The Pension Risk Strategy Roadmap
While de-risking a defined benefit (DB) plan by reducing or limiting liabilities may help provide some protection for their organization, plan sponsors can also incorporate safeguards on the asset side of the balance sheet through investment strategy and strong governance.
In the 2023 CFO Dive/Mercer survey results, which include responses from 152 senior financial executives who manage an organization's DB or pension plan, 88% of respondents indicate that they run a multi-year investment strategy. 83% said they manage the defined benefit plan using an integrated asset and liability framework and 89% say they already use or are currently considering using funding status and/or interest rate triggers to de-risk their portfolios.
Here's how organizations have been managing the obstacles they face in today's investing environment.
Interest Rate Hedging
Given the recent run-up in interest rates, there's more urgency to reduce rate risk in the event rates back down. There are two tools organizations use in this process: Reduce exposure to interest rates and increase fixed income investments.
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increased the level of interest-rate hedging of plan liabilities.
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used derivatives to reduce interest-rate risk.
Given that many plans are much closer to their destination, plan sponsors are looking to de-risk by increasing allocations to fixed income assets and level of interest-rate hedging of plan liabilities by using derivatives.
Increasing Interest in Alternatives
As for the riskier, return-seeking side of the asset pool, some plan sponsors are considering diversifying away from public equities into private markets and alternatives.
What does this mean for DB plan sponsors? Ultimately, more complexity, more asset classes and different types of risk to manage.
78%
of DB plan sponsors are likely to make greater use of derivatives.
69%
likely to increase use of private assets.
61%
added alternative investments in the past two years.
While there is an opportunity for private markets to capture potentially stronger and more stable returns than with public fixed income and equities, private markets span a broad spectrum of risk and reward drivers. Organizations must carefully consider the unique idiosyncratic risks and potentially higher costs that come with these investments.
Specialized Expertise
There’s a move towards incorporating governance frameworks that encourage speed and precision with execution of increasingly sophisticated traditional and non-traditional investment strategies. While 93% of organizations say they have access to plan assets and liabilities to make informed decisions, 43% also said they lack the talent, expertise or bandwidth to execute on them.
Organizations need access to specialized expertise to successfully navigate future market uncertainty and volatility, whether they prefer to maintain some investment responsibilities in house, or outsource some of all functions to an OCIO.
Having the Right Guide
Executing de-risking quickly once funded status triggers are hit is crucial to lock-in gains and secure less future volatility
The right OCIO will aim to provide a full spectrum of services, offering complete end-to-end framework with a goal of transforming the way you manage your DB plan's financial uncertainties.
Download our full report: Next Steps in Pension Risk Management
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