DB Sponsors Seek 'Holistic' Liability Management Strategies

March 27, 2007 (PLANSPONSOR.com) - Underfunding problems and a move to mark to market accounting continue to further push defined benefit plan sponsors to find "more holistic" strategies for funding pension liabilities, a new Greenwich Associates research paper asserted.

Describing the trend as putting asset managers “on the brink of revolutionary change, ” Greenwich Associates suggested the mark to market accounting standards trend (See  Accounting Rulemakers Ponder ‘Mark to Market’ Approach ) cut plan sponsors’ ability to tolerate market volatility and their ability to generate much-needed investment returns, according to a news release. The development could portend radical disruptions for the investment management industry, the research firm claimed.

“Plan sponsors in both the public and corporate sectors have begun investigating a series of investment and management strategies, some new and some not-so-new, that are designed to achieve some combination of increasing investment returns, limiting portfolio volatility and managing liabilities down over time,” said Greenwich Associates consultant Dev Clifford, in the news release.

The company said that its 2006 U.S. Investment Management Research Study found that the trend is most evident in the increasing popularity of products and techniques such as liability-driven investment strategies, absolute return strategies, portable alpha and net-long approaches such as 120/20 and 130/30 strategies.

According to the news release, about a third of U.S. plan sponsors told Greenwich Associates that they have adopted new strategies in response to the emerging investment and regulatory environment while another 30% say they plan to do so over the next 24 months.

More than 20% of plan sponsors cited absolute return strategies. More than 10% say they have implemented portable alpha strategies and an almost equal proportion say they are using efficient portfolio strategies utilizing derivatives or other synthetic instruments.