Watson Wyatt Urges Liability-Driven Strategies for DB

November 1, 2006 (PLANSPONSOR.com) - Companies will likely consider investment approaches that better hedge their long-term pension liabilities as they react to the Pension Protection Act (PPA) and new accounting rules, according to Watson Wyatt Investment Consulting.

A Watson Wyatt news release said that according to Mark Ruloff, director of asset allocation at Watson Wyatt, the company has recommended the use of liability-driven strategies in more than 90% of its asset allocation work for US companies in the past year.   Watson Wyatt’s asset allocation methodology makes extensive use of liability-driven investment concepts to achieve funding status predictability in the post-reform environment, the press release said.

These concepts include decreasing public equity investment in favor of fixed income and alternatives and enhancing alpha opportunities as performance exceeds benchmarks.

The move is part of a global trend to more closely match pension investments with plan liabilities, instead of focusing solely on the amount of assets in the plan.   In the United Kingdom, for instance, Watson Wyatt has been an adviser on nearly 70 over-the-counter derivative and related executions for Sterling-based institutions, with a total nominal exposure of approximately £32 billion.  

“With the recently enacted pension reform law and new accounting rules, plan sponsors are shifting risk strategies,” said Ruloff, in the announcement. “Higher funding targets, restrictions on smoothing and requirements for valuing pension assets and liabilities at a market basis are prompting companies to look for more predictable returns through liability-driven investing.”