1) Consider taking your de-risking glide path to the next
level with interest triggers as well as funded status triggers.
Many plan sponsors have adopted de-risking glide paths with
an increased allocation to assets that provide a hedge against liabilities. The
majority of the glide paths have triggers based on funded status, with some
plans also adopting interest rate triggers. Mercer anticipates plan sponsors
will continue to use a two-pronged approach, with an increased emphasis on
interest rate triggers given expectations of tapering by the Federal Reserve in
2014, and the potential for an increase in the level of interest rate volatility. This
approach would help plan sponsors lock in interest rate increases when they
Also, a number of plan sponsors are introducing time-based
triggers. This pertains mostly to plan sponsors looking to terminate the
pension plan within a specific time frame. Mercer also expects to see greater
interest in these types of triggers as more plans seek to terminate.
2) Review the optimal LDI (liability-driven investing)
benchmarks for liabilities.
Pension plans that have a substantial allocation to
liability hedging assets in their portfolios should ensure that the choice of
bond benchmarks fits the liability characteristics. This will be an important
theme in 2014 and Mercer anticipates an increasing number of plans will explicitly set the benchmark to the plan liabilities.
3) Don’t forget about derivatives.
Pension plans utilizing LDI have increased their
exposure to liability hedging assets as funded status has improved. However,
physical securities may not be sufficient to manage interest rate risk, or may
be an inefficient use of capital, and more plan sponsors will begin to deploy
the use of derivatives. Mercer anticipates an increased use of interest rate
derivatives in 2014.