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Notes to the Financial Statements NOTE 17. RETIREMENT BENEFITS (Continued) As a result of the UAW Retiree Health Care Settlement Agreement and various personnel-reduction programs (discussed in Note 21), we have recognized curtailments and settlements in the U.S. and Canadian pension and OPEB plans. We also recognized in 2011 a settlement loss associated with the partial settlement of a Belgium pension plan. The financial impact of the curtailments and settlements is reflected in the tables above and is recorded in Automotive cost of sales and Selling, administrative and other expenses. Weighted Average Assumptions Used to Measure our Benefit Obligations and Plan Assets at December 31 Discount rate Expected return on assets Average rate of increase in compensation Assumptions Used to Determine Net Benefit Cost for the Year Ended December 31 Discount rate Expected return on assets Average rate of increase in compensation Pension Benefits U.S. Plans Non-U.S. Plans 2011 4.64% 7.50% 3.80% 5.24% 8.00% 3.80% 2010 5.24% 8.00% 3.80% 5.86% 8.25% 3.80% 2011 4.84% 6.77% 3.39% 5.31% 7.20% 3.34% 2010 5.31% 7.20% 3.34% 5.68% 7.17% 3.15% U.S. OPEB 2011 2010 4.60% 5.20% — — 3.80% 3.80% 5.20% 5.74% — — 3.80% 3.80% The amounts in Accumulated other comprehensive income/(loss) that are expected to be recognized as components of net expense/(income) during the next year are as follows (in millions): Pension Benefits Prior service cost/(credit) (Gains)/Losses and other U.S. Plans $ 220 425 Non-U.S. Plans $ 70 403 Worldwide OPEB $ (544) 129 Total $ (254) 957 Pension Plan Contributions In 2011, we contributed $1.1 billion to our worldwide funded pension plans and made $400 million of benefit payments directly by the Company for unfunded plans. During 2012, we expect to contribute from Automotive cash and cash equivalents $3.5 billion to our worldwide funded plans (including discretionary contributions to our U.S. plans of $2 billion), and to make $350 million of benefit payments directly by the Company for unfunded plans, for a total of about $3.8 billion. Based on current assumptions and regulations, we do not expect to have a legal requirement to fund our major U.S. pension plans in 2012. Estimated Future Benefit Payments The following table presents estimated future gross benefit payments (in millions): 2012 2013 2014 2015 2016 2017 - 2021 U.S. Plans $ 3,520 3,430 3,350 3,290 3,220 15,430 Gross Benefit Payments Pension Non-U.S. Plans $ 1,290 1,290 1,300 1,330 1,340 7,150 Worldwide OPEB $ 460 430 420 410 400 1,980 132 Ford Motor Company | 2011 Annual Report
Notes to the Financial Statements NOTE 17. RETIREMENT BENEFITS (Continued) Pension Plan Asset Information Investment Objective and Strategies. Our investment objectives for the U.S. plans are to minimize the volatility of the value of our U.S. pension assets relative to U.S. pension liabilities and to ensure assets are sufficient to pay plan benefits. Our prior target asset allocations disclosed in our 2010 Form 10-K Report were about 30% public equity investments, 45% fixed income investments, and up to 25% alternative investments (e.g., private equity, real estate, and hedge funds). In October 2011, as part of our broader pension de-risking strategy, we revised our U.S. investment strategy to increase the matching characteristics of our assets relative to our liabilities. Our new U.S. target asset allocations, which we expect to reach over the next several years, are 80% fixed income and 20% growth assets (primarily alternative investments, which include hedge funds, real estate, private equity, and public equity). Our largest non-U.S. plans (Ford U.K. and Ford Canada) have similar investment objectives to the U.S. plans. Their prior target asset allocations were 45% fixed income investments, 30% public equity investments, and up to 25% alternative investments. We expect to reach target asset allocations similar to the new U.S. target asset allocations over the next several years, subject to legal requirements in each country. Investment strategies and policies for the U.S. plans and the largest non-U.S. plans 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 - liability matching, asset diversification, and hedging. The fixed income target asset allocation matches the bond-like and long-dated nature of the pension liabilities. Assets are broadly diversified within asset classes to achieve risk-adjusted returns that in total lower asset volatility relative to the liabilities. Our policy to rebalance our investments regularly ensures actual allocations are in line with target allocations as appropriate. Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes, and strategies within asset classes that provide adequate returns, diversification, and liquidity. All assets are externally managed and most assets are actively managed. Managers are not permitted to invest outside of the asset class (e.g., fixed income, public equity, alternatives) or strategy for which they have been appointed. We use investment guidelines and recurring audits as tools to ensure investment managers invest solely within the investment strategy they have been provided. Derivatives are permitted for fixed income investment and public equity managers to use as efficient substitutes for traditional securities and to manage exposure to interest rate and foreign exchange risks. Interest rate and foreign currency derivative instruments are used for the purpose of hedging changes in the fair value of assets that result from interest rate changes and currency fluctuations. Interest rate derivatives also are used to adjust portfolio duration. Derivatives may not be used to leverage or to alter the economic exposure to an asset class outside the scope of the mandate an investment manager has been given. Alternative investment managers are permitted to employ leverage (including through the use of derivatives or other tools) that may alter economic exposure. Significant Concentrations of Risk. Significant concentrations of risk in our plan assets relate to interest rate, equity, and operating risk. In order to minimize asset volatility relative to the liabilities, a portion of plan assets is allocated to fixed income investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities. In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to growth assets (equity investments and alternative investments) that are expected over time to earn higher returns with more volatility than fixed income investments which more closely match pension liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process. Within alternative investments, risk is similarly mitigated by constructing a portfolio that is broadly diversified by asset class, investment strategy, manager, style and process. Operating risks include the risks of inadequate diversification and weak controls. To mitigate these risks, investments are diversified across and within asset classes in support of investment objectives. Policies and practices to address operating risks include ongoing manager oversight (e.g., style adherence, team strength, firm health, and internal risk controls), plan and asset class investment guidelines and instructions that are communicated to managers, and periodic compliance and audit reviews to ensure adherence. Ford Motor Company | 2011 Annual Report 133
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PROFITABLE GROWTH FOR ALL Ford Moto
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A MESSAGE FROM THE PRESIDENT AND CE
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