- Critical Need for Liability-Driven Investing and Popularity of Lump Sum Payouts Are Among Top Risk Reduction Strategies for DB Plans into 2016
- China’s Short-term Impact Is Most Concerning Macro Event This Year
- Alternative Strategies Still Integral to Pension Portfolios into Next Year
BOSTON–(BUSINESS WIRE)– NEPC, LLC, one of the industry’s largest independent, full-service investment consulting firms, today announced the results of NEPC’s 2015 Defined Benefit Plan Trends Survey, a gauge of corporate plan sponsors’ strategic vision for their pension funds.
The most impactful year over year change observed in this year’s survey relates to the impact of longevity improvements released by the Society of Actuaries in an updated mortality table. As expected, improvements in longevity had a significant negative impact on plans’ funded status. This year, the number of defined benefit plans with a funded status less than 80% increased dramatically to 21% from nine percent in 2014.
To view an infographic of the findings click here.
The change in mortality tables prompted 69% of funds to conduct a formal review of their hedging glidepath strategy. Of those that conducted a review, 39% redefined their glidepath and 10% re-risked or revised their strategy to take into account the updated assumptions. Although the new mortality tables prompted significant evaluation by plan sponsors, a majority of respondents (52%) were comfortable with their current strategy and decided not to make any adjustments to their current glidepath.
“For years, studies have shown that Baby Boomers will be the longest-living generation on average and many are relying on defined benefit plans for income over the next 30-plus years,” said Brad Smith, Partner in NEPC’s Corporate Practice. “While there are nuances to managing the impact of improved mortality, there can be meaningful differences in how a plan sponsor should construct and implement a hedging strategy and glidepath. At NEPC, we help clients navigate this issue in the face of today’s volatile and low-return market.”
While a majority of plan sponsors are hedging interest rate exposure using Liability Driven Investing (LDI) strategies, many are also taking action to reduce the absolute size of the sponsor’s pension liability by offering lump sum distributions to a subset of participants, generally terminated vested participants. During the course of the year, the Internal Revenue Service banned lump sum distributions for beneficiaries currently in payout status. Of those surveyed, 65% of plan sponsors have offered lump sum distributions and 18% are planning to do so in the future. Annuity purchases are another option available to plan sponsors to reduce the absolute size of the pension liability. Although several high profile plan sponsors have gone this route, 69% of plan respondents say an annuity purchase is cost prohibitive at this time.
LDI continues to be an important tool for plan sponsors seeking risk management solutions. As such, allocations to LDI investment strategies have continued to increase. Twenty six percent of funds have an allocation of 50% or more today, versus nine percent in 2011. The long-term hedge ratio target for plans using LDI has also increased with 55% of plans targeting a hedge ratio greater than 80%, compared to 30% in 2011.
Among the LDI strategies that are gaining popularity, Treasury STRIPs and other zero coupon bonds are standouts. Forty-eight percent of funds that allocate to LDI invest in these products today, versus only 10% in 2012. Long-duration government bonds are the most popular LDI investment, with 53% of LDI investors using them today versus 32% in 2012. Lastly, there is growing interest in hedging using fixed income-centric alternatives (e.g., private equity funds) and hedge funds with usage increasing to 17% from 11% in 2014.
Other key findings:
- China’s short-term impact was the most concerning macro event for plan sponsors this year
- Oil’s performance in 2015 has been the biggest surprise for plan sponsors
- 52% of plan sponsors have a bullish outlook on the stock market for the next 12 months, while 48% are bearish
- 81% of plan sponsors expect to maintain similar exposure to alternatives in the next 12 months while 10% will increase exposure
“There’s no silver bullet or one-size-fits-all solution to address the needs of plan sponsors who still have their sights set on maintaining their corporate defined benefit plans,” Smith said. “With an eye toward the obstacles that lay ahead, we will continue to counsel clients aiming to maximize risk adjusted returns while opportunistically de-risking their plans in the most strategic and cost-efficient manner.”
About the Survey
The 2015 NEPC survey was conducted online by the Corporate Defined Benefits Practice Group in August 2015. The survey captures 102 plan sponsors’ views, including a number of NEPC clients representing approximately $130 billion in defined benefit assets. Copyright is held by NEPC. For the full survey results, contact Matthew Kirdahy at email@example.com. For full survey results click here.
About NEPC, LLC
NEPC, LLC® is an independent, full service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. It works with institutional investment programs and high net worth clients on both an advisory and discretionary basis. NEPC services approximately 347 retainer clients with $927 billion in assets under advisement. NEPC has offices in Atlanta, Boston, Charlotte, Chicago, Detroit, Las Vegas and San Francisco. Learn more at http://www.nepc.com/clients/corporate.
The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any particular strategy of NEPC, LLC. Nor are the views expressed herein representative of all NEPC clients. While NEPC has exercised reasonable professional care in preparing this report, we cannot guarantee the accuracy of all source information contained within or the completeness of such information. Please note that all investments carry some level of risk. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Past performance does not guarantee future results. Please contact NEPC for current information about our views of the economy and the markets.
Water & Wall Group
Matthew Kirdahy, 212-343-2366
Source: NEPC, LLC