SEC Filings


10-K
CUMMINS INC filed this Form 10-K on 02/11/2019
Entire Document
 

U.S. Plan Assets
For the U.S. qualified pension plans, our assumption for the expected return on assets was 6.5 percent in 2018. 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 in a rising interest rate environment, we have elected to reduce our assumption to 6.25 percent in 2019.
The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the following:
Asset Class
 
Target
 
Range
U.S. equities
 
7.0
%
 
+5.0/ -5.0%
Non-U.S. equities
 
2.0
%
 
+3.0/ -2.0%
Global equities
 
6.0
%
 
+3.0/ -3.0%
Total equities
 
15.0
%
 
 
Real estate
 
6.5
%
 
+3.5/ -6.5%
Private equity/venture capital
 
6.5
%
 
+3.5/ -6.5%
Opportunistic credit
 
4.0
%
 
+6.0/ -4.0%
Fixed income
 
68.0
%
 
+5.0/ -5.0%
Total
 
100.0
%
 
 

The fixed income component 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 68 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 specifically discussed with the BPC and approved in their guidelines.
U.K. Plan Assets
For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.0 percent in 2018. The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:
Asset Class
 
Target
Global equities
 
23.0
%
Real estate/private markets
 
5.0
%
Reinsurance
 
8.0
%
Corporate credit instruments
 
7.5
%
Fixed income
 
56.5
%
Total
 
100.0
%

As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match liability duration and are not used in a speculative way. The 56.5 percent fixed income component is structured in a way that covers approximately 80 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.0 percent in 2019.

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