DB Sponsors Increasingly Adopting LDI Strategies

May 10, 2011 (PLANSPONSOR.com) - A new survey from Aon Hewitt found that pension plan sponsors are shifting their asset allocation away from domestic equities in favor of liability-matching investments in an effort to reduce plan volatility.

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.