DBSummit07: Moving Targets

December 5, 2007 (Washington, D.C.) - With a flawed defined benefit plan funding landscape behind us and following the setting of new funding rules with the passage of the Pension Protection Act (PPA) in August of 2006, a panel at PLANSPONSOR's DBSummit in Washington, D.C., discussed how new asset allocation strategies can help plan sponsors, large and small, avoid the next funding crisis.

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here 


Mark Gibbens, Chief Investment Officer for Alcatel Lucent Retirement Plans, shared with the DBSummit audience the portfolio analysis and resulting new investment policy implemented by the investment committee for his firm. Gibbens said the committee decided to implement a liability-driven investing strategy for Alcatel Lucent’s biggest pension plan, and decreased risk by reducing the plan’s equity allocation, diversifying the equities held by the plan, and extending the duration of the plan’s fixed income allocation.

All steps reduce the asset and surplus risks and improve the Sharpe ratio (asset returns/asset risk) for the plan, Gibbens said. The new policy also reducing the effect of a declining interest rate scenario, he added.

Size Matters?

But, the Alcatel Lucent plan is a very large plan and is current overfunded. What are smaller plans and those that are not fully funded to do? According to panel member Mary Choksi, Director, Strategic Investment Group, the tendencies will be generally the same for plans of all sizes and funding status.

Those tendencies include, according to Choksi:

  • A move toward fixed income (to control inflation risk and interest rate risk);
  • Increased duration partially achieved via swaps and overlays;
  • More liquid investments;
  • Hedge funds (for good asset returns without a lot of risk);
  • Investments against which exists a greater borrowing ability; and
  • A more frequent review of a plan’s asset mix.

Panel member Paul Morgan, Sr., Consultant Strategic Planning at Evaluation Associates, stressed that the change in equity and fixed income split and duration of fixed income investments are two key elements for risk and surplus risk management. So, why aren’t more plan sponsors making these changes? Morgan said some sponsors are still waiting on final guidance on how to calculate plan assets under new rules in the PPA, and some sponsors are just stuck in the old way of thinking.

Choksi added that some sponsors have seen their funded status improve and do not feel a need for change right now.

For those plans that have decided on a changed portfolio strategy, Morgan said, to get sponsors to approve new policies, committees must explain the concept behind each decision and especially show boards the numbers. Panel member James J. Barrett, Sr., Managing Director and Global Head of Business Development at Bear Stearns said committees can also promote new policies as what can be added to the allocation to better diversification.

All panel members agreed that the new DB landscape and rules could make a good argument for outsourcing a plan’s investment management.