GLIDEPATH STRATEGIES ARE EVOLVING
Many pension plans are refining asset allocation and risk mitigation after achieving higher funded status in favorable market conditions
Innovation in liability-driven investing continues to drive the adoption of investment solutions and risk management approaches by pension plans. With the recent strong equity market performance improving their funded status, many plans are adopting a more dynamic approach and moving down the glidepath to further derisking.
As plan sponsors consider some of the current LDI approaches, not only do they need to navigate the current market environment of low yields and high equity valuations, they face the challenges of potential inflationary pressures and uncertainty over the spread of the COVID Delta variant.
“There are a lot of current and emerging best practices that are moving the LDI ball forward,” said Andy Hunt, CFA, head of fixed income solutions at Allspring Global Investments (formerly Wells Fargo Asset Management). “There is a lot of money in motion as the glidepath progresses from equity to long-duration fixed income. Topic No. 1, 2 and 3 on the minds of all pension plans is how to deploy that money most efficiently and continue to make funded ratio improvements.”
“A number of tools, from underlying investment products to total plan advisory services and technology resources, are critical in order to effectively manage pension liabilities and mitigate overall funding volatility,” said Thomas Kennelly III, managing director and head of investment strategy OCIO at State Street Global Advisors. These tools and solutions often include outsourced chief investment officer services and completion management, he said. Not all of the investment tools, such as derivatives, are new but, Kennelly added, “they’re more widely embraced in order to provide greater precision and capital efficiencies.”
Tune into an audio webinar by our panel of experts who share the latest techniques for managing plans across all stages of the glide path. From defensive equity strategies, diversified asset exposure, and active – passive approaches all the way to completion management and pension risk transfer, this webinar will give you practical insights and solutions going into next year.
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The improved funded status of pension plans — driven largely by positive equity market performance, but also by rising interest rates earlier in the year — has had additional consequences. “We are seeing more pension risk transfer activity by our clients,” said Kennelly. He noted that while the SSGA OCIO team guides investment committees in overall asset-liability management through a pension risk transfer, State Street also has an independent fiduciary team for PRT transactions. “The fiduciary team stands between the sponsor, who is looking to get the best price, and the participant, who obviously would like the best insurance carrier from a credit standpoint. An independent fiduciary can advise the client on the ultimate annuity selection in adherence with the Department of Labor Bulletin 95-1. We’ve collectively seen a real uptick in activity here.”
Also notable in LDI today is the growing role of equity strategies that are aimed at mitigating volatility and other risks to the growth portfolio. “Using defensive equity strategies has become a mainstay of many asset-owner portfolios,” said Rupert Watts, senior director of strategy indices at S&P Dow Jones Indices. “These are strategies that have historically tended to outperform during market downturns and may have a lower beta than the market to help reduce the intrinsic risk of the portfolio.” He also pointed out that “just because a strategy is defensive, the return isn’t necessarily lower than the broad equity market over the long term.”
When looking at the liability portfolio, the painfully low yields today remain a challenge for plan sponsors. “When sponsors look at their liability risk, it’s typically going to be based on corporate spreads over Treasuries,” said Jason Giordano, director of fixed income indices at S&P Dow Jones Indices. “They look at the current yield curve. Although the curve has been steepening, if we look at implied forward rates, such as the three-month forward rates, it’s at about 1% for the next year.” (See chart on benchmark yields.)
A number of tools, from underlying investment products to total plan advisory services and technology resources, are critical in order to effectively manage pension liabilities and mitigate overall funding volatility.
“Pension plans should not change their risk framework because of the presence of some of these short-term issues,” the low yields and high equity valuations, said Todd Thompson, senior portfolio manager at Reams Asset Management, an affiliate of Carillon Tower Advisers. Instead, he said, “they’ve learned from the past in regard to trying to time the […]
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