
15 %
Fixed income/insurance annuity
64 %
25
%
45 %
Cash
Total
1 %
100 %
%
-
%
As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match
liability duration and are not used in a speculative way. The fixed income component of the Cummins portfolio, excluding the annuity contract, hedges approximately 15
percent of the plan's exposure to interest rates and 30 percent of the plan's exposure to inflation. The insurance annuity contract covers approximately another21 percent of
exposure to interest rates and 18 percent of inflation. The fixed income component of the Meritor portfolio, excluding the annuity contract, hedges approximately 100 percent of
the plan's exposure to interest rates and 100 percent of the plan's exposure to inflation. The insurance annuity contract effectively hedges 100 percent of the insured liabilities
exposure to interest rates and 100 percent of the insured liabilities to inflation. Based on the above discussion, we elected an assumption of5.00 percent in 2023.
Fair Value of U.S. Plan Assets
The fair values of U.S. pension plan assets by asset category were as follows:
Fair Value Measurements at December 31, 2022
Quoted prices in active
markets for identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Total
In millions
Equities
U.S.
Non-U.S.
Fixed income
Government debt
Corporate debt
U.S.
Non-U.S.
Asset/mortgaged backed securities
Net cash equivalents (1)
$
118
S
31
118
31
188
188
Diversified strategies
423
12
41
7
499
9
14
423
53
7
508
14
Private markets and real assets (2)
Net plan assets subject to leveling
Accruals (3)
$
681
$
661
$
641
641 $
641
1,983
7
Investments measured at net asset value
1,838
Net plan assets
$
3,828
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