Defined benefit (DB) plan sponsors can leverage an array of tools to evaluate their plan and make decisions on overall financial strategies. Technology can enable sponsors to assess their governance; monitor and project the plan’s status to manage costs and risks; quantify the impact of diversification; and they can explore various investment manager opportunities. Below we offer core strategies from which all DB sponsors can gain.
Next Generations’ Plans
There are several important tactics at DB plan sponsors’ disposal to help keep their current plans in place.
Choosing an Annuity Provider
After a DB plan sponsor has strategized about how to best manage its program and decided to offload a portion of liabilities through the purchase of annuities to pay benefit obligations, there follow two sets of complex tactical choices.
ESG Trends in DB Plans
Institutional investing in the U.S. along environmental, social and governance (ESG) lines has seen large advances among endowments and foundations, as well as public pension plans. Uptake on ESG on the corporate side of the DB world has been slower, as many sponsors are de-risking their plans by cutting equity exposures.
Blurring the Lines: DB, Cash Balance and DC Plans
Recently the borders among DB, cash balance and defined contribution (DC) plans have been blurred further by an evolving regulation on investment choices, and few large sponsors are migrating to the new territory. But the flexibility in design, and significant tax advantages, of cash balance plans have expanded their numbers among smaller companies with highly paid owners.
Alternative Assets for Diversification
In the 10 years since the enactment of the Pension Protection Act (PPA), DB sponsors have been motivated to shift portfolio allocations. The most notable change has been a de-risking through scaling back traditional equities, and heading into alternative assets such as direct real estate, private equity and hedge funds.
LDI Evolves as Effective Hedging Tool
Asset managers and consultants have refined applications of liability-driven investing (LDI) to make them increasingly effective hedges of liability values. The foundation of an LDI program is long-duration high-quality bonds, but asset managers routinely adjust the interest rate sensitivity of LDI portfolios with Treasury bond futures and STRIPS [separate trading of registered interest and principal securities] to more accurately mirror the plan’s liabilities.