Bob Browne, CIO at Northern Trust, argues that pension plan sponsors should not wait to de-risk their plans based solely on the assumption that interest rates will rise.
Asked what they plan to look for in asset management searches in the next 12 months, the majority of mid-sized defined benefit (DB) plan CIOs said better risk-adjusted returns, and they plan to turn to private equity, real estate and hedge funds.
Speakers on a PGIM Fixed Income webcast offered practical steps pension plan sponsors can take today and over time to protect funding levels; they suggested liability-driven investing is a smart way to “get off the funded-status rollercoaster.”
The company is offering a lump-sum window, transferring some liabilities to a group annuity, making a contribution to its pension plan and transitioning to a liability-matching investment allocation.
Corporate DB plans have experience funded status improvement, and LDI strategies help plan sponsors preserve this; however, investment committees are looking for new asset classes that can provide greater returns at a reasonable level of risk.
Equity prices have strongly recovered since the Great Recession, bringing some benefit to corporate pension funded status, but pension plan sponsors have still faced periods of unprecedented volatility, a prolonged slowdown in global growth, and historically low interest rates.
This enables corporations to expense their contributions at a higher tax rate, according to Cerulli.
Alexi Maravel, director of Cerulli’s institutional practice, observes that the LDI topic is “probably the most competitive pricing environment among the different types of institutional custom solutions available today.”
Eighty-one percent of pension plan professionals say funded status volatility is their top motivating factor for pursuing an LDI strategy.
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John Lowell, with October Three, says for two types of DB plans, investment-driven liabilities (IDL) is almost risk free for plan sponsors and provides more meaningful benefits to participants.
Nearly 85% of pension plans paying PBGC premiums have less than 1,000 participants—so it only makes sense that small plans make up a significant proportion of the ERISA industry’s annual risk transfer business.
A lot of parties are involved in even a modestly sized pension risk transfer deal; aligning their interests, timelines and incentives for success is no small task.