Meritor Acquisition and 2022 Financial Results
Table of Contents
return expectations as the plan assets continue to be de-risked, we believe that an investment return assumption of 5.00 percent in 2023 for U.K. pension assets is reasonable and
attainable.
Our target allocation for 2023 and pension plan asset allocations, excluding Meritor, at December 31, 2022 and 2021 are as follows:
Investment description
Liability matching
Risk seeking
Total
Cummins U.S. Plan
Cummins U.K. Plan
Target
Allocation
2023
Percentage of Plan Assets at
December 31,
2022
2021
Target
Allocation
2023
Percentage of Plan Assets at
December 31,
72.0 %
70.0 %
70.0 %
65.0 %
2022
48.0 %
2021
28.0 %
100.0 %
30.0 %
30.0 %
100.0 %
100.0 %
35.0 %
100.0%
52.0 %
52.0%
48.0 %
100.0 %
100.0 %
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. Target allocation for 2023 and pension plan asset allocation at December 31, 2022, for Meritor plans are as follows:
Meritor U.K. Plan
Investment description
Liability matching
Risk seeking
Total
Meritor U.S. Plan
Target Allocation
Percentage of Plan Assets at
December 31,
Target Allocation
2023
2022
2023
%
100 %
100 %
%
100 %
100 %
35 %
65 %
100 %
Percentage of Plan Assets at
December 31,
2022
70 %
30 %
100
%
Due to the extreme market volatility in the U.K. during the fourth quarter of 2022, the Meritor U.K. plan rebalanced a significant portion of the plan into liability matching
assets. The current investment policy and asset allocation targets for the U.K. plan are being actively reviewed to determine if any changes are appropriate.
The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic cost over
five years. The table below sets forth our expected rate of return for 2023 and the expected return assumptions used to develop our pension cost for the period 2020-2022.
U.S. plans
U.K. plans
Long-term Expected Return Assumptions
2023
2022
2021
2020
7.00 %
5.00 %
6.50 %
4.01 %
6.25%
4.00 %
6.25%
4.00%
Pension accounting offers various acceptable alternatives to account for the differences that eventually arise between the estimates used in the actuarial valuations and the actual
results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes in pension obligations (including those resulting
from plan amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension cost as they occur but are recognized
initially in AOCL and subsequently amortized as components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, we may
also adopt immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortize
actuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $693 million ($525 million after-tax) from cumulative
actuarial net losses for our U.S. and U.K. pension plans.
The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and under certain circumstances, such as
when the difference exceeds 10 percent of the greater of the market value of plan assets or the projected benefit obligation, the difference is amortized over future years of
service. This is also true of changes to actuarial assumptions. Under the delayed recognition alternative, the actuarial gains and losses are recognized and recorded in AOCL. As
our losses related to the U.S. and U.K. pension plans exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of
participating employees. Net actuarial losses decreased our shareholders' equity by $129 million after-tax in 2022. The loss is primarily due to unfavorable asset returns,
partially offset by higher discount rates in the U.S. and U.K.
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