Ford Motor Co. is pouring $3.8 billion into its global pension plan this year and will invest its plan assets more heavily in bonds, as the second-largest U.S. automaker moves more aggressively to minimize its pension risks in a shaky market.
The planned cash injection, detailed in its annual securities filing posted on Tuesday, dwarfs the $1.5 billion Ford contributed in 2011. Ford also said 80 percent of its U.S. pension plans will be invested in bonds within the next several years. Funds outside the United States have similar goals.
The outsized cash contribution and shift to bonds reflect Ford's push to offset the challenges posed by rock-bottom interest rates, market volatility and lower expectations for investment returns.
With the lower returns, over time you need to be putting more into the plan to meet your liabilities, Morningstar analyst David Whiston said. Your liabilities don't change. You still have to fund the plan.
Assets in Ford's pension plan earned 7.7 percent in 2011, better than the broader U.S. stock market, which was flat, but lower than the expected 8 percent return. Ford's long-term return forecast is now 7.5 percent.
In the filing, Ford said it expected its pension assets to match future benefit obligations in the next few years. If Ford fully funds its pension plans by around 2015, the stock could spike to $24 a share, nearly double its current level, Citigroup analyst Itay Michaeli said last month.
Since Ford has already reinstated its dividend and chances for a share buyback are slim, Whiston of Morningstar said the next best use of cash is for Ford to fund its pension plan.
Other major companies, including Boeing Co and Alcoa , plan large cash payments to their pension plans this year. Ford's payout will be funded by cash from its automotive operations.
Ford last month reported a lower-than-expected fourth-quarter profit as operations outside North America fell short of expectations and commodity costs shot up across all regions.
At the end of 2011, Ford's U.S. benefit obligations came to nearly $49 billion. Outside the United States, Ford's pension liability totaled a little more than $25 billion.
The size of a pension obligation is based on two factors - discount rates and the expected return on plan assets. Both rates and expected returns are now falling, forcing companies to have more cash on hand to meet payments.
Over time, Ford plans to invest 80 percent of its U.S. pension plan assets in bonds. The remainder would be invested in growth assets, including hedge funds and real estate.
We believe this is a prudent way to further minimize the volatility of our pension assets relative to the liabilities, Ford spokesman Todd Nissen said of the company's plan to shift more assets into fixed income investments.
As recently as 2006, Ford targeted 70 percent in equities. Starting in 2007, Ford changed its goal and aimed to invest 45 percent in fixed income.
Last month, Ford said it would put $3.5 billion in its pension plan. In its annual filing with the U.S. Securities and Exchange Commission, Ford updated the figure to include $350 million in benefit payments for unfunded plans.
(Editing by Muralikumar Anantharaman)