Meritor Acquisition and 2022 Financial Results
Table of Contents
Plan Assets
Our investment policies, excluding Meritor, in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to
this long-term strategy and do not attempt to time the market. Given empirical evidence that asset allocation is critical, rebalancing of the assets has and continues to occur,
maintaining the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant
exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock or corporate bonds.
Meritor's investment policies in the U.S. and U.K. have historically targeted a well-diversified asset allocation strategy to promote asset growth while maintaining an acceptable
level of risk over the long-term with a goal of minimizing company contributions. We are actively reviewing the plan investments and will pursue adjustments to the allocation
when appropriate and necessary to align the assets more closely with our management's strategy and view of prudent and acceptable risk to the company, the plan and its
funding goals.
U.S. Plan Assets
For the Cummins U.S. qualified pension plan, our assumption for the expected return is greatly influenced by our objective to match assets and liabilities and the increase in
bond yields. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment
management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations, we elected
an assumption of 7.00 percent in 2023.
For the Meritor U.S. qualified pension plan, our assumption for the expected return is based upon the primary investment objective to exceed, on a net-of-fees basis, the rate of
return on a policy portfolio represented in the following table. We expect active management and the alternative investments to provide excess return over the long run. Based
upon these objectives, historical returns, yield curve movements and forward-looking expectations, we elected an assumption of 7.00 percent in 2023.
To achieve these objectives, we established the following targets:
Asset Class
U.S. equities
Non-U.S. equities
Cummins
Plan Target
Meritor
Plan Target
5 %
1 %
11 %
9 %
Global equities
6 %
%
Total equities
12 %
20 %
Real assets
6 %
%
Private equity/venture capital
6 %
%
Opportunistic credit
4 %
― %
Alternative investments
Fixed income
Total
%
39 %
72 %
41 %
100 %
100 %
The fixed income component of the Cummins plan is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This
component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In
order to achieve a hedge on more than the targeted 72 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed income
managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining
interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless approved by the BPC.
Investment strategies for the Meritor plan assets reflect a balance of risk-reducing and return-seeking considerations. The objective of minimizing the volatility of assets relative
to liabilities is addressed primarily through asset diversification. Assets are broadly diversified across several asset classes to achieve risk-adjusted returns that accomplish this
objective. Meritor plan assets are also allocated to fixed income investments, which seek to minimize interest rate risk volatility relative to pension liabilities. The fixed income
portfolio partially matches the long-dated nature of the pension liabilities reducing interest rate risk.
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