General Motors 2011 Annual Report Download - page 145

GENERAL MOTORS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Real estate investments include funds that invest in entities which are principally engaged in the ownership, acquisition,
development, financing, sale and/or management of income-producing real estate properties, both commercial and residential. These
funds typically seek long-term growth of capital and current income that is above average relative to public equity funds.
Significant Concentrations of Risk
The pension plans’ assets include certain private investment funds, private equity and debt securities, real estate investments and
derivative instruments. Investment managers may be unable to quickly sell or redeem some or all of these investments at an amount
close or equal to fair value in order to meet a plan’s liquidity requirements or to respond to specific events such as deterioration in the
creditworthiness of any particular issuer or counterparty.
Illiquid investments held by the plans are generally long-term investments that complement the long-term nature of pension
obligations and are not used to fund benefit payments when currently due. Plan management monitors liquidity risk on an ongoing
basis and has procedures in place that are designed to maintain flexibility in addressing plan-specific, broader industry and market
liquidity events.
Certain plan assets represent investments in group annuity contracts. We entered into group annuity contracts with various life
insurance companies to provide pension benefits to certain of our salaried workforce and backed these obligations by high quality
fixed income securities. We, as the plans’ sponsor, might be exposed to counterparty risk if any or all of the life insurance companies
fail to perform in accordance with the terms and conditions stipulated in the contracts, or any or all of the life insurance companies
become insolvent or experience other forms of financial distress. We and the plans might also be exposed to liquidity risk due to the
funding obligation that may arise under these contracts. The plans’ management monitors counterparty and liquidity risks on an
on-going basis and has procedures in place that are designed to monitor the financial performance of the life insurance companies that
are parties to these contracts and maintain flexibility in addressing contract-specific and broader market events.
The pension plans may invest in financial instruments denominated in foreign currencies and may be exposed to risks that the
foreign currency exchange rates might change in a manner that has an adverse effect on the value of the foreign currency denominated
assets or liabilities. Forward currency contracts are used to manage and mitigate foreign currency risk.
The pension plans may invest in fixed income securities for which any change in the relevant interest rates for particular securities
might result in an investment manager being unable to secure similar returns upon the maturity or the sale of securities. In addition,
changes to prevailing interest rates or changes in expectations of future interest rates might result in an increase or decrease in the fair
value of the securities held. Interest rate swaps and other financial derivative instruments may be used to manage interest rate risk.
Counterparty credit risk is the risk that a counterparty to a financial instrument will default on its commitment. Counterparty risk is
primarily related to over-the-counter derivative instruments used to manage risk exposures related to interest rates on long-term debt
securities and foreign currency exchange rate fluctuations. The risk of default can be influenced by various factors including macro-
economic conditions, market liquidity, fiscal and monetary policies and counterparty-specific characteristics and activities. Certain
agreements with counterparties employ set-off, collateral support arrangements and other risk mitigating procedures designed to
reduce the net exposure to credit risk in the event of counterparty default. Credit policies and processes are in place to manage
concentrations of counterparty risk by seeking to undertake transactions with large well-capitalized counterparties and by monitoring
the creditworthiness of these counterparties. The majority of our derivatives at December 31, 2011 were fully collateralized and
therefore, the related counterparty credit risk was significantly reduced.
Pension Funding Requirements
We are subject to a variety of U.S. federal rules and regulations, including the Employee Retirement Income Security Act of 1974,
as amended and the Pension Protection Act of 2006 (PPA), which govern the manner in which we fund and administer our pensions
for our retired employees and their spouses. The Pension Relief Act of 2010 provides us with options to amortize any shortfall
amortization base for U.S. qualified pension plans either (1) over seven years with amortization starting two years after the election of
this relief or (2) over 15 years.
General Motors Company 2011 Annual Report 143