DB Sponsors Increasingly Adopting LDI Strategies
Aon Hewitt’s survey of 227 large U.S. employers, representing $389 billion in total assets revealed that in 2010, 38% of sponsors reduced their exposure to domestic equities and the same percentage expects to do so in 2011. Just 4% expect to increase domestic equity exposure.
Plan sponsors are primarily shifting assets to liability-driven investment strategies, with long-duration corporate bonds as the asset of choice, according to a press release. Nearly a third (32%) of plan sponsors expect to increase allocation to long-duration bonds and 24% expect to increase allocation to other corporate bonds, while just 13% expect to do so for government bonds.
One-in-five plan sponsors raised their global equity exposure in 2010, compared to just 13% that lowered this exposure. Roughly equal proportions expect to raise and lower this exposure in the next 12 months.
Nearly 20% of plan sponsors raised exposure to alternative asset classes, while only 10% lowered exposure in 2010. Nearly one-in-five (19%) expect to raise exposures in this category in 2011, and just 8% expect to lower exposure.
Sixteen percent of plan sponsors are very likely to implement longevity-hedging strategies, 10% have already done so.
Nearly one-third (32%) of pension plan sponsors have already delegated the full responsibility for the implementation of their investment policy, or are very or somewhat likely to do so in the future.DB Plan “Glidepaths”
A new survey from Aon Hewitt found that static investment policies for defined benefit plans are giving way to dynamic investment policies, or "glidepaths," that incorporate plan-specific objectives, such as funded status, to mitigate pension risk. By 2010, more than one-in-five sponsors had already adopted some form of dynamic investment policy, up from 15% in 2009. Twenty-nine percent of sponsors expect to be operating some form of dynamic policy in the next year.
According to the survey, glidepaths have become an increasingly attractive strategy for a few reasons. Most plan sponsors (78%) view glidepaths as a sensible way to reduce risk as their plans' funded status improves, and 42% feel they are an appealing way to take the emotion out of de-risking decisions. Additionally, 33% say glidepaths offer the potential to reduce long-term plan costs.
As more plan sponsors have turned to glidepaths to manage pension risk, fewer are making fundamental changes to their plan design, a press release said. While a majority of plans (61%) are already closed to new entrants, many U.S. plan sponsors continue to accrue benefits for at least some portion of their workers. Just under a third (32%) of plan sponsors now report frozen plans, up slightly from 30% in 2009, and only 16% believe a freeze is likely in the future.