As part of its aggressive efforts to reduce pension risks in an unstable market, Ford Motor Co. is investing $3.8 billion into its global pension plan this year, according to an annual securities filing. It will also heavily pour its plan assets in bonds. The planned cash injection is far from the $1.5 billion that the automaker contributed in 2011.
The company also disclosed that 80% of its pension plans in the U.S. will be spent in bonds within "the next several years." The funds that are outside the U.S. have similar targets. The shift to bonds and the outsized cash contribution are a reflection of the automaker's efforts to meet the challenges created by market volatility, lower expectations for investment returns and rock-bottom interest rates.
Analyst David Whiston at Morningstar commented that with the lower returns, one needs to be investing more into the plan over time to offset liabilities. He further explained that the liabilities do not change and that one still has to fund the plan. In 2011, the assets in the pension plan of Ford earned 7.7%, which is better compared to the broader U.S. stock market. However, this is lower than the anticipated 8% return. The automaker now predicts a long-term return at 7.5 percent.
In the regulatory filing, the automaker disclosed that it anticipated its pension assets to counterpart future benefit obligations in the next few years. The stock could increase to $24 a share if the automaker fully funds the pension plans by around 2015.
The increase is almost twice its current level, analyst Itay Michaeli at Citigroup explained in January. Whiston of Morningstar also shared that since the automaker has already re-established its dividend and the possibility of a share buyback is slim, "the next best use of cash" for the carmaker is to fund the pension plan.