Survey Indicates DB Freeze Wave is Over

October 21, 2008 ( - A new survey of large corporate and public defined benefit (DB) plans found that plan sponsors have, for the most part, concluded their formal assessments of the merits of freezing or closing their DB plans and are now focused on a long-term view.

“Today, we’re seeing more true believers who view their DB plans as critical components of their employees’ future retirement needs. Our study leads us to conclude that the plans that were inclined to freeze or close have already done so,” said Patrick J. Mc Nelis, executive vice president, Global Distribution & Client Service, Pyramis Global Advisors, in a press release. The study was conducted by Pyramis and was executed in association with Asset International, Inc., publisher of PLANSPONSOR .

According to the press release, 83% of corporate plans and 98% of public plans have already made the decision whether to freeze their DB plans. Looking ahead, more than half of both types of plan sponsors said they were “philosophically committed” to the concept of a DB plan.

Investment Strategies

Both corporate and public plans continued to make broad asset allocation changes, according to the survey, reducing their reliance on U.S. equities in favor of other asset classes. Corporate plans reported they decreased their U.S. equity allocation by an average of 600 basis points (6%), while increasing their fixed income allocation by 400 basis points (4%). Public plans also reduced their U.S. equity allocation by a similar amount; however, they are shifting the proceeds of their U.S. equity overseas to non-U.S. equity investments and alternatives.

Public plans surveyed expected non-U.S. equity markets to outperform the U.S. market over the next five years.

Corporate and public plans differ in the nature of their concerns about volatility. Corporate plans are considering the volatility of their funding status, so 36% have implemented a liability-driven investing (LDI) program. As such, they increased bond allocations, extended duration of existing bond mandates, and made greater use of credit and interest rate derivatives.

Both corporate and public plans are seeking out long and long-short strategies (including 130/30 and market neutral) and alternative investments (hedge funds and private equity) for diversification and uncorrelated sources of returns. Nearly half of public plans noted having hedge funds and hedge fund-type strategies, such as long/short or equity market neutral.

Looking Ahead

In 10 years, corporate plans (40%) are looking to shift asset allocations to fixed income and public plans (56%) are looking to shift to global equity and fixed income. Eighteen percent of corporate plans and one-fifth of public plans plan to shift to alternatives.

The survey also found plans are looking to establish strategic partnerships (22% currently using or considering, 24% of those are $1 billion or more) where they would hire fewer managers and give them larger mandates and more latitude.

The top concern identified by corporate plans is volatility (36%), with 33% of those citing market volatility specifically. Funding status volatility caused by pension laws and accounting rules are a close secondary concern.

Public plan sponsors are most concerned about the low return environment (37%) when long-term yields are low and equity markets are difficult. Top concerns also include funding health care obligations in response to Government Accounting Standards Board (GASB) Statement 45.

An online "Quick Poll" survey of 70 large defined benefit plan sponsors in late September revealed that, at this point, market volatility had little or no impact on the asset allocation decisions stated in the June survey.

The sixth annual DB survey - "The Global Investor's Challenge: Achieving Balance in a Volatile World" - was executed in June 2008. CIOs, treasurers and executive directors from 248 of the largest DB plans in the United States (126 corporate, 122 public) responded to an online questionnaire.

A comprehensive report on the survey will be available in November by writing to .