Pension Investing for the Long Term: An Alternative to Risk Transfer

The Upcoming Pension Shakeout

Following a flurry of investment de-risking activity after the global financial crisis, plan sponsors have recently turned to pension transactions — such as voluntary lump-sum and bulk annuity buyouts — as cost-effective ways to reduce or eliminate legacy pension obligations. Much of this activity has involved liabilities easily transferred to a receptive and vibrant insurance market.

In our 2017 paper “DB Pensions and the Emergence of the Big Bang Strategy,” we described a confluence of factors that may drive many plan sponsors to accelerate these de-risking changes, with many terminating their plans entirely.

Although we anticipate that a near-term upswing in plan terminations will put pressure on capacity, we also foresee a parallel growth in those fully funding and winding down their plans on balance sheets over time. This challenge of steady-state pension management will drive pension investing to a “hibernation” focus for many, which is the focus of this paper.

The Emergence of Hibernation Investing

Hibernation investing involves putting plans in a steady state while winding them down over time and/or gradually preparing for pension risk transfer over a longer period of time.

For a plan entering a hibernation period, four key priorities come to the fore. Sponsors will want to:

  1. Minimize residual expenses
  2. Maximize their asset returns in a low-risk state
  3. Minimize residual risk in the end state
  4. Minimize the capital deployed in excess of pension obligations

Ultimately, the need for close integration between asset and liability management will be more acute than ever, as DB obligations navigate to their many destinations.

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