DB Sponsors Searching for Juiced Up Returns

April 17, 2007 (PLANSPONSOR.com) - Large corporate and public defined benefit pension plans are going back to the drawing board to find new ways to generate enough returns so they can deliver on their employee obligations, according to a new survey.

That was a key finding of a survey released Tuesday by Pyramis Global Advisors, the institutional money management arm of Fidelity Investments, according to a Pyramis news release.

For the first time in the survey’s five-year history, U.S. public DB plans invested in more international equities than corporate DB plans while, in 2006, corporate pension plans allocated more assets to fixed income than public pension plans did.

“While U.S. corporate and public pension plans have historically had different concerns and motivations, these differences became magnified in 2006,” said Michael Barnett, executive vice-president of Fidelity’s retirement services in Canada (including Pyramis), in the news release. “The Canadian pension industry has historically mirrored the U.S., so these findings offer great insights into what could happen for pension plans in this country.”

According to the news release, the survey found that nearly four in 10 executives from corporate DB plans cite “earnings volatility” as their top concern.   To address their concerns, corporations have begun using or considering risk management strategies with half of all corporate DB plans claimed that they were using or considering liability driven investing (LDI) (See  Cover: Corporate Plan Sponsor of the Year: Slow and Steady ).

To meet the goal of increasing returns, a large percentage of corporate DB plans are open to new investment approaches and reducing the past restrictions that they placed on their investment managers. For example, results showed that many are looking beyond long only stock portfolios, with 63% of corporate DB plans using or considering 130/30 equity portfolios in which investment managers have limited ability to sell stocks short. In addition, 20% of corporate DB plans said they will be increasing allocations to non-U.S. equity and 19% of corporate DB plans said they would be increasing allocations to real estate (See  DB Sponsors Seek ‘Holistic’ Liability Management Strategies ).

Public plans are now more focused on investment performance with 53% citing a low-return environment as their biggest concern. In addition, the survey found that many plans were considering new ways of engineering their portfolios. For instance, survey results found that more than 80% of large public DB plans are either using or considering portable alpha programs.

The fifth annual defined benefit survey was designed by Pyramis Global Advisors and was executed by Asset International, Inc, in October 2006. CIOs, treasurers and executive directors from 214 of the largest DB plans in the United States (124 corporate, 90 public) responded to an online questionnaire.

Asset International is the owner of the PLANSPONSOR.com Web site among a variety of other properties.