DB Plans Tap New Investment Strategies to Meet Funding Obligations

February 22, 2007 (PLANSPONSOR.com) - Funding requirements set by the Pension Protection Act and new accounting rules have propelled companies to consider risk management and investment strategies that they once shied away from for their defined benefit plans, according to a recent survey by Pyramis Global Advisors.

According to the survey of 214 directors of the largest DB plans in the U.S., half of all corporate DB plans said they were using or considering liability-driven investing (LDI) (See   Cover: Corporate Plan Sponsor of the Year: Slow and Steady ), and for the first time, corporate DB plans’ allocation to fixed income surpasses that of public DB plans.

In terms of investment strategies, corporate DB plans have started to loosen the reins and allow investment managers to try new approaches to increase returns, with 63% of corporate DB plans using or considering 130/30 equity portfolios, 20% saying they plan to hike allocations to non-U.S. equity and 19% planning to increase real estate allocations.

Public DB plans have also been recently handed some new accounting rules that will require them to account for future health-care liabilities, which public plan sponsors estimate to top $1 billion, according to Pyramis.

More than half of public DB plans have cited a “low return environment” as their biggest concern. In order to boost returns, 80% of large public plans are using or considering alpha programs. Pyramis also said that asset allocation in international equities for public DB plans surpassed allocation to international equities for corporate plans.

The respondents include 124 corporate DB plan directors and 90 public DB plan directors.